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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 154 added, 83 removed, 172 unchanged (58% of the section changed)

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Previously we referred to catch-up revenues as non-recurring revenues.

On January 1, 2023, we agreed to renew our patent license agreement with Samsung and enter into binding arbitration to determine the final terms of the license, including the amount payable by Samsung under the new agreement.

In first quarter 2023, we began recognizing revenue for Samsung at a conservative level consistent with the revenue we recognized from our patent license agreement that expired on December 31, 2022.

We believe that it is likely the arbitration award will exceed the conservative estimate and require a true-up at that time.

Lenovo Proceedings

On March 16, 2023, the UK’s High Court handed down its judgment in the company’s licensing dispute with Lenovo.

The Court ruled that Lenovo should pay a total of $138.7 million for a license to InterDigital’s portfolio of 3G, 4G and 5G patents, including past sales.

We recognized $101.3 million of revenue in first quarter 2023, including $98.8 million of catch-up revenues based on conservative estimates of the minimum revenue that we expect to recognize under a patent license agreement.

On June 27, 2023, we were awarded an additional $46.2 million by the UK High Court in our case against Lenovo, increasing the total Lenovo must pay for a patent license through 2023 to $184.9 million.

We received the cash payment for the full $184.9 million on July 11, 2023.

The Company will defer recognizing any additional catch-up revenue until the appeal process progresses.

See Note 5, “ Litigation and Legal Proceedings ,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the Lenovo proceedings.

Share Repurchases

On December 31, 2022, we announced an increase to the share repurchase program to a total of $400 million outstanding at the beginning of 2023.

On January 23, 2023, we commenced a modified “Dutch auction” tender offer (the “Tender Offer”) to purchase for cash up to $200.0 million of our common stock.

On February 23, 2023 we announced the final results of the Tender Offer, which resulted in the repurchase of 2.7 million shares of our common stock at a price of $72.98 per share, for an aggregate cost of $199.9 million, excluding fees, expenses and excise tax relating to the Tender Offer.

During the period April 1, 2023 to April 30, 2023, we repurchased 0.3 million shares for $24.7 million.

As of April 30, 2023, there was $175.4 million remaining under the share repurchase authorization, which we plan to utilize to periodically repurchase additional common shares.

During second quarter 2023, we repurchased 0.5 million shares for $42.5 million under our share repurchase program and an additional 0.2 million shares for $15.4 million during the period July 1, 2023 to July 31, 2023.

As of July 31, 2023, there was $142.8 million remaining under the share repurchase authorization, which we plan to utilize to periodically repurchase additional common shares.

Cash & Short-term Investments

As of March 31, 2023, we had $962.8 million of cash, restricted cash and short-term investments and an additional $1.4 billion of cash payments due under contracted fixed price agreements, which includes our conservative estimates of the minimum cash receipts that we expect to receive under patent license agreements with Samsung and Lenovo.

In addition, it includes $118.7 million of fixed-fee accounts receivable.

As of June 30, 2023, we had $854.0 million of cash, restricted cash and short-term investments and an additional $1.5 billion of cash payments due under contracted fixed price agreements, which includes our conservative estimates of the minimum cash receipts that we expect to receive under patent license agreement with Samsung, $184.9 million due from Lenovo which was collected early in third quarter 2023, and $29.5 million of accounts receivable due under fixed-fee contracts from other customers.

89% of our recurring revenue comes from fixed-fee royalties.

Such agreements often have prescribed payment schedules that are uneven and sometimes front-loaded, resulting in timing differences between when we collect the cash payments and recognize the related revenue.

