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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-02 · 89 added, 159 removed, 154 unchanged (62% of the section changed)

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The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2023 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 — Forward-Looking Statements below.

Throughout the following discussion and elsewhere in this Form 10-Q, we refer to “catch-up revenues.” Catch-up revenues are comprised of past patent royalties and revenues from static agreements.

Lenovo HEVC Agreement

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

The new license resolves all related HEVC litigation.

During third quarter 2023, we recognized a total of $40.8 million of revenue from Lenovo, including amounts received under the Lenovo HEVC PLA.

Throughout the following discussion and elsewhere in this Form 10-Q, 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.

Samsung TV Agreement

In January 2024, we signed a patent license agreement with Samsung Electronics (the "Samsung TV agreement").

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.

Return of Capital to Shareholders

During the third quarter 2023, the Company returned $66.1 million to shareholders, including $9.3 million, or $0.35 per share, of cash dividends paid and $56.9 million through the repurchase of 0.7 million shares of common stock.

Additionally, we announced an increase to the quarterly cash dividend from $0.35 to $0.40 per share, beginning with the dividend paid in fourth quarter 2023.

During the period October 1, 2023 to October 31, 2023, we repurchased an additional 0.3 million shares for $21.9 million under our share repurchase program.

As of October 31, 2023, there was $79.9 million remaining under the share repurchase authorization, which we plan to utilize to repurchase additional common shares.

During the first quarter 2024, we returned $39.2 million to shareholders, including $10.2 million, or $0.40 per share, of cash dividends declared and $29.0 million through the repurchase of 0.3 million shares of common stock.

During the period April 1, 2024 to April 30, 2024, we repurchased an additional 0.2 million shares for $21.1 million, bringing the year to date total to approximately 0.5 million shares of common stock repurchased.

As of April 30, 2024, there was $246.3 million remaining under the share repurchase authorization, which we plan to utilize to periodically repurchase additional common shares.

See Part II, Item II - Unregistered Sales of Equity Securities and Use of Proceeds—Issuer Purchases of Equity Securities of this Quarterly Report on Form 10-Q.

Cash & Short-term Investments

As of September 30, 2023, we had $1.1 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 a patent license agreement with Samsung.

As of March 31, 2024, 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.

87% of our recurring revenue comes from fixed-fee royalties.

Our fixed-fee 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 and nine months ended September 30, 2023 and 2022, including the resulting operating cash flow (in thousands):

Three months ended September 30, Nine months ended September 30,

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, 2024 and 2023, including the resulting operating cash flow (in thousands):

For the Three Months Ended March 31,

Non-cash revenue:

2023 2022 2023 2022

Fixed fee cash receipts (a)

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Change in receivables 28,337 90,856

12,510 1,491 (13,752) 9,724

Other 7,353 24,110

Total Revenue $ 263,542 $ 202,373

Net cash provided by (used in) operating activities $ 50,773 $ (27,852)

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

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

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

(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.

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.

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 September 30, 2023 (in thousands):

Deferred Revenue (a)

The following table shows the projected amortization of our current and long term deferred revenue as of March 31, 2024 (in thousands):

Deferred Revenue

Remainder of 2024 $ 122,762

2028 and Thereafter 3,617

Thereafter 2,476

Total Revenue $ 349,921

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

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.

Third quarter 2023 total revenues of $140.1 million increased 22% from third quarter 2022 primarily due to catch-up revenues recognized from the Lenovo HEVC PLA and one other new agreement signed during third quarter 2023.

Third quarter 2023 recurring revenues were $104.5 million, compared to recurring revenues of $101.0 million in third quarter 2022, a 3% year-over-year increase.

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

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

Total revenues of $263.5 million, which includes both recurring and catch-up revenues, increased 30% compared to first quarter 2023 primarily due to catch-up revenues from the Samsung TV agreement recognized in first quarter 2024.

First quarter 2024 recurring revenues were $96.9 million, compared to recurring revenues of $101.6 million in first quarter 2023, a 5% year-over-year decrease.

