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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-15 · 142 added, 154 removed, 388 unchanged (43% of the section changed)

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A discussion regarding our financial condition and results of operations for December 31, 2022 compared to our fiscal year ended December 31, 2021 can be found in Part II, Item 7 of our Annual Report on Form 10-K for fiscal year 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2023.

Throughout the following discussion and elsewhere in this Form 10-K, we refer to “recurring revenues” and “non-recurring revenues.” For variable and dynamic fixed-fee license agreements, “non-recurring revenue” primarily represents revenue associated with reporting periods prior to the execution of the license agreement, while “recurring revenue” represents revenue associated with reporting periods beginning with the execution of the license agreement.

For static fixed-fee license agreements, we typically classify the associated revenue as non-recurring revenue.

Throughout the following discussion and elsewhere in this Form 10-K, we refer to “recurring revenues” and “catch-up revenues.” For variable and dynamic fixed-fee license agreements, “catch-up revenues” primarily represents revenue associated with reporting periods prior to the execution of the license agreement, while “recurring revenue” represents revenue associated with reporting periods beginning with the execution of the license agreement.

For static fixed-fee license agreements, we typically classify the associated revenue as catch-up revenues.

InterDigital, Inc.

("InterDigital") is a global research and development company focused primarily on wireless, visual and related technologies.

We design and develop advanced technologies that enable connected, immersive experiences in a broad range of communications and entertainment products and services.

We license or intend to license our innovations worldwide to companies providing such products and services, including wireless communications, consumer electronics, personal computer, and automotive, as well as cloud-based services such as video streaming.

Since our founding in 1972, our engineers have designed and developed a wide range of innovations that are used in wireless products and networks, from the earliest digital cellular systems to 5G.

With the acquisitions of the patent licensing business (the "Technicolor Patent Acquisition") and research and innovation unit of visual technology industry leader Technicolor SA ("Technicolor") (together, the "Technicolor Acquisitions"), we are a leader in video processing, encoding/decoding, and display technology, with a significant Artificial Intelligence ("AI") research effort that intersects with both wireless and visual technologies.

("InterDigital") is a global research and development company focused primarily on wireless, video, artificial intelligence ("AI"), and related technologies.

We design and develop foundational technologies that enable connected, immersive experiences in a broad range of communications and entertainment products and services.

We license our innovations worldwide to companies providing such products and services, including makers of wireless communications devices, consumer electronics, IoT devices, cars and other motor vehicles and providers of cloud-based services such as video streaming.

As a leader in wireless technology, our engineers have designed and developed a wide range of innovations that are used in wireless products and networks, from the earliest digital cellular systems to 5G and today's most advanced Wi-Fi technologies.

We are also a leader in video processing and video encoding/decoding technology, with a significant AI research effort that intersects with both wireless and video technologies.

InterDigital is one of the largest pure research and development and licensing companies in the world, with one of the most significant patent portfolios of fundamental wireless and video technologies.

As of December 31, 2022, InterDigital's wholly owned subsidiaries held a portfolio of approximately 28,800 patents and patent applications related to wireless communications, video coding, display technology, and other areas relevant to communications and entertainment products and services.

Our portfolio includes numerous patents and patent applications that we believe are or may be essential or may become essential to standards established by many Standards Development Organizations ("SDOs"), including cellular and other wireless communications and video technology standards.

Those wireless standards include 3G, 4G and the IEEE 802 suite of standards, as well as patents and patent applications that we believe are or may become essential to 5G standards that currently exist or are under development.

Our video technology portfolio includes patents and applications relating to standards established by ISO/IEC Moving Picture Expert Group (MPEG), the ITU-T Video Coding Expert Group (VCEG), the Joint Collaborative Team on Video Coding (JCT-VC) and the Joint Video Expert Team (JVET), among others.

As of December 31, 2023, InterDigital's wholly owned subsidiaries held a portfolio of more than 30,000 patents and patent applications related to wireless communications, video coding, display technology, and other areas relevant to communications and entertainment products and services.

Our portfolio includes numerous patents and patent applications that we believe are or may be essential to existing standards, or may become essential to future standards, established by many Standards Development Organizations ("SDOs").

We have contributed technology to wireless standards including the 3G, 4G, and 5G cellular standards and the IEEE 802 suite of standards.

We have contributed technology to video standards including standards established by ISO/IEC Moving Picture Expert Group (MPEG), the ITU-T Video Coding Expert Group (VCEG), the Joint Collaborative Team on Video Coding (JCT-VC) and the Joint Video Expert Team (JVET), among others.

Our wireless portfolio has largely been built through internal development, supplemented by joint development projects with other companies, and select acquisitions of patents and companies.

Our video technology portfolio combines patents and applications that InterDigital obtained through the Technicolor Acquisitions and patents and applications created by internal development.

Our patented inventions have been implemented in a wide variety of products and services, including smartphones, other wireless communication devices and infrastructure equipment, such as tablets, and base stations, consumer electronics and Internet of Things ("IoT") products, such as televisions, laptops, gaming consoles, set-top boxes, streaming devices and connected automobiles.