The following table reconciles the timing differences between cash receipts and recognized revenue during the three months ended March 31, 2023 and 2022, including the resulting operating cash flow (in thousands):

Three months ended March 31,

The following table reconciles the timing differences between cash receipts and recognized revenue during the three and six months ended June 30, 2023 and 2022, including the resulting operating cash flow (in thousands):

Three months ended June 30, Six months ended June 30,

Non-cash revenue:

2023 2022 2023 2022

Fixed fee cash receipts (a)

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Other cash receipts (b)

11,160 16,620 31,132 25,212

Change in deferred revenue 38,641 76,959 81,407 127,700

Change in receivables 92,756 25,163 183,612 17,688

Other 24,110 5,657

(50,372) 2,576 (26,262) 8,233

Total Revenue $ 101,591 $ 124,657 $ 303,964 $ 225,975

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(b) Other cash receipts are primarily comprised of cash receipts related to our variable patent royalty revenue and catch-up revenues.

When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded which relate to revenue expected to be recognized in future periods.

(c) The changes in other are primarily driven by customer deposits partially offset by long-term contract assets associated with revenue estimates.

When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded that relate to revenue expected to be recognized in future periods.

That liability is then reduced as we recognize revenue over the balance of the agreement.

The following table shows the projected amortization of our current and long term deferred revenue as of March 31, 2023 (in thousands):

Deferred Revenue

The following table shows the projected amortization of our current and long-term deferred revenue as of June 30, 2023 (in thousands):

Deferred Revenue (a)

Remainder of 2023 $ 107,837

Thereafter 3,617

2028 and Thereafter 3,617

Total Revenue $ 345,232

Total revenues of $202.4 million, which includes both recurring and catch-up revenues, nearly doubled from first quarter 2022 primarily due to catch-up revenues from the Lenovo proceedings recognized in first quarter 2023.

First quarter 2023 recurring revenues were $101.6 million, compared to recurring revenues of $99.1 million in first quarter 2022, a 2% year-over-year increase.

In first quarter 2023, revenues (in descending order) from Lenovo and Apple each comprised 10% or more of our consolidated revenues.

Refer to " Results of Operations --First Quarter 2023 Compared to First Quarter 2022 " for further discussion of our 2023 revenue.

Impact of Inflation and Other Market Factors

(a) This table includes our estimated amortization of deferred revenue related to Lenovo.

In accordance with ASC 606, these estimates are limited to the amount of revenue we expect to recognize only to the extent it is probable that a subsequent change in the estimate would not result in a significant revenue reversal.

Second quarter 2023 total revenues of $101.6 million, which includes both recurring and catch-up revenues, decreased 19% from second quarter 2022 primarily due to catch-up revenues recognized from two new agreements and connected automobile license agreements signed during second quarter 2022.

Second quarter 2023 recurring revenues were $99.1 million, compared to recurring revenues of $100.1 million in second quarter 2022, a 1% year-over-year decrease.

In second quarter 2023, revenues (in descending order) from Apple, Samsung, Xiaomi, and Huawei each comprised 10% or more of our consolidated revenues.

Refer to " Results of Operations --Second Quarter 2023 Compared to Second Quarter 2022 " for further discussion of our 2023 revenue.

Impact of Inflation and Other Macroeconomic Factors

We have been actively monitoring the impact of the current macroeconomic environment in the U.S.

and globally characterized by increasing inflation, supply chain issues, rising interest rates, labor shortages, and the potential for a recession.

and globally characterized by inflation, supply chain issues, rising interest rates, labor shortages, and the potential for a recession.

These market factors, as well as the impacts of the Russia and Ukraine conflict, have not had a material impact on our business to date.

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Comparability of Financial Results

When comparing first quarter 2023 financial results against other periods, the following items should be taken into consideration:

• Our first quarter 2023 revenues include $100.8 million of catch-up revenues primarily related to estimates associated with the Lenovo proceedings.

• In first quarter 2023, we accrued a $5.7 million one-time charge for a net litigation fee reimbursement associated with the Lenovo proceedings.

• In first quarter 2023, we incurred a $2.5 million one-time impairment on our patents held for sale.

