Janet Point - IR Bill Merritt - President and CEO Scott McQuilkin - CFO

Charlie Anderson - Dougherty & Company Chris Versace - Think 20/20 Bill Nasgovitz - Heartland Funds Tom Carpenter - Hilliard Lyons

Thank you, Jessica. Good morning, everyone, and welcome to InterDigital second quarter 2010 earnings conference call.

With me on the call this morning are Bill Merritt, our President and Chief Executive Officer, and Scott McQuilkin, our Chief Financial Officer. Consistent with last quarter’s call, we will offer some highlights about the quarter and our outlook and then open up the call for questions.

Before we begin our remarks, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs, plans and expectations, 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 earnings release published yesterday as well as those detailed on our annual report filed on Form 10-K for the year ended December 31, 2009 and from time to time in our other filings with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof, and except as 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. Finally, please note that we have also posted some supplemental information on our website in connection with this call this morning which you can access in the events and presentation section of the investor relations portion of our website www.interdigital.com.

With that I would like to turn the call over to Scott.

Thanks, Janet, and good morning to everyone. I’m pleased to report that our second quarter 2010 results were very strong.

Year-over-year revenue increased $16.2 million or 22% and drove net income of 32% to $35 million. Diluted EPS was $0.78 in second quarter 2010 up from $0.59 in second quarter 2009.

Free cash flow was positive $67 million in first half 2010 and was a results cash and short term investments increased to $486 million at the end of first half 2010 up from $410 million at year end 2009. In addition to the $100 million received from Samsung in first half 2010, we also received patent royalty payments of $71 million and other cash payments of $10 million from Technology Solutions Customers.

Revenue for second quarter 2010 was $91.2 million and consists of three components. Current patent royalties, add sales royalties and technology solutions revenues.

Current patent royalties were $80.2 million in second quarter 2010 up $9.8 million or 14% over second quarter 2009. The increase was driven by a combination of higher sales by nearly all of our per unit license fees and new patent licenses added since second quarter 2009, With Casio, Amtech, Centurion and Enfora.

From a sequential basis, current patent royalties increased to 80.2 million from $78.1 million in first quarter 2010. It’s worth noting that current patent royalties have increased in each sequential quarter since first quarter 2009 due primarily to higher 3G unit sales volume and the addition of new or renewed license agreements.

Add sales royalties were $4.9 million in second quarter 2010 compared to $2.3 million second quarter 2009. Add sales royalties in second quarter 2010 were due to the renewal of an agreement with one of our licensees and covered the six months between the explorations with the previous agreement in the beginning of the licensee's new reporting period.

Technology solutions revenues was $6.1 million, up $3.9 million and more than double the level in second quarter 2009. The significant increase is due to growth in per-unit royalties related to licensing of our SlimChip modem core as well as $3.1 million of revenue from addition to customers for our SlimChip modern core.

The same communications and capital semiconductor. Consistent with past practice, we will provide guidance on our revenue expectations for third quarter 2010, after we received the relevant royalty reports.

Turning to the expense side, second quarter 2010 operating expenses were $38.1 million, up from $34.7 million in the second quarter 2009. Second quarter 2010 expenses included cumulative charge of $49 million to increase the accrual rate for a performance based cash incentive under our long-term compensation program.

In addition, second quarter 2010 expenses reflect an increase of $1.3 million for third party sub-license fees and other non-personnel expenses to support the technology transfer supporting the Beceem and CapiSemi relationships. Importantly, these expenses were more than offset by the contribution of $3.1 million of revenue from these customers.

Second quarter 2010 expenses also include an increase in due diligence costs associated with Patent acquisition opportunities. These increases were offset by a decrease in intellectual property enforcement cost to $2.4 million in the second quarter 2010 from $5.6 million in the second quarter of 2009.

On a sequential basis, second quarter 2010 expenses decreased $3.4 million from first quarter 2010. The decrease is due to $4.2 million decreases in intellectual property enforcement cost and a $2.6 million decrease in personnel expense.

These decreases were partially offset by $1.3 million increases in non-personnel expenses associated with the Beceem and CapiSemi relationship and in increase in due diligent cost associated with patent acquisition opportunities. Both of which I mentioned earlier.