Our video technology portfolio combines patents and applications that InterDigital obtained through the acquisitions of the patent licensing business and research and innovation unit of visual technology industry leader Technicolor SA and patents and applications created by internal development.

Our patented inventions have been implemented in a wide variety of products, including smartphones, other wireless communication devices and infrastructure equipment, such as tablets, and base stations, consumer electronics and Internet of Things ("IoT") products, such as televisions, laptops, gaming consoles, set-top boxes, streaming devices and connected automobiles.

In addition, our patented inventions have been implemented in a wide variety of services, such as video streaming and other cloud-based services.

In 2023, 2022, and 2021, our total revenues were $549.6 million, $457.8 million, and $425.4 million, respectively.

Our recurring revenues in 2023, 2022 and 2021 were $408.4 million, $403.9 million, and $351.7 million, respectively.

In 2022, 2021, and 2020, we recognized $53.9 million, $73.7 million and $22.2 million, respectively, of non-current patent royalties and patent sales as more fully discussed below.

In 2023, 2022, and 2021, we recognized $141.2 million, $53.9 million and $73.7 million, respectively, of catch-up revenues as more fully discussed below.

In 2023, fixed-fee royalties accounted for 89% of our recurring revenues.

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The majority of the remaining portion of our recurring revenue was variable in nature due to the per-unit structure of the related license agreements.

Beginning in 2022, we updated our disaggregated revenue disclosures to provide information to enable investors to better understand the composition of revenue from contracts with customers.

As a result, variable patent royalty revenue and fixed-fee royalty revenue was combined and disaggregated into the Smartphone and CE, IoT/Auto groupings.

Additionally, the Other category includes current technology solutions revenues and non-recurring revenue is comprised of past patent royalties and revenues from static agreements.

We believe this better reflects both our current revenue sources and our growth opportunities across these vertical markets.

The Company considers Smartphone and CE, Auto/IoT as the groupings that best reflect the Company's core licensing product verticals.

The Company considers Smartphone and CE, Auto/IoT as the groupings that best reflect the Company's core licensing programs.

The Smartphone revenue grouping consists primarily of smartphones and also includes other wireless communication devices and infrastructure equipment, such as tablets, and base stations.

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New Agreements

During 2022, we entered an agreement with Samsung for binding arbitration to take a new license and eight direct patent license agreements, including agreements with Apple, Amazon, Panasonic, Zebra, and LG as discussed below.

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.

During 2023, we entered into eight patent license agreements as discussed below.

Direct Licenses

During second quarter 2022, we entered into a multi-year, worldwide, non-exclusive, fee bearing patent license agreement with Amazon Technologies, Inc., covering a range of Amazon's consumer electronic devices.

We also entered into a multi-year, worldwide, non-exclusive, royalty bearing license with Zebra Technologies Corporation, under the Company’s standard essential patents related to 4G, 5G and Wi-Fi.

During third quarter 2022, we renewed a patent license agreement with Apple.

The Company expects to recognize approximately $133.7 million in revenue each year over the seven-year term of the license, which commenced on October 1, 2022.

During fourth quarter 2022, the Company entered into four licenses covering digital television and/or video patents, including with Panasonic Entertainment & Communication Co., Ltd.

and LG Electronics.

In 2023, we signed a multi-year, worldwide, non-exclusive, royalty bearing license with Lenovo, covering InterDigital’s HEVC patents (the "Lenovo HEVC PLA").

The new license resolved all related HEVC litigation at the time.

We also entered into a multi-year, worldwide, non-exclusive, royalty bearing license with TCL Communication Technology Holdings, Ltd.

covering InterDigital’s portfolio of 3G and 4G patents.

In 2023, we also entered into five other licenses covering digital televisions, set-top boxes, and/or video patents, including licenses with Humax Co., Ltd., Alps Alpine Co., Ltd., Panasonic Entertainment & Communication Co., LTD., and Funai Electronic Co., LTD.

Other Licensing Activities

On March 16, 2023, the U K’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.

On June 27, 2023, we were awarded an additional $46.2 million, increasing the total Lenovo must pay for a cellular patent license through 2023 to $184.9 million.

During 2023, we recognized a total of $150.1 million of revenue from Lenovo, including amounts received under the Lenovo HEVC PLA.

The Company will defer recognizing any additional revenue related to the UK proceedings until the appeal process progresses.

Samsung TV Agreement

In January 2024, we signed a new patent license agreement with Samsung Electronics.

The agreement licenses Samsung’s digital TVs and computer display monitors under InterDigital's joint licensing program with Sony and includes licenses to key technologies including ATSC 3.0, as well as licenses under InterDigital’s patents including HEVC, VVC and Wi-Fi.

No revenues or revenue share costs associated with this patent license agreement were recognized in 2023.

Expiration of License Agreements

We had seven revenue generating patent license agreements that were scheduled to expire between January 1, 2022 and December 31, 2022, including with Apple and Samsung.

As discussed above, Apple was renewed to a seven-year agreement, which commenced on October 1, 2022.

We also 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.

We expect to recognize revenue for Samsung effective January 1, 2023, at a conservative level consistent with the revenue we have recognized from our patent license agreement that just 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.

