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InterDigital, Inc. (NASDAQ:IDCC)

Investor Conference

June 18, 2012, 15:00 p.m. ET

Executives

Janet Point - IR

Bill Merritt - President and CEO

Scott McQuilkin - Senior EVP, Strategy and Finance

Analysts

Jonathon Skeels - Davenport & Company

Ron Shuttleworth - M Partners

Charlie Anderson - Dougherty & Company LLC

Eugene Fox - Cardinal Capital Markets

Mike Swartz - SunTrust Robinson Humphrey

George Prince - RBC

Nicholas Rodelli - CFRA Research

Operator

Good day and welcome to the InterDigital Investor Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Janet Point. Please go ahead.

Janet Point

All right. Thank you, Brett and good afternoon everyone, and welcome to InterDigital’s investor conference call to address our recently announced $375 million sale of patent assets to Intel. With me this afternoon are Bill Merritt, our President and CEO; and Scott McQuilkin, our Senior Executive Vice President of Finance and Strategy.

Before I begin our remarks I will need to remind you that in this call we will make forward-looking statements regarding our current beliefs and plans and expectation which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our two press releases published earlier today as well as those detailed in our Annual Report on Form 10-K for the year ended December 31, 2011, and from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of to-date hereof and acceptance required by law we undertake no obligation to update or revise any of them whether as a result of new information, future events or otherwise. Today’s press releases have been posted in the press center of our website at InterDigital.com.

So with that taking care of I’d like to turn the call over to Bill.

Bill Merritt

Thank you, Janet and thanks to all of you for joining us on the call today. As you read in today’s announcement we have entered into a definitive agreement with Intel for the sale of a portion of our patent portfolio. Scott will go through the details of the transaction and provide some information on the financial impact, but before he does I’d like to make three main points.

First of all, I want to emphasize that this transaction is a tremendous milestone on the road to delivering on this strategy we discussed earlier in the year. We announced in January that we felt that expanding our efforts to include patent sales and licensing partnerships will be a source of value for the company. Today’s announcement highlights the potential value of that strategy as well as InterDigital’s ability to execute on it.

Second, a transaction like this really shines in a spotlight on the value of our very strong research and development team of more than 200 engineers. This transaction involves approximately 1700 patents and patent applications a number that our internal R&D efforts typically generate over the course of a given 18 months period. Intel clearly understands the strength of our invention and this transaction highlights the value of continuing developed [including edge] technologies.

Finally, let me emphasize that although the patent assets were selling a very strong, we do not expect to sell to have a material impact on our ongoing licensing program. For example, the transaction involves none of the patent that issue in our recently filed ITC action as well as the patents that issue on our prior ITC action against Nokia which remains under appeal.

So, with that let me turn it over to Scott.

Scott McQuilkin

Thanks Bill. In the agreement InterDigital will be selling Intel portfolio of approximately 1700 patents and patent applications leading primarily to 3G, 4G LTE, and 802.11 technology. Transaction is valued at 375 million and net amount will be paid in cash once the transaction is completed which we expect in the third quarter of 2012.

The portfolio in this transaction includes approximately 1200 granted worldwide patents and the balance in applications. The U.S. patents in this transaction include approximately 160 issued patents and roughly 40 patent applications, none of the patents included in this deal are included in any of our ongoing litigations.

In terms of the percentage of our portfolio that the deal represents, let me provide you some numbers. We currently have a portfolio of approximately 20,000 patents and patent applications. Given that this transaction represents approximately 8% of our overall portfolio. Also given that our R&D team continues to develop new innovations every day, we expect the continued monetization parts of our intellectual property portfolio to be an ongoing element of our strategy going forward. The added financial strength generated by the sale of these patents it also enabled us to pursue our licensing efforts and expansion of our strong patent portfolio even more aggressively.

From a financial perspective although we are still working to finalize the accounting for this transaction, we expect that a significant portion of the 375 million from the sale will be recognized as revenue in the period in which the transaction closes. It has anticipated to be the third quarter of 2012.

After taking into account taxes, the transaction is expected to generate approximately 250 million in cash. We also expect to record a related charge of approximately 3 million in second quarter 2012 to increase our accrual for the company’s long-term compensation program cycle ending December 31, 2012. You may recall we managed our performance incentives on rolling three cycles. So, this adjustment includes 10 quarters worth of an accumulated accrual.

Finally, we are confirming our revenue guidance for the second quarter of 2012 of approximately $71 million which includes approximately 9 million for the sale of four patent families in a separate transaction as disclosed in the company’s May 4, 2012 guidance release. This revenue guidance does not include the potential impact of any additional new license for sale agreements that maybe signed to a second quarter 2012 or the potential impact of any royalties identified in audits regularly conducted by the company.

