Good day, everyone. Thank you for standing by, and welcome to Adeia's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jill Koval of Adeia. Jill, please go ahead.

Good afternoon, and thank you for joining us as Adeia reports its third quarter 2022 financial results. With me on the call today are Paul Davis, Chief Executive Officer; and Keith Jones, Chief Financial Officer. In addition to today's earnings release, there is an earnings presentation, which you can access along with the webcast on Adeia's Investor Relations website. Before we begin, I would like to provide a few reminders. First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs. And therefore, subject to risks, uncertainties and changes in circumstances. For more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please refer to our Risk Factors section in our SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. Second, we refer to certain non-GAAP financial measures, which exclude one-time or ongoing non-cash acquired intangibles amortization charges, costs related to actual or planned business combination, including transaction fees, integration costs severance, facility closures and retention bonuses. Separation costs, stock-based compensation, loss on debt extinguishment, expensed debt refinancing costs, impairment of intangible assets, and related tax effects. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website. The recording of this conference call will be available on the IR website at www.adeia.com. I will now turn the call over to Adeia's CEO, Paul Davis.

Thank you, Jill. I want to welcome everyone to Adeia's first earnings call as a leading independent publicly traded IP licensing company. On behalf of our management team and our Board, I want to extend a big thank you to all our employees and partners who have worked so diligently over the past few years to make our separation from the Xperi product business a success. I also want to wish the Xperi management team and its employees all the best as they begin their own journey as a stand-alone public company. I am very proud of what the Adeia team has accomplished. We have built an incredible licensing platform and world-class innovation engines in both our media and semiconductor businesses. Our financial profile reflects strong recurring cash flows driven by long-term license agreements with companies and a diverse cross-section of the technology and media landscape. We are also excited about the growth opportunities that are in front of us, which I will cover in more details shortly. As a reminder, the product business spinoff closed on October 1. So our third quarter financial results are inclusive of the product business prior to separation. However, Keith and I will focus today's comments on Adeia. We would refer listeners to yesterday's replay of Xperi Inc.'s third quarter earnings call for more commentary on the product business. As we prepared for separation from the Xperi product business, we focused on positioning Adeia for continued long-term success as a stand-alone business. These efforts included assembling a new management team and Board of Directors presenting our long-term vision for Adeia on a stand-alone basis for the first time during our Investor Day in September. And implementing new systems, processes, and corporate governance policies and practices. While work continues on these efforts, I am proud…

Thank you, Paul. As Paul mentioned earlier, we successfully completed the separation of the IP and product businesses on October 1 thus achieving a tremendous milestone in our history. However, as of September 30th, we were still operating as a combined company. And the financial statements presented in our earnings release today reflect the results for both the IP and product businesses. Additionally, on November 8th, our counterparts at Xperi Inc. provided a comprehensive review of the operating results for the product business for the quarter ending September 30. We refer you to the earnings release and earnings call replay for more color on the financial results and the future outlook of the product business. While we have provided GAAP and non-GAAP results for the combined business, our discussion today will focus on the results of Adeia on a stand-alone basis. To aid our conversation today and to provide a more of historical perspective of Adeia, as a stand-alone organization, we have supplementally provided historical income statements of the business within our earnings deck. The earnings deck also provides reconciliations of the GAAP to non-GAAP numbers. Now let me walk you through our operating results for the third quarter. Revenue was $89.3 million, representing a 17% decrease from the prior quarter. The decline was principally driven by the recognition of a significant catch up license fee in the prior quarter. As Paul mentioned earlier, there were a couple of deals in our pipeline, we anticipated to close in the third quarter that has subsequently moved into our fourth quarter forecast. We remain confident we will get these deals closed this year, which is reflected in the guidance, which I will cover later in the call. During the third quarter, we signed several agreements covering both our media and semiconductor portfolios,…

[Operator Instructions] Our first question comes from Nick Zangler of Stephens.

Yes. So I think you're talking about a modest revenue decline in 2023, obviously when you're comparing to the Micron deal. If I recall at the Analyst Day, you talked about a 6% CAGR. I think that was starting from F '21 and going through, but I believe it was F '25. So would that imply that there's an acceleration in revenue as you look past 2023 into the '24, 2025 period, if I'm getting my math right there? And if so, just curious what the driver of that acceleration might be?