The remaining patent license agreements that have not yet been renewed contributed $15.4 million of recurring revenue in 2022.

Ten of our revenue generating patent license agreements are scheduled to expire during 2023.

Collectively, these agreements accounted for $55.2 million, or approximately 14%, of recurring revenue in 2022.

Our patent license agreements with a number of licensees that expired between January 1, 2023 and December 31, 2023 have not yet been renewed.

These patent license agreements, including with Huawei and the Lenovo cellular license resulting from the UK proceedings, contributed $59.5 million of recurring revenues in 2023.

Seven of our revenue generating patent license agreements were scheduled to expire during 2024, of which two agreements were renewed during 2023.

Collectively, the five expiring agreements not yet renewed accounted for $17.6 million, or approximately 4%, of recurring revenues in 2023.

We are actively working to renew these agreements on terms consistent with the licensees' respective market positions and utilization of our technology.

Intellectual Property Rights Enforcement

If we believe a party is required to license our patents in order to manufacture, use and/or sell certain products and such party refuses to do so, we typically offer such party to have royalty rates, or other terms, set by third party adjudicators (such as arbitrators).

If we believe a party is required to license our patents in order to manufacture, use and/or sell certain products or services and such party refuses to do so, we typically offer such party to have royalty rates, or other terms, set by third party adjudicators (such as arbitrators).

If the party refuses that offer and we believe they are unwilling to agree to a patent license on a fair, reasonable and non-discriminatory basis, we may have no other viable recourse but to institute legal action against them to enforce our patent rights.

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During 2020, we filed patent infringement actions against Xiaomi.

We negotiated resolutions to the matters involving ZTE, Huawei and Xiaomi in December 2019, April 2020 and July 2021, respectively, while our matters with Lenovo continue to proceed.

During 2021, we filed patent infringement actions against Oppo, OnePlus and realme.

During 2022, we agreed to have a panel of arbitrators establish the royalties to be paid by Samsung Electronics for a worldwide license to certain of the Company’s patents, as well as any other terms to a patent license agreement on which the parties are not able to agree.

We negotiated resolutions to the matters involving ZTE, Huawei and Xiaomi in October 2019, April 2020 and July 2021, respectively, and resolution with Lenovo on our HEVC patents in September 2023.

Other open matters with Lenovo continue to proceed.

During 2021, we filed patent infringement actions against Oppo, OnePlus and realme, which proceedings are ongoing.

The matters are more fully discussed in Note 12, “ Litigation and Legal Proceedings ,” to the Notes to Consolidated Financial Statements included below in Part II, Item 8 of this Form 10-K.

We filed these actions after lengthy periods of negotiation and after the refusal of our counterparties to accept our various proposals to them, including our proposal to have a third party adjudicator set a royalty rate and resolve certain other terms upon which we could not mutually agree.

We filed these actions, other than our arbitration with Samsung, after lengthy periods of negotiation and after the refusal of our counterparties to accept our various proposals to them, including our proposals to have a third party adjudicator set a royalty rate and resolve certain other terms upon which we could not mutually agree.

In 2023, our intellectual property enforcement costs increased to $48.8 million, from $44.4 million and $34.3 million in 2022 and 2021, respectively.

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Cash and Short-Term Investments

As of December 31, 2022, we had $1,211.5 million of cash, restricted cash and short-term investments and an additional $727.3 million of cash payments due under contracted fixed price agreements, including $22.6 million recorded in our $53.2 million accounts receivable balance.

The remaining accounts receivable is primarily related to variable patent royalty revenue.

As of December 31, 2023, we had $1.0 billion of cash, restricted cash, and short-term investments and an additional $1.2 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 the wireless patent license agreement with Samsung.

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

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Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Q1 Q2 Q3 Q4 Total

Fixed fee cash receipts (a)

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19,972 11,160 3,684 18,649 53,465

Change in deferred revenue 50,741 76,959 (274,034) 60,931 (85,403)

Change in receivables (7,475) 25,163 354,242 (349,861) 22,069

Decrease (increase) in deferred revenue

42,766 38,641 (77,474) 45,243 49,176

Increase (decrease) in receivables

90,856 92,756 (167,222) 47,720 64,110

Other 24,110 (50,372) 12,510 (36,279) (50,031)

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Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Q1 Q2 Q3 Q4 Total

Fixed fee cash receipts (a)

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8,592 16,620 6,403 20,154 51,769

Change in deferred revenue 23,429 63,230 (150,703) 80,912 16,868

Change in receivables (3,507) (499) 129,655 (110,546) 15,103

Decrease (increase) in deferred revenue

50,741 76,959 (274,034) 60,931 (85,403)

Increase (decrease) in receivables

(7,475) 25,163 354,242 (349,861) 22,069

Other 5,657 2,576 1,491 1,579 11,303

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Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Q1 Q2 Q3 Q4 Total

Fixed fee cash receipts (a)

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10,676 17,808 7,739 15,556 51,779

Change in deferred revenue 39,512 (16,829) (75,749) 28,669 (24,397)

Change in receivables (2,664) (6,228) 8,902 (11,364) (11,354)

Decrease (increase) in deferred revenue

23,429 63,230 (150,703) 80,912 16,868

Increase (decrease) in receivables

(3,507) (499) 129,655 (110,546) 15,103

Other 4,453 4,146 13,755 2,843 25,197

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Net cash (used in) provided by operating activities $ (9,842) $ (27,259) $ 96,264 $ 71,229 $ 130,392

(a) Fixed fee cash receipts are comprised of cash receipts from Dynamic Fixed-Fee Agreement royalties, including the associated past patent royalties

(b) Other cash receipts are comprised of cash receipts related to our variable patent royalty revenue, including the associated past patent royalties, current technology solutions revenue and royalties from static agreements.