Before I turn it back over to Bill, I’d like to say one last thing; our expanded strategy involves various new avenues for driving revenue and creating shareholder value. I’d like to assure our shareholders that we believed in that strategy, are committed to executing on it, and that this transaction shows a tremendous potential of that strategy going forward.

And with that I’ll turn it back over to Bill.

Bill Merritt

Thanks Scott. Just before we take questions, I’d like to take a moment to reflect on the impact of this transaction. One of the key things I think it underscores is the strength of our intellectual property portfolio. Intel is one of the handful of true technology leaders globally. And we believe their interest in entering into an agreement like this with us firms the strength of the technologies that InterDigital has developed and continues to develop.

Also a transaction like this has broad impact on various areas. The depth and quality of the portfolio is such that you can see the market with pieces of our portfolio and continue to maintain our licensing program. Moreover with the dynamics created by [seeding or splintering] the patent portfolio have the potential to help motivate licensees to enter into new and renewed agreements without undue delays.

As I said at our annual meeting with shareholders last week, we believe that our efforts to broaden our sources of revenue rather than to tracking from our licensing efforts, lastly we added it to them.

Finally, I’d like to congratulate Scott and the team that he assembled to put this transaction together. This group will continue to pursue a value creating opportunities from its [unique part] of their creativity and hard work and bringing this deal to fruition.

With that we can open it up to questions-and-answers.

Janet Point

Okay. Operator if you could give the listeners instructions on how to ask a question.

Question-and-Answer Session

Operator

(Operator Instructions) First comes from the side of Jonathon Skeels [Davenport & Company]. Please go ahead.

Jonathon Skeels - Davenport & Company

First, can you talk about how many other patent sale opportunities you have identified and are actively pursuing within the portfolio

Bill Merritt

Let me give you the number of transactions that we are looking at, but we see other opportunities with respect to the transactions, [either] sale or we talked about ventures or things like that, that we are looking at. So, we think we still have a good pipeline and additional opportunities and we will see how they play out.

Jonathon Skeels - Davenport & Company

So, there are multiple other opportunities you see in terms of breaking pieces of portfolio sale?

Bill Merritt

Yes, that’s correct.

Jonathon Skeels - Davenport & Company

And then, can you just maybe elaborate a little bit more in the strategic implications for this, clearly it provides you with cash for acquisition or licensing purposes, but you mention it also motivates or potentially motivate companies to signs new licensing agreements. Can you just maybe elaborate on that, what real impact do you think this will have on your ongoing discussions and has it already had any impact on ongoing discussions with company?

Scott McQuilkin

A couple of things, one, when we announced the fact that we will be seeking to sell some of our patent assets or technology partner with folks with our patent assets actually did begin to motivate folks and we did sign a number of deals at the beginning of this year following that announcement. I think that this transaction actually proves that that strategy is working, and therefore, could motivate others who may want to deal with a portfolio in a less splintered state; we just like the better way to put it. So, that’s another motivator. It also I think the validation by Intel in terms of the quality of portfolio something we (inaudible), some of our licensees are also folks that are looking to buy patents and certainly could motivate them as well to use that as part of a transaction as a way to get to a bundled transaction with them.

And then the last thing or answer the first thing you identify, it does provide us cash, obviously we have increased the capital return to shareholders, but it also provides us an opportunity to invest in other targeted patent assets that could give us further diversity in a portfolio. And this could be assets that aren’t cellular related because we have a wealth of those types of patents but things covering other technologies like compression and security and things like that, which I think is important as we move forward in this industry and the devices continue to become more and more complex and there is other parts of these devices that have a lot of value in addition to the wireless components.

Jonathon Skeels - Davenport & Company

And the last one, what made this particular portfolio attractive. Can you talk about maybe the process of identifying the specific assets that were included in this sale, are they patents that are brand encumbered or not brand encumbered and I guess how the deal arrive at this particular grouping?

Bill Merritt

The process by which we like this, obviously when it took place between the company Intel, but I think Scott characterized the portfolio little bit more [affluent] in terms of what it contains in terms of the great band of patents and apps and whether determining those and issued or (inaudible) assets. Scott if you can take through that.

Scott McQuilkin

What I’d say is a few things; one is, it contains 3G and 4G wireless technology as well as some other technologies, obviously those technologies are considered valuable in the mobile world today. In terms of issued patents and applications, 1700 in total and approximately 200 U.S. issued patents and applications. There is a mix in the portfolio as you might expect but we have not provided details on that.

