ML report
Announcement of new licensing deal with major company
InterDigital today announced that it has reached an agreement for a new patent
licensing deal with Apple, which is InterDigital’s biggest customer, accounting for 35%
and 28% of 1Q22 and 2Q22 revenues, respectively. The prior licensing agreement was a
six-year deal that amounted to ~$111mn per annum for the first five years and $140mn
in the sixth year. On average, the prior deal contributed $115mn per annum. The new
agreement is a seven-year deal, carrying an average value of $134mn per annum,
representing roughly a 15% increase in the average annual contribution. However, if we
compare the average contribution on a year-over-year basis, it represents a slight
decline from the prior year. Additionally, we point out that InterDigital’s licensing
agreement with Samsung is set to expire in 4Q22, with Samsung being the secondlargest customer, comprising about 16-19% of revenues.
Updated revenue guidance separate from deal announcement
Separately, InterDigital updated its 3Q guidance to $113.5mn in total revenues, versus
the previous guidance of $98mn, attributed to other deals excluding Apple. The new
Apple deal is expected to impact revenues starting in 4Q. Management also increased its
3Q operating expense expectations to $89mn, from $78mn previously. We update our
expectations accordingly and note that our 3Q operating margin estimate increases to
21.5% from the prior 20.6%, raising our 3Q EPS estimate by 10c to 44c.
Long-term growth story remains unfavorable; Underperform
Despite the newly announced agreement and updated guidance estimates, we maintain
our Underperform rating. We expect revenue growth to flatten from 18.5% in 2021 to
6.4% and 4.9% in 2022 and 2023, respectively, with the Apple agreement extension not
changing the long-term growth trajectory. Management believes that recurring revenues
from wireless technologies could climb to ~$500mn from the current ~$375mn run rate,
but this would require key Chinese vendors to agree to pay royalties. Also, even if IDCC
manages to close these deals and reach 80-85% market penetration (versus 55%
currently), additional revenue upside would likely be limited, as 90% of revenues are still
related to the wireless segment. We adjust our target multiple given market conditions
and set our new PO at $50, based on 15x 2023E P/E, from $60 and 19x previous
