InterDigital, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in millions of dollars unless noted. InterDigital has one reportable segment and primarily licenses patents.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $124.7 | $87.7 | $226.0 | $170.1 |
| Operating income (loss) | $49.9 | $(3.1) | $80.1 | $8.8 |
| Operating margin | 40.0% | (3.6)% | 35.4% | 5.2% |
| Net income (loss) attributable to InterDigital | $21.1 | $1.6 | $39.1 | $7.2 |
| Diluted EPS | $0.69 | $0.05 | $1.26 | $0.23 |
Q2 revenue rose 42%; first-half revenue rose 33%. Patent royalties drove the increase: Q2 patent royalties were $124.0 million, up 44%, and first-half royalties were $225.1 million, up 35%. Q2 current patent royalties increased 30%, primarily reflecting new license agreements; non-current patent royalties increased to $24.6 million, including revenue from two agreements signed during the quarter. Technology solutions revenue declined. Management reported Q2 recurring revenue of $100.1 million, up 28% year over year.
Operating expenses fell 18% in Q2 and 10% in the first half, mainly due to lower personnel costs and reduced restructuring charges following 2021 cost actions. These savings were partly offset by higher patent enforcement costs, including costs associated with Lenovo and Oppo litigation, and higher revenue-sharing costs. Q2 included $2.7 million of restructuring expense, primarily a $2.4 million impairment related to office-space reductions.
Cash flow, liquidity and debt
- At June 30, cash and cash equivalents were $833.5 million, short-term investments were $67.1 million, and restricted cash was $11.7 million. Together, these totaled $912.3 million, down $36.3 million from year-end 2021.
- Operating cash flow was negative $51.7 million in the first half, compared with negative $37.1 million a year earlier. Management attributed the deterioration principally to non-cash revenue and working-capital movements; cash operating expenses declined.
- Investing cash flow was positive $142.7 million, largely reflecting net sales of short-term investments. Financing cash flow was positive $41.0 million, reflecting debt refinancing, partly offset by share repurchases and dividends.
- Long-term debt was $604.2 million at June 30, versus $422.7 million at December 31. The balance includes $460 million principal of 3.50% convertible notes due 2027, $126.2 million principal remaining on 2.00% notes due 2024, and Technicolor-related debt. The convertible notes’ net carrying amount was $575.2 million.
- The company issued the 2027 notes and used proceeds, among other things, to repurchase $273.8 million principal of 2024 notes, repurchase 1.2 million shares for $74.4 million, and fund convertible-note hedge and warrant transactions. The refinancing generated an $11.2 million extinguishment loss.
- Management said available liquidity and expected cash generation should fund operations, capital needs, debt obligations, the existing repurchase program and dividends in both the next 12 months and longer term. The company had $242.8 million of contracted fixed-price agreement cash payments due, including $26.0 million recorded in receivables.
Material changes and unusual items
- Revenue growth reflected new patent licenses, including two agreements signed in Q2, and connected-automobile licensing through a platform. Fixed-fee royalty revenue rose 32% in Q2 and 31% in the first half.
- Q2 other expense included the $11.2 million debt-extinguishment loss and foreign-currency translation losses; the company also recorded a $1.6 million gain from observable price changes in a strategic investment. These items contributed to the decline in reported other income versus 2021.
- Share repurchases totaled $74.4 million in the first half, all reported in Q2. The board increased the authorized repurchase program by $100 million to $800 million; $67.0 million remained available at June 30. Dividends declared were $0.35 per share per quarter.
- The company disclosed a prior-period accounting error related to its 2021 adoption of convertible-debt accounting guidance. It said the previously issued interim statements were not materially misstated and revised the relevant 2021 equity statements; further revision was planned in its Q3 2022 filing.
Outlook, risks and contingencies
Based on signed and committed dynamic fixed-fee contracts, InterDigital expected to recognize $432.6 million of revenue over the remaining contract terms: $148.5 million in the remainder of 2022, $129.4 million in 2023, $81.0 million in 2024, $68.6 million in 2025 and $5.2 million in 2026 and thereafter. Separately, the company expected to recognize $213.5 million of deferred revenue over time, including $137.7 million in the remainder of 2022. These are contracted revenue schedules, not total company guidance.
Management said COVID-19 had limited operational and financial impact to date and had not materially affected contracted revenue. Inflation, supply-chain issues, rising interest rates, labor shortages, recession risk and the Russia-Ukraine conflict had not materially affected the business to date, but worsening conditions could hurt results and financial condition. The filing identifies inflation-driven cost increases, talent retention, patent-law or standards-policy changes, licensing execution and litigation outcomes as risks. Revenue and receivables are concentrated among licensees: three licensees represented 84% of net receivables at June 30, and four customers each represented at least 10% of Q2 revenue.
Material ongoing proceedings include patent and FRAND disputes involving Lenovo across the UK, U.S. and China, and patent enforcement and royalty-rate proceedings involving Oppo, OnePlus and realme in multiple jurisdictions. The Delaware consolidated trial was scheduled for March 2023; additional UK, German and other proceedings had scheduled hearings. The company said none of the described matters met the requirements for accrual or disclosure of a potential loss range as of June 30, and it did not believe other ordinary-course disputes would materially affect its financial condition, results or cash flows. Management anticipated no further significant restructuring charges, while noting actual restructuring costs could differ from estimates.
Disclosure controls were assessed as effective at quarter-end, with no reported material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and earnings came from recurring fixed-fee royalties versus non-current royalties and other non-recurring items.
- The renewal, timing and collection risks in the contracted royalty pipeline, including the effect of deferred-revenue amortization on operating cash flow.
- Potential outcomes, costs and timing of the Lenovo and Oppo-related litigation and FRAND proceedings, including possible effects on licensing terms and patent remedies.
- The dilution, cash-settlement and refinancing implications of the 2027 and remaining 2024 convertible notes, hedges and warrants.
- Customer concentration, particularly the 84% receivables exposure to three licensees, and whether inflation or talent costs pressure margins.