InterDigital, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. InterDigital licenses its patent portfolio and reports one business segment. Financial amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $114.8 | $143.5 | $340.7 | $313.6 |
| Operating income | $31.8 | $36.8 | $111.9 | $45.6 |
| Net income attributable to InterDigital | $22.2 | $26.2 | $61.3 | $33.4 |
| Diluted EPS | $0.74 | $0.83 | $2.00 | $1.07 |
- Q3 revenue fell 20%, primarily because Q3 2021 included $50.1 million of non-recurring revenue from previously disclosed agreements. Q3 2022 included $13.7 million of non-recurring revenue, primarily from connected-automobile licenses.
- Recurring revenue rose 8% in Q3 to $101.0 million: Smartphone revenue increased 4% to $87.5 million, and CE/IoT/Auto increased 60% to $13.6 million. For the first nine months, recurring revenue grew 20% to $300.3 million.
- Q3 operating expenses declined 22% to $82.9 million, including no restructuring expense versus $7.0 million a year earlier. Lower revenue share and compensation costs also contributed. Operating margin was approximately 27.7%, compared with 25.6% in Q3 2021.
- Nine-month operating expenses declined 15% to $228.8 million, supporting operating income growth despite higher patent enforcement costs. Nine-month operating margin was approximately 32.8%, versus 14.5% in 2021.
- Q3 interest expense was $7.7 million; other income, net, was $0.9 million. For the first nine months, other expense, net, was $15.1 million, including an $11.2 million debt-extinguishment loss and foreign-currency losses. The nine-month effective tax rate was 22.4%.
- Operating cash flow was negative $70.5 million for the first nine months, versus positive $59.2 million in 2021. The company cited lower cash receipts and timing differences, including a $371.9 million increase in receivables; cash operating expenses and taxes paid declined.
Financial position and capital allocation
- At September 30, cash and cash equivalents were $539.7 million, short-term investments $323.8 million, and restricted cash $9.3 million. Together these totaled $872.8 million, down $75.8 million from year-end 2021.
- Accounts receivable rose to $403.0 million from $31.1 million at year-end, including an expected partial upfront payment related to a license renewal. One licensee represented 89% of net receivables.
- Long-term debt was $605.9 million, up from $422.7 million at year-end. The company issued $460.0 million of 3.50% convertible notes due 2027 and repurchased $273.8 million of its 2.00% notes due 2024; $126.2 million principal of the 2024 notes remained outstanding. The refinancing generated an $11.2 million extinguishment loss.
- Current and long-term deferred revenue totaled $487.6 million. Separately, contracted dynamic fixed-fee royalties expected over the terms of signed agreements totaled $1.279 billion; these are expected revenues, not all near-term cash receipts.
- The company paid $31.9 million in dividends and repurchased $74.4 million of shares in the first nine months. No shares were purchased in Q3 under the repurchase program.
Outlook, commentary, and risks
- InterDigital renewed its Apple patent license on September 30, 2022. Management expects approximately $134.0 million of revenue annually over the seven-year term beginning October 1, 2022. The filing provides no broader earnings or revenue guidance.
- Management said available liquidity and expected operating cash flows should fund operations, capital needs, debt obligations, dividends, and the repurchase program in both the next 12 months and longer term. It does not expect further significant restructuring charges; the plan was substantially complete.
- Management reported limited operational and financial impact from COVID-19 through Q3. Inflation, supply-chain issues, rising rates, labor shortages, recession risk, and the Russia-Ukraine conflict had not materially affected the business to date, but worsening conditions could adversely affect results and costs.
- Key exposures include dependence on patent licensing and successful negotiations, customer and receivables concentration, changes to patent and standards-body rules, and outcomes and costs of licensing and patent litigation. Legal proceedings include disputes with Lenovo across several jurisdictions and patent actions involving Oppo, OnePlus, and realme. The company said the matters did not meet the criteria for accrual or disclosure of a potential loss range at September 30.
- Q3 included $8.4 million of one-time supplemental compensation costs driven by licensing success. The filing also notes increased intellectual-property enforcement expense for the first nine months.
Important facts for investors to verify
- Collection timing and credit exposure associated with the $403.0 million receivable balance, including the 89% concentration in one licensee.
- Conversion, dilution, interest, and refinancing implications of the 2027 and remaining 2024 convertible notes, as well as the company’s share-repurchase and dividend plans.
- Timing and revenue contribution from the Apple renewal and other contracted licenses, alongside the distinction between recurring and non-recurring royalties.
- Developments in the Lenovo and Oppo-related litigation and any resulting effect on licensing terms, enforcement costs, or royalty collections.
- Whether macroeconomic pressures, patent-policy changes, or customer concentration alter the company’s stated liquidity outlook or ability to secure future licenses.