Adeia Inc.

We believe our co-optimization program launched earlier this year will pay long-term dividends, especially in the logic market. In media, we are seeing particular focus on image recognition in e-commerce and ad tech utilizing AI and the critical issue of network security. All areas where our media R&D team is driving exciting new solutions. The introduction of the first augmented reality glasses utilizing spatial computing and innovative micro-LED displays instead of traditional OLED are recent market developments that we believe will be of growing relevance to audio. Our media and semiconductor portfolios have important inventions that contribute to the advancements in these areas and can help drive long-term revenue growth. Further, our participation in related industry events not only keeps us close to these industry trends, but also brings new customer engagements. Our media team participated in a panel on preventing unauthorized broadband sharing at SCTE Tech Expo 24 and presented a paper on groundbreaking solutions for copyright attribution and AI generated images at IEEE 2024. Further, our semiconductor team presented research on enabling cost-effective microLED integration for near-eye devices at MicroLED Connect. Audia continues to gain recognition through our participation in these conferences and contributions to the innovation ecosystem in our target markets. In October, we were honored to be included in the 2024 Streaming Media 100, a list of the most innovative and influential North American based companies in the streaming ecosystem. The progress we have made has been impressive, both operationally and in terms of executing our highly cash generative and profitable business model. And we remain committed to achieving the goals we set earlier this year. Since separation, we have created an engaging, vibrant, and healthy working environment where we are attracting and retaining top talent. To that end, I'm proud we were recently recognized by US News and World Report as one of their best companies to work for. Now I would like to turn the call over to Keith for a review of our third quarter financial results.

Thank you, Paul. I'm pleased to be speaking with you today to share details of our third quarter 2024 financial results. We delivered revenue of $86.1 million in the third quarter, driven by the execution of seven deals across multiple verticals, including consumer electronics, pay TV, semiconductor, and OTT. And shortly after we closed the third quarter, we signed a new multi-year agreement with Neiman Marcus, demonstrating early success in our e-commerce media adjacent market vertical. Now I would like to discuss our operating expenses, for which I will be referring to non-GAAP numbers only. During the third quarter operating expenses were $35.3 million, an increase of $300,000 or 1% from the prior quarter. Research and development expenses were $13.7 million and were consistent with the prior quarter. Selling general and administrative expenses increased $1.9 million or 11% from the prior quarter, primarily due to higher personal costs as a result of increases in staffing, higher spending to support our sales efforts in both the media and semiconductor businesses, and due to a non-recurring benefit on the recovery of bad debt expense in the prior quarter related to our settlement with X. litigation expense was $2.7 million, a decrease of $1.6 million or 38% compared to the prior quarter, primarily due to the timing of expenses related to certain legal matters. Interest expense during the third quarter was $12.8 million, a decrease of $540,000 from the prior quarter due to the benefit of a lower interest rate following the successful repricing of our term loan and due to our continued debt repayments. Our current effective interest rate, which includes amortization of debt issuance costs, was 9.2%. I would like to highlight that our year-over-year interest expense has decreased $2.9 million, which is a significant accomplishment as we continue to deleverage our balance sheet and enjoy the benefits of repricing our debt agreement. Other income was $1.4 million. It was primarily related to interest earned on our cash investment portfolio and due to interest income recognized on revenue agreements with long-term billing structures. Our adjusted EBITDA for the third quarter was $51.3 million, reflecting an adjusted EBITDA margin of 60%. Depreciation expense for the quarter was $526,000. Our non-GAAP income tax rate remained at 23% for the quarter. Our income tax expense consists primarily of federal and state domestic taxes, as well as Korean withholding taxes. Now for a few details on the balance sheet. We ended the third quarter with $89.2 million in cash, cash equivalents and marketable securities and generated $14.3 million in cash from operations. We made $12 million in principal payments on our debt in the third quarter and ended the quarter with a term loan balance of $537.1 million. During the third quarter, we paid a cash dividend of $0.05 per share of common stock. Our board also approved a payment of another $0.05 per share dividend to be paid on December 18th to shareholders of record as of November 27th. Additionally, in October, the board approved an increase to our current repurchase program to repurchase up to a total of $200 million of our common stock. The share repurchase program is part of our broader capital allocation strategy as a result of the increased flexibility that we have following our recent debt repricing. As we discussed during last quarter's call, we now have greater capacity to have a more balanced approach in deploying our capital, including continuing to make accelerated payments on our debt, continuation of our current dividend program, commencing stock repurchases, and increasing our capacity to make tuck-in acquisitions to expand our patent portfolio. Now I will go over guidance for the full year 2024. We remain confident in the overall progress towards executing our sales pipeline. We continue to make great strides throughout our businesses, which includes significant new license agreements in both OTT and semiconductor. As we have consistently emphasized, obtaining the appropriate economics on each deal is of paramount importance to us. As we maintain this discipline and given the relatively large size of agreements we enter into, the timing of executing agreements can impact our reporting in the near term. Given this dynamic as we close out 2024 we are adjusting our revenue guidance range to 370 to $400 million. Once again, this guidance is a reflection of the potential impact a small subset of deals can have on our short term reporting and is merely timing related. With the health of our sales pipeline and the progress we have made to date, we see no loss in business momentum and our ability to execute. Operating expenses are now expected to be in the range of $144 to $148 million. We have again reduced and narrowed our operating expense guidance range as we continue to leverage our internal resources better than we had initially planned and also due to changes in the timing of certain litigation expenses. We expect interest expense to be in the range of $52 to $53 million. We expect other income to be in the range of $5.5 to $6 million. We expect a resulting adjusted EBITDA margin of approximately 62%. We expect the non-GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be approximately $2 million for the full year. Our sales pipeline of new opportunities is more robust than it has been since our separation, and I'm confident we will achieve our goals as we look to grow and expand our business. We also view our current litigation with Disney as a step forward. While we view this as a last resort, it is of the utmost importance for us to protect our IEP in order to drive shareholder value. That brings an end to our prepared remarks. And with that, I'd like to turn the call over to the operator to begin our question and answer session. Operator.