Operator

Thank you. We will take our next question from Ron Shuttleworth [M Partners]. Please go ahead.

Ron Shuttleworth - M Partners

Again Scott, just wondering if there is any way you can bucketize the distribution of 3G, 4G and other patent sale like as a percentage maybe of the total patents?

Scott McQuilkin

Well, if you take a look at the 1700 patents and patents applications, that’s about 8% of our total portfolio.

Ron Shuttleworth - M Partners

No, I understand that. I’m talking about of your, I’m not sure if you are [correct] in answering the question, but I think it was asked previously first of all, what percentage are terminal versus infrastructure? And then what percentage maybe are 3G versus 4G versus anything else?

Scott McQuilkin

I understand the question Ron, and we are not providing that level of detail.

Ron Shuttleworth - M Partners

Okay. You mentioned restoring of the 2000 patents too, is there an implication there and that they are still 300 patents maybe more that are to go in the near-term?

Scott McQuilkin

I’d prefer to say what Bill said which is, we view this effort as not one-time transaction. Its part of our core business strategy and overtime we expect to do other transactions in terms of timing and amounts of those transactions and prefer to wait until we report a specific transaction for you.

Ron Shuttleworth - M Partners

All cash transactions, there are no trailing revenue streams or anything like that like service or royalty trails or anything like that associated with these?

Scott McQuilkin

I’m not sure what you mean.

Ron Shuttleworth - M Partners

Cash transaction, but there is no trailing, there is nothing trailing behind that, there is no monthly or quarterly revenue stream that comes out of (inaudible) cash only deal.

Scott McQuilkin

Yes, as I said its $375 million and that would be paid in cash.

Operator

Our next question comes from the side of Charlie Anderson [Dougherty & Company LLC]. Please go ahead.

Charlie Anderson - Dougherty & Company LLC

I guess I will start with, you are going to get 250 net of cash and the market is sort of barely giving you over that today in terms of add into your market caps. So, the market seems to be saying the base thing that this doesn’t, you can extrapolate the value of these patents to rest of the portfolio. And I wonder if you guys will take issue to that sort of analysis by the market today?

Bill Merritt

I think early sort of left into sort of commented on how the stock is trading any one day, but I do think that the portfolio and the sale price of the portfolio is a strong indicator I terms of the overall value of InterDigital portfolio. At the end of day patents that we can let go without it having any impact on our licensing program which means that (inaudible) and there continues to be a very, very strong portfolio back at the company. And on top of that we have already also indicated that we think we can pursue more of these types of transactions and even if we do more of these types of transaction we don’t believe that that will impact our licensing program. So, the market will do what it does, but something from our perspective it's a great validation, very strong technology company, the transaction value is certainly very strong in terms of looking at the entire value of the additional portfolio. And again the fact that we can continue our licensing programs so that without (inaudible) suggest that this a truly additive exercise to the business which is great.

Charlie Anderson - Dougherty & Company LLC

I’m going to guess the potential licensees up for renegotiation are going to maybe take a little issue at the thought that it doesn’t impact, I deserve a discount because you sold a portion, what will be sort of your come back to that claim by some either side of that. Can you give a [shedding] table?

Scott McQuilkin

I think if you look at the way the licensing presentations were rolled out, what they may see is even if the patent comes off the table and bunch of more patents come on the table in terms of new issuances and other things, frankly we just had in the on deck circle that we didn’t need in-licensing presentation. So, I think you can kind of flip that issue on the pad and I think it starts to show the depth of the portfolio that in-license negotiation we can actually present just a strong case after a transaction like us. And the licensing may think, what’s even further below the surface here at InterDigital. So, I think licensees (inaudible) extremely strong come back to that position. It's also again it's worth repeating and I think that’s also the fact that Intel that’s part of the portfolio suggest, because they are obviously they are high quality tech company that they see a lot of value in a portfolio too, and I think we can translate that into licensing discussions. It also goes to the point of, we have done one sales transaction which means we can do more actually we have done two; one small one and this one of Intel. They are [not about our] prospective licensee thing they are also faced with the prospect of the portfolio further splintering. So, I think we got a pretty strong response to already response to what we will be a point from a licensee that’s really not based on fact (inaudible).

Charlie Anderson - Dougherty & Company LLC

And then if you look at the pipeline, I’m curious are there any others that look like this in size or it's just pretty unique. I mean did they look more like the smaller one that you did?

Bill Merritt

As I said that I’d be reluctant to speculate on future transactions and said we would be very happy to explain the nature of the transaction from when we announced another one.