(a) Fixed fee cash receipts are comprised of cash receipts from Dynamic Fixed-Fee Agreement royalties, including the associated catch-up revenues.

(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.

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In June 2014, our Board of Directors authorized a $300 million share repurchase program (the “Share Repurchase Program”).

Subsequently our Board of Directors authorized five $100 million increases to the program, respectively, and an additional $333 million in December 2022, bringing the total amount of the Share Repurchase Program to $1.1 billion.

Since 2014, we have repurchased $733.0 million of shares at an average price of $52.22, adjusted for dividends.

As of December 31, 2022, there was $400.0 million remaining under the share repurchase authorization, of which the Company expects to use up to $200 million pursuant to the modified Dutch auction tender offer commenced by the Company in January 2023.

Since January 2014, we have paid $355.1 million in dividends, bringing our total return of capital over the last nine years to $1.1 billion.

Subsequently our Board of Directors authorized five $100 million increases to the program, an additional $333 million in December 2022, and an additional $235 million in December 2023, bringing the total amount of the Share Repurchase Program to nearly $1.4 billion.

Since 2014, we have repurchased $1.1 billion of shares at an average price of $58.36, adjusted for dividends.

This amount includes the $199.9 million, excluding fees, expenses and excise tax, repurchased as part of the modified “Dutch auction” tender offer in 2023.

As of December 31, 2023, there was $296.3 million remaining under the Share Repurchase Program authorization.

Since January 2014, we have paid $394.4 million in dividends, bringing our total return of capital over the last ten years to nearly $1.5 billion.

The table below sets forth the total number of shares repurchased and the dollar value of shares repurchased under the Share Repurchase Program, cash dividends on outstanding common stock declared, and the total capital returned to our shareholders (in thousands):

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2015 1,836 96,410 0.80 28,726 125,136

2014 3,554 152,625 0.70 27,153 179,778

Total 17,340 $ 1,072,685 $ 12.30 $ 394,397 $ 1,467,082

2027 Senior Convertible Notes

On May 27, 2022, we issued the $460.0 million aggregate principal of 2027 Notes.

The net proceeds from the offering were approximately $450.0 million after deducting the initial purchasers' fees and estimated offering expenses.

Additionally, on May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into the 2027 Call Spread Transactions.

The net proceeds from the issuance of the 2027 Notes, after deducting fees and offering expenses, were used for the following:

(i) $282.5 million was used to repurchase $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes (ii) $74.4 million was used to repurchase shares of common stock at $60.78 per share, the closing price of the stock on May 24, 2022;

and (iii) $36.8 million, in addition to the proceeds from the 2027 Warrant Transactions, was used to fund the cost of the 2027 Call Spread Transactions.

The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock (“Common Stock”) or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share).

For more information on this transaction, refer to Note 9, " Obligations " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

Restructuring Activities

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Additionally, in October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S.

All impacted employees have been provided notification of termination.

During 2022, we recognized $3.3 million restructuring expenses, including a $2.4 million asset impairment, $0.3 million severance and other benefits, and $0.5 million outside services and other associated costs, which are included within “ Restructuring Activities ” in the consolidated statement of income.

The $2.4 million impairment, comprised of $2.0 million of right-of-use assets and $0.4 million of property and equipment, was due to the abandonment of portions of three of our leased properties resulting from the Company’s evaluation of its current office space footprint and its expected needs going forward.

The Company does not anticipate further significant restructuring charges, however these charges are estimated based on information available at the time such charges are recorded.

Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts incurred for such activities may differ from amounts initially estimated.

Impact of Inflation and Market Factors

During 2023, we did not recognize any restructuring expenses and the Company considers the plan to be complete.

Impact of Macroeconomic and Geopolitical 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.

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.

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 COVID-19 pandemic and the Ukraine-Russia and Israel-Hamas conflicts, have not had a material impact on our business to date.

However, if these conditions continue or worsen, they could have an adverse effect on our operating results and our financial condition.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to significantly impact the United States and the rest of the world.

We continue to believe that our strategic strengths, including talent, our strong balance sheet, stable revenue base, and the strength of our patent portfolio, allows us to weather a rapidly changing marketplace.

Fixed-fee royalties accounted for 90% of our recurring revenues in 2022.

These fixed-fee revenues are not directly affected by our related licensees’ success in the market or the general economic climate.

To that end, in fiscal year 2022, we did not experience a significant impact on our contracted revenue due to COVID-19.

Comparability of Financial Results

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

• Our 2022 revenue includes $53.9 million of non-recurring revenue primarily related to seven new patent license agreements signed in 2022 and new connected automobile license agreements.