Yes. Hey, Nick. This is Paul. I think that's a great question. Thanks for asking it. The CAGR was built from 2021 revenue as the baseline and went out about 5 years, so into 2026. And certainly we see revenue growth expanding past 2023 and accelerating a bit. But from 2021 into that 2026 period, and certainly it won't be linear as our business is often high dollar, small number of deals, but high dollar deals. And so you can see step-ups during that period of time.

Got you. And is there -- just lastly on that then, is there a way to think about, I guess, the number and size of IP arrangements and agreements that come up for renewal each year. just, I guess, to gauge either the risk of a nonrenewal in the year, but also as well the likelihood that a particular arrangement is renewed and at more favorable rates?

Nick, that's a great question. I wish there was an easy answer. The truth matters that our deals do vary in size. One thing to kind of point out is that we're a big dollar small volume shop. So with that being said, all of the deals that we chase has some impact. But really what I would point to is, if you take a look at our history, we've been incredibly successful that we're doing. It's greater than 90%. So I think one parallel you can follow is when we talk about our baseline [ revenue at 375 ] It's a combination of governments. It's a combination of what we have signed today and those things that we have very good line of sight and a high degree of profits signing. So from that risk profile, we adjust, but on both ends we see that growing and we have great confidence in renewing in the future.

Got it. And then -- very helpful. And then last one for me. Just obviously, because you're a stand-alone company now and we're getting used to the way that you guide. But obviously, 85% of your revenue base is considered recurring. Yet if you look at like the guide for 4Q, the range is $15 million between peak and trough. So basically, like that's the 15% right there or pretty close. So just considering that so much of your revenue base is recurring, maybe you can help explain like why the gap between the peak and trough revenue estimate is theoretically so wide. Like what do you -- what considerations are being made when you put out that revenue range for the quarter?

Hey, that's a great question. And I like the way you tied that question back into your previous question because they're related. What that really means is that, once again, we have large sizable deals. And what I talked about the antaciven deal in the quarter, you could have some influence some of report from quarter-to-quarter. And quite frankly, even though we manage the business and we have targets. But really, when you -- when we think about how we want our report card and how we score ourselves on an annual basis because the timing of those deals could shift there. There currently could be a situation where we're negotiating a contract in general commercial terms that we need to. And as Paul said, we need to put up over the line and get the best turn to begin, and that might slip a month or something like that. And that could have a $10 million impact on revenue if they're out of license, if you will. So with that, that's why you're seeing that gap in the range. And that's why it's very difficult just really to measure us on a quarterly basis and that annual guidance is much more reflective because -- going back to your first question, I take a look at what we had talked about at [indiscernible] Day and then looking at what our profile looks like, the pipeline remains strong, and it's pretty much the consistent strong numbers. There's really no change in our outlook.

Got it. I don't know if I said last one, the last time, but this is the last one. I don't know. I don't know if you guys are willing to do it, again, obviously, now that you've broken out a new company and everything. But is there -- obviously, the litigation expenses or recurring cost for you guys. Are you willing to kind of like walk through everything that's pending right now, like all of your efforts that you're -- the various potential companies that you're going after and trying to come to some sort of agreement. Is there any way to kind of just walk through the list of where you're chasing potential agreements?

So Nick, I guess maybe just a clarifying question first. Are you referring to outstanding litigation or in a broader sense?

I'm more referring to, I guess, outstanding litigation. I'm just trying to determine like where there are opportunities where you have feet on the ground, trying to come to a resolution and therefore like an agreement could be reached at any near-term time.

Sure. If you look in our 10-Q, Nick, it lists all of our outstanding litigation currently. So it's really Canada and then there's an older litigation matter that with NVIDIA, that's still outstanding as well. And that's really -- that we currently have outstanding. I think there's -- and we'll provide those updates obviously on a quarterly basis in our 10-Q, and that's where you should look for them. I would remind you though that the vast majority of our deals get done without litigation, right? And so it's not a significant part. We use litigation as the last resort, but our goal is to get deals done without litigation, and we're very successful at that. And so I don't -- I wouldn't look at for that as kind of the driver necessarily for our success. It's really when we end up in litigation, it's because we need a third party to help validate the value of our portfolio.

The next question comes from Hamed Khorsand of Financial.

Could you just talk about the essence of why the pushout occurred and why you thought it would happen in Q3 and it did not?

