Adeia Inc.

we are still in the early innings of translating that into our financial results. As of today, much of the market remains a significant opportunity for us. Moving forward, we also anticipate that we will be able to approach the OTT market more aggressively following our recent separation from the product business, since we are no longer restricted by the channel conflicts we've discussed in the past. When we look at this market, it is important to note that we anticipate the average per subscriber rate will be less than what we have established in the U.S. pay TV market. However, given the average number of OTT services each household subscribes to, this is a significant opportunity for us. Next is consumer electronics. First, for the purpose of this presentation, we have excluded mobile from the CE market. The total CE market in 2021 was $139 billion and continues to be an attractive licensing opportunity for us, especially for the global CE providers that ship significant volume into the United States. Consumer electronics provides us with strong visibility for our annual baseline revenue and represents an area of growth with further market penetration. Lastly, social media is an attractive growth market for us and in 2021 was $136 billion market. We have had early success in this market, and we believe the opportunity will continue to expand with the explosion of video on social media platforms. In addition to these already large and attractive markets, we are actively working to expand into ad tech, automotive, gaming, music streaming, and sports gambling. As these markets further develop, we will provide additional details on these opportunities. Supporting these growth opportunities is our world-class team of engineers, inventors, and IT licensing executives and professionals. Our headcount currently stands at approximately 110 employees, and we expect to grow that in the near term to around 125. I would like to highlight our media R&D team. This impressive team averages over 20 years of experience at top-tier companies, including Dolby, Amazon, Qualcomm, Charter, Samsung, and Snap, to name a few. Approximately 60% of the team have PhDs and the rest hold master's degrees, and they are all prolific inventors. Our strong internal team also collaborates with top R&D labs and academia around the world to enhance our patent innovation engines. Collectively, this team is now producing more innovation disclosures than we had prior to separation with the combined product business. It is these invention disclosures that will lead to organic growth in our patent portfolios. Another benefit of the separation that we expected and are now beginning to realize is that without the need to navigate the separate roadmaps and strategic priorities of the Xperia product business, there is a greater focus and alignment in our R&D teams on the truly innovative and disruptive technology that will drive the value of our portfolio over the long term. Turning to our semi-business, we continue to focus on executing in our five core semiconductor market segments. Image sensors, RF front-end, DRAM, NAND, and LOGIC. We are actively engaging in partnership and licensing discussions with the remaining major unlicensed companies in each of these sectors, with an emphasis on promoting the adoption of our hybrid bonding and advanced processing node technologies. We also continue our efforts to promote our proprietary hybrid bonding technology and advancing the industry beyond Moore's Law. Our marketing, thought leadership, and promotion of hybrid bonding at industry events has increased significantly over the past year as the world began to emerge from the COVID-19 pandemic. At these events, and based on customer feedback, we are widely recognized in the industry as a leader in hybrid bonding, and we've recently seen an increased pull from our customers and partners. We also significantly enhanced our internal semiconductor team with key additions, including a new senior sales executive and a new head of strategy. These hires add decades of experience and domain expertise and will help drive success for the next chapter of our semiconductor business. Before I turn it over to Keith, I want to provide a high-level look at 2023. As a reminder, we will provide 2023 guidance on our fourth quarter earnings call in February of next year. First, we anticipate modest decline in revenue year over year. However, after accounting for the impact of our revenue recognized from Micron in the first quarter of 2022, we anticipate revenue growth in 2023. Second, in our first full year as a standalone IP company, we will demonstrate the benefits of the leverage from our highly profitable business model with investments in our patent portfolio growth, returning capital to our shareholders, primarily through our quarterly dividend, and paying down our debt through making accelerated payments. Third, we will continue to progress our efforts to expand into adjacent markets that will help accelerate our revenue growth. We anticipate initial progress in music streaming, as our IP portfolio already has significant applicability and we have begun the customer engagement process. The entire management team is excited about sharing our progress in 2023 and beyond. With that, I'll turn the call over to Keith to discuss our financials. Keith? Thank you, Paul.