In first quarter 2024, revenues (in descending order) from Samsung and Apple each comprised 10% or more of our consolidated revenues.

Refer to " Results of Operations --First Quarter 2024 Compared to First Quarter 2023 " for further discussion of our 2024 revenue.

Impact of Macroeconomic and Geopolitical Factors

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

These market factors, as well as the impacts of the Ukraine-Russia and Middle East 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.

See the section titled “Risk Factors” in the 2022 Form 10-K.

Comparability of Financial Results

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

• Our third quarter 2023 revenues include $35.6 million of catch-up revenues related to the Lenovo HEVC PLA and one other new agreement signed in third quarter 2023.

• During third quarter 2023, we recognized a $6.1 million gain resulting from an observable price change of a long-term strategic investment, which was included within “O ther income (expense), net ” in the condensed consolidated statement of income.

• During third quarter 2023, we incurred $5.1 million of one-time supplemental compensation costs driven by licensing success.

When comparing first quarter 2024 financial results against other periods, the following items should be taken into consideration:

• Our first quarter 2024 revenues include $166.7 million of catch-up revenues primarily related to the Samsung TV agreement signed in first quarter 2024.

Operating Expenses

• During first quarter 2024, we incurred $65.7 million of nonrecurring revenue share costs associated with the catch-up revenues recognized in the period.

Non-Operating (Expense) Income, Net

• During first quarter 2024, we recognized a $0.7 million net loss resulting from observable price changes of our long-term strategic investment, which was included within “ Other income, net ” in the condensed consolidated statement of income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

As of March 31, 2024 and December 31, 2023, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):

March 31, 2024 December 31, 2023 Increase /

Cash and cash equivalents $ 440,242 $ 437,076 $ 3,166

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

Cash flows from operating activities

Cash flows provided by (used in) operating activities in the first nine months 2023 and 2022 were as follows (in thousands):

Nine months ended September 30,

Cash flows provided by (used in) operating activities

Cash flows provided by (used in) operating activities in the first quarter 2024 and 2023 (in thousands) were as follows:

For the Three Months Ended March 31,

2024 2023 Change

Net cash provided by (used in) operating activities $ 50,773 $ (27,852) $ 78,625

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

The $307.8 million change in net cash provided by (used in) operating activities was primarily driven by cash receipts from the Lenovo UK proceedings, Lenovo HEVC PLA, and seven other new patent license agreements signed in the last twelve months, as well as timing of cash receipts under existing agreements.

The increase in cash receipts was partially offset by tax payments made in first nine months 2023 and an increase in cash operating expenses.

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

Nine months ended September 30,

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

The $78.6 million change in net cash provided by (used in) operating activities was driven by higher cash receipts primarily due to new patent license agreements signed in first quarter 2024 and due timing of cash receipts related to existing patent license agreements, partially offset by increased cash operating expenses primarily due to increased revenue share costs from new patent license agreements.

The table below sets forth the significant items comprising our cash flows provided by (used in) operating activities during the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended March 31,

2024 2023 Change

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$ 50,773 $ (27,852) $ 78,625

(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.

______________________________

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

Includes revenue share costs of $69.0 million and $1.1 million in first quarter 2024 and 2023, respectively.

(b) Income taxes paid include foreign withholding taxes.

Cash flows from investing and financing activities

Net cash used in investing activities for first nine months 2023 was $74.3 million, a $48.9 million decrease from $123.2 million in first nine months 2022.

During first nine months 2023, we purchased $43.7 million of short-term marketable securities, net of sales, and capitalized $31.2 million of patent costs and property and equipment purchases.

During first nine months 2022, we purchased $92.1 million of short-term marketable securities, net of sales, and capitalized $31.1 million of patent costs and property and equipment purchases.

Net cash used in financing activities for first nine months 2023 was $340.5 million, a change of $369.9 million from net cash provided by financing activities of $29.4 million the first nine months 2022.