• In 2022, we repurchased approximately $273.8 million in aggregate principal amount of our 2024 Notes, which resulted in the recognition of a $11.2 million loss on the extinguishment of debt, which was included within “ Other (expense) income, net ” in the condensed consolidated statement of income.

For more information on this transaction, refer to Note 9, " Obligations " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

• In 2022, we incurred $1.5 million of one-time supplemental compensation costs driven by licensing successes achieved during 2022.

• In 2022, we recognized $3.3 million of restructuring expenses including a $2.4 million asset impairment, $0.3 million of severance and other benefits, and $0.5 million of associated outside services and other costs.

These costs resulted from our restructuring activities as described in Note 20, " Restructuring Activities " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

• In 2022, " Other (expense) income, net " includes a $1.3 million net loss resulting from observable price changes in orderly transactions of our long-term strategic investments.

• Our 2023 revenue includes $141.2 million of catch-up revenues primarily related to the two Lenovo agreements entered into in 2023.

Operating Expenses

• In 2023, we incurred a $7.5 million charge for a net litigation fee reimbursement associated with the Lenovo proceedings.

See Note 12, “ Litigation and Legal Proceedings ,” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information on this matter.

• In 2023, we incurred $3.0 million of nonrecurring share-based compensation costs driven by licensing successes.

• In 2023, we incurred a $2.5 million impairment on Convida's sale of a portion of its patent portfolio.

Non-Operating Income (Expense), Net

• In 2023, we recognized $10.4 million of gains resulting from observable price changes of our long-term strategic investments, which was included within “ Other income (expense), net ” in the consolidated statement of income.

• In 2023, we recognized a $4.0 million reduction to interest expense due to a change in estimate of our Technicolor Patent Acquisition Long-Term Debt, which was included within “ Interest expense ” in the consolidated statement of income.

For more information regarding this arrangement, refer to Note 10, “ Obligations ,” to the Notes to Consolidated Financial Statements included below in Part II, Item 8 of this Form 10-K.

Income Tax Provision

• In 2023, we recognized a $11.7 million tax benefit resulting from the release of a valuation allowance from certain foreign jurisdictions and interest due on a federal refund.

Critical Accounting Policies and Estimates

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Such estimates are only recognized to the extent it is probable that a significant reversal of cumulative revenues recognized will not occur.

We analyze the risk of a significant revenue reversal considering both the likelihood and magnitude of the reversal and, if necessary, constrain the amount of estimated revenues recognized in order to mitigate this risk, which may result in recognizing revenues less than amounts we expect we are most likely to receive.

We analyze the risk of a significant revenue reversal considering both the likelihood and magnitude of the reversal and, if necessary, constrain the amount of estimated revenues in order to mitigate this risk, which may result in recognizing revenues less than amounts we expect we are most likely to receive.

These aforementioned estimates may require significant judgment.

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As a result of recognizing revenues in the period in which the licensees’ sales occur using estimates, adjustments to revenues are required in subsequent periods to reflect changes in estimates as new information becomes available, primarily resulting from actual amounts reported by our licensees.

Technology Solutions

Technology solutions revenue consists primarily of revenue from royalty payments, software licenses, and engineering services.

The nature of these contracts and timing of payments vary.

We recognize revenue from royalty payments and license agreements using the same methods described above under our policy for recognizing revenue from patent license agreements.

We recognize revenue from engineering services using the percentage of completion method.

During 2022, we determined patent sales are no longer a part of the company’s on-going central operations and therefore will no longer be accounted for as revenue.

We had no patent sales during 2022 or 2021 and $0.6 million of patent revenues during 2020.

Agreements with Multiple Performance Obligations

During 2022, we signed four new fixed-fee agreements that had multiple performance obligations.

During 2023, we signed two new fixed-fee agreements that had multiple performance obligations.

Consistent with the revenue recognition policies disclosed above, we (1) identified the contract with the customer, (2) identified the performance obligations, (3) determined the transaction price, (4) allocated the transaction price to the performance obligations, and (5) recognized revenue as we satisfy the performance obligations.

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For grants that cliff vest, we amortize the associated unrecognized compensation cost on a straight-line basis over their vesting term.

For awards containing performance conditions, we recognize compensation expense ratably over the vesting period when it is probable that the stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change.

In the event of canceled awards, we adjust compensation expense recognized to date as they occur.

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The inclusion of windfalls and shortfalls in the tax provision could increase our earnings volatility between periods.

Tax windfalls and shortfalls related to share-based compensation was shortfalls of $0.4 million for the year ended 2022, and windfalls for the years ended 2021 and 2020 of $0.8 million and $0.2 million, respectively.

Tax windfalls and shortfalls related to share-based compensation was windfalls of $3.1 million and $0.8 million for the years ended 2023 and 2021, respectively, and shortfalls for the year ended 2022 of $0.4 million.

The below table summarizes our supplemental compensation expense for 2023, 2022 and 2021, in thousands:

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10,035 8,155 17,933

Other share-based compensation 4,901 3,962 2,580

Total supplemental compensation expense $ 56,241 $ 47,918 $ 49,243

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Due to foreign currency fluctuations, any such agreement could result in foreign currency gain or loss.