When comparing second quarter 2023 financial results against other periods, the following items should be taken into consideration:

• Our second quarter 2023 revenues include $2.5 million of catch-up revenues primarily related to two new patent license agreements signed in second quarter 2023.

• In second quarter 2023, we accrued a $1.8 million one-time charge for a net litigation fee reimbursement associated with the Lenovo proceedings.

• During second quarter 2023, we recognized a $3.1 million gain resulting from fair value changes of one of our long-term strategic investments, which was included within “O ther income (expense), net ” in the condensed consolidated statement of income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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There have been no material changes to our existing critical accounting policies from the disclosures included in our 2022 Form 10-K.

In addition, we have analyzed the impact of COVID-19 on our financial statements as of March 31, 2023, and we have determined that the changes to our significant judgments and estimates did not have a material impact on our financial statements.

Refer to Note 1, “ Basis of Presentation ,” in the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements and changes in accounting policies.

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Cash, cash equivalents, restricted cash and short-term investments

As of March 31, 2023 and December 31, 2022, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):

March 31, 2023 December 31, 2022 Increase /

As of June 30, 2023 and December 31, 2022, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):

June 30, 2023 December 31, 2022 Increase /(Decrease)

Cash and cash equivalents $ 277,599 $ 693,479 $ (415,880)

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Refer to the sections below for further discussion of these items.

Cash flows used in operating activities

Cash flows used in operating activities in the first quarter 2023 and 2022 (in thousands) were as follows:

Three months ended March 31,

Cash flows from operating activities

Cash flows used in operating activities in the first half 2023 and 2022 (in thousands) were as follows:

Six months ended June 30,

2023 2022 Change

Net cash used in operating activities $ (73,292) $ (51,740) $ (21,552)

Our cash flows used in operating activities are principally derived from cash operating expenses and income tax payments, offset by cash receipts from patent license agreements.

The $9.9 million change in net cash used in operating activities was primarily driven by lower cash receipts due to the timing of cash receipts related to existing patent license agreements.

The table below sets forth the significant items comprising our cash flows used in operating activities during the three months ended March 31, 2023 and 2022 (in thousands):

Three months ended March 31,

Our cash flows used in operating activities are principally driven by cash operating expenses and income tax payments, offset by cash receipts from patent license agreements.

The $21.6 million change in net cash used in operating activities was primarily driven by a federal tax payment paid in first half 2023, an increase in cash operating expenses and lower cash receipts due to the timing of cash receipts related to existing patent license agreements.

For more information on the change in operating expenses refer to " Results of Operations --Second Quarter 2023 Compared to Second Quarter 2022 " below.

The table below sets forth the significant items comprising our cash flows used in operating activities during the six months ended June 30, 2023 and 2022 (in thousands):

Six months ended June 30,

2023 2022 Change

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______________________________

(a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.

(a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, non-cash compensation and non-cash impairment charges.

(b) Income taxes paid include foreign withholding taxes.

Cash flows from investing and financing activities

Net cash used in investing activities for first quarter 2023 was $14.5 million, a $122.1 million change from $107.6 million of net cash provided by investing activities in first quarter 2022.

During first quarter 2023, we purchased $6.0 million of short-term marketable securities, net of sales, and capitalized $8.5 million of patent costs and property and equipment purchases.

During first quarter 2022, we sold $117.8 million of short-term marketable securities, net of purchases, and capitalized $10.2 million of patent costs and property and equipment purchases.

Net cash used in financing activities for first quarter 2023 was $218.1 million, a change of $205.1 million from $13.0 million the first quarter 2022.

This change was primarily attributable to a $203.4 million increase in share repurchases in first quarter 2023.

Our combined short-term and long-term deferred revenue balance as of March 31, 2023 was approximately $383.9 million, a net decrease of $42.8 million from December 31, 2022.

Net cash used in investing activities for first half 2023 was $67.5 million, a $210.3 million change from $142.7 million of net cash provided by investing activities in first half 2022.