As Paul mentioned earlier, we successfully completed the separation of the IT and product businesses on October 1st, 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 IT and product businesses. Additionally, on November 8th, our counterparts at Experian Inc. provided a comprehensive review of the operating results for the product business for the quarter ending September 30th. We refer you to their earnings release and earnings call replays 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 the ADIA on a standalone basis. To aid our conversation today and to provide a more historical perspective of ADIA as a standalone organization, we have supplemented 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 have 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, including agreements with Philo and Foxtail. These multi-year agreements contribute to the stability of our $375 million baseline revenue amount. Now let's discuss our operating expenses, which I will be referring to non-GAAP numbers only. Operating expenses were $30.4 million, a 7% increase from the prior quarter. Research and development expenses increased $466,000, or 4%, primarily due to spending associated with our efforts to further build out our innovation and development engine. Selling general and administrative expenses increased $1.3 million, or 8%, from the prior period. primarily due to higher personal costs and administrative support functions as we continue to put in place the infrastructure to operate as a standalone company. In the third quarter, interest expense to our term loan was $12.3 million, up from $9.5 million in the prior quarter, primarily due to the impact of higher interest rates on the loan. Other income was $900,000, primarily related to interest earned on our cash and investment portfolio. Our non-GAAP income tax rate was 23% for the period. Our income tax expense consists primarily of federal and state domestic taxes, as well as Korean withholding taxes. As we discussed during our investor day, Our financial model provides significant operating leverage. Specifically, our EBITDA for the third quarter was $59.2 million, reflecting an EBITDA margin of 66%. Depreciation expense for the quarter was approximately $400,000. Now, let me provide a few balance sheet details for Adia post-separation. Following the separation, we had $89.6 million in cash, cash equivalents, and marketable securities. Additionally, we retained the outstanding term loan, which had a balance of $759.4 million. This balance reflects paying down $10.1 million during the third quarter. Also during the quarter, we paid a cash dividend of 5 cents per share of common stock. Further, our board approved the payment of a five cents per share dividend on December 21st to stockholders of record as of November 30th. Now turning to our guidance. Our license agreements tend to be quite large and complex by their nature. As we look to ensure that we achieve the commiserate economic return relative to the value our patented inventions provide, the timing and execution of our license agreements can vary. creating fluctuations in our revenue from quarter to quarter. As such, we generally believe evaluating our performance on an annual basis is the most appropriate measure. Thus, we will be focused on providing guidance on a full-year perspective only. Accordingly, we will be providing standalone guidance for the full year 2022. However, as Q4 will be the first time we are reporting standalone results, On this particular occasion, we'd like to give more insight and we'll also be providing guidance for the fourth quarter of 2022. For the fourth quarter of 2022, we expect revenue to be in the range of 95 to $110 million. We expect operating expenses to be in the range of 35 to $39 million. We expect interest expense to be in the range of $15 to $17 million, and we expect other income to be approximately a half a million dollars. For the full year 2022, we are narrowing our prior revenue guidance range to $430 to $445 million. We expect operating expenses to be in the range of $120 to $124 million. We expect interest expense to be in the range of $45 to $47 million. And we expect other income to be approximately $2 million. We expect the non-GAAP tax rate to remain consistent at roughly 23% for both the fourth quarter and the full year. Our tax rate, a standalone basis, is higher than previously reported on a combined basis largely in part due to a greater mix of domestic-based income and utilization of certain tax credits. From a CapEx perspective, our overall needs are relatively light given our operating structure and condensed operational footprint. As such, CapEx for the fourth quarter is expected to be approximately $200,000. In closing, I'm very pleased with our results. Our media and semiconductor portfolios provide exceptional opportunities in both markets that will drive our long-term growth. With the operating leverage our financial model provides, we are well positioned to have a balanced capital allocation strategy that will help grow our business. This consists of making both organic and inorganic investments in our company to help further expand our patent portfolio and drive adoption. Additionally, we look to make accelerated payments against our term loan in order to strengthen our balance sheet. As part of our long history of returning capital to shareholders, we remain committed to continuing our dividend program. Also, I'd like to acknowledge and thank all the employees of both Adia Inc. and Xperia Inc. for all their hard work and dedication throughout this process to have successfully fulfilled the long-term vision that was set forth several years ago. And with that, I'd like to turn the call over to the operator for questions. Operator?

Thank you, sir. We will now be conducting question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation turn will indicate that your line is in the question queue. You may press star 2 to leave the question queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. Our first question comes from Nick Zangler of Stevens.