Our balance sheet continues to be very strong, we ended first quarter 2010 was $486 million in cash and short-term investments. The increase from $407 million at year-end is due primarily to the receipt of the third, fourth payments relating to our patent license agreement with Samsung in January 2010.

The fourth payment and 100 million has been received and we will be included in our September 30, cash and short-term investments. In summary, we believe that we have many opportunities as well as the financial capacities flexibility and discipline to execute on our business strategy and drive shareholder value.

Now, I will turn the call over to Bill.

Thanks, Scott. And good morning to everyone.

As you saw in our earning release yesterday and just heard from Scott the company delivered a very strong quarter. We grew our revenue and profitability and substantially and maintained a very strong balance sheet and grew our customer base.

As a result of our strategic efforts to build innovative wireless solutions attractive customers and exercised financial discipline, today we are in a position of unprecedented financial strength and stability. I will start my remarks by covering the two new strategic customer relationships involving our modem IP.

As Scott mentioned during the first half 2010 we added two new customers from our SlimChip modem core. Beceem communications and WiMAX semiconductor supply what will integrate our modem core into their 4G products.

In addition Capital Semiconductor based in Beijing and owned by TechFaith Group Technology in Beijing International Investment Development Company will use our modem core for duel mode 2G, 3G product in the Chinese market. These new relationships are consistent with our plan to monetize our investment in the 3G core modem platform.

Each relationship is profitable with a term will provide further upside when Beceem and Capital Semiconductors start shipping chips that contain our technology. In addition, these new relationships have grown the customer base for our modem core to six companies, covering approximately 10% of the current 3G cellular ASIC market.

This larger base has created an option for us to develop and license upgrades, for the modem IP core on attractive terms. Beyond the modem IP business, the company is currently involved in the number of other activities on both the patent licensing and R&D funds.

However, through our discussion today, I thought it was focused in my remaining remarks on just one topic, LTE technology. We view LTE rollout of this delivering an opportunity for the company, both in terms of the its ability to drive higher returns from our terminal limit patent licensing business and its ability to serve a market driver for many of the other technologies we are developing.

So let me talk about what LTE is, the market drivers for this technology and resulting deployment schedule. While we have our fingerprints all over LTE, what this technology can do and also what it can’t do and why this also presents an opportunity for us.

To start, no one has missed that over the last two decades wireless technologies have dramatically changed the way we live, work and play. We have evolved from the early days of non-compatible regional analog systems with starting localized coverage to more reliable digital CDMA and TDMA based networks, many of which support worldwide roaming.

We have moved from simple analog voice calls, to text messaging and real time access to rich multimedia content on the internet using WCDMA and HSPA technologies. Multi mobile telephones have more to speak consumer electronics that featured crystal clear display to play music and video.

Today’s applications may seem impressive but we believe we are only at the very beginning of the wireless revolution. And LTE the next major technology upgrade path selected by many operators will be a key element on the future of wireless.

So what exactly is LTE? LTE stands for long-term evolution and it is a standardized global technology focused on substantially enhancing the over the air and network capabilities of the current wireless infrastructure and handsets.

Specifically the LTE specification provides for various performance categories but the most initial deployments having peak down link data rates of 100 megabits per second and up link of 50 megabits per second. LTE also supports seamless hand over with folder network technologies such GSM Edge, UMTS, and CDMA 2000.

So LTE devices will almost all be multi mode. LTE is very needed today by operators.

As we know with the proliferation of smartphones, tablets and wireless laptops. Operator’s world wide are having or soon will have substantial bandwidth issues.

Consequently operators need these LTE systems to begin to move traffic off the over burdened 3G UMTS networks. Moreover with mobile applications like Hulu, Netflix, Rhapsody, YouTube and the like users already have on their devices the ability and the desire to consume more bandwidth as soon as it is delivered.

This is the opposite of 3G which rolled out at a more leisurely pace because there were no killer applications driving the need for bandwidth. Today the killer applications are already here.

Assuming all of this is correct; we should see a transaction to LTE devices more rapidly. This transaction goes well for InterDigital for several reasons.

First on a value perspective LTE devices will be higher priced. Second from the core invention strand point LTE sits right in the sweet spot of our development road map.