If the matter had been resolved as of December 31, 2023, we would have recognized a loss up to $13.8 million based on exchange rates and prior competent authority resolutions.

On November 8, 2019, the Company received notification that its request for competent authority pertaining to Article 25 (Mutual Agreement Procedure) of the United States-Republic of Finland Income Tax Convention had been reviewed by the IRS and an agreement has been reached (the “Finland Competent Authority Proceeding”).

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Restricted cash included within prepaid and other current assets 5,885 9,682 (3,797)

Restricted cash included within other non-current assets — 1,081 (1,081)

Short-term investments 569,280 508,298 60,982

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

The net increase in cash, cash equivalents, restricted cash and short-term investments was attributable to cash provided by operating activities of $286.0 million and cash provided by financing activities of $18.6 million.

These increases were partially offset by cash used in investing activities, excluding sales and purchases of short-term investments of $42.8 million.

Cash used in investing activities primarily related to net purchases of short-term investments, as well as capital investments for patents and fixed assets.

Cash provided by financing activities primarily related net proceeds from the debt refinancing, partially offset by dividend payments and repurchases of common stock.

$ 1,012,241 $ 1,211,459 $ (199,218)

The net decrease in cash, cash equivalents, restricted cash, and short-term investments was attributable to cash used in financing activities of $388.8 million and cash used in investing activities of $46.5 million, excluding sales and purchases of short-term investments, partially offset by cash provided by operating activities of $213.7 million.

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

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

The $155.6 million change in net cash provided by operating activities was primarily driven by higher cash receipts, largely attributable to new or renewed patent license agreements, including the Apple patent license agreement discussed above.

Additionally, lower cash operating expenses benefiting from the cost-savings actions taken in 2021 contributed to the increase.

The $72.3 million change in net cash provided by operating activities was driven by higher cash outflows related to tax payments made in 2023 and an increase in cash operating expenses.

Cash receipts decreased largely due to timing of cash receipts under existing agreements.

The table below sets forth the significant items comprising our cash flows provided by operating activities during the years ended December 31, 2023 and 2022 (in thousands):

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2023 2022 Increase / (Decrease)

Cash Receipts:

Patent royalties $ 509,517 $ 364,348 $ 145,169

Technology solutions 308 3,893 (3,585)

Total Cash Receipts $ 486,333 $ 509,825 $ (23,492)

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(211,525) (204,153) (7,372)

Income taxes paid, net of refunds (b)

Income taxes paid (b)

(59,202) (6,805) (52,397)

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Cash provided by or used in investing and financing activities

Net cash used in investing activities in 2022 was $314.7 million, a $494.3 million change from $179.6 million net cash provided by investing activities in 2021.

Net cash used in investing activities in 2023 was $85.2 million, a $229.5 million change from $314.7 million in 2022.

During 2023, we purchased $38.7 million of short-term marketable securities, net of sales, and capitalized $44.6 million of patent costs and property and equipment purchases.

During 2021, we sold $216.6 million of short-term marketable securities, net of purchases, capitalized $35.9 million of patent costs and property and equipment purchases, acquired $2.4 million of patents, and received $1.4 million of net cash receipts from the sale of one of our long-term strategic investments.

The increase in net purchases of short-term marketable securities was largely driven by higher cash receipts discussed above, as well as more favorable market conditions.

Net cash provided by financing activities for 2022 was $18.6 million, a $93.1 million change from net cash used in financing activities of $74.5 million in 2021.

This change was primarily attributable to net proceeds of $138.9 million from the debt refinancing, partially offset by a $44.4 million increase in share repurchases.

Our combined short-term and long-term deferred revenue balance at December 31, 2022 was $426.6 million, a increase of $115.5 million from December 31, 2021.

During 2022, we purchased $272.0 million of short-term marketable securities, net of sales, and capitalized $42.8 million of patent costs and property and equipment purchases.

Net cash used in financing activities for 2023 was $388.8 million, a $407.4 million change from net cash provided by financing activities of $18.6 million in 2022.

This change was primarily attributable to a $265.3 million increase in share repurchases in 2023 compared to 2022, of which $203.4 million was related to the Company's modified "Dutch auction" tender offer in 2023.

The change was also due to net proceeds of $138.9 million from the debt refinancing in 2022.

Our combined short-term and long-term deferred revenue balance at December 31, 2023 was $377.5 million, a decrease of $49.2 million from December 31, 2022.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the December 31, 2023 deferred revenue balance by $153.6 million over the next twelve months.

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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 December 31, 2022) 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 December 31, 2022), 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 December 31, 2023) or above the weighted average strike price of the warrants ($106.35 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of December 31, 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.

Under the if-converted method, changes in the price per share of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation.

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 December 31, 2022, 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:

As described in Note 10, " Obligations " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, 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 December 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 (in thousands):

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

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Total contractual obligations $ 683,648 $ 159,276 $ 40,963 $ 474,845 $ 8,564

(a) Refer to Note 9, “ Obligations ,” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our 2024 Notes and 2027 Notes.