This change was primarily attributable to a $228.3 million increase in share repurchases in first nine months 2023 compared to first nine months 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 $139.2 million from the debt refinancing during second quarter 2022.

Our combined short-term and long-term deferred revenue balance as of September 30, 2023 was approximately $422.7 million, a net decrease of $3.9 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 new and existing patent license agreements.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the September 30, 2023 deferred revenue balance of $422.7 million by $167.6 million over the next twelve months.

Net cash provided by investing activities for first quarter 2024 was $16.8 million, a $31.2 million change from $14.5 million of net cash used in investing activities in first quarter 2023.

During first quarter 2024, we sold $24.6 million of short-term marketable securities, net of purchases, and capitalized $9.4 million of patent costs and property and equipment purchases.

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.

Net cash used in financing activities for first quarter 2024 was $49.3 million, a change of $168.8 million from $218.1 million the first quarter 2023.

This change was primarily attributable to a $174.5 million decrease in share repurchases, of which $203.4 million was related to the Company's modified "Dutch auction" tender offer in first quarter 2023.

Our combined short-term and long-term deferred revenue balance as of March 31, 2024 was approximately $349.9 million, a net decrease of $27.5 million from December 31, 2023.

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, 2024 deferred revenue balance of $349.9 million by $156.0 million over the next twelve months.

Convertible Notes

See Note 5, “ Obligations ” to the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for definitions of capitalized terms below.

Commencing on March 1, 2024, the 2024 Notes became convertible at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2024 Notes.

Additionally, from the period April 1, 2024 through June 30, 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.

Our 2027 and 2024 Notes, which for purposes of this discussion are also referred to as the "Convertible Notes", are included in the dilutive earnings per share calculation using the if-converted method.

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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 September 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 September 30, 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 March 31, 2024) or above the strike price of the warrants (weighted average of $106.31 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of March 31, 2024), 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 5, " 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 September 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:

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, 2024, 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 If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2027 Note Hedge Transactions Incremental Shares Issuable (a)

(Shares in thousands)

$80 186 — 186 (186) —

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Market Price Per Share Shares Issuable Upon Conversion of the 2024 Notes Shares Issuable Upon Exercise of the 2024 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2024 Note Hedge Transactions Incremental Shares Issuable (a)

(Shares in thousands)

$85 68 — 68 (68) —

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RESULTS OF OPERATIONS

Third Quarter 2023 Compared to Third Quarter 2022

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

Three months ended September 30,

First Quarter 2024 Compared to First Quarter 2023

The following table compares first quarter 2024 revenues to first quarter 2023 revenues (in thousands):

For the Three Months Ended March 31,

2024 2023 Increase/(Decrease)

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

Total revenues of $140.1 million increased $25.3 million primarily due to catch-up revenues related to the Lenovo HEVC PLA and one other new agreement, partially offset by catch-up revenues from connected automobile license agreements recognized in third quarter 2022.

Recurring revenues were relatively flat compared to third quarter 2022.

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

Three months ended September 30,

Total revenues of $263.5 million, which includes both recurring and catch-up revenues, increased 30% from first quarter 2023 primarily due to catch-up revenues from the Samsung TV agreement signed in first quarter 2024, partially offset by catch-up revenues related to the Lenovo proceedings recognized in first quarter 2023.

Recurring revenues decreased 5% to $96.9 million, compared to $101.6 million in first quarter 2023.

The decrease was primarily driven by the expiration of the Huawei patent license agreement, partially offset by recurring revenues from seven new patent license agreements signed in first quarter 2024.

In first quarter 2024 and 2023, 84% and 67%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue.

In first quarter 2024 and 2023, the following licensees accounted for 10% or more of our total revenue:

For the Three Months Ended March 31,

Customer A 71% <10%

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Customer C <10% 50%

Customer D 11% 13%

Operating Expenses

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

Three months ended September 30,

The following table summarizes the changes in operating expenses between first quarter 2024 and first quarter 2023 by category (in thousands):

For the Three Months Ended March 31,

2024 2023 Increase/(Decrease)

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Total Operating expenses $ 159,804 $ 83,112 $ 76,692 92 %

Operating expenses increased to $86.5 million in third quarter 2023 from $82.9 million in third quarter 2022.