And third the LTE devices will multi mode, we believe that these devices will include more InterDigital innovation then ever before then we have ever had before on a cellular device. Since the early stage of digital cellular our inventions have been at the core of mobile devices networks and services worldwide.

And a longstanding contributor to the evolution of the wireless industry we have solved many of the industries most critical and complex tactical challenges years ahead of market deployment. In fact, well before the first LTE standardization discussion in November 2004.

InterDigital was already working to solve problems would become relevant to efficient LTE deployments. And now we go on to replace technical challenges for LTE and our solutions in two categories.

The third includes critical digital cellular technologies such as power control, radio resource management, interference mitigation, multi-channel arrangements, roaming and hand-off techniques and control channels for efficient signaling, all of which InterDigital successfully tackled in 2G and 3G. Many of these elements are also mission critical in LTE and our engineers have developed and will continue to develop substantial technical enhancements and refinements in these areas.

To putting faster more reliable, more robust and more efficient devices networks and services. The second category relates to new technologies that will be introduced first in LTE including multi-input, multi-output commonly known as MIMO technologies.

Multi Antenna configurations for reducing interference and increasing data rates. Advanced OFDM, Advanced OFDMA and SCFDMA signaling techniques, hybrid ARQ for fast error correction and themes for discontinuous reception that will improve handset battery life.

We’ve been working on these issues for a long time and our solutions will support the deployment of more efficient wireless networks, a richer multimedia experience and new mobile broadband capabilities for billions of users like you and me. Given the expensive work we’ve done in LTE there is no surprise that we are routinely mentioned among leading LTE innovators based on patent holdings.

And indeed we have read a number of recent reports trying to analyze the LTE patent landscape applying on the relative strength for the company in this area and InterDigital is from among the top players in each one, of course we see third party analyst supply of variety and methodology for assessing the various LTE patent holders. And such analysis are understandably very complex and dynamic we are not endorsing or adopting them.

However, one frequent source of data for these reports is the ETSI IPR data base. To any company that participates in the ETSI standard setting organization declared certain patent and to our patent application to ETSI, which subsequently processes over the data from these declarations and posts the listings of ETSI IPR data base.

We have recognized that this data base presents difficulties in compiling organizing and displaying records provide to ETSI by declaration. Therefore as Janet mentioned we have prepared our own summary of certain information regarding the company’s IPR declarations and have posted it to our website.

Included in the summary our chart this year are number of InterDigital US patents non-provisional patent applications and provisional patent applications declared to ETSI for UMTS and EUMTS what ETSI calls LTE through July 29, 2010. These charged to our company by additional information describing the data and how it may or may not be comparable to similar data provided by ETSI and other third parties.

So I encourage you to visit our website to learn more. There are three main take aways from the chart; first they show that we have been an active participant and prolific inventor in LTE technologies.

As of today, we had declared approximately 360 US patents and patent applications to ETSI for LTE. This is consistent with the hard and creative work done by our wireless engineers over the years and the fact that we are continuing to make further contributions for the ETSI standard.

Second the data is constituent with our view that as a result of the higher level of investment in LTE standards participation. Our pace of innovation and invention for LTE is actually faster and broader than it was in 3G.

So as an example, in 2004 deployment of 3G began its worldwide rollout, we had declared approximately 200 US patent and patent applications to ETSI for 3G UMTS. While in Apple's, Apple's comparison may not be powerful for LTE we have already declared as of today in key words we have 363 US patent applications before LTEs rollout.

And our innovation and invention for LTE continues, indeed InterDigital R&D efforts and technology rollout reached well beyond the current LTE standards, in fact our next generation cellular project targets advanced network technologies in spectrally efficient air interface solutions for LTE advanced and beyond. The third point is as noted LTE devices will predominantly be multi mode incorporating 2G, 3G UMTS and LTE technology.

As of today, we have declared approximately 770 US patents and patent applications to ETSI for 3G UMTS and approximately 360 US patents and patent applications to ETSI for the LTE standards. For all those reasons we entered the LTE licensing cycle with a highly great confidence.

As noted above we also believe that LTE could rollout quickly perhaps even faster than the current market forecast suggests. Further we believe LTE will let the appetite for even more data intensive mobile services but will not be able to fully meet the consumer's needs.