During first half 2023, we purchased $46.0 million of short-term marketable securities, net of sales, and capitalized $21.5 million of patent costs and property and equipment purchases.

During first half 2022, we sold $164.8 million of short-term marketable securities, net of purchases, and capitalized $22.1 million of patent costs and property and equipment purchases.

Net cash used in financing activities for first half 2023 was $271.5 million, a change of $312.4 million from net cash provided by financing activities of $41.0 million the first half 2022.

This change was primarily attributable to a $171.4 million increase in share repurchases in first half 2023 compared to first half 2022, of which $203.4 million was related to the Company's modified "Dutch auction" tender offer in first quarter 2023.

The change was also due to net proceeds of $140.0 million from the debt refinancing during first half 2022.

Our combined short-term and long-term deferred revenue balance as of June 30, 2023 was approximately $345.2 million, a net decrease of $81.4 million from December 31, 2022.

This decrease in deferred revenue was primarily due to amortization of deferred revenue recognized in the period, partially offset by cash receipts on existing patent license agreements.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the March 31, 2023 deferred revenue balance of $383.9 million by $178.8 million over the next twelve months.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the June 30, 2023 deferred revenue balance of $345.2 million by $172.7 million over the next twelve months.

Convertible Notes

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However, under GAAP, since the impact of the 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "Note Hedge Transactions") is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.

During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of March 31, 2023) or above the strike price of the warrants ($106.37 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of March 31, 2023), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share.

During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of June 30, 2023) or above the strike price of the warrants ($106.37 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of June 30, 2023), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share.

As a result, in periods where the average market price of our common stock is above the conversion price or strike price, as applicable, under the if-converted method, we calculate the number of shares issuable under the terms of the Convertible Notes and the warrants based on the average market price of the stock during the period, and include that number in the total diluted shares outstanding for the period.

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As described in Note 7, " Obligations, " the Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof ("net share settlement").

Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of March 31, 2023, and the approximately 5.9 million warrants related to the 2027 Notes and the 1.6 million warrants remaining related to the 2024 Notes, outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2027 Warrant Transactions and 2024 Warrant Transactions (together, the "Warrant Transactions"), (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the Warrant Transactions, and settlement of the Note Hedge Transactions:

Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of June 30, 2023, and the approximately 5.9 million warrants related to the 2027 Notes and the 1.6 million warrants remaining related to the 2024 Notes, outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2027 Warrant Transactions and 2024 Warrant Transactions (together, the "Warrant Transactions"), (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the Warrant Transactions, and settlement of the Note Hedge Transactions:

Market Price Per Share Shares Issuable Upon Conversion of the 2027 Notes Shares Issuable Upon Exercise of the 2027 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2027 Note Hedge Transactions Incremental Shares Issuable (a)

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RESULTS OF OPERATIONS

First Quarter 2023 Compared to First Quarter 2022

The following table compares first quarter 2023 revenues to first quarter 2022 revenues (in thousands):

Three months ended March 31,

Second Quarter 2023 Compared to Second Quarter 2022

The following table compares second quarter 2023 revenues to second quarter 2022 revenues (in thousands):

Three months ended June 30,

2023 2022 Increase/(Decrease)

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(a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements.

Recurring revenues increased 2% to $101.6 million, compared to recurring revenue of $99.1 million in first quarter 2022.

The increase was primarily driven by CE, IoT/Auto recurring revenue resulting from six new patent license agreements and new connected automobile license agreements signed over the last twelve months.

In first quarter 2023 and 2022, 67% and 80%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue.

In first quarter 2023 and 2022, the following licensees accounted for 10% or more of our total revenue:

Three months ended March 31,

Total revenues of $101.6 million, which includes both recurring and catch-up revenues, decreased $23.1 million primarily due to catch-up revenues related to two previously-announced patent license agreements and connected automobile license agreements recognized in second quarter 2022, compared to catch-up revenues recognized on two patent license agreements signed in second quarter 2023.