Operating expenses increased to $159.8 million in first quarter 2024 from $83.1 million in first quarter 2023.

The $76.7 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

Revenue share

Intellectual property enforcement 11,527

Total increase in operating expenses $ 3,526

The $3.5 million increase in operating expenses was primarily due to a $2.3 million increase in intellectual property enforcement costs driven by costs from the Samsung arbitration and Oppo proceedings, partially offset by decreased costs from the Lenovo proceedings.

Research and portfolio development expense:

Research and portfolio development expense was relatively flat compared to third quarter 2022.

Licensing expense:

Licensing expense increased $3.1 million primarily due to the above-noted increase in intellectual property enforcement costs.

General and administrative expense:

General and administrative expense was relatively flat compared to third quarter 2022.

Non-Operating Income (Expense), net

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

Three months ended September 30,

2023 2022 Increase/(Decrease)

Interest expense $ (12,683) $ (7,659) $ (5,024) (66) %

Interest and investment income 11,763 4,421 7,342 166 %

Other 2,962 (3,509) 6,471 184 %

Total non-operating income (expense), net $ 2,042 $ (6,747) $ 8,789 130 %

Interest expense increased $5.0 million primarily due to significant financing expense resulting from a previously announced patent license agreement.

The $7.3 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 from the short-term investments.

The change in Other was primarily due to a $6.1 million gain resulting from an observable price change of a long-term strategic investment.

In third 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 15.3% and 13.2%, respectively.

The change in effective tax rate is due to a change in the amount of Foreign Derived Intangible Income deduction 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 third quarter 2023 and 2022 effective tax rate would have been 14.4% and 7.5%, respectively.

First Nine Months 2023 Compared to First Nine Months 2022

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

Nine months ended September 30,

2023 2022 Total Increase/(Decrease)

Recurring revenues:

Smartphone $ 260,882 $ 262,323 $ (1,441) (1) %

CE, IoT/Auto 43,177 37,040 6,137 17 %

Other 1,063 911 152 17 %

Total recurring revenues 305,122 300,274 4,848 2 %

Catch-up revenues a

138,948 40,465 98,483 243 %

Total revenues $ 444,070 $ 340,739 $ 103,331 30 %

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

Total revenues of $444.1 million increased 30% from $340.7 million in the first nine months of 2022 primarily due to catch-up revenues from Lenovo.

Recurring revenues were relatively flat compared to first nine months 2022.

In first nine months 2023 and first nine months 2022, 79% and 71% of our total revenue, respectively, was attributable to licensees that individually accounted for 10% or more of our total revenue.

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

Nine months ended September 30,

Customer A 33% —%

Customer B 23% 31%

Customer C 13% 17%

Customer D 10% 13%

Operating Expenses

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

Nine months ended September 30,

2023 2022 Increase/(Decrease)

Research and portfolio development $ 149,560 $ 139,470 $ 10,090 7 %

Licensing 59,534 51,249 8,285 16 %

General and administrative 38,686 34,818 3,868 11 %

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

Total Operating expenses $ 247,780 $ 228,817 $ 18,963 8 %

Operating expenses increased 8% to $247.8 million in first nine months 2023 from $228.8 million in first nine months 2022.

The $19.0 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

Share-based compensation $ 11,640

One-time net litigation fee reimbursement

Fair value changes of deferred compensation liability 4,403

Performance-based compensation 3,421

Net litigation fee reimbursement (5,636)

Patent impairment (2,500)

Intellectual property enforcement

Restructuring activities (3,279)

Total increase in operating expenses $ 76,692

The $19.0 million increase in operating expenses was primarily due to a $11.6 million increase in share-based compensation costs driven by both higher accrual rates and higher award levels to non-executive employees and a $4.4 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 nine months 2023 included one-time items, including a $7.5 million net litigation fee reimbursement related to the Lenovo proceedings and a $2.5 million impairment on our patents held for sale.