(a) The table above represents the payment made on the maturity dates of the 2024 and 2027 Notes.

From the period January 1, 2024 through March 31, 2024, the holders of the 2027 Notes have the right, but not the obligation, to convert any portion of the principal amount of the 2027 Notes.

We will pay cash up to the aggregate principal amount of the 2027 Notes to be converted, if any, and will pay cash, shares of our Common Stock, or a combination of cash and shares of our Common Stock for any conversion obligation in excess of the aggregate principal amount being converted at our election.

Refer to Note 10, “Obligations,” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our 2024 Notes and 2027 Notes.

(b) Refer to Note 11, " Commitments ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our defined benefit plan obligations.

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Total recurring revenues 408,392 403,888 4,504 1 %

Non-recurring revenues a

Catch-up revenues a

141,196 53,906 87,290 162 %

Total revenues $ 549,588 $ 457,794 $ 91,794 20 %

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

Total revenues of $457.8 million, which includes both recurring and non-recurring revenues, increased 8% from $425.4 million in 2021 primarily due to recurring revenue increasing 15% to $403.9 million, compared to $351.7 million in 2021.

The company increased recurring revenue in both its Smartphone (up 11%) and CE, IoT/Auto markets (up 63%) as a result of twenty new agreements signed over the last seven quarters.

Non-recurring revenues decreased $19.8 million primarily attributable to revenues recognized on nine previously disclosed agreements signed in 2021.

Non-recurring revenues in 2022 were primarily attributable to seven of the above disclosed license agreements signed in 2022 and revenues from new connected automobile license agreements.

In each of 2022 and 2021, 70% of our total revenues were attributable to companies that individually accounted for 10% or more of our total revenues.

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

Total revenues of $549.6 million increased 20% from $457.8 million in 2022 primarily due to catch-up revenues from the Lenovo cellular license resulting from the UK proceedings and the Lenovo HEVC PLA.

Recurring revenues were relatively flat compared to 2022.

In 2023 and 2022, 76% and 60% of our total revenues were attributable to companies that individually accounted for 10% or more of our total revenues, respectively.

In 2023 and 2022, the following licensees or customers accounted for 10% or more of our total revenues:

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Customer C 14% 17%

Customer D <10% 10%

Operating Expenses

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Total operating expenses $ 327,973 $ 307,278 $ 20,695 7 %

Operating expenses decreased 13% to $307.3 million in 2022 from $354.2 million in 2021.

The $46.9 million decrease in total operating expenses was primarily due to increase/(decrease) in the following items (in thousands):

Operating expenses increased 7% to $328.0 million in 2023 from $307.3 million in 2022.

The $20.7 million increase in total operating expenses was primarily due to increases/(decreases) in the following items (in thousands):

Increase/(Decrease)

Share-based compensation $ 13,587

Net litigation fee reimbursement

Fair value changes of deferred compensation liability 4,968

Patent impairment 2,500

Intellectual property enforcement (3,153)

Restructuring activities (3,280)

Personnel-related costs (19,569)

Consulting and outside services (6,986)

Revenue share (6,620)

Intellectual property enforcement and non-patent litigation 10,152

Other (1,464)

Total increase in operating expenses $ 20,695

The $46.9 million decrease in operating expenses was primarily due to reduction in non-recurring costs, which were driven by a $6.6 million decrease in revenue share costs primarily attributable to a patent license agreement signed in third quarter 2021, and a $24.6 million decrease in restructuring costs associated with cost savings measures taken in 2021.

These measures also helped drive both the $19.6 million decrease in personnel-related costs and the $7.0 million decrease in consulting and outside services.

These decreases were offset by a $10.2 million increase in intellectual property enforcement costs, primarily driven by the Oppo and Lenovo litigations.

The $20.7 million increase in operating expenses was primarily due to a $13.6 million increase in share-based compensation costs driven by both higher accrual rates and higher award levels to non-executive employees and a $5.0 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 the plan.

Additionally, 2023 included nonrecurring items, including a $7.5 million net litigation fee reimbursement primarily related to the Lenovo proceedings and a $2.5 million impairment on Convida's sale of a portion of its patent portfolio.

These increases were partially offset by a $3.2 million decrease in intellectual property enforcement costs primarily driven by decreased costs from the Lenovo proceedings, partially offset by an increase in costs from the Oppo proceedings, and a $3.3 million decrease in non-recurring restructuring activities recognized in 2022.

Research and portfolio development expense:

Research and portfolio development expense decreased by $15.3 million primarily resulting from the above-noted decreases in personnel-related costs and consulting costs.

Research and portfolio development expense increased by $10.1 million primarily resulting from the above-noted increases in share-based compensation, fair value changes of our deferred compensation liability, and Convida's sale of a portion of its patent portfolio.

Licensing expense:

The $6.8 million increase in licensing expense primarily resulted from the above noted increase in intellectual property enforcement costs.

This increase was partially offset by the above noted decrease in revenue share costs.

The $8.0 million increase in licensing expense primarily resulted from the above-noted litigation fee reimbursement, increases in share-based compensation, and fair value changes of our deferred compensation liability, partially offset by the decrease in intellectual property enforcement costs.

