BoA raises target to 140
Strong end of year with 20% YoY revenue growth
Interdigital posted a strong end to the year with FY23 total revenues growing 20% to $550mn and EPS up 148% YoY to $7.61. The company's quarterly revenue cadence remains lumpy, on the back of revenue recognition timing, with 4Q23 topline declining 10% YoY due to outsized catchup royalty payments in 4Q22. This also drove gross and operating margin contraction (see Exhibit 1). However, 4Q23 EPS grew 31% YoY to $1.41, benefitting from lower interest expenses and a reduced tax rate in the quarter. Overall, InterDigital continues to widen its moat within device licensing, and the company increased its total patent filings by 70% YoY in FY23. We reiterate our Buy rating and raise our PO to $140 (from $125), now based on 17x our 2025 EV/FCF vs. prior 15x 2024E EV/FCF, as we remain confident in InterDigital's medium-term outlook and potential topline benefits from licensing agreements with Oppo and Vivo. See Exhibit 2 for our estimate revisions.
Recurring revenue supported by strong ex-handset growth
Recurring revenues from smartphones were roughly flat YoY in 4Q23 at $86mn, yet the company continues to grow via its Consumer Electronics (CE) and IoT/autos segment, which grew 14% YoY. This strength was driven by new agreements in video, solid momentum in autos and ASP uplift within the connected car ecosystem from the migration to 5G from 4G. New sources of upside include licensing of artificial intelligence (AI) technologies across all verticals, which could drive content growth and better unit royalties. Aa faster handset replacement cycle due to AI could also be a positive growth catalyst.
Better-than-expected FY24 revenue guidance
Management provided full-year guidance for FY24 revenues to reach $645mn at the midpoint, which came in well above Street's estimates of $471mn. We see additional upside from new licensing agreements and subsequent catch-up payments. For example, the final resolution of InterDigital's latest licensing agreement with Samsung for smartphones is expected to finalize by YE24.