Charlie Anderson - Dougherty & Company LLC

Is there a threshold by which you would attach revenue, you have some licensee they pay you sort of life of the patent. This one sounds like Intel is not going to get the revenue, you continue to get it, but is this rumor, whenever you sell so many of that, you kind of [after-tax] revenue and I’m curious how that works.

Scott McQuilkin

The way I think about it is we are selling patent assets and those would be subject to any existing encumbrances and those encumbrances are associated with license agreements revenue from which we would retain.

Charlie Anderson - Dougherty & Company LLC

And then just one last housekeeping from me. Can you update me on how many issuers you bought back since last quarter ended, and kind of what average price?

Janet Point

The last announcement that we made was for (inaudible) that was the conclusion of the first 100 million plus the authorization of the second 100 million.

Charlie Anderson - Dougherty & Company LLC

And you have been involved in that second 100 million?

Janet Point

Well, we announced the additional 100 million and then we will update.

Scott McQuilkin

Yes, what we have announced is that we completed the first 100 million authorization that was in place at the beginning of the year. We subsequently in two steps announced 200 million authorization and we will report on any purchases under that authorization when we come back to you with the second quarter earnings.

Charlie Anderson - Dougherty & Company LLC

Or is it maybe just one way I could ask it different way is, you are offering guidance for revenue key to would be able to offer guidance on share count for Q2?

Scott McQuilkin

We can’t. No. Sorry.

Operator

Our next question comes from the side of Eugene Fox [Cardinal Capital Markets]. Please go ahead.

Eugene Fox - Cardinal Capital Markets

You answered the second question I have. The first question was there were really two buckets of patents and I think you addresses this, one was terminal patents and one was the infrastructure patents that you were looking to sell. My interpretation of the commentary thus far is that the Intel transaction falls in the terminal patents and infrastructure patents would still be remaining. Is that an adequate characterization of the process thus far?

Bill Merritt

I don’t think we again are providing lot of details in terms of the composition of the portfolio other than to say, it relates to 3G and 4G LTE as well as some 802.11 technology.

Operator

(Operator Instructions) Next we will go to the side of (inaudible). Please go ahead.

Mike Swartz - SunTrust Robinson Humphrey

It's Mike Swartz here from (inaudible). Just a question, the stock was so much higher earlier in the year, almost $70 there are all sorts of rumors that they were going to sell the entire company. Is that just totally off the table now?

Scott McQuilkin

Company went through a processes as you know starting last summer and we concluded that process at the beginning of this year. And we concluded without a transaction and indicated that we would be focusing on; one, executing the core strategy when we have which is licensing but also supplementing that strategy with things like this, which is monetization of in fact I call them surplus or non-core patents. So, that’s the strategy we are executing on.

Mike Swartz - SunTrust Robinson Humphrey

But if someone were to come knocking your door, you basically just start (inaudible) or are you still open to [list] new agreements.

Scott McQuilkin

As a public company you always have the obligation to listen to any that incredible that comes across the [bell]. So, that remains our obligation.

Operator

Next we will take a question from George Prince from RBC. Please go ahead.

George Prince - RBC

In the press release I saw the matching again of the 800 million of revenues in 3 to 5 years, and that looks pretty amazing number. Can you talk about cost structure that a little bit more maybe walk us through that, that’s still alive?

Bill Merritt

Absolutely and it's still alive. And I think it was important for us to emphasize that here because it sort of supports our view that the patents sales transactions are not going to impact the licensing programs, but we are still driving towards that goal, managements compensation is still going to e measured, achieving that goal. And there is a pretty straight forward walk to get up to that level of revenue, obviously there is a lot of execution that we got to do to get there. And I will turn over to Scott, he is pretty good at taking people through that, walk us to how we get there.

Scott McQuilkin

I mean the very simple math if you take our revenue run rate today, it can grow for a couple sorry basic reasons; one is that for 3G, 4G handset sales we expect those volumes worldwide in terms of the industry will double over the next 3 to 5 years. That’s consistent with forecasts that are out there. All of our sequel that could lead to a doubling of that run rate. Secondly, we got about 50% of the market under license today, and we think there is the opportunity to go up to a 100%. If we are able to do that that would be another doubling in our revenue opportunity. So, you combine a doubling in the market size with the doubling of our share of that market under license and you get more or less a quadrupling of our current run rate which is in excess of the 800 million that we signed up for.

Operator

Next we will go to the side of Nicholas Rodelli [CFRA Research]. Please go ahead.

