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 2024 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.” 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. New Agreement In March 2025, we signed a new multi-year, worldwide, non-exclusive, royalty bearing license agreement with vivo Mobile, a major Chinese smartphone vendor. We now have seven of the ten largest smartphone vendors and almost 80% of the entire global smartphone market under license. Subsequent Events In April 2025, we signed a new multi-year license agreement with HP Inc. The agreement licenses HP personal computers to InterDigital’s Wi-Fi and video decoding technologies. No revenue related to this agreement was recognized in first quarter 2025. Return of Capital to Shareholders In February 2025, we announced an additional increase in the quarterly cash dividend by $0.15 per share to $0.60 per share, beginning with the quarterly dividend payable in second quarter 2025. During first quarter 2025, we returned $20.8 million to shareholders, including $15.6 million, or $0.60 per share, of cash dividends declared and $5.2 million through the repurchase of shares of common stock. As of April 30, 2025, there was $216.1 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, 2025, we had $894.8 million of cash, restricted cash, and short-term investments and over $1.6 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 Samsung and Lenovo arbitrations. 92% of our first quarter 2025 revenues are from fixed-fee agreements. 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, 2025 and 2024, including the resulting operating cash flow (in thousands): Three Months Ended March 31, Cash vs. Non-cash revenue: 2025 2024 Fixed fee cash receipts (a) $ 22,579 $ 190,985 Other cash receipts (b) 24,251 10,773 Change in deferred revenue 38,750 27,542 Change in receivables 115,966 28,337 Other 8,961 5,905 Total Revenue $ 210,507 $ 263,542 Net cash (used in) provided by operating activities $ (19,989) $ 50,773 (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. 19 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, 2025 (in thousands): Deferred Revenue Remainder of 2025 $ 140,156 2026 141,119 2027 39,486 2028 1,141 2029 1,206 Thereafter 1,270 Total Revenue $ 324,378 Revenue First quarter 2025 revenues of $210.5 million includes $84.8 million of catch-up revenues, while first quarter 2024 revenues of $263.5 million includes $166.7 million of catch-up revenues. The $53.0 million decrease was primarily due to catch-up revenues from the Samsung TV agreement recognized in first quarter 2024, partially offset by revenues recognized from new agreements signed over the last twelve months. In first quarter 2025, revenues (in descending order) from vivo Mobile, Apple, and Samsung each comprised 10% or more of our consolidated revenues. Refer to " Results of Operations --First Quarter 2025 Compared to First Quarter 2024 " for further discussion of our 2025 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 market volatility, inflation, supply chain issues, high interest rates, labor shortages, tariffs and other potential trade-related sanctions, 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 2025 financial results against other periods, the following items should be taken into consideration: Revenue • Our first quarter 2025 revenues include $84.8 million of catch-up revenues primarily related to a new patent license agreement with vivo Mobile signed in first quarter 2025. 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 2024 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 2024 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2024 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. 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, 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. 20 Table of Contents Cash, cash equivalents, restricted cash, and short-term investments As of March 31, 2025 and December 31, 2024, we had the following amounts of cash and cash equivalents, restricted cash, and short-term investments (in thousands): March 31, 2025 December 31, 2024 Increase / (Decrease) Cash and cash equivalents $ 536,639 $ 527,360 $ 9,279 Restricted cash included within prepaid and other current assets 11,476 24,187 (12,711) Short-term investments 346,653 430,848 (84,195) Total cash, cash equivalents, restricted cash, and short-term investments $ 894,768 $ 982,395 $ (87,627) The net decrease in cash, cash equivalents, restricted cash, and short-term investments was attributable to cash used in financing activities of $43.0 million, cash used in investing activities of $26.7 million, excluding sales and purchases of short-term investments, and cash used in operating activities of $20.0 million. Refer to the sections below for further discussion of these items. Cash flows (used in) provided by operating activities Cash flows (used in) provided by operating activities in the first quarter 2025 and 2024 (in thousands) were as follows: Three Months Ended March 31, 2025 2024 Change Net cash (used in) provided by operating activities $ (19,989) $ 50,773 $ (70,762) Our cash flows (used in) provided by operating activities are principally derived from cash receipts from patent license agreements, offset by cash operating expenses and income tax payments. The $70.8 million change in net cash (used in) provided by operating activities was driven by lower cash receipts primarily due