Recurring revenues were flat compared to second quarter 2022.

In second quarter 2023 and 2022, 78% and 70%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue.

In second quarter 2023 and 2022, the following licensees accounted for 10% or more of our total revenue:

Three months ended June 30,

Customer A 33% 28%

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Operating Expenses

The following table summarizes the changes in operating expenses between first quarter 2023 and first quarter 2022 by category (in thousands):

Three months ended March 31,

The following table summarizes the changes in operating expenses between second quarter 2023 and second quarter 2022 by category (in thousands):

Three months ended June 30,

2023 2022 Increase/(Decrease)

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Total Operating expenses $ 78,215 $ 74,757 $ 3,458 5 %

Operating expenses increased to $83.1 million in first quarter 2023 from $71.1 million in first quarter 2022.

Operating expenses increased to $78.2 million in second quarter 2023 from $74.8 million in second quarter 2022.

The $3.5 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

One-time net litigation fee reimbursement

Personnel-related costs 3,376

Patent impairment 2,500

Share-based compensation $ 4,756

Fair value changes of deferred compensation liability 2,676

One-time net litigation fee reimbursement

Intellectual property enforcement and non-patent litigation (3,778)

Restructuring activities (2,738)

Other (1,488)

Total increase in operating expenses $ 3,458

The $12.0 million increase in operating expenses was driven by one-time items, including a $5.7 million net litigation fee reimbursement and a $2.5 million patent impairment on our patents held for sale.

A $3.4 million increase in personnel-related costs was driven by fair value changes of our deferred compensation liability, which was offset by a related gain recorded within "O ther income (expense), net " on the investments that we hold under this plan.

Additionally, share-based compensation increased $2.4 million driven by both higher accrual rates and higher award levels to non-executive employees.

These increases were partially offset by a $0.5 million decrease in non-recurring restructuring activities recognized in first quarter 2022.

The $3.5 million increase in operating expenses was primarily due to a $4.8 million increase in share-based compensation costs driven by both higher accrual rates and higher award levels to non-executive employees and a $2.7 million increase from fair value changes of our deferred compensation liability, which was offset by a related gain recorded within " Other income (expense), net " on the investments that we hold under this plan.

Additionally, second quarter 2023 included a one-time $1.8 million net litigation fee reimbursement related to the Lenovo proceedings.

These increases were partially offset by a $3.8 million decrease in intellectual property enforcement costs driven by decreased costs from the Lenovo proceedings and a $2.7 million decrease in non-recurring restructuring activities recognized in second quarter 2022.

Research and portfolio development expense:

The $5.3 million increase in research and portfolio development expense was primarily driven by the above-noted increased personnel-related costs and patent impairment.

The $4.7 million increase in research and portfolio development expense was primarily driven by the above-noted increases in share-based compensation and fair value changes of our deferred compensation liability.

Licensing expense:

Licensing expense increased $5.8 million primarily driven by the above-noted one-time net litigation fee reimbursement.

Licensing expense was relatively flat as compared to second quarter 2022.

The decrease in intellectual property enforcement costs was offset primarily by the above-noted increases in share-based compensation and fair value changes of our deferred compensation liability.

General and administrative expense:

General and administrative expense increased $1.4 million primarily due to the above-noted increased share-based compensation costs.

General and administrative expense increased $2.2 million, primarily driven by the above-noted increases in share-based compensation and fair value changes of our deferred compensation liability.

Restructuring activities:

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Non-Operating Income (Expense), net

The following table compares first quarter 2023 non-operating income (expense), net to first quarter 2022 non-operating income (expense), net (in thousands):

Three months ended March 31,

The following table compares second quarter 2023 non-operating income (expense), net to second quarter 2022 non-operating income (expense), net (in thousands):

Three months ended June 30,

2023 2022 Increase/(Decrease)

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Interest and investment income 10,254 297 9,957 3,353 %

Other income (expense), net 1,511 (1,214) 2,725 (224) %

Loss on extinguishment of long-term debt — (11,190) 11,190 (100) %

Other 4,133 (4,123) 8,256 (200) %

Total non-operating income (expense), net $ 2,246 $ (21,288) $ 23,534 111 %

Interest expense increased primarily due to the additional interest on the 2027 Notes issued during second quarter 2022 and significant financing expense resulting from a previously announced patent license agreement.

