Good day, everyone. Thank you for standing by. Welcome to Adeia's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I would like to now turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead.

Good afternoon, everyone. Thank you for joining us as we share with you details of our second quarter 2023 financial results. With me on the call today are Paul Davis, our President and CEO; and Keith Jones, our CFO. Paul will share with you some general observations during our second quarter and then Keith will give further details on our financial results and guidance. We will then conclude with a question-and-answer period. In addition to today's earnings release, there is an earnings presentation which you can access, along with the webcast in the IR portion of our website. Before turning the call over to Paul, 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 discussed today, please refer to the 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 this call. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results as we do internally. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release, the earnings presentation and on the Investor Relations section of our website. A recording of this conference call will be available on the Investor Relations website at adeia.com. Now, I'd like to turn the call over to our CEO, Paul Davis.

Thank you, Chris and thank you, everyone, for joining us today. During the second quarter, our deal momentum continued as we signed 9 agreements with a diverse group of Pay-TV, OTT, Consumer Electronics, in Semiconductor customers in both domestic and international markets. We delivered another quarter of strong financial results with revenue of $83.2 million and adjusted EBITDA of $51.7 million. We paid down approximately $20 million of debt in the second quarter, bringing our debt pay down since separation to over $114 million. In addition, we are on track to expand our patent portfolios by 10% this year. I am also excited to announce that we have expanded our Board with the addition of Adam Rymer. Adam is a well-respected executive with over 20 years of experience in the technology, media and entertainment industries and he has hands-on experience leading organizations in gaming, TV, film, music and live streaming. With his impressive track record of driving innovation at a wide variety of organizations, I am confident Adam will be a valued addition to our Board. Turning back to the quarter. Our deal momentum continued. Of the 9 deals we signed in Q2, 8 were in media and 1 was in semiconductor. Within media, we signed a significant long-term license renewal with Cox Communications. With the Cox renewal, we have now signed 3 multiyear renewals with the top 10 U.S. Pay-TV providers in the first half of the year. These renewals continue to validate the strength of our media portfolio in this market. Additionally, we signed an important new license agreement with DAZN, a leading OTT provider of global sports programming. This is an exciting deal in an emerging market for us and OTT will be a catalyst for our future growth as we continue to expand our customers in…

Thank you, Paul. I am very pleased to be speaking with you today to share details of our second quarter 2023 financial results. Our second quarter results were very much in line with the guidance provided during our last call. Revenue for the second quarter was $83.2 million, a decrease of 29% from the prior quarter. Last quarter, when we gave color on the revenue trends we expected to see during the course of the year, we noted that the second quarter would be the low point due to certain renewals we anticipated closing in the second half of the year. And we also noted that we expected the first half of the year and the second half of the year to be evenly split relative to the midpoint of the annual guidance we provided. In the first half of the year, we delivered revenue of $200.5 million. This is exactly in line with what we laid out in last quarter's call. And with our strong pipeline, we remain on track to reach our full year revenue guidance. We generated revenue from the execution of 9 license agreements in the quarter, including a significant renewal with Cox Communications and a new license agreement with OTT sports program provider, DAZN. 7 of the 9 license agreements we signed in the second quarter were renewals. Our renewal rate remains very strong at greater than 90%. As Paul discussed, this is driven by our ongoing dedication to growing and evolving our IP portfolios which are fueled by our continued investments in R&D. Now I'd like to discuss our operating expenses for which I will be referring to non-GAAP numbers only. For the second quarter, operating expenses were $31.9 million, flat compared to the prior quarter. Research and development expenses were relatively consistent as…

[Operator Instructions] We'll take our first question this afternoon from Hamed Khorsand at BWS Financial.

Just one clarification. You're talking about your patent portfolio expanding. Is that all internal innovation? Or are you looking at acquiring patents in the near term?

Hamed, good question. Yes, we are -- so far, the growth has been almost entirely organic R&D efforts which is what we focus on. We do look for opportunities though to acquire portfolios as well to augment our own internal R&D efforts.

Okay. And then as far as the free cash flow is concerned, do you think it's going to be linear for the rest of the year as far as what you generate? And do you think you're over the hump as far as interest expense rising in this environment as you're paying it down?

In terms of the free cash flow, we actually expect that to kind of go in the same general direction that our revenues, so to the extent that we have a deal being signed and the timing of billings. So we see volatility and we saw that from Q1 to Q2 and we would anticipate seeing a bit of that in Q3, with Q3 kind of being somewhat relatively consistent and then having a little bit more forward momentum as we close out the year. But in terms of the interest rate, we've -- we're still relatively conservative. So we're still baking in some further increases. So with that, we're kind of keeping that guidance the same on interest expense.

Okay. And then Paul, I know in the last couple of quarters, you've talked about music streaming being one of your focuses as being an area to expand on. Is that still the case? Or do you think that you would get new licensees from other end markets first?

