new ML report stays at underperform target 50
Solid results but revenues fall YoY due to
tough non-recurring comps; reit. U/P
Reiterate Rating: UNDERPERFORM| PO: 50.00 USD | Price: 48.32 USD
Solid 3Q, yet LT growth remains a concern
3Q revenues were down 20% YoY to $115mn, due to lower non-recurring revenues, yet
came in above Street’s $109mn. Gross and operating margins of 59%/28% also beat
Street’s 50%/22%, with opex levels benefiting from lower-than-expected litigation costs
and a strong USD, which also drove EPS of 74c to beat by 22c. Management provided
solid 4Q guidance for recurring revenues of $100mn, in-line with our estimates, and
opex of $77.5mn, which came in lower than our expectations by $2.2mn. Separately, we
model InterDigital’s FY22 recurring revenues from non-handsets, namely CE and
IoT/autos, at about $50mn, and note that management’s LT targets for consumer
electronics stand at $150mn. We remain cautious on the longer-term growth outlook
and the company’s ability to generate sustainable growth. We reiterate our
Underperform and $50 PO that is now based on 16x our new 2023E EPS (prior 15x).
Strength in smartphone recurring revenues drove topline
Revenues declined 20% YoY from tough comps due to the migration to recurring
revenues, as non-recurring revenues fell 73% YoY to only $14mn this quarter, vs. $51mn
in 3Q21, while recurring revenues increased 8% YoY to $101mn. Recurring revenues now
account for 88% of total revenues and the mix shift impact is therefore expected to
subside over time. Smartphones comprised the majority of recurring revenues, at 87%,
and grew 4% YoY. CE and IoT/Autos accounted for the remaining 13% and increased
60% YoY. Within the non-smartphone markets, Automotive was particularly strong in the
quarter, as Honda, Toyota, and Nissan all began utilizing InterDigital’s 3G and 4G
patents. Overall, management expects CE and IoT/autos to contribute about $100mn in
total FY22 revenues (recurring and non-recurring), which includes a 37% YoY increase
over the first three quarters of the year.
Samsung agreement expiration set for next quarter
InterDigital recently announced a new seven-year licensing agreement with Apple lasting
through 2029 (see our initial reaction here), which should carry ~$134mn in annual revs,
vs. the prior six-year deal at ~$111mn per annum. However, the ramp is not linear, with
Apple-related revenues expected to decline YoY in 2023, from ~$140mn in 2022, and
only ramp in outer years. We flag that InterDigital’s current licensing agreement with
Samsung, its second-largest customer, is set to expire next quarter, but the dealings
with Samsung are normally peaceful and the contract could be renewed before then.
