InterDigital, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparison is primarily with FY 2020. InterDigital is a wireless, video and related technology research and development company that earns most of its revenue through patent licensing. It reported approximately 27,500 patents and patent applications at year-end.
Financial performance and position
- Revenue: $425.4 million, up 19% from $359.0 million. Patent royalties were $420.5 million; technology solutions revenue was $4.9 million. Recurring revenue was $351.7 million, while non-current patent royalties were $73.7 million.
- Profit: Operating income was $71.2 million, versus $55.2 million. Operating margin was approximately 16.7%, compared with 15.4%. Consolidated net income was $42.2 million, versus $37.9 million; net income attributable to InterDigital was $55.3 million, versus $44.8 million, reflecting losses attributable to noncontrolling interests. Diluted EPS was $1.77, versus $1.44.
- Cash flow: Operating cash flow was $130.4 million, down from $163.5 million. Investing activities provided $179.6 million, largely reflecting net sales of short-term investments; financing activities used $74.5 million, primarily for dividends and share repurchases.
- Liquidity: Cash, restricted cash and short-term investments totaled $948.6 million, compared with $930.8 million. Current assets were $1,050.3 million and current liabilities $371.6 million, a current ratio of approximately 2.8. Management said available funds and operating cash flow should cover obligations and planned capital returns in the short and long term.
- Debt: Total indebtedness was approximately $427.1 million, including $400 million principal of 2.00% convertible notes due 2024 and approximately $27.1 million related to the Technicolor acquisition. The 2024 Notes require principal settlement in cash under the company’s net-share-settlement election.
- Returns to shareholders: Dividends declared were $1.40 per share for the year. The company repurchased $30.0 million of stock in 2021, with approximately $41.5 million remaining under its authorization.
Changes versus FY 2020
- Revenue rose $66.4 million, mainly due to Xiaomi and a top-ten global TV manufacturer agreements signed in 2021, which contributed to higher recurring and non-current patent royalties. Technology solutions revenue declined $6.9 million, partly because a strategic partner contract ended.
- Operating expenses increased 17% to $354.2 million. Restructuring charges were $27.9 million; share-based compensation and revenue-share costs also increased. These items partly offset higher revenue.
- Interest expense decreased $15.6 million, primarily following adoption of convertible-instrument accounting standard ASU 2020-06, which reduced non-cash interest expense. The standard increased 2021 basic and diluted EPS by $0.35 and $0.34, respectively.
- The effective tax rate was 27.0%, compared with a 21.2% tax benefit in 2020. The prior-year benefit included discrete tax-return amendment and reserve-reversal effects.
Outlook, commentary and risks
- Agreements and revenue visibility: The company entered 13 patent license agreements in 2021 and estimated they would generate more than $390 million over their respective lives. At year-end, contracted revenue from signed agreements and committed dynamic fixed-fee payments was approximately $572.0 million, including $319.0 million expected in 2022; this is not a forecast of total 2022 revenue.
- Renewals: Nine license agreements were scheduled to expire in 2022 and generated $211.5 million, or about 60% of 2021 recurring revenue. Apple’s agreement ends September 30, 2022, and Samsung’s ends December 31, 2022. Management said it was working to renew the agreements.
- Restructuring: The strategic review led to proposed workforce reductions in research and innovation and further reductions in general and administrative functions. The company expected about $15 million of cost savings in 2022 and approximately $1 million of additional restructuring charges in first-quarter 2022; savings exclude possible changes in litigation, revenue share or new investment.
- Litigation and licensing uncertainty: Proceedings with Lenovo include U.S. patent and antitrust litigation, UK proceedings to establish worldwide FRAND terms, and Chinese rate-setting matters. InterDigital also filed infringement actions against Oppo, OnePlus and realme in multiple jurisdictions. Outcomes could affect licensing rates, revenue, costs and available remedies. No accrual or potential loss range was recorded for the described proceedings as of year-end.
- Concentration and execution risks: Apple, Samsung, Xiaomi and Huawei each generated at least 10% of 2021 revenue. The company highlights renewal risk, reliance on a limited number of licensees, patent validity and essentiality challenges, regulatory and judicial changes to SEP licensing, and the timing of new licensing agreements.
- COVID-19 and management view: Management reported limited impact on FY 2021 operations and financial position and no significant effect on contracted revenue, noting that 89% of recurring revenue came from fixed-fee royalties. It continued to identify pandemic, supply-chain and economic uncertainty as risks.
- Unusual reporting matters: The company corrected a 2020 balance-sheet classification of $24.3 million in tax receivables, concluding the issue did not materially misstate previously issued statements. It also disclosed an error in its 2021 interim accounting for ASU 2020-06 adoption; annual statements reflect the corrected accounting, and prior interim statements were to be revised prospectively in 2022 filings. Revenue valuation for dynamic fixed-fee licenses and patents received in license agreements was identified as a critical audit matter.
Key facts for investors to verify
- Progress, timing and economic terms of the Apple, Samsung and other 2022 license renewals, particularly against the $211.5 million of 2021 recurring revenue represented by 2022 expirations.
- Results and potential financial consequences of Lenovo and other FRAND, patent-infringement and antitrust proceedings.
- Whether reported 2022 restructuring savings materialize, alongside the remaining restructuring costs and effects on research capacity.
- Cash collection timing versus revenue recognition: year-end deferred revenue was approximately $311.1 million, while management expected 2022 cash receipts from existing agreements to be lower than related recognized revenue.
- Debt repayment capacity and capital-return plans, including the $400 million convertible-note principal due in 2024 and the board’s discretion over future dividends and repurchases.
- Revenue concentration and the assumptions used to value license performance obligations and patent consideration, which involve significant management judgment.