The $11.5 million increase in interest and investment income was primarily due to market conditions driving higher yields on our short-term investments.

Lastly, the change in Other income (expense), net was primarily due to fair value adjustments of our investments resulting in a $1.0 million net gain in 2023, compared to a $0.8 million net loss in 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $0.7 million in first quarter 2023, compared to a $0.4 million net loss in first quarter 2022.

In first quarter 2023 and 2022, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 14.0% and 25.2%, respectively.

Interest expense increased primarily due to significant financing expense resulting from a previously announced patent license agreement and additional interest on the 2027 Notes issued during second quarter 2022.

Also in second quarter 2022, there was a $11.2 million loss on extinguishment of the 2024 Notes, as described further Note 7, " Obligations " within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The $10.0 million increase in interest and investment income was primarily due to increased short-term investments made by the Company and market conditions driving higher yields the short-term investments.

The change in Other was primarily due to fair value adjustments of our investments resulting in a $3.9 million net gain in 2023, compared to a $0.3 million net loss in 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $0.4 million in second quarter 2023, compared to a $3.6 million net loss in second quarter 2022.

In second quarter 2023 and 2022, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 16.9% and 28.1%, respectively.

The change in effective tax rate is due to an increase in the amount of Foreign Derived Intangible Income deduction benefit available to the Company due to an increase in taxable income for the timing difference between the recognition of book and tax revenue.

The effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation.

Excluding this valuation allowance, our first quarter 2023 and 2022 effective tax rate would have been 13.8% and 19.2%, respectively.

Excluding this valuation allowance, our second quarter 2023 and 2022 effective tax rate would have been 9.6% and 24.9%, respectively.

First Half 2023 Compared to First Half 2022

The following table compares first half 2023 revenues to first half 2022 revenues (in thousands):

Six months ended June 30,

2023 2022 Total Increase/(Decrease)

Recurring revenues:

Smartphone $ 172,506 $ 175,182 $ (2,676) (2) %

CE, IoT/Auto 27,518 23,135 4,383 19 %

Other 622 911 (289) (32) %

Total recurring revenues 200,646 199,228 1,418 1 %

Catch-up revenues a

103,318 26,747 76,571 286 %

Total revenues $ 303,964 $ 225,975 $ 77,989 35 %

(a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements.

Total revenues of $304.0 million, which includes both recurring and catch-up revenues, increased 35% from $226.0 million in the first six months of 2022 primarily due to catch-up revenues from the Lenovo proceedings recognized in first quarter 2023.

Recurring revenues were flat compared to first half 2022.

In first half 2023 and first half 2022, 69% and 71% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In first half 2023 and first half 2022, the following companies accounted for 10% or more of our total revenue:

Six months ended June 30,

Customer A 22% 31%

Customer B 13% 17%

Customer C <10% 13%

Customer D <10% 10%

Customer F 34% —%

Operating Expenses

The following table summarizes the changes in operating expenses between first half 2023 and first half 2022 by category (in thousands):

Six months ended June 30,

2023 2022 Increase/(Decrease)

Research and portfolio development $ 99,307 $ 89,354 $ 9,953 11 %

Licensing 38,012 32,856 5,156 16 %

General and administrative 24,008 20,400 3,608 18 %

Restructuring activities — 3,280 (3,280) (100) %

Total Operating expenses $ 161,327 $ 145,890 $ 15,437 11 %

Operating expenses increased 11% to $161.3 million in first half 2023 from $145.9 million in first half 2022.