These increases were partially offset by a $3.9 million decrease in intellectual property enforcement costs primarily driven by decreased costs from the Lenovo proceedings and a $3.3 million decrease in non-recurring restructuring activities recognized in first nine months 2022.

The $76.7 million increase in operating expenses was driven by a $67.9 million increase in revenue share costs primarily related to the Samsung TV agreement and a $3.4 million increase in performance-based compensation due to higher accrual rates driven by licensing successes.

Additionally, intellectual property enforcement costs increased $11.5 million due to costs associated with the Lenovo and Oppo proceedings and the Samsung arbitration.

These increases were partially offset by one-time items recognized in first quarter 2023, including a $5.6 million net litigation fee reimbursement and a $2.5 million patent impairment on our patents held for sale.

Research and portfolio development expense:

The $10.1 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.

Research and portfolio development expense were flat compared to first quarter 2023.

Licensing expense:

Licensing expense increased by $8.3 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.

Licensing expense increased $75.2 million primarily driven by the above-noted increased revenue share costs and intellectual property enforcement costs, partially offset by the one-time net litigation fee reimbursement.

General and administrative expense:

The $3.9 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.

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 nine months 2023 non-operating income (expense), net to first nine months 2022 non-operating income (expense), net:

Nine months ended September 30,

General and administrative expense increased $1.5 million primarily due to the above-noted increased performance-based compensation costs.

Non-Operating (Expense) Income, net

The following table compares first quarter 2024 non-operating expense, net to first quarter 2023 non-operating income, net (in thousands):

Three months ended March 31,

2024 2023 Increase/(Decrease)

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Interest and investment income 11,778 11,680 98 1 %

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

Other 8,606 (8,846) 17,452 197 %

Total non-operating income (expense), net $ 5,392 $ (34,555) $ 39,947 116 %

Interest expense increased 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.

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 $28.8 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 from the short-term investments.

The change in Other was primarily due to fair value adjustments of our investments resulting in a $10.5 million net gain in first nine months 2023, compared to a $1.8 million net loss in first nine months 2022 and due to a foreign currency translation net loss arising from euro translation of our foreign subsidiaries of $1.0 million in first nine months 2023, compared to a $6.7 million net loss in first nine months 2022.

In first nine months 2023 and 2022, we had an effective tax rate of 14.7% and 22.4%, 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 nine months ended September 30, 2023 and 2022 effective tax rate would have been 13.4% and 18.1%, respectively.

In the nine months ended September 30, 2023, we recorded a net discrete tax benefit of $2.9 million primarily related to share-based compensation.

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

Other (expense) income, net (2,531) 1,511 (4,042) (268) %

Total non-operating (expense) income, net $ (2,675) $ 1,104 $ (3,779) (342) %

Interest expense and interest and investment income were flat compared to first quarter 2023.

The change in Other (expense) income, net was primarily due to a foreign currency translation net loss arising from translation of our foreign subsidiaries of $2.4 million in first quarter 2024, compared to a $0.7 million net gain in first quarter 2023.

In first quarter 2024 and 2023, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 19.2% and 14.0%, respectively.

The change in effective tax rate is due to a decrease in the amount of Foreign Derived Intangible Income deduction benefit available to the Company.

In addition, the Company is subject to an increase in the Global Intangible Low-Tax Income inclusion derived from the increase in French revenue.

The effective tax rate in the period ending March 31, 2023, was impacted by losses in certain jurisdictions where the Company recorded a valuation allowance against the related tax benefit.

Excluding this valuation allowance, our effective tax rate for the three months ended March 31, 2023 would have been 13.8% respectively.

STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — 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;

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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;

• 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;

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

• 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;

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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-Q

Item 2. Management’s Discussion and Analysis