Thank you. And at this time, I would like to remind everyone in order to ask a question, press star and the number one on your telephone keypad. Once again, star one. And we will pause just a moment to compile the Q&A roster. And it looks like our first question today comes from the line of Madison DePaola with Rosenblatt Securities. Madison, please go ahead.

Hi, thanks for taking my question. So I'm just wondering, could you provide any more details around the semiconductor license signed during the quarter?

Hi, Maddie. This is Paul Davis. Thanks for the question. Hope you're doing well. You know, we can't get into too much details on it. But, you know, I think what it really shows is the continued interest in hybrid bonding. You know, we're getting tremendous feedback. Interesting, and really across the board and a number of different customers. And, and it's, it's really exciting for us as, as that hybrid bonding adoption as I said in my prepared remarks are really seeing it across, you know, a number of industries, including Obviously, flash memory, where we're seeing increased adoption after our signing of our deals with with Kyokusha and Western Digital last year. And then also in logic, we continue to see more devices. And then finally, we're continuing to monitor and look at what what people are talking about and high bandwidth memory as well. So we're very excited about it. Unfortunately, though, because of confidentiality, I can't get too much more into details about a specific agreement.

Okay, great. Thank you. And then I just was wondering, what are the trends that you're seeing in pay TV subscribers from your customers point of view?

Yeah, I think it's more of the same. It's really, we're continuing to see declines in subscribers in our customer base in the US with traditional pay TV. It's right in line with what our expectations are though. We put that into our forecast both for the year And in our long term forecast as well. So we continue to see that going down over a period of time, we do think it will level out after you know a few years is our expectations, but we've modeled that into to our forecast and it is what it is in terms of, you know, what we are what our expectations are. The one thing I would note though, is, you know, there is, there's tremendous growth in, uh, obviously OTT, the virtual, uh, MVPD, uh, players. And so, you know, that's the plan. That's what, how we're trying to offset those declines that we anticipated. Um, and, and we're, we're very confident in our ability to continue, uh, to execute towards, towards that plan to offset, uh, the expected declines.

Okay, great. Thank you guys so much.

All right. Thanks, Madison. And our next question comes from the line of Hamid Korsan with BWS Financial. Hamid, please go ahead.

