InterDigital, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . OVERVIEW 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 “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 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 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. 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, Cash vs. Non-cash revenue: 2024 2023 Fixed fee cash receipts (a) $ 190,133 $ 24,669 Other cash receipts (b) 10,177 19,972 Change in deferred revenue 27,542 42,766 Change in receivables 28,337 90,856 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 royalties (b) Other cash receipts are primarily comprised of cash receipts related to our variable patent royalty revenue and catch-up revenues. 22 Table of Contents 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 March 31, 2024 (in thousands): Deferred Revenue Remainder of 2024 $ 122,762 2025 131,858 2026 79,234 2027 12,450 2028 1,141 Thereafter 2,476 Total Revenue $ 349,921 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 We have been actively monitoring the impact of the current macroeconomic environment in the U.S. 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 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. Comparability of Financial Results When comparing first quarter 2024 financial results against other periods, the following items should be taken into consideration: Revenue • 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 Our significant accounting policies are described in Note 2, " Summary of Significant Accounting Policies and New Accounting Guidance ", in the notes to consolidated financial statements included in our 2023 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2023 Form 10-K. Refer to Note 1, “ Basis of Presentation ,” in the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements and changes in accounting policies. 23 Table of Contents FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. We believe we have the ability to obtain additional liquidity through debt and equity financings. From time to time, we may engage in a variety of transactions to augment our liquidity position as our business dictates and to take advantage of favorable interest rate environments or other market conditions, including the incurrence or issuance of debt and the refinancing or restructuring of existing debt. Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program, dividend program, and other contractual obligations discussed below in both the short-term over the next twelve months, and the long-term beyond twelve months. Cash, cash equivalents, restricted cash and short-term investments 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 / (Decrease) Cash and cash equivalents $ 440,242 $ 437,076 $ 3,166 Restricted cash included within prepaid and other current assets 20,948 5,885 15,063 Short-term investments 544,393 569,280 (24,887) Total cash, cash equivalents, restricted cash and short-term investments $ 1,005,583 $ 1,012,241 $ (6,658) The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $49.3 million and cash used in investing activities of $7.8 million, excluding sales and purchases of short-term investments, partially offset by cash provided by operating activities of $50.8 million. Refer to the sections below for further discussion of these items. 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 24 Table of Contents 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 Total Cash Receipts $ 200,310 $ 44,642 $ 155,668 Cash Outflows: Cash operating expenses a 133,178 53,296 79,882 Income taxes paid b 9,335 4,942 4,393 Total cash outflows 142,513 58,238 84,275 Other working capital adjustments (7,024) (14,256) 7,232 Cash flows provided by (used in) operating activities $ 50,773 $ (27,852) $ 78,625 ______________________________ (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 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. Other 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. 25 Table of Contents 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. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted. Any remaining obligation of the 2027 Notes may be settled in cash, shares of the Company’s common stock or a combination thereof and any remaining obligation of the 2024 Notes is settled in shares of our common stock. As the principal amount must be paid in cash and only the conversion spread is settled in shares, we only include the net number of incremental shares that would be issued upon conversion. We must calculate the number of shares of our common stock issuable under the terms of the Convertible Notes based on the average market price of our common stock during the applicable reporting period and include that number in the total diluted shares figure for the period. At the time we issued the Convertible Notes, we entered into the 2027 Call Spread Transactions and 2024 Call Spread Transactions that together were designed to have the economic effect of reducing the net number of shares that will be issued in the event of conversion of the Convertible Notes by, in effect, increasing the conversion price of the Convertible Notes from our economic standpoint. However, under GAAP, since the impact of the 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "Note Hedge Transactions") is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement. During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of March 31, 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. 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 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 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): 26 Table of Contents 2027 Notes 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) $80 186 — 186 (186) — $85 524 — 524 (524) — $90 825 — 825 (825) — $95 1,094 — 1,094 (1,094) — $100 1,336 — 1,336 (1,336) — $105 1,555 — 1,555 (1,555) — $110 1,754 199 1,953 (1,754) 199 $115 1,936 449 2,385 (1,936) 449 $120 2,103 677 2,780 (2,103) 677 $125 2,256 888 3,144 (2,256) 888 2024 Notes 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) $85 68 — 68 (68) — $90 150 — 150 (150) — $95 224 — 224 (224) — $100 290 — 290 (290) — $105 351 — 351 (351) — $110 405 8 413 (405) 8 $115 455 75 530 (455) 75 $120 501 137 638 (501) 137 $125 543 193 736 (543) 193 $130 582 246 828 (582) 246 ______________________________ (a) Represents incremental shares issuable upon concurrent conversion of convertible notes, exercise of warrants and settlement of the hedge agreements. 27 Table of Contents RESULTS OF OPERATIONS First Quarter 2024 Compared to First Quarter 2023 Revenues 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) Recurring revenues: Smartphone $ 74,029 $ 87,431 $ (13,402) (15) % CE, IoT/Auto 22,116 14,086 8,030 57 % Other 719 56 663 1,184 % Total recurring revenues 96,864 101,573 (4,709) (5) % Catch-up revenues a 166,678 100,800 65,878 65 % Total revenues $ 263,542 $ 202,373 $ 61,169 30 % (a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements. 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, 2024 2023 Customer A 71% <10% Customer B 13% 17% Customer C <10% 50% Operating Expenses 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) Research and portfolio development $ 49,375 $ 49,429 $ (54) — % Licensing 96,589 21,368 75,221 352 % General and administrative 13,840 12,315 1,525 12 % Total Operating expenses $ 159,804 $ 83,112 $ 76,692 92 % 28 Table of Contents 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 $ 67,911 Intellectual property enforcement 11,527 Performance-based compensation 3,421 Net litigation fee reimbursement (5,636) Patent impairment (2,500) Other 1,969 Total increase in operating expenses $ 76,692 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: Research and portfolio development expense were flat compared to first quarter 2023. Licensing expense: 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: 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) Interest expense $ (11,922) $ (12,087) $ 165 1 % Interest and investment income 11,778 11,680 98 1 % 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. Income taxes 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. 29 Table of Contents STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include certain information in regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to," "will continue," "predict," "likely," "in the event," and variations of any such words or similar expressions contained herein are intended to identify such forward-looking statements. Forward-looking statements are made on the basis of management’s current views and assumptions and are not guarantees of future performance. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2023 Form 10-K and the risks and uncertainties set forth below: • unanticipated delays, difficulties or accelerations in the execution of patent license agreements; • 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 enter into partnerships with leading inventors and research organizations and identify and acquire technology and patent portfolios that align with our roadmap; • our ability to commercialize our technologies and enter into customer agreements; • 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; • 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; • risks related to the potential impact of new accounting standards on our financial position, results of operations or cash flows; • 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; • changes or inaccuracies in market projections; • our ability to obtain liquidity through debt and equity financings; • the potential effects that macroeconomic uncertainty could have on our financial position, results of operations and cash flows • changes in our business strategy; • changes or inaccuracies in our expectations with respect to royalty payments by our customers; and • risks related to our assumptions and application of relevant accounting standards, including with respect to revenue recognition. You should carefully consider these factors before making any investment decision with respect to our common stock. These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law. 30 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . There have been no material changes in quantitative and qualitative market risk from the disclosures included in our 2023 Form 10-K.