General and administrative expense:

The $13.8 million decrease in general and administrative expense was primarily due to the above-noted decreases in personnel-related costs and consulting costs.

The $5.9 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, partially offset by a decrease in short-term incentive compensation costs.

Restructuring Activities:

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For more information on the restructuring activities refer to Note 20, " Restructuring Activities " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

Non-Operating Expense

The following table compares 2022 non-operating expense to 2021 non-operating expense (in thousands):

Non-Operating Income (Expense), Net

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

For the Year Ended December 31,

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Other 11,184 (6,719) 17,903 266 %

Total non-operating expense $ (32,953) $ (13,650) $ (19,303) (141) %

Interest expense increased $4.3 million due to the interest on the 2027 Notes issued during second quarter 2022.

The $12.8 million increase in interest and investment income was primarily due to market conditions driving higher yields on the Company's short-term investments.

The $11.2 million loss on extinguishment of long-term debt was related to the partial repurchase of the 2024 Notes, as described further in Note 9, " Obligations " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

The change in Other was primarily due to fair value adjustments of our investments resulting in a $3.7 million net loss in 2022, compared to a $9.1 million net gain in 2021 and due to foreign currency translation losses arising from euro translation of our foreign subsidiaries of $3.9 million in 2022, compared to $3.0 million in 2021.

Additionally, we recognized a $1.9 million gain on a contract termination in 2021.

In 2022, based on the statutory federal tax rate net of discrete federal and state taxes, our effective tax rate is 21.7%.

as compared to an effective tax of 27.0% in 2021.

Total non-operating income (expense), net $ 12,995 $ (32,953) $ 45,948 139 %

Interest expense increased $15.3 million primarily due to significant financing expense resulting from a previously announced patent license agreement and additional interest on the 2027 Notes that were issued during second quarter 2022.

Additionally, we recognized a $4.0 million reduction to interest expense due to a change in estimate of our Technicolor Patent Acquisition Long-Term Debt resulting from updated estimated cash outflows owed under the arrangement.

For more information regarding this arrangement, refer to Note 10, “ Obligations ,” to the Notes to Consolidated Financial Statements included below in Part II, Item 8 of this Form 10-K.

The $32.2 million increase in interest and investment income was due to increased short-term investments made by the Company and market conditions driving higher yields from the short-term investments.

In 2022, we recognized a $11.2 million loss on extinguishment of long-term debt related to the partial repurchase of the 2024 Notes, as described further in Note 10, " Obligations " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

The change in Other was primarily due to fair value adjustments of our investments and pension obligation resulting in $12.1 million of net gains in 2023, compared to $2.4 million of net losses in 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $1.0 million in 2023, compared to $3.9 million foreign currency translation net loss in 2022.

In 2023, based on the statutory federal tax rate net of discrete federal and state taxes, our effective tax rate is 10.0%, as compared to an effective tax of 21.7% in 2022.

In both periods, the effective tax rate was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit.

Excluding this valuation allowance, our effective tax rate would have been 19.3% and 16.7% in 2022 and 2021, respectively.

In addition, there was a reduction to the effective rate in 2023, of 4.2%, due to a partial release of valuation allowance in France due to higher projected income resulting from recently signed agreements, including with Samsung Electronics.

Excluding the impact of valuation allowance, our effective tax rate would have been 12.4% and 19.3% in 2023 and 2022, respectively.

FORWARD-LOOKING STATEMENTS

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• unanticipated delays, difficulties or accelerations in the execution of patent license agreements;

• 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;

• our ability to leverage our strategic relationships and secure new patent license agreements on acceptable terms;

• our ability to enter into sales and/or licensing partnering arrangements for certain of our patent assets;

• our ability to expand our revenue opportunities by entering into licensing arrangements with video streaming and other cloud-based service providers;

• our ability to enter into partnerships with leading inventors and research organizations and identify and acquire technology and patent portfolios that align with our roadmap;

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• the failure of the markets for our current or new technologies to materialize to the extent or at the rate that we expect;

• unexpected delays or difficulties related to the development of our technologies;

• our continued ability to develop new technologies and secure new patents, including the risk of unexpected delays or difficulties related to the development of our technologies;

• risks associated with our capital allocation strategies, including risks associated with our planned dividend payments and share repurchases;

• changes in our interpretations of, and assumptions and calculations with respect to the impact on us of, the 2017 Tax Cuts and Jobs Act, as well as further guidance that may be issued regarding such act;

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• 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 timing and impact of potential administrative and legislative matters;

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• the potential effects that macroeconomic uncertainty could have on our financial position, results of operations and cash flows;

• impacts from acts of terrorism, war or political or civil unrest, or any responses thereto, in the United States or elsewhere;

• changes in our business strategy;

• changes or inaccuracies in our expectations with respect to royalty payments by our customers;

• risks related to our assumptions and application of relevant accounting standards.

• risks related to our assumptions and application of relevant accounting standards, including with respect to revenue recognition.

You should carefully consider these factors as well as the risks and uncertainties outlined in greater detail in Part I, Item 1A, of this Form 10-K before making any investment decision with respect to our common stock.

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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-K

Item 7. Management’s Discussion and Analysis