Many industry analysts are still projecting at substantial gap between user demand and system capacity even after LTE is deployed. This is also good news for us as that user demand will accelerate the need for other technologies to close that bandwidth down.

We are already working hard with those technologies including spectrum optimization cross network connectivity and mobility and intelligent data delivery techniques what we call bigger price, more price and better price. We believe that all these initiatives will ultimately enable the future network of networks.

The seamless integration of multiple communication networks both wired and wireless which intelligently and constantly connect people and things across a myriad of applications and locations. Needless to say we are excited about the LTE opportunity and for the opportunities that lie beyond.

The wireless market continues to be driven by innovation posing very hard problems and very few companies have the experience and talent to address, we do. As results in addition to be able to being able to deliver great current financial returns, we also believe that our future can be even brighter.

Thanks again for your support. We can now open the call up for questions.

Good morning. Thanks for taking my questions.

Japanese revenue. I wonder if, Scott, if you could just update us there, where it was in the quarter.

And then also wondered, in terms of the renewal you did, did you get a full quarter on the per unit, if you signed it mid-quarter, was part of the contribution from past and part of it from per-unit? And then I've got a question for Bill, too.

Yeah the Japanese market as you know is relatively mature. The 3G component is a very large percentage of that total market and is not growing very rapidly.

And I’d say that's reflected in the numbers of our Japanese per unit licenses that we saw this quarter. And it's probably indicative of the longer trend for 3G in that market place.

That could of course changes once LTE starts to generate significant volumes over there. In terms of the renewal of the existing licensee that contributed bulk of the past sales and contributed a full quarter in the second quarter of our current loyalties as well.

And just to tack onto that, I know sometimes you give us data on Japan as a percent of recurring. Do you have that stat, Scott?

Yes, it’s a little 20% range.

Got it. Okay.

Good. And then, Bill, question for you on the Nokia case, the appeal of ITC.

They filed their red brief now as has Nokia. Obviously you had a view into how ITC looked at this case back in the fall.

Now that they've got maybe a more fuller explanation, I wonder if you could just update us on your thoughts on that case, kind of having seen where their arguments shakeout.

Sure. So having obviously read our brief and theirs as well I continue to be in accounting it continues to be very strong appeal going up to the federal circuit.

So that’s good, so there were no surprises and in terms of the audience that we put forth. So while we appreciate these things are always an up hill battle and we got a pretty good case not only for the federal circuit also I think the fact that we continue to add licensees that reflects the fact in that case was in no means an indicator of the strength of the individual portfolio.

People continue to find licenses or renew licenses on very good terms and I think that’s the better indicator of this strength and the patent portfolio.

Some of your other licensees that aren't quite at the 10% level like REM and HTC, which are having a lot of success with Smart Phones, did they passed the 5% threshold and are somewhere between 5% and 10%?

We don’t disclose that. Of course I can tell you that don’t for unit licenses and we have seen good growth from both of those as you might expect in their success in the marketplace.

Excellent. Yes, it would be helpful going forward if you guys could give a little more color on those, just given the growth in Smart Phones and some of the slides you guys have put in the past on how much you're averaging per phone with the strong shipments to REM, they should be getting very close to that threshold.

I look for to the day when I can do that.

Okay so, Bill, thank you for that insight you provided on 4G LTE and the slide you guys put up on patents, that's great. And also its comparison to 3G In 3G, you guys had a lot of success in the early days signing Japanese licensees and a little bit later with some of the Korean manufacturers and still ongoing with some of the bigger North American ones and the Western European manufacturers.

Can you give us some insight into 4G, if you think it will follow the same pattern or if you guys have adjusted your strategy to go after some of the bigger existing players in that market early?

Good. I think its going to be a little bit different in part because I think when we are doing 3G it wasn’t as much driven by some of the renewal cycles and it will be driven now by to some extent renewal cycles.

So, people may come into the process at a slightly different time than we did before. Obviously, we still think we are definitely reaching out in to places like Japan and trying to move forward in that licensing process.

But I think the customers will come in a slightly different order then they did before but we are very confident with respect to our ability to bring all those customers on board in terms of licensees at the time. And let me just add quickly the other thing that was happening in 3G if you remember in Japan they were really rolling it out like in 2001 really before the rest of the world LTE is being rolled out.