to large cash receipts in first quarter 2024 related to catch-up revenues from agreements signed in first quarter 2024 and due to timing of cash receipts under existing agreements. This decrease was partially offset by lower cash operating expenses primarily due to lower revenue share and litigation costs recognized in first quarter 2025. The table below sets forth the significant items comprising our cash flows provided by operating activities during the three months ended March 31, 2025 and 2024 (in thousands): Three Months Ended March 31, 2025 2024 Change Total Cash Receipts $ 46,830 $ 201,758 $ (154,928) Cash Outflows: Cash operating expenses a (50,964) (133,178) 82,214 Income taxes paid b (10,204) (9,335) (869) Total cash outflows (61,168) (142,513) 81,345 Other working capital adjustments (5,651) (8,472) 2,821 Cash flows (used in) provided by operating activities $ (19,989) $ 50,773 $ (70,762) ______________________________ (a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, and non-cash compensation. Amount includes revenue share costs of $2.6 million and $69.0 million in first quarter 2025 and 2024, 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 2025 was $59.5 million, a $42.7 million change from $16.8 million in first quarter 2024. During first quarter 2025, we sold $86.2 million of short-term marketable securities, net of purchases, and capitalized $26.7 million of patent costs and property and equipment purchases. 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. 21 Table of Contents Net cash used in financing activities for first quarter 2025 was $43.0 million, a change of $6.4 million from $49.3 million the first quarter 2024. This change was primarily attributable to a $23.5 million increase of taxes withheld on restricted stock unit vestings primarily due to the increased share price at vesting, partially offset by a $23.6 million decrease in share repurchases and $7.3 million of proceeds from the exercise of stock options. Other Our combined short-term and long-term deferred revenue balance as of March 31, 2025 was approximately $324.4 million, a net decrease of $35.8 million from December 31, 2024. This decrease in deferred revenue was primarily due 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 March 31, 2025 deferred revenue balance of $324.4 million by $175.3 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. From the period January 1, 2024 through June 30, 2025, 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 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 2027 Notes are convertible into cash up to the aggregate principal amount of the 2027 Notes to be converted and any remaining obligations may be settled in cash, shares of the Company’s common stock or a combination thereof. 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 2027 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 2027 Notes, we entered into the 2027 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 2027 Notes by, in effect, increasing the conversion price of the 2027 Notes from our economic standpoint. However, under GAAP, since the impact of the 2027 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 2027 Notes (initial conversion price of approximately $77.49 per share), or above the strike price of the warrants (weighted average strike price of $106.14 per share), 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 2027 Notes and the 2027 Warrant Transactions 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. 22 Table of Contents 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 2027 Notes are convertible into cash up to the aggregate principal amount to be converted and any remaining obligations may be settled 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 outstanding as of March 31, 2025, and the approximately 5.9 million warrants related to the 2027 Notes, changes in our stock price would affect (i) the number of shares issuable upon conversion of the 2027 Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2027 Warrant Transactions, (iii) the number of additional shares deemed outstanding with respect to the 2027 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 2027 Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the 2027 Notes, exercise of the warrants subject to the 2027 Warrant Transactions, and settlement of the 2027 Note Hedge Transactions (in thousands): 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) $106 1,616 — 1,616 (1,616) — $120 2,122 694 2,816 (2,122) 694 $130 2,417 1,098 3,515 (2,417) 1,098 $140 2,669 1,445 4,114 (2,669) 1,445 $150 2,888 1,746 4,634 (2,888) 1,746 $160 3,080 2,009 5,089 (3,080) 2,009 $170 3,249 2,241 5,490 (3,249) 2,241 $180 3,400 2,448 5,848 (3,400) 2,448 $190 3,534 2,632 6,166 (3,534) 2,632 $200 3,655 2,798 6,453 (3,655) 2,798 $210 3,765 2,949 6,714 (3,765) 2,949 $220 3,864 3,085 6,949 (3,864) 3,085 $230 3,955 3,210 7,165 (3,955) 3,210 $240 4,038 3,324 7,362 (4,038) 3,324 $250 4,115 3,430 7,545 (4,115) 3,430 ______________________________ (a) Represents incremental shares issuable upon concurrent conversion of convertible notes, exercise of warrants and settlement of the hedge agreements. 23 Table of Contents RESULTS OF OPERATIONS First Quarter 2025 Compared to First Quarter 2024 Revenues The following table compares first quarter 2025 revenues to first quarter 2024 revenues (in thousands): Three Months Ended March 31, 2025 2024 Increase/(Decrease) Smartphone $ 183,991 $ 80,280 $ 103,711 129 % CE, IoT/Auto 26,267 182,543 (156,276) (86) % Other 249 719 (470) (65) % Total Revenues $ 210,507 $ 263,542 $ (53,035) (20) % Catch-up revenues (a) , included above $ 84,785 $ 166,678 $ (81,893) (49) % (a) Catch-up revenues represent revenue associated with reporting periods prior to the execution of the license agreement. Total revenues of $210.5 million decreased $53.0 million from first quarter 2024 primarily due to catch-up revenues from the Samsung TV agreement recognized in first quarter 2024, partially offset by catch-up revenues recognized from the new agreement with vivo Mobile signed in first quarter 2025. Additionally, the decrease was partially offset by revenues from seven new patent license agreements signed in the last twelve months, including the vivo Mobile agreement and the previously announced OPPO agreement and the Lenovo arbitration agreement. In first quarter 2025 and 2024, 71% and 84%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue. In first quarter 2025 and 2024, the following licensees accounted for 10% or more of our total revenue: Three Months Ended March 31, 2025 2024 Customer A 43% —% Customer B 16% 13% Customer C 12% 71% Operating Expenses The following table summarizes the changes in operating expenses between first quarter 2025 and first quarter 2024 by category (in thousands): Three Months Ended March 31, 2025 2024 Increase/(Decrease) Research and portfolio development $ 47,430 $ 49,375 $ (1,945) (4) % Licensing 17,677 96,589 (78,912) (82) % General and administrative 13,568 13,840 (272) (2) % Total Operating expenses $ 78,675 $ 159,804 $ (81,129) (51) % Operating expenses decreased to $78.7 million in first quarter 2025 from $159.8 million in first quarter 2024. The $81.1 million decrease in total operating expenses was primarily due to changes in the following items (in thousands): Increase/(Decrease) Revenue share $ (66,319) Intellectual property enforcement (12,766) Other (2,044) Total decrease in operating expenses $ (81,129) 24 Table of Contents Operating expenses decreased $81.1 million primarily due to revenue share costs related to the catch-up revenues recognized from the Samsung TV agreement signed in first quarter 2024. Additionally, intellectual property enforcement costs decreased $12.8 million primarily due to our fourth quarter 2024 resolution of the OPPO and Lenovo proceedings, as well as the Samsung arbitration. Research and portfolio development expense: Research and portfolio development expense was relatively flat compared to first quarter 2024. Licensing expense: Licensing expense decreased $78.9 million primarily driven by the above-noted decreases in revenue share costs and intellectual property enforcement costs. General and administrative expense: General and administrative expense was relatively flat compared to first quarter 2024. Non-Operating Income (expense), net The following table compares first quarter 2025 non-operating income, net to first quarter 2024 non-operating expense, net (in thousands): Three Months Ended March 31, 2025 2024 Increase/(Decrease) Interest expense $ (9,871) $ (11,922) $ 2,051 17 % Interest and investment income 9,264 11,778 (2,514) (21) % Other income (expense), net 994 (2,531) 3,525 139 % Total non-operating income (expense), net $ 387 $ (2,675) $ 3,062 114 % The change in non-operating income (expense), net was primarily due to a foreign currency translation net gain arising from translation of our foreign subsidiaries of $2.2 million in first quarter 2025, compared to a $2.4 million net loss in first quarter 2024. Income taxes In first quarter 2025 and 2024, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 12.6% and 19.2%, 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 and tax benefits related to share-based compensation. In addition, the Company is subject to a decrease in the Global Intangible Low-Tax Income inclusion derived from the increase in revenue in certain foreign jurisdictions. 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 2024 Form 10-K and the risks and uncertainties set forth below: • unanticipated delays or difficulties in the execution of patent license agreements on acceptable terms or at all; • our ability to expand our revenue opportunities by entering into licensing arrangements with streaming and cloud-based service providers; • the resolution of legal proceedings, including any awards or judgments relating to such proceedings, and changes in the schedules or costs associated therewith; • our ability to maintain a strong patent portfolio and make strategic decisions related to our intellectual property protection; • the failure of markets for our technologies to materialize to the extent that we expect; 25 Table of Contents • our continued ability to develop new 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 and other U.S. and non-U.S. tax laws; • the timing and impact of potential regulatory, administrative and legislative matters; • the potential effects of macroeconomic conditions or trade conflicts; • our ability to hire and retain key personnel; • operational risks, including cybersecurity events, human failures or other difficulties with our information technology systems; and • risks related to any new accounting standards or 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. 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 2024 Form 10-K.