Nicholas Rodelli - CFRA Research

We noted that Huawei attempt to have (inaudible) declare what InterDigital’s [spend rate] is what’s rejected last week. And I was just wondering did the clearing of that overhang have anything to do with the timing of getting this deal over the finish line?

Bill Merritt

No.

Operator

Next we have a follow-up from Ron Shuttleworth [M Partners]. Please go ahead.

Ron Shuttleworth - M Partners

So, on the question around the patent values themselves, but do you expect calculates to about 220 per patent, patent application. Do you expect that to be a range other than value of other assets in your portfolio or do you see stuff higher. I know that’s a theoretical question, but I’m just curious if you are precise by the range of value that you see it.

Bill Merritt

I think it was a value that clearly both parties were satisfied with and found it acceptable. In terms making projections about how that might apply in the future deals and say every transaction out there is unique in one or plus many ways depending on the timing that it's executed, the mix of the portfolio, the size of the portfolio and of course the seller and the buyer. So, if you look out there, first of all there is probably a limited number of publicly available transactions that could potentially be interpreted as comparables. And secondly, you see a very broad range out there in terms of statistics. So, it's very difficult to say without really understanding a lot of the details whether or not this is something that we see in the future or whether it would be higher or lower.

Ron Shuttleworth - M Partners

Okay. The last question is, I think you have some preferred revenue ongoing licensing dispute with a party or is that at all impacted by this transaction?

Bill Merritt

We are not going to comment on that.

Operator

Next we will go to the side of (inaudible). Please go ahead.

Unidentified Analyst

I’ve got three questions here. Going forward would you anticipate revenue from compression and security to be much bigger component since we are selling off some of the 3G and LTE portfolio? My next question after that would be, you kind of anticipated that a deal with a major carrier would be coming along sometime by the middle of the year, is that still the case. And my third question is, we really haven’t heard too much about the compression technology and the trials (inaudible) well over a year ago. Can you give us an update on that. Thank you.

Scott McQuilkin

In terms of the value of other types of technology outside of cellular, so their compression technology and security, I think the way we look at that is what we have sold here and the other assets that we would think about selling are ones that are not currently driving value in our business. And so we can go and extract value through transactions like this and then to the extend we acquire additional patent assets that give us further diversity on the handset. We think that those diversifying assets will actually drive higher licensing revenue for us. So, it's a nice way to sort of optimize the portfolio and actually deliver a good amount of cash into the business at the same time.

In terms of the overall efforts around compression, we continue to be very focused on that space, we think it's an important space going forward in terms of one of the critical technologies that will be needed to deliver the services that people want. Wireless networks, we announced those, I guess couple of months ago or so. We are working with LiveCast and some of their firework with operators and so those efforts are continuing as well as our development is continuing. At this point I think a lot of the compression technologies that we are working on are still somewhat new. And therefore I wouldn’t expect them to be large revenue contributors in the short-term, but certainly it's a very important part of our innovation pipeline.

Unidentified Analyst

And with regard to a major deal with a carrier, is that something that’s still anticipated?

Bill Merritt

Yes, I’m not sure exactly what that refers to, so I know that with respect to LiveCast demo that was, I think that was announced about a month or so, again we are not involved somewhat what they were doing with one of the carriers. And that’s the type of thing that we will be doing at this point in time in terms of some of the technologies. Proving elements of it out in the field but again I think the revenue opportunity for compression technologies is little bit down the road which is fine that’s consistent with where we approach our research and development and certainly we have big revenue contributors today. Those technologies will be some of the revenue contributors in the future.

Operator

(Operator Instructions) Next we will go to Charlie Anderson [Dougherty & Company LLC]. Please go ahead.

Charlie Anderson - Dougherty & Company LLC

I’m just wondering when you put the 375 in the income statement, probably going to be subtract in a book value on that, (inaudible) gain on sale?

Scott McQuilkin

We are still finalizing the accounting on that, so I’d rather not give you a specific answer on that right now.

Charlie Anderson - Dougherty & Company LLC

Or we probably shouldn’t model 375 for year sake?

Scott McQuilkin

In terms of net to the bottom line, it would be typical for a transaction like this to also recognize transaction expenses and any book basis attributable to those patents.

Operator

At it looks like at this point we have not further questions. I will turn it back over to Mr. Merritt.

Bill Merritt

And I will turn it back over to Janet.

Janet Point

All right guys, thank you all for calling in and participating and that was short notice but certainly appreciate that. And I will be around and available for any follow-up.

Operator

Thanks all. And this does conclude today’s teleconference you may disconnect at any time. Thank you all for joining us.

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