Yes. It's still the most likely to be first. I think we're focused on music streaming, adtech and e-commerce as kind of the soonest of the adjacent markets. But music streaming would still be my expectation of what would come in first.

We'll take our next question now from Nick Zangler at Stephens.

So it sounds like performance this quarter was in line with your expectations. And obviously, we saw most of the contracts signed in the quarter, they were renewals and so you did get the new OTT licensee in DAZN. Can you just talk about the full year revenue guide here? It remains unchanged. What has to happen to hit the low end of that guide? And what has to happen to hit the high end of the guide, knowing that we've got a few months left -- 5 months left here, we've got one, I guess, new licensee signed in DAZN as of recently. But maybe you could just talk about those 2 scenarios? And then if you can, just peel back the onion on maybe how many deals you're currently working on and expectations or likelihood that they do get signed by year-end?

Well, Nick, one of the things I love about my job is going into sales meetings and looking at our pipeline. It's absolutely exciting to me. And for us and when we grow and thinking about how we're going to get to the next level and then kind of maximize our opportunities. It's just a matter of timing. And it's a matter of timing in light of the economics that we're trying to reach in these deals. So frankly, we could close out a lot more deals and we could have some slightly different inflection points for our revenue but to us, that would be sacrificing long-term benefit to the company. So really what I'm getting at is that the pipeline is there. There's nothing in it that's fleeting. It's really going to come down that have we reached the economic terms that we like at that point in time? And to the extent that we don't, we'll let things play out a little bit more. So that's really entirely the difference between us being at the low end of the range or the high end range.

Yes. I would just add, Nick, that what Keith mentioned last quarter and we said earlier on this call is we had a few renewals that we fully anticipated being in the second half of the year and that's still our current expectation. And that's really the fluctuation you see in that quarter-to-quarter but we still have high confidence in our guidance range.

Got it. And I guess with that said and I know you guys don't provide quarterly guidance but how would you recommend the Street model, I guess, 3Q relative to 4Q? Any way to kind of frame that split between what 3Q and 4Q look like given the full year guide?

It's a great question. Really, because of that volatility that we talked about, we're really just focused on the back half in total, is that relative to the midpoint of $400 million and we said it's being evenly split, that's what we're focused in. So there could be a little bit of volatility from one quarter to next, Q3 to Q4. But in any event, that $200 million relative to the midpoint of the guidance, we remain confident.

Got it. All right. Last one. I'm glad you guys talked about it. Everyone has to these days, artificial intelligence. Can you just expand on the ways in which Adeia does support the proliferation of AI? And if there's any way you could either tie your current revenue base or maybe your patent portfolio to AI use cases at least just to gauge your current exposure or how you think about exposure currently.

Sure, Nick. Happy to expand on that. And I'd really look at it both from the media and the semiconductor part of our business differently. But starting with media, we've always been an innovator using AI, like natural language processing, machine learning technology. That is part of our current portfolio. It's been part of our innovations that have actually helped drive current license agreements that we have. We're also today focused on AI technologies, primarily around kind of VR, AR, mixed reality use cases as we see those developing in the marketplace. Going forward, though, what excites me in media is really the AI economy broadly as there's a proliferation of more content out there that's using AI and how we can capitalize on that development as well. So for us, this generative AI explosion is very exciting as we look forward in the media space and how much more is going to be out there in terms of our efforts and how our portfolio will continue to apply. So our R&D team led by Serhad Doken is focused on this area. They talk about AI all the time and we've got key inventors that have always been and continue to be looking at ways that they can use AI in our innovation cycle. On the semi side, it's really what has driven the ability -- AI has been around for a while. The current generative AI explosion that you're seeing today is because semiconductors now are able to process so much of this, right? And the next generation of semiconductor chips that are going to continue to be able to process more and more on the edge, in particular, is going to need advancements in semiconductor technologies. And our hybrid bonding and our advanced processing node portfolios fit within that perfectly. And so we're very excited about that development as well and how we can continue to add to the ecosystem that's driving this development.

We go next now to Matthew Galinko. Excuse me, Mr. Davis, Mr. Jones, it looks like we lost Mr. Galinko. [Operator Instructions] And Mr. Davis, it appears we have no further questions today. I'd like to turn the conference back to you for any closing comments.

Thank you, operator. Our second quarter results were in line with our expectations. We continue to make progress executing our strong deal pipeline and we remain on track to meet our goals set out earlier this year. Also, we will be meeting with investors in the next couple of weeks at several events. We will be attending the BWS Conference on August 17, the Rosenblatt Age of AI Conference on August 23 and the Deutsche Bank Technology Conference on August 30. We look forward to discussing our progress at these and other events later in the year. Thank you for joining us today.

Ladies and gentlemen, that will conclude the Adeia Q2 2023 earnings call. We'd like to thank you all so much for joining and wish you all a great day. Goodbye.