Actually monthly in North America just constraints in terms of bandwidth are stronger here and in Europe than they are actually in Japan at this point.

Okay. Excellent.

One final question and I'll jump back in the queue. One of the things that may be a little different than six or seven years ago is you guys are significantly involved in solutions and products.

Can you guys monetize those with carriers going forward? Or is it still going to be with the infrastructure and chip manufacturers?

Thank you.

I think that the opportunity in terms of the newer technologies that we are creating are not only in the handset markets but with the handset manufactures that they are in the adjacent market as well. And so that would include infrastructure manufacturers, operators, consumer electronics manufactures and the light.

In particular for example the connectivity and mobility technology that we are creating I think we are particularly relevant for operators and maybe is relevant for one operator and more then another and so we're certainly looking at operators as an opportunity for software planning into that market to give them enhanced connectivity options.

Just a couple or three questions for you guys, pretty straightforward. Bill, that was a great overview on LTE.

One thing I would say that was kind of lacking is any kind of targets from you guys, how many customers do you think you'd look to sign in the second half of the year? Are there any internal targets for how many you guys would like to have exiting the year?

We've actually consciously avoided targets right because they are not useful in those negotiations. The other side believes you have a target, that you need to do in the particular quarter.

They will use that and try to leverage that against you. So I'd rather be in a position saying we'll do this deal when it’s the right deal not because it’s the quarter which I promised to get X number of deals.

Okay. That sounds like a smart strategy for the long term rather than getting your back up against the wall.

So let me just turn to Scott. Hey, Scott, on the patent administration licensing costs, we saw them creep down in the second quarter.

And given some of the incremental cost of that last year, I'm thinking about the second half of the year, should we be thinking that that line item would kind of be balanced in the second half of the year or really trend lower, given the heavy expense in the first quarter?

Yeah the decline in the patent administration costs relates almost entirely to lower patent enforcement costs for the quarter. And as I said in the past that’s a number that can go up or down in a pretty wide range depending on the level of specific activity for the quarter.

I think that number is average similar in that $4 to $5 million range per quarter over the last couple of years. That’s not necessarily inductive of where it might be in the next quarter or the quarter after that all depends, but I think that gives you some perspective at least what exactly it is over the last few years.

Right. Right.

Just I think conceptually we don't expect anything to heat up with Nokia towards maybe exiting the year or something like that. I just wanted to double check my thinking on that.

Yeah, it all depends on activity levels.

Okay. Okay.

And then just one last one, you guys are very good revenue numbers the last couple of quarters. But at the same at time we've seen the deferred revenue line really creep down.

I think it peaked last September. Is there some disconnect there that maybe I or others are not seeing that you guys might want to talk about?

The deferred revenue goes up as we collect cash payments that are not recognized in the current period as revenue and it goes down as we recognized revenue for cash payments that we previously received. So that’s a number that can move up or down again pretty significantly depending on whether not we received cash payments in that quarter.

And as you know the cash payments can be lumpy overtime. I would say that although it did move down in the second quarter we also recognized a significant increase in cash payments from the couple of our licensees.

So and we did get cash in during the quarter and yeah I think next quarter you will see a $100 million cash coming in which we have already received from same. So it could be lumping but I think if you look at it overtime it’s a good strong number in cash flow that cash in revenue overtime will equalize.

So we have almost $600 million in cash, is that correct?

Well, if you take the year and cash balance and add it in $100 million from Samsung net of the foreign withholding tax you get a pretty strong member there.

So what is your aggregate yield on this money?

It’s what you might expect given the fact that we have got it in very liquid and very safe investments very low. In the order 0.5%.

Okay. And then what is the timing I know it's tough to figure out.

But I understand that you were interested in buying additional IP, specifically I guess Nortel has been mentioned. When might that happen?

Process is on the way its hard to predict exactly when it would run out I mean we are originally thinking it should run out this year. And I think that depending upon the exact profits they apply, that’s possible to slide into next year as well.

We continue to be very interested in that opportunity and talking with some other focus about the partnering for that opportunity. So it's still very much on our radar and as we also said that we also look at that opportunity and we have look at it in comparison to other ways of deploying that cash.

And we have to make sure that is superior to other use for cash, so that’s under the radar as well.