Hi. So my first question is, what gives you the confidence that you would sign at least one in Q4 and then the slippage into 2025 actually happens?

Yeah, listen, Hamed, I think, you know, it's a fair question. I think what gives us confidence is just the regular communication that we continue to have with these customers and are also just our pipeline of opportunities continues to expand. And so, yeah, We've signed seven deals in Q3. These deals, though, take time. Even those deals that we signed took quite a bit of time to ultimately conclude. But where we're at and the progress we've made, the frequency of communication that we're having, and um we we think they're our goal is to close both of them but we wanted to be transparent about you know that there could be one of them that closes in in q4 and the other could slip into 2025 but our our goal and what we're pushing the team to is get still get both of them done this year so is it fair to assume that at least the one that you're saying that might go into 2025 is not disney Yeah, I mean, Disney was not in our near-term opportunities. As I noted on the call, it wasn't a 2024 revenue projection for us. And so that was not one of the ones that we were counting on for 2024.

Okay, thank you.

You're welcome.

All right, thank you, Hamid. And our next question comes from the line of Matthew Galinka with Maxim Group. Matthew, please go ahead.

Hey, thanks for taking my questions. So maybe first, could you give us a little bit of background on, I guess, how long the negotiation with Disney was ongoing prior to you filing the infringement cases and, you know, anything you could share with us about, you know, what the sticking point might have been? Is it really just kind of a price discovery issue or, you know, maybe just any background you could share on that.

Yeah. Thanks, Matt. You know, unfortunately, you know, we can't, we can't get into specific details, you know, like our conversations with our customers are often covered, you know, under confidentiality agreements. What I can say, you know, is, is, is generally speaking, you know, we pride ourselves on, on, getting deals done and taking the time to get deals done. And we have lengthy discussions. I've, I've mentioned, you know, multiple times, you know, often our, our cycle is 18 to 24 months. Sometimes it can, can even take, you know, longer than that at some point though, you know, in discussions, it becomes clear if, if someone, uh, you know, we're going to be able to get a deal done or not. And in this case, you know, we, we, we determined obviously by following this litigation that we needed to move down that in that step, as Keith said, we see this as a step forward, right? This is, this is something that we needed to do. We're confident in the cases that we filed today. And, and that we'll, we'll ultimately be able to get a good outcome, you know, from them.

All right, thanks. And then I think you've referenced the shift in capital allocation for a couple quarters now. So I'm wondering what the pipeline looks like for those sorts of tuck-in M&A opportunities now that you're a little bit more able to execute on them.

Yeah, you know, great question, Matt. So I kind of start with, you know, the catalyst is kind of thinking about, even with the guidance that we've talked about, the overall stability in our business. So, you know, really with that, and we talk about capital allocation, one thing that we didn't mention in some of our prepared remarks is that that cash flow outlook that we've alluded to, noting that it was going to be, you know, slightly above what we had realized in 2023, is absolutely on point today. Our outlook is that we see the strength in the cashflow and that's a minimum expectation that we have for ourselves. So if you take that strength and outlook in our business, coupled with our backlog, coupled with the opportunities, and then the cherry on top, quite frankly, is the repricing that we have and the interest rates. We have a tremendous amount more flexibility. So in Q4, you're going to see a few things. You're going to see us paying down some of our debt, and you're going to see us starting... some of the share repurchase programs that we alluded to with the $200 million authorization that our board has allotted us. So we're quite excited. This is all part of our vision of returning capital to shareholders. And this is very consistent with what we've been alluding to in the last two calls.

All right. Anything else, Matt?

No, that's it for me. Thanks.

Okay. Thank you for the questions. And that does conclude today's Q&A session. I will now turn the floor back over to President and CEO Paul Davis for closing comments. Paul?

Thank you, Operator. I want to thank our employees for remaining committed to executing our business plan and the progress we have made in 2024. In December, we will be participating in the Wells Fargo Technology and Media Summit and the UBS Global Media and Communications Conference. We look forward to seeing you at these events and updating you on our progress. Thank you for joining us today.

Thanks, Paul. And ladies and gentlemen, that concludes today's call. Thank you so much for joining and you may now disconnect. Have a great day, everyone.