Sure. Obviously, we did get deals done in Q3. But the business, as Keith mentioned earlier, is a hard one to predict on a quarterly basis because they are sizable deals that we're trying to get done, and we want to make sure we're getting the best deal done over a longer period of time. And so the negotiations and discussions with the other parties are going well, but we just weren't were ready to close them out at that time. And so we decided this company was better to go for the longer-term value. So we see that from time to time. But on an annual basis, and this is why Keith mentioned it, earlier is that we'll guide on an annual basis going forward because that's how we see and value the business rather than on a quarterly because you can get those shifts from time to time.

Is this with the existing licensee?

There's multiple discussions. There wasn't just one deal.

Okay. And then just given the fluid nature of the business with these negotiations, how do you put them into each bucket? And what's a certain event and what's not, so this doesn't happen again, especially when you look out into '23?

Sure. Well, I would say, again, we look at it certainly on an annual basis and the quarterly fluctuations can happen from time to time. But I'd say that what we look at is where they are in the cycle of the deal negotiation. Are we talking financial terms, are we exchanging draft agreements, or are we at an earlier stage where we're having technical discussions on the value of the portfolio. And so we monitor that closely, and we're very good at kind of gauging on where we're coming out on -- for a year. And again, those quarterly fluctuations can happen. But right now as we look at closing out the year, we feel very confident in our annual guide and that hasn't changed.

Okay. My last question is given the different end markets that you were talking about in the presentation slides, what does the funnel look like for '23? Is there a particular end market that you think you'll be capturing more of when you look out the next 12 months?

Certainly, we continue to have success in U.S. Pay-TV and also in consumer electronics. We've had quite a bit of success in both of those areas. But the other markets are large and attractive as well. OTT and social media, we've had deals there. So there's deals across the -- and even international Pay-TV, with our announcement of Foxtel, right? So we continue to have deals in all of those. We've signed 30 deals in the last 12 months, as we mentioned earlier as well. So there's not one deal. And so that we -- as we look out in each market, there's opportunities everywhere. Not to mention, we also have deals in semi as well. So we -- that we're actively progressing as well. Those market segments that I highlighted today were in media, but we also feel good about the progress we're making on the semi part of the business as well.

[Operator Instructions] the next question comes from Matthew Galinko of Maxim Group.

I guess maybe going to the unlicensed opportunity in semi, particularly around the graphical markets or hyper bonding, how do you think about the pace of capturing that opportunity?

Yes. We're excited about the opportunities that we see. There's obviously -- we're getting a lot of call, as I mentioned on the call. These deals take time. Our average sales cycle is 18 to 24 months and from start to finish. And so we're at various different time periods with a number of those discussions. As I look at the semi market, certainly, as in memory, we've had a lot of success in and we continue to have some unlicensed opportunities there, especially in the NAND market that we're actively pursuing. But we also see logic starting to come into play more and more and seeing more pull there. Obviously, I can't get into the details of the specific customers. But we're excited about the pipeline of opportunities in semi as that business continues to really kind of expand into its next phase.

Got it. Thanks. And I guess, I think you mentioned plans to add to head count modestly. I guess what is the -- what is the cadence -- or what should we expect in terms of that cadence in terms of how they hit between fourth quarter and throughout 2023? And do the current dynamics in the tech labor market, they get more or likely that you're able to make the higher side you're targeting?

Yes, we certainly hope so. I mean, I think we're in a unique situation where we're trying to expand our team, especially on the R&D effort. As we've talked about before, we've got that 10% growth target. We've already expanded that team significantly, as I mentioned on the call, but we do have some hires specifically in that area that we're focused on, and we think there'll be tremendous opportunity given the market dynamics that we're seeing globally. And to answer your question in terms of the timing, it will really be spread out over the year. I don't think there'll be a big hire in Q1 or not, but we are actively looking to expand the team. So it might be slightly front-loaded, but I do see that spread out over the course of the year.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I will now turn the call over to Mr. Paul Davis for closing remarks.

Thank you, operator, and thank you, everyone, for joining today's call. Keith and I look forward to seeing many of you at the Stephens Annual Investment Conference next week in Nashville. As we close out 2022, we are excited about our path forward on a stand-alone basis and demonstrating continued growth in our highly profitable business model. Thank you again for joining us on the call. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation, and you may now disconnect your lines.