So this could happen, Nortel might be 2011?

Again its hard to predict while the process is underway I will tell you it's also not moving as quickly and as we thought it would move but we thought this is also just take off at a certain point too. I think there is still further strategies deployed by the personal selling asset to try to maximize value here.

So we will see how it goes.

Okay. Well, again, speaking as a significant long-term loyal shareholder, we'd love to see the buyback reactivated even at $28 earning three bucks.

Gee, just simple, that's over 10% on our money. Why not?

Why not do some buyback, especially when you paid over $30 a share a year or so ago?

It’s a good question I could say the board regularly discusses that issue. And its not a question of, we believe we can create value to a stock buybacks without a question premium value it’s a question of whether there's other opportunity that can create more value.

And so I appreciate your comment and I tell you that this is a topic that we roughly went out to figure pretty regular basis here. And let me mention before we had mentioned before we're not we have not been and we don’t expect to be people that just hoard cash.

If this happens to be there is a couple of opportunities sitting out there that could be very significantly value creators and we wanted to make sure that we have sufficient liquid assets to be able to participate effectively in those processes.

And those potential acquisitions would be immediately accretive to earnings for InterDigital shareholders?

As we talked about on the last call. I think the way to look at them is if you're as a example the Nortel patent portfolio, I don’t believe today is producing significant amounts of revenue.

So there really is a future opportunity but that future opportunity can be enormous. I think Scott mentioned on last call if you just look at it tenth of a percent royalty increase as a result of the added portfolio on a net present value basis it’s worth $900 million.

So that doesn’t immediately improve your earnings in the next quarter but it could substantially increase your share holder value over time. And set out the table that that’s a question the board asked so they paid balance all this year so you are asking all the right questions.

Well, I'd love to see a balanced approach, meaning an active buyback here with over a 10% earnings yield. Thank you.

Just two quick questions. Bill, I'm sure you read about Sprint, that they may actually kind of switch from WiMAX to LTE, and it looks like almost everyone in the world is going to go to LTE, I think, Intel and Sprint and Clearwire may be the last ones pushing WiMAX.

Can you talk about any impact that will have on your efforts or your product relationship with licensees?

I think that I've heard that as well and with that I am not surprised by that in terms of I think the long-term, well, WiMAX is a viable technology I think long-term LTE is probably has a better solutions result. I think certainly while we have good licensing positions with respect to both technology I think we’re deeper with respect to LTE, so I think that switch is probably in a positive thing for us.

I also don’t think difficult question will be whether WiMAX disappears or whether its become just part of the fabric out there, and I think its going to be part of fabric, I think that’s good for us because of the volatility activity technology we’re working on but even if it's not there is still going to be a whole load of systems out there that need to be stitched together. So it’s a trend that I think overall positive for us.

Excellent. And just wanted to confirm on the, I guess the renewal that you guys had, you didn't name it.

Was that the licensee whose deal or agreement expired at the end of June 2009?

We are not going to mention that we didn’t mention the name of licensee but we did not. I think the removal reflects a couple very good things, right.

One is, it came in as a good contributor of revenue and only contributor going forward so that’s a positive. And second the fact that there was a gap and that we were patient and waited for the right deal and got it going on the right terms and we talked about that before and I think people sometimes know really what you can do.

Yes we can do it and we got the right deal by waiting. And that’s the benefit of a good cash balance and good diversity in terms of the customer.

So we are happy to have gotten that done we were talking earlier it's more than two years as we get bigger in the business with granularity of the business kind of goes away and appreciate there is plusses and minuses in that but I am happy that not everything was material any more.

Sure. Because in this company's markets, I think 4Gs launching later than some other parts of the world.

Is that why the agreement, at least from what we know so far doesn't include 4G?

You know as I said before I think certainly in this timeframe as we do agreements I think you have a mix of products of agreement that include LTE and don’t because it’s going to depend upon the capture period of that agreement and the product plans for that manufacturer. So I think it’s not going to be unusual over the next year or two frankly if they haven’t given deals that exclude LTE so the capture period shortened up for the manufacturers and in type it's not quite ready for LTE.

All right. Thank you very much.

This is Janet Point, I’m available for follow-up questions if anybody has any and thank you this morning for listing in our call.