The $15.4 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

One-time net litigation fee reimbursement

Share-based compensation 7,152

Fair value changes of deferred compensation liability 4,238

Patent impairment 2,500

Intellectual property enforcement and non-patent litigation (6,247)

Restructuring activities (3,279)

Total increase in operating expenses $ 15,437

The $15.4 million increase in operating expenses was primarily due to a $7.2 million increase in share-based compensation costs driven by both higher accrual rates and higher award levels to non-executive employees and a $4.2 million increase from fair value changes of our deferred compensation liability, which was offset by a related gain recorded within "O ther income (expense), net " on the investments that we hold under the plan.

Additionally, first half 2023 included one-time items, including a $7.5 million net litigation fee reimbursement related to the Lenovo proceedings and a $2.5 million patent impairment on our patents held for sale.

These increases were partially offset by a $6.2 million decrease in intellectual property enforcement costs driven by decreased costs from the Lenovo proceedings and a $3.3 million decrease in non-recurring restructuring activities recognized in first half 2022.

Research and portfolio development expense:

The $10.0 million increase in research and portfolio development expense primarily resulted from the above-noted increases in share-based compensation, fair value changes of our deferred compensation liability, and patent impairment.

Licensing expense:

Licensing expense increased by $5.2 million primarily resulting from the above-noted one-time litigation fee reimbursement and increases in share-based compensation, partially offset by the decrease in intellectual property enforcement costs.

General and administrative expense:

The $3.6 million increase in general and administrative expense was primarily driven by the above-noted increases in share-based compensation and fair value changes of our deferred compensation liability.

Restructuring activities:

Restructuring expenses associated with our overall restructuring plan decreased due to the plan being substantially complete in 2022.

Non-Operating Income (Expense), net

The following table compares first half 2023 non-operating income (expense), net to first half 2022 non-operating income (expense), net:

Six months ended June 30,

2023 2022 Increase/(Decrease)

Interest expense $ (24,228) $ (11,787) $ (12,441) (106) %

Interest and investment income 21,934 506 21,428 4,235 %

Loss on extinguishment of long-term debt — (11,190) 11,190 (100) %

Other 5,644 (5,337) 10,981 206 %

Total non-operating income (expense), net $ 3,350 $ (27,808) $ 31,158 112 %

The $21.4 million increase in interest and investment income was primarily due to increased short-term investments made by the Company and market conditions driving higher yields the short-term investments.

The change in Other was primarily due to fair value adjustments of our investments resulting in a $4.9 million net gain in first half 2023, compared to a $1.1 million net loss in first half 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $1.5 million in first half 2023, compared to a $4.0 million net loss in first half 2022.

In first half 2023 and 2022, we had an effective tax rate of 14.5% and 26.8%, respectively.

The change in effective tax rate is due to an increase in the amount of Foreign Derived Intangible Income deduction benefit available to the Company due to higher taxable income inclusive of timing difference between the recognition of book and tax revenue.

Additionally, the effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation.

Excluding this valuation allowance, our six months ended June 30, 2023 and 2022 effective tax rate would have been 13.0% and 23.2%, respectively.

In the six months ended June 30, 2023 we recorded a net discrete tax benefit of $1.2 million primarily related to share-based compensation.

The prior period included a net discrete tax expense of $2.3 million related to the extinguishment of long-term debt recognized during second quarter of 2022.

STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS

16 unchanged sentences

• failure to accurately forecast the impact of our restructuring activities on our financial statements and our business;

• the resolution of current legal proceedings, including any awards or judgments relating to such proceedings, additional legal proceedings, changes in the schedules or costs associated with legal proceedings or adverse rulings in such proceedings;

• the resolution of current legal proceedings, including any awards or judgments relating to such proceedings, additional or related legal proceedings, including appeals, changes in the schedules or costs associated with such proceedings or adverse rulings;

• the timing and impact of potential administrative and legislative matters;

13 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis