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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| | | | | | | | |
☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
| | | | | | | | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-33579
INTERDIGITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | | | | | | | |
Pennsylvania | | 82-4936666 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
200 Bellevue Parkway, Suite 300, Wilmington, DE 19809-3727
(Address of Principal Executive Offices and Zip Code)
(302) 281-3600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | IDCC | Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | |
Common Stock, par value $0.01 per share | 25,343,734 |
Title of Class | Outstanding at October 29, 2024 |
INDEX
InterDigital® is a registered trademark of InterDigital, Inc. All other trademarks, service marks and/or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | |
| SEPTEMBER 30, 2024 | | DECEMBER 31, 2023 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 401,090 | | | $ | 437,076 | |
Short-term investments | 412,120 | | | 569,280 | |
Accounts receivable | 212,420 | | | 117,292 | |
Prepaid and other current assets | 128,106 | | | 43,976 | |
Total current assets | 1,153,736 | | | 1,167,624 | |
Property and equipment, net | 10,872 | | | 11,566 | |
Patents, net | 299,567 | | | 313,001 | |
Deferred tax assets | 110,739 | | | 128,967 | |
Other non-current assets, net | 150,436 | | | 149,656 | |
| | | |
Total assets | $ | 1,725,350 | | | $ | 1,770,814 | |
Liabilities and Shareholders' equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 454,250 | | | $ | 578,752 | |
Accounts payable | 8,015 | | | 7,846 | |
Accrued compensation and related expenses | 38,966 | | | 32,665 | |
Deferred revenue | 156,885 | | | 153,597 | |
Dividends payable | 11,366 | | | 10,226 | |
Other accrued expenses | 42,289 | | | 98,042 | |
Total current liabilities | 711,771 | | | 881,128 | |
Long-term debt | 18,302 | | | 29,019 | |
Long-term deferred revenue | 216,665 | | | 223,866 | |
Other long-term liabilities | 56,075 | | | 55,252 | |
Total liabilities | 1,002,813 | | | 1,189,265 | |
Commitments and contingencies | | | |
Shareholders' equity: | | | |
Preferred Stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding | — | | | — | |
Common Stock, $0.01 par value, 100,000 shares authorized, 70,137 and 69,507 shares issued and 25,242 and 25,580 shares outstanding | 701 | | | 694 | |
Additional paid-in capital | 794,644 | | | 742,981 | |
Retained earnings | 1,654,774 | | | 1,462,070 | |
Accumulated other comprehensive gain (loss) | 134 | | | (647) | |
Treasury stock, 44,895 and 43,927 shares of common stock held at cost | (1,727,716) | | | (1,623,549) | |
Total shareholders' equity | 722,537 | | | 581,549 | |
Total liabilities and shareholders' equity | $ | 1,725,350 | | | $ | 1,770,814 | |
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenues | $ | 128,679 | | | $ | 140,106 | | | $ | 615,714 | | | $ | 444,070 | |
Operating expenses: | | | | | | | |
Research and portfolio development | 48,331 | | | 50,253 | | | 147,851 | | | 149,560 | |
Licensing | 27,467 | | | 21,522 | | | 149,212 | | | 59,534 | |
General and administrative | 13,539 | | | 14,678 | | | 41,665 | | | 38,686 | |
| | | | | | | |
Total operating expenses | 89,337 | | | 86,453 | | | 338,728 | | | 247,780 | |
| | | | | | | |
Income from operations | 39,342 | | | 53,653 | | | 276,986 | | | 196,290 | |
| | | | | | | |
Interest expense | (10,681) | | | (12,683) | | | (34,086) | | | (36,911) | |
Other income, net | 12,554 | | | 14,725 | | | 33,483 | | | 42,303 | |
Income before income taxes | 41,215 | | | 55,695 | | | 276,383 | | | 201,682 | |
Income tax provision | (7,025) | | | (8,541) | | | (50,877) | | | (29,715) | |
Net income | $ | 34,190 | | | $ | 47,154 | | | $ | 225,506 | | | $ | 171,967 | |
Net loss attributable to noncontrolling interest | — | | | (787) | | | — | | | (3,016) | |
Net income attributable to InterDigital, Inc. | $ | 34,190 | | | $ | 47,941 | | | $ | 225,506 | | | $ | 174,983 | |
Net income per common share — Basic | $ | 1.36 | | | $ | 1.82 | | | $ | 8.92 | | | $ | 6.42 | |
Weighted average number of common shares outstanding — Basic | 25,149 | | | 26,285 | | | 25,286 | | | 27,259 | |
Net income per common share — Diluted | $ | 1.14 | | | $ | 1.72 | | | $ | 7.84 | | | $ | 6.19 | |
Weighted average number of common shares outstanding — Diluted | 30,034 | | | 27,812 | | | 28,759 | | | 28,261 | |
| | | | | | | |
Cash dividends declared per common share | $ | 0.45 | | | $ | 0.40 | | | $ | 1.25 | | | $ | 1.10 | |
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net income | $ | 34,190 | | | $ | 47,154 | | | $ | 225,506 | | | $ | 171,967 | |
Unrealized gain (loss) on investments, net of tax | 1,366 | | | 30 | | | 781 | | | (1,230) | |
Comprehensive income | $ | 35,556 | | | $ | 47,184 | | | $ | 226,287 | | | $ | 170,737 | |
Comprehensive loss attributable to noncontrolling interest | — | | | (787) | | | — | | | (3,016) | |
Total comprehensive income attributable to InterDigital, Inc. | $ | 35,556 | | | $ | 47,971 | | | $ | 226,287 | | | $ | 173,753 | |
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Non-Controlling Interest | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance, December 31, 2022 | 71,923 | | | $ | 719 | | | $ | 717,102 | | | $ | 1,492,046 | | | $ | (916) | | | 42,255 | | | $ | (1,484,056) | | | $ | 5,618 | | | $ | 730,513 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 105,259 | | | — | | | — | | | — | | | — | | | 105,259 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,739) | | | (1,739) | |
| | | | | | | | | | | | | | | | | |
Non-controlling interest contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,750 | | | 1,750 | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | 579 | | | — | | | — | | | — | | | 579 | |
Dividends declared ($0.35 per share) | — | | | — | | | 259 | | | (9,708) | | | — | | | — | | | — | | | — | | | (9,449) | |
Exercise of common stock options | 13 | | | — | | | 687 | | | — | | | — | | | — | | | — | | | — | | | 687 | |
Issuance of common stock, net | 132 | | | 1 | | | (6,709) | | | — | | | — | | | — | | | — | | | — | | | (6,708) | |
Share-based compensation | — | | | — | | | 7,790 | | | — | | | — | | | — | | | — | | | — | | | 7,790 | |
Repurchase of common stock | (2,739) | | | (27) | | | — | | | (203,354) | | | — | | | — | | | — | | | — | | | (203,381) | |
Balance, March 31, 2023 | 69,329 | | | $ | 693 | | | $ | 719,129 | | | $ | 1,384,243 | | | $ | (337) | | | 42,255 | | | $ | (1,484,056) | | | $ | 5,629 | | | $ | 625,301 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 21,783 | | | — | | | — | | | — | | | — | | | 21,783 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (490) | | | (490) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (1,839) | | | — | | | — | | | — | | | (1,839) | |
Dividends declared ($0.35 per share) | — | | | — | | | 360 | | | (9,633) | | | — | | | — | | | — | | | — | | | (9,273) | |
Exercise of common stock options | 1 | | | — | | | 12 | | | — | | | — | | | — | | | — | | | — | | | 12 | |
Issuance of common stock, net | 42 | | | — | | | (1,389) | | | — | | | — | | | — | | | — | | | — | | | (1,389) | |
Share-based compensation | — | | | — | | | 8,740 | | | — | | | — | | | — | | | — | | | — | | | 8,740 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 548 | | | (42,489) | | | — | | | (42,489) | |
Balance, June 30, 2023 | 69,372 | | | $ | 693 | | | $ | 726,852 | | | $ | 1,396,393 | | | $ | (2,176) | | | 42,803 | | | $ | (1,526,545) | | | $ | 5,139 | | | $ | 600,356 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 47,941 | | | — | | | — | | | — | | | — | | | 47,941 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (787) | | | (787) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | 30 | | | — | | | — | | | — | | | 30 | |
Dividends declared ($0.40 per share) | — | | | — | | | 328 | | | (10,676) | | | — | | | — | | | — | | | — | | | (10,348) | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock, net | 59 | | | 1 | | | (2,888) | | | — | | | — | | | — | | | — | | | — | | | (2,887) | |
Amortization of unearned compensation | — | | | — | | | 10,335 | | | — | | | — | | | — | | | — | | | — | | | 10,335 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 653 | | | (56,858) | | | — | | | (56,858) | |
BALANCE, SEPTEMBER 30, 2023 | 69,431 | | | $ | 694 | | | $ | 734,627 | | | $ | 1,433,658 | | | $ | (2,146) | | | 43,456 | | | $ | (1,583,403) | | | $ | 4,352 | | | $ | 587,782 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Gain (Loss) | | Treasury Stock | | Non-Controlling Interest | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance, December 31, 2023 | 69,507 | | | $ | 694 | | | $ | 742,981 | | | $ | 1,462,070 | | | $ | (647) | | | 43,927 | | | $ | (1,623,549) | | | $ | — | | | $ | 581,549 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 81,652 | | | — | | | — | | | — | | | — | | | 81,652 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (495) | | | — | | | — | | | — | | | (495) | |
Dividends declared ($0.40 per share) | — | | | — | | | 343 | | | (10,490) | | | — | | | — | | | — | | | — | | | (10,147) | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock, net | 131 | | | 2 | | | (8,637) | | | — | | | — | | | — | | | — | | | — | | | (8,635) | |
Share-based compensation | — | | | — | | | 9,386 | | | — | | | — | | | — | | | — | | | — | | | 9,386 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 277 | | | (29,019) | | | — | | | (29,019) | |
Balance, March 31, 2024 | 69,638 | | | $ | 696 | | | $ | 744,073 | | | $ | 1,533,232 | | | $ | (1,142) | | | 44,204 | | | $ | (1,652,568) | | | $ | — | | | $ | 624,291 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 109,664 | | | — | | | — | | | — | | | — | | | 109,664 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | |
Dividends declared ($0.40 per share) | — | | | — | | | 443 | | | (10,495) | | | — | | | — | | | — | | | — | | | (10,052) | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock, net | 39 | | | — | | | (1,580) | | | — | | | — | | | — | | | — | | | — | | | (1,580) | |
Share-based compensation | — | | | — | | | 9,655 | | | — | | | — | | | — | | | — | | | — | | | 9,655 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 344 | | | (35,111) | | | — | | | (35,111) | |
Settlement of the 2024 Notes | 324 | | | 3 | | | (3) | | | — | | | — | | | — | | | — | | | — | | | — | |
Settlement of the 2024 Hedges | — | | | — | | | 37,120 | | | — | | | — | | | 324 | | | (37,120) | | | — | | | — | |
Balance, June 30, 2024 | 70,001 | | | $ | 699 | | | $ | 789,708 | | | $ | 1,632,401 | | | $ | (1,232) | | | 44,872 | | | $ | (1,724,799) | | | $ | — | | | $ | 696,777 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 34,190 | | | — | | | — | | | — | | | — | | | 34,190 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net change in unrealized gain (loss) on short-term investments | — | | | — | | | — | | | — | | | 1,366 | | | — | | | — | | | — | | | 1,366 | |
Dividends declared ($0.45 per share) | — | | | — | | | 451 | | | (11,817) | | | — | | | — | | | — | | | — | | | (11,366) | |
Exercise of common stock options | 1 | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | 11 | |
Issuance of common stock, net | 53 | | | 1 | | | (4,602) | | | — | | | — | | | — | | | — | | | — | | | (4,601) | |
Share-based compensation | — | | | — | | | 9,081 | | | — | | | — | | | — | | | — | | | — | | | 9,081 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 23 | | | (2,917) | | | — | | | (2,917) | |
Settlement of the 2024 Warrants | 82 | | | 1 | | | (5) | | | — | | | — | | | — | | | — | | | — | | | (4) | |
BALANCE, SEPTEMBER 30, 2024 | 70,137 | | | $ | 701 | | | $ | 794,644 | | | $ | 1,654,774 | | | $ | 134 | | | 44,895 | | | $ | (1,727,716) | | | $ | — | | | $ | 722,537 | |
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Cash flows from operating activities: | | | |
Net income | $ | 225,506 | | | $ | 171,967 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 52,165 | | | 58,698 | |
Non-cash interest income, net | (8,290) | | | (9,800) | |
Non-cash change in investments | 329 | | | (9,370) | |
| | | |
Change in deferred revenue | (3,913) | | | (3,933) | |
| | | |
Deferred income taxes | 18,020 | | | 2,635 | |
| | | |
Share-based compensation | 28,122 | | | 26,865 | |
| | | |
| | | |
| | | |
Other | — | | | 2,616 | |
Increase in assets: | | | |
Receivables | (95,128) | | | (16,390) | |
Deferred charges and other assets | (81,333) | | | (54,384) | |
(Decrease) Increase in liabilities: | | | |
Accounts payable | (2,092) | | | 881 | |
Customer deposit | (76,100) | | | 76,100 | |
Accrued compensation and other expenses | 22,208 | | | (8,567) | |
| | | |
Net cash provided by operating activities | 79,494 | | | 237,318 | |
Cash flows from investing activities: | | | |
Purchases of short-term investments | (445,434) | | | (671,612) | |
Sales of short-term investments | 618,642 | | | 627,906 | |
Purchases of property and equipment | (1,928) | | | (3,167) | |
| | | |
Capitalized patent costs | (33,506) | | | (27,992) | |
| | | |
| | | |
Long-term investments | 1,576 | | | 567 | |
Net cash provided by (used in) investing activities | 139,350 | | | (74,298) | |
Cash flows from financing activities: | | | |
| | | |
| | | |
| | | |
Payments on long-term debt | (139,069) | | | — | |
| | | |
| | | |
| | | |
Payments of debt issuance costs | — | | | (100) | |
Repurchase of common stock | (66,726) | | | (302,728) | |
Net proceeds from exercise of stock options | 11 | | | 699 | |
Non-controlling interest contribution | — | | | 1,750 | |
| | | |
Taxes withheld upon restricted stock unit vestings | (14,816) | | | (10,984) | |
Dividends paid | (30,425) | | | (29,106) | |
Net cash used in financing activities | (251,025) | | | (340,469) | |
Net decrease in cash, cash equivalents and restricted cash | (32,181) | | | (177,449) | |
Cash, cash equivalents and restricted cash, beginning of period | 442,961 | | | 703,161 | |
Cash, cash equivalents and restricted cash, end of period | $ | 410,780 | | | $ | 525,712 | |
Refer to Note 1, "Basis of Presentation," for additional supplemental cash flow information. Additionally, refer to Note 3, "Cash, Concentration of Credit Risk and Fair Value of Financial Instruments" for a reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets.
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of InterDigital, Inc. (individually and/or collectively with its subsidiaries referred to as “InterDigital,” the “Company,” “we,” “us” or “our,” unless otherwise indicated) as of September 30, 2024, the results of our operations for the three and nine months ended September 30, 2024 and 2023 and our cash flows for the nine months ended September 30, 2024 and 2023. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the detailed schedules, information and notes necessary to state fairly the financial condition, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”). The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP for year-end financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (our “2023 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”) on February 15, 2024. Definitions of capitalized terms not defined herein appear within our 2023 Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. We have one reportable segment.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Change in Accounting Policies
There have been no material changes or updates to our existing accounting policies from the disclosures included in our 2023 Form 10-K, except as indicated below in "New Accounting Guidance".
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Supplemental Cash Flow Information
The following table presents additional supplemental cash flow information for the nine months ended September 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
Supplemental cash flow information: | 2024 | | 2023 |
Interest paid | $ | 9,311 | | | $ | 9,312 | |
Income taxes paid, including foreign withholding taxes | 37,269 | | | 30,117 | |
Non-cash investing and financing activities: | | | |
Settlement of the 2024 Hedge Transactions | 37,120 | | | — | |
Dividend payable | 11,366 | | | 10,348 | |
| | | |
Right-of-use assets obtained in exchange of operating lease liabilities | 2,023 | | | 93 | |
| | | |
| | | |
Accrued capitalized patent costs and property and equipment purchases | (2,261) | | | 334 | |
Unsettled repurchase of common stock | — | | | 1,853 | |
New Accounting Guidance
Accounting Standards Update: Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments in the ASU require disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption allowed. We are currently evaluating the impact of adoption on our financial disclosures.
Accounting Standards Update: Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments in the ASU enhance income tax disclosures, primarily through standardization, disaggregation of rate reconciliation categories, and income taxes paid by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption allowed. We are currently evaluating the impact of adoption on our financial disclosures.
2. REVENUE
Disaggregated Revenue
The following table presents the disaggregation of our revenue for the three and nine months ended September 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2024 | | 2023 | | Increase/(Decrease) |
Recurring revenues: | | | | | | | |
Smartphone | $ | 74,184 | | | $ | 88,376 | | | $ | (14,192) | | | (16) | % |
CE, IoT/Auto | 23,830 | | | 15,659 | | | 8,171 | | | 52 | % |
Other | 620 | | | 441 | | | 179 | | | 41 | % |
Total recurring revenues | 98,634 | | | 104,476 | | | (5,842) | | | (6) | % |
Catch-up revenues a | 30,045 | | | 35,630 | | | (5,585) | | | (16) | % |
Total revenues | $ | 128,679 | | | $ | 140,106 | | | $ | (11,427) | | | (8) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2024 | | 2023 | | Increase/(Decrease) |
Recurring revenues: | | | | | | | |
Smartphone | $ | 221,738 | | | $ | 260,882 | | | $ | (39,144) | | | (15) | % |
CE, IoT/Auto | 67,824 | | | 43,177 | | | 24,647 | | | 57 | % |
Other | 1,878 | | | 1,063 | | | 815 | | | 77 | % |
Total recurring revenues | 291,440 | | | 305,122 | | | (13,682) | | | (4) | % |
Catch-up revenues a | 324,274 | | | 138,948 | | | 185,326 | | | 133 | % |
Total revenues | $ | 615,714 | | | $ | 444,070 | | | $ | 171,644 | | | 39 | % |
(a) Catch-up revenues are comprised of past patent royalties and revenues from static fixed-fee agreements.
During the nine months ended September 30, 2024, we recognized $119.8 million of revenue that had been included in deferred revenue as of the beginning of the period. As of September 30, 2024, we had contract assets of $161.1 million included within "Accounts receivable" in the condensed consolidated balance sheet. As of December 31, 2023, we had contract assets of $94.6 million included within "Accounts receivable" in the condensed consolidated balance sheet.
Contracted Revenue
Based on contracts signed and committed as of September 30, 2024, we expect to recognize the following revenue from dynamic fixed-fee royalty payments over the term of such contracts (in thousands):
| | | | | |
| Revenue (a) |
Remainder of 2024 | $ | 84,979 | |
2025 | 330,439 | |
2026 | 237,275 | |
2027 | 227,858 | |
2028 | 215,821 | |
Thereafter | 265,882 | |
Total Revenue | $ | 1,362,254 | |
(a) This table includes estimated revenue related to our Samsung arbitration. 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.
3. CASH, CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash currently consist of money market and demand accounts. The following table provides a reconciliation of total cash, cash equivalents and restricted cash as of September 30, 2024, December 31, 2023 and September 30, 2023 to the captions within the condensed consolidated balance sheets and condensed consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | | | |
| September 30, | | December 31, | | September 30, |
| 2024 | | 2023 | | 2023 |
Cash and cash equivalents | $ | 401,090 | | | $ | 437,076 | | | $ | 518,483 | |
Restricted cash included within prepaid and other current assets | 9,690 | | | 5,885 | | | 7,229 | |
| | | | | |
Total cash, cash equivalents, and restricted cash | $ | 410,780 | | | $ | 442,961 | | | $ | 525,712 | |
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and accounts receivable. We place our cash equivalents and short-term investments only in highly rated financial instruments and in United States government instruments.
Our accounts receivable and contract assets are derived principally from patent license and technology solutions agreements. Four licensees comprised 85% and 84% of our accounts receivable balances of September 30, 2024 and December 31, 2023, respectively. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the Company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements
Our financial assets are generally included within short-term investments on our condensed consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of September 30, 2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of September 30, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 400,422 | | | $ | — | | | $ | — | | | $ | 400,422 | |
Commercial paper | — | | | 95,932 | | | — | | | 95,932 | |
U.S. government securities | — | | | 192,507 | | | — | | | 192,507 | |
Corporate bonds, asset backed and other securities (c) | — | | | 134,039 | | | — | | | 134,039 | |
Total | $ | 400,422 | | | $ | 422,478 | | | $ | — | | | $ | 822,900 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 430,707 | | | $ | — | | | $ | — | | | $ | 430,707 | |
Commercial paper (b) | — | | | 174,991 | | | — | | | 174,991 | |
U.S. government securities | — | | | 256,850 | | | — | | | 256,850 | |
Corporate bonds, asset backed and other securities (c) | — | | | 149,693 | | | — | | | 149,693 | |
Total | $ | 430,707 | | | $ | 581,534 | | | $ | — | | | $ | 1,012,241 | |
______________________________
(a)Primarily included within cash and cash equivalents.
(b)As of December 31, 2023, $5.7 million of commercial paper was included within cash and cash equivalents.
(c)As of September 30, 2024 and December 31, 2023, $10.4 million and $6.5 million of corporate bonds, asset backed and other securities was included within cash and cash equivalents, respectively.
Non-Recurring Fair Value Measurements
Patents
During the nine months ended September 30, 2023, we incurred a one-time impairment of $2.5 million on our patents held for sale. We determined the fair value based upon evaluation of market conditions.
Investment in Other Entities
During the three and nine months ended September 30, 2024, we recognized net gains of $0.3 million and $1.8 million, respectively, resulting from fair value changes of our long-term strategic investments, which was included within “Other income, net” in the condensed consolidated statement of income.
During the three and nine months ended September 30, 2023, we recognized gains of $6.1 million and $9.4 million, respectively, resulting from fair value changes of one of our long-term strategic investments, which was included within “Other income, net” in the condensed consolidated statement of income.
Fair Value of Long-Term Debt
Convertible Notes
The principal amount, carrying value and related estimated fair value of the Company's Convertible Notes reported as of September 30, 2024 and December 31, 2023 was as follows (in thousands). The aggregate fair value of the principal amount of the Convertible Notes is a Level 2 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| Principal Amount | | Carrying Value | | Fair Value | | Principal Amount | | Carrying Value | | Fair Value |
2027 Senior Convertible Long-Term Debt | $ | 460,000 | | | $ | 454,250 | | | $ | 855,554 | | | $ | 460,000 | | | $ | 452,830 | | | $ | 677,230 | |
2024 Senior Convertible Long-Term Debt | $ | — | | | $ | — | | | $ | — | | | $ | 126,174 | | | $ | 125,922 | | | $ | 171,130 | |
Technicolor Patent Acquisition Long-term Debt
The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported as of September 30, 2024 and December 31, 2023 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Technicolor Patent Acquisition Long-Term Debt | $ | 18,302 | | | $ | 16,584 | | | $ | 29,019 | | | $ | 28,859 | |
4. OTHER ASSETS AND LIABILITIES
The amounts included in "Prepaid and other current assets" in the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Deposits | $ | 40,643 | | | $ | — | |
Prepaid assets | 35,019 | | | 9,353 | |
Tax receivables | 25,257 | | | 19,835 | |
Restricted cash | 9,690 | | | 5,885 | |
| | | |
| | | |
Other current assets | 17,497 | | | 8,903 | |
Total Prepaid and other current assets | $ | 128,106 | | | $ | 43,976 | |
The amounts included in "Other non-current assets, net" in the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Tax receivables | $ | 87,331 | | | $ | 76,740 | |
| | | |
| | | |
Goodwill | 22,421 | | | 22,421 | |
Long-term investments | 20,667 | | | 31,895 | |
Right-of-use assets | 15,840 | | | 15,746 | |
Other non-current assets | 4,177 | | | 2,854 | |
Total Other non-current assets, net | $ | 150,436 | | | $ | 149,656 | |
The amounts included in "Other accrued expenses" in the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Accrued legal fees | $ | 20,616 | | | $ | 10,338 | |
Customer deposit | — | | | 76,100 | |
Other accrued expenses | 21,673 | | | 11,604 | |
Total Other accrued expenses | $ | 42,289 | | | $ | 98,042 | |
The amounts included in "Other long-term liabilities" in the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Deferred compensation liabilities | $ | 19,560 | | | $ | 18,413 | |
Operating lease liabilities | 16,819 | | | 17,385 | |
Other long-term liabilities | 19,696 | | | 19,454 | |
Total Other long-term liabilities | $ | 56,075 | | | $ | 55,252 | |
5. OBLIGATIONS
2027 Notes, and Related Note Hedge and Warrant Transactions
On May 27, 2022, we issued $460.0 million in aggregate principal amount of 3.50% Senior Convertible Notes due 2027 (the "2027 Notes"). The net proceeds from the issuance of the 2027 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $450.0 million. The 2027 Notes bear interest at a rate of 3.50% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2022, and mature on June 1, 2027, unless earlier redeemed, converted or repurchased.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share). From the period January 1, 2024 through December 31, 2024, the holders of the 2027 Notes have the right, but not the obligation, to convert any portion of the principal amount of the 2027 Notes. As such, the 2027 Notes are included in "Current portion of long-term debt" in our condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023.
The 2027 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with any of the Company’s current and any future senior unsecured indebtedness. The 2027 Notes are effectively subordinated to all of the Company’s future secured indebtedness, if any, to the extent of the value of the related collateral, and the 2027 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries.
On May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into convertible note hedge transactions ("2027 Note Hedge Transactions") that cover, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2027 Notes, subject to adjustment, and are exercisable upon any conversion of the 2027 Notes. Also, on May 24 and May 25, 2022, we entered into privately negotiated warrant transactions ("2027 Warrant Transactions"), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock. As of September 30, 2024, the warrants under the 2027 Warrant Transactions had a weighted average strike price of $106.31 per share, subject to adjustment, and mature beginning September 2027 through April 2028.
2024 Notes, and Related Note Hedge and Warrant Transactions
On June 3, 2019, we issued $400.0 million in aggregate principal amount of Senior Convertible Notes due in 2024 (the "2024 Notes") that bore interest at a rate of 2.00% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and matured on June 1, 2024. During second quarter 2022, we repurchased $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes. We repaid the remaining $126.2 million in aggregate principal at maturity on June 1, 2024.
On May 29 and May 31, 2019, in connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions (collectively, the "2024 Note Hedge Transactions") that covered, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock, in the aggregate, at a strike price that corresponded to the conversion price of the 2024 Notes, subject to adjustment, and were exercisable upon any conversion of the 2024 Notes. On May 29 and May 31, 2019, we also entered into privately negotiated warrant transactions (collectively, the "2024 Warrant Transactions" and, together with the 2024 Note Hedge Transactions, the "2024 Call Spread Transactions"), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock at an initial strike price of approximately $109.43 per share, subject to adjustment.
At maturity on June 1, 2024, the Company issued 0.3 million shares to settle the 2024 Notes that had been converted by holders. This issuance was effectively offset by our receipt of 0.3 million shares from the settlement of the 2024 Note Hedge Transactions. The 2024 Warrants settle during the period September 3, 2024 through December 17, 2024 on a net-share basis. 0.1 million shares have been issued related to the 2024 Warrant Transactions as of September 30, 2024, and warrants to acquire 1.1 million shares of common stock at an initial strike price of approximately $109.43 per share, subject to adjustment, remain outstanding.
The following table reflects the carrying value of our Convertible Notes long-term debt as of September 30, 2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
3.50% Senior Convertible Notes due 2027 | $ | 460,000 | | | $ | 460,000 | |
2.00% Senior Convertible Notes due 2024 | — | | | 126,174 | |
Less: Deferred financing costs | (5,750) | | | (7,422) | |
Net carrying amount of the Convertible Notes | 454,250 | | | 578,752 | |
Less: Current portion of long-term debt | (454,250) | | | (578,752) | |
Long-term net carrying amount of the Convertible Notes | $ | — | | | $ | — | |
The following table presents the amount of interest cost recognized, which is included within "Interest expense" in our condensed consolidated statements of income, for the three and nine months ended September 30, 2024 and 2023 relating to the contractual interest coupon and the amortization of deferred financing costs of the Convertible Notes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, |
| 2024 | | 2023 |
| 2027 Notes | | 2024 Notes | | Total | | 2027 Notes | | 2024 Notes | | Total |
Contractual coupon interest | $ | 4,025 | | | $ | — | | | $ | 4,025 | | | $ | 4,025 | | | $ | 631 | | | $ | 4,656 | |
Amortization of deferred financing costs | 483 | | | — | | | 483 | | | 448 | | | 147 | | | 595 | |
Total | $ | 4,508 | | | $ | — | | | $ | 4,508 | | | $ | 4,473 | | | $ | 778 | | | $ | 5,251 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2024 | | 2023 |
| 2027 Notes | | 2024 Notes | | Total | | 2027 Notes | | 2024 Notes | | Total |
Contractual coupon interest | $ | 12,075 | | | $ | 1,059 | | | $ | 13,134 | | | $ | 12,075 | | | $ | 1,893 | | | $ | 13,968 | |
Amortization of deferred financing costs | 1,419 | | | 252 | | | 1,671 | | | 1,315 | | | 433 | | | 1,748 | |
Total | $ | 13,494 | | | $ | 1,311 | | | $ | 14,805 | | | $ | 13,390 | | | $ | 2,326 | | | $ | 15,716 | |
Technicolor Patent Acquisition Long-Term Debt
On July 30, 2018, we completed our acquisition of the patent licensing business of Technicolor SA ("Technicolor"), a worldwide technology leader in the media and entertainment sector (the "Technicolor Patent Acquisition"). In conjunction with the Technicolor Patent Acquisition, we assumed Technicolor’s rights and obligations under a joint licensing program with Sony relating to digital televisions and standalone computer display monitors, which commenced in 2015 (the "Madison Arrangement"). An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit made certain payments to Technicolor and Sony and agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit meets the criteria in ASC 470-10-25 - Sales of Future Revenues or Various Other Measures of Income ("ASC 470"), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our condensed consolidated balance sheet. This initial fair value measurement was based on the perspective of a market participant and included significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of September 30, 2024 and December 31, 2023 is disclosed within Note 3, "Cash, Concentration of Credit Risk and Fair Value of Financial Instruments." Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt are amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “Interest Expense” in the condensed consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the three and nine months ended September 30, 2024, we recognized $0.6 million and $2.2 million, respectively, of interest expense related to this debt, compared to $1.1 million and $2.5 million during the three and nine months ended September 30, 2023, respectively. This was included within “Interest Expense” in the condensed consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly. We made $12.9 million in payments to CPPIB Credit during the nine months ended September 30, 2024, and no payments were made during the nine months ended September 30, 2023.
Technicolor Contingent Consideration
As part of the Technicolor Patent Acquisition, we entered into a revenue-sharing arrangement with Technicolor that created a contingent consideration liability. Under the revenue-sharing arrangement, Technicolor receives 42.5% of future cash receipts from new licensing efforts from the Madison Arrangement only, subject to certain conditions and hurdles. As of September 30, 2024, the contingent consideration liability from the revenue-sharing arrangement was deemed not probable and is therefore not reflected within the consolidated financial statements.
6. LITIGATION AND LEGAL PROCEEDINGS
ARBITRATIONS AND COURT PROCEEDINGS
Lenovo
In fourth quarter 2024, the Company reached an agreement with Lenovo Group Limited and certain of its subsidiaries (“Lenovo”) to enter into binding arbitration to determine the final terms of a new patent license agreement, which will be effective from January 1, 2024. As part of the agreement to arbitrate, both parties have agreed to dismiss all pending litigations between them.
UK Proceedings
In August 2019, the Company and certain of its subsidiaries filed a claim in the UK High Court against Lenovo. The claim, as amended, alleged infringement of five of the Company’s patents relating to 3G and/or 4G/LTE standards. The Company sought, among other relief, injunctive relief to prevent further infringement of the asserted patents or, in the alternative, a determination of the terms of a FRAND license.
Between 2021 and 2023, three of the Company’s European Patents were found by UK courts to be valid, essential and infringed by Lenovo. In March 2023, the UK High Court issued an order staying all deadlines with respect to the fourth and fifth technical trials.
On March 16, 2023, the UK High Court issued its order regarding judgment in the trial to determine how much Lenovo must pay for a license to the Company’s portfolio of cellular assets, awarding the Company a lump sum of $138.7 million for such license through December 31, 2023. On June 27, 2023, the court issued an order awarding the Company an additional $46.2 million, thus increasing the total award to $184.9 million, which was paid on July 11, 2023. The court also found that the Company should pay a portion of Lenovo’s costs and granted both parties permission to appeal on certain grounds. Both parties appealed certain aspects of the ruling, and in July 2024, the UK Court of Appeal ruled in favor of InterDigital and awarded the Company an additional amount of $55.2 million to a total of approximately $240.1 million. It rejected Lenovo’s appeal in its entirety and confirmed that Lenovo must pay for all of its past sales starting from 2007 through December 31, 2023. The court also found that Lenovo should pay the Company’s costs for the appeal and reduced the costs that Lenovo was awarded from the initial decision. Lenovo sought permission to appeal, and permission to appeal was refused by the UK Court of Appeals. Lenovo filed an application to the UK Supreme Court requesting permission to appeal on August 9, 2024; Lenovo withdrew its application to appeal in October 2024 following entry into the arbitration agreement described above.
On September 24, 2023, Lenovo filed a new claim in the UK High Court, which alleged invalidity of two of the Company’s patents relating to 4G/LTE standards. Lenovo sought, among other relief, a declaration that the patents at issue were invalid, not essential, and not infringed, revocation of the patents at issue, and a declaration that, upon expiration of the current license in 2023, Lenovo is licensed under terms to be determined by the UK High Court through 2028 or, in the alternative, a determination of the terms of a FRAND license. In October 2023, Lenovo filed a request for an order that the Company indicate whether it is prepared to give an unconditional undertaking to enter into a global license on terms set by the UK Court, or failing that, a declaration that the Defendants are unwilling licensors; a hearing was held in December 2023 during which Lenovo agreed to stay its application. The Company filed a jurisdiction challenge in October 2023, and a hearing on such challenge took place in April 2024, following which, the jurisdiction challenge was denied. In November 2023, Lenovo filed an application seeking an expedited FRAND trial and an interim license until a FRAND decision is issued in the UK. A hearing on the interim license was held in February 2024; in March 2024 the UK High Court denied Lenovo’s request for the interim license. A FRAND trial was set for June-July 2025.
District of Delaware Patent Proceedings
In August 2019, the Company and certain of its subsidiaries filed a complaint in the United States District Court for the District of Delaware (the "Delaware District Court") against Lenovo alleging that Lenovo infringes eight of the Company’s U.S. patents by making, using, offering for sale, and/or selling Lenovo wireless devices with 3G and/or 4G LTE capabilities. As relief, InterDigital sought: (a) a declaration that the Company is not in breach of its relevant FRAND commitments with respect to Lenovo; (b) to the extent Lenovo does not agree to negotiate a worldwide patent license, does not agree to enter into binding international arbitration to set the terms of a FRAND license, and does not agree to be bound by the terms to be set by the UK High Court in the separately filed UK proceedings described above, an injunction prohibiting Lenovo from continued infringement; (c) damages, including enhanced damages for willful infringement and supplemental damages; and (d) attorneys’ fees and costs.
In June 2023, the parties requested that the entire case be stayed pending resolution of all appeals in the UK proceedings, and this request was granted.
District of Delaware Antitrust Proceedings
In April 2020, Lenovo and Motorola Mobility LLC filed a complaint in the Delaware District Court against the Company and certain of its subsidiaries, alleging that the Company defendants violated Sections 1 and 2 of the Sherman Act in connection with, among other things, their licensing of 3G and 4G standards essential patents ("SEPs"). The complaint further alleged that the Company defendants have violated their commitment to the ETSI with respect to the licensing of 3G and 4G SEPs on FRAND terms and conditions. The complaint sought, among other things (i) rulings that the Company defendants have violated Sections 1 and 2 of the Sherman Act and are liable for breach of their ETSI FRAND commitments, (ii) a judgment that the plaintiffs are entitled to a license with respect to the Company’s 3G and 4G SEPs on FRAND terms and conditions, and (iii) injunctions against any demand for allegedly excessive royalties or enforcement of the Company defendants’ 3G and 4G U.S. SEPs against the plaintiffs or their customers via patent infringement proceedings.
In June 2020, the Company filed a motion to dismiss Lenovo’s Sherman Act claims with prejudice, and to dismiss Lenovo’s breach of contract claim with leave to re-file as a counterclaim in the Company’s legal proceeding against Lenovo in the Delaware District Court discussed above.
In March 2021, the Delaware District Court dismissed the Sherman Act Section 1 claim without prejudice, denied the motion to dismiss the Sherman Act Section 2 claim, and consolidated the Section 2 and breach of contract claims with Company’s Delaware patent proceeding discussed above.
International Trade Commission and Companion District Court Proceedings
In September 2023, the Company and certain of its subsidiaries filed a complaint in the United States International Trade Commission (the "International Trade Commission") alleging that Lenovo infringes five of the Company’s U.S. patents by making, using, offering for sale, and/or selling certain electronic devices, including smartphones, computers, tablet computers, and components thereof that infringe certain claims of the asserted patents. As relief, the Company sought: (a) a limited exclusion order against Lenovo barring from entry into the United States all of Lenovo’s products that infringe the asserted patents; (b) cease and desist orders prohibiting Lenovo from importing, selling, offering for sale, marketing, advertising, and distributing, infringing products; and (c) a bond during the 60-day Presidential review period. An evidentiary hearing was held in August 2024.
Also in September 2023, the Company and certain of its subsidiaries filed a complaint in the United States District Court for the Eastern District of North Carolina (the "North Carolina District Court") alleging that Lenovo infringes those same five of the Company’s U.S. patents. As relief, the Company sought: (a) a finding that Lenovo is liable for infringement of the asserted patents; (b) an injunction against further infringement; (c) damages, including enhanced damages for willful infringement and supplemental damages; and (d) costs.
Germany Proceedings
In September 2023, the Company filed a complaint with the Munich Regional Court against Lenovo and certain of its affiliates, alleging infringement of a European patent relating to cellular 4G/LTE and/or 5G standards. The Company sought, among other relief, injunctive relief to prevent further infringement of the asserted patents. In May 2024, the Munich Regional Court issued a judgment finding Lenovo infringed the Company’s European patent and that the Company complied with its FRAND obligations while Lenovo did not; the Court ordered Lenovo to cease and desist selling infringing products. The Company served Lenovo with an enforcement note of the judgment in May 2024. Lenovo appealed the judgment and requested a stay of the enforcement of the judgment, and in June 2024, the Munich Regional Court rejected Lenovo’s request.
Oppo, OnePlus and realme
In fourth quarter 2024, the Company entered into a license agreement with Guangdong Oppo Mobile Telecommunications Corp., Ltd. (“Oppo”) and certain of its subsidiaries and affiliates, (collectively, “Oppo Group”). As part of the license agreement, both parties have agreed to dismiss all pending litigations between them.
UK Proceedings
In December 2021, the Company filed a patent infringement claim in the UK High Court against Oppo and certain of its affiliates, OnePlus Technology (Shenzhen) Co., Ltd. (“OnePlus”) and certain of its affiliates, and realme Mobile Telecommunications (Shenzhen) Co., Ltd. (“realme”) and certain of its affiliates, collectively, Oppo Group, alleging infringement of the Company’s European patents relating to cellular 3G, 4G/LTE or 5G standards. The Company was seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents.
In March 2023, the parties agreed to stay all technical trials. The FRAND trial to determine the royalties to be paid under the license with Oppo was held in March and April 2024; a second hearing was held in September 2024 regarding the parties’ submissions relating to the UK Court of Appeal’s decision in the Lenovo litigation.
India Proceedings
In December 2021, the Company and certain of its subsidiaries filed patent infringement claims in the Delhi High Court in New Delhi, India against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme Mobile Telecommunication (India) Private Limited, alleging infringement of certain of the Company’s Indian patents relating to cellular 3G, 4G/LTE, and/or 5G, and HEVC standards. The Company was seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. In February 2024, the Delhi High Court granted the Company’s application for pro tem security, and Oppo appealed. Evidentiary trial proceedings began in October 2024 and were expected to take place through December 2024.
Germany Proceedings
In December 2021, a subsidiary of the Company filed three patent infringement claims, two in the Munich Regional Court and one in the Mannheim Regional Court, against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates, alleging infringement of certain of the Company’s European patents relating to cellular 3G, 4G/LTE and/or 5G standards. The Company was seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The Munich Regional Court held hearings in March and December 2023, and in December 2023, the Munich Regional Court issued a decision finding infringement and issuing an injunction against Oppo. Oppo appealed this decision. In March and November 2023, the Munich Regional Court entered stays of the proceedings in respect of specific patents.
China Proceedings
In January 2022, the Company was informed that Oppo had purportedly filed a complaint against the Company in the Guangzhou Intellectual Property Court (the “Guangzhou IP Court”) seeking a determination of a global FRAND royalty rate for the Company’s 3G, 4G, 5G, 802.11 and HEVC SEPs. In May 2022, the Company filed an application challenging, among other things, process of service and the jurisdiction of the Guangzhou IP Court. The Guangzhou IP Court denied the application, and the Company appealed that decision. The Supreme People’s Court denied the appeal, and an initial evidentiary hearing was held in October 2023.
Spain Proceedings
In March 2022, a subsidiary of the Company filed patent infringement claims in the Barcelona Commercial Courts against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates. The Company filed an amended complaint in April 2022, alleging infringement of certain of its European patents relating to cellular 3G, 4G/LTE and/or 5G standards. The Company was seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. Evidentiary trial proceedings were scheduled to take place in May 2025.
Samsung
The Company reached an agreement with Samsung Electronics Co. Ltd. (“Samsung”) to enter into binding arbitration to determine the final terms of a renewed patent license agreement to certain of the Company’s patents, which will be effective from January 1, 2023. The Company and Samsung have also agreed not to initiate certain claims against the other during the arbitration. On March 31, 2023, the Company filed a request for arbitration with the International Chamber of Commerce.
On July 21, 2023, the International Chamber of Commerce confirmed the full tribunal for the arbitration. The two-week arbitration hearing was held in July 2024, and we expect a decision by the end of 2024.
Tesla
On December 5, 2023, Tesla and certain of its subsidiaries filed a claim in the UK High Court against the Company and Avanci. The claim alleges invalidity of three of the Company’s patents relating to 5G standards: European Patent (UK) Nos. 3,718,369, 3,566,413, and 3,455,985. Tesla sought, among other relief, a declaration that the patents at issue are invalid, not essential, and not infringed, revocation of the patents at issue, a declaration that the terms of the Avanci 5G Connected Vehicle platform license are not FRAND, and a determination of FRAND terms for a license between Tesla and Avanci covering its Avanci’s 5G Connected Vehicle platform. On March 8, 2024, the Company filed a jurisdiction challenge; the jurisdiction challenge was heard on May 24-25 and June 4, 2024, and on July 15, 2024 the UK High Court issued a judgment dismissing Tesla’s FRAND claims against the Company and Avanci, and maintaining Tesla’s patent claims against the Company. The patent claims against the Company were further stayed by the UK High Court, and a hearing on costs and permission to appeal is scheduled for July 30, 2024. On July 16, 2024, Tesla sought permission to appeal the decision; the Company also sought permission to appeal on two limited grounds conditionally, should Tesla’s request for an appeal be granted. The appeal hearing is scheduled to take place on December 2-3, 2024.
OTHER
We are party to certain other disputes and legal actions in the ordinary course of business, including arbitrations and legal proceedings with licensees regarding the terms of their agreements and the negotiation thereof. We do not currently believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows. None of the preceding matters have met the requirements for accrual or disclosure of a potential range as of September 30, 2024, except as noted above.
7. INCOME TAXES
In the nine months ended September 30, 2024 and 2023, the Company had an estimated effective tax rate of 18.4% and 14.7%, 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 revenue in certain foreign jurisdictions. The effective tax rate in the nine months ended September 30, 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 nine months ended September 30, 2023 would have been 13.4%. During both the nine months ended September 30, 2024 and 2023, the Company recorded discrete net benefits of $4.3 million and $2.9 million, respectively, primarily related to share-based compensation.
The effective tax rate reported in any given year will continue to be influenced by a variety of factors, including timing differences between the recognition of book and tax revenue, the level of pre-tax income or loss, the foreign vs. domestic classification of the Company’s customers, and any discrete items that may occur.
During the nine months ended September 30, 2024 and 2023, the Company paid approximately $14.5 million and $8.4 million, respectively, in foreign source creditable withholding tax.
8. NET INCOME PER SHARE
Basic Earnings Per Share ("EPS") is calculated by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock or resulting from the unvested outstanding restricted stock units ("RSUs"). The following tables reconcile the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net income applicable to InterDigital, Inc. | $ | 34,190 | | | $ | 47,941 | | | $ | 225,506 | | | $ | 174,983 | |
Weighted-average shares outstanding: | | | | | | | |
Basic | 25,149 | | | 26,285 | | | 25,286 | | | 27,259 | |
Dilutive effect of stock options, RSUs, and warrants | 2,446 | | | 784 | | | 1,389 | | | 669 | |
Dilutive effect of convertible securities | 2,439 | | | 743 | | | 2,084 | | | 333 | |
Diluted | 30,034 | | | 27,812 | | | 28,759 | | | 28,261 | |
Earnings per share: | | | | | | | |
Basic | $ | 1.36 | | | $ | 1.82 | | | $ | 8.92 | | | $ | 6.42 | |
Dilutive effect of stock options, RSUs, and warrants | (0.11) | | | (0.05) | | | (0.40) | | | (0 |