Xperi Holding Corp

LSE:0M2A

Earnings Call Analysis

Adeia's Third Quarter Highlights: Growth, Guidance, and Strategic Moves

In the third quarter, Adeia reported revenue of $86.1 million, driven by seven significant deals across key sectors. Their adjusted EBITDA was $51.3 million, indicating a robust margin of 60%. The company has adjusted its 2024 revenue guidance to between $370 million and $400 million, driven by strategic focus on revealing value in complex agreements. Operating expenses are forecasted between $144 million and $148 million, while interest expenses are expected to reach $52 million to $53 million. Notably, a share repurchase program of up to $200 million has been authorized, showcasing greater financial flexibility.

Positive Revenue Growth Amid Expansion

In the third quarter, Adeia demonstrated strong revenue growth, reporting $86.1 million, buoyed by the execution of seven deals across various sectors, including Consumer Electronics, Pay-TV, Semiconductor, and Over-The-Top (OTT) media services. This performance underscores the firm's robust market position, especially with significant renewals from key clients like LG Electronics and VIZIO, reflecting a high renewal rate exceeding 90%. The signing of a new multiyear agreement with Neiman Marcus marks a successful entry into the growing e-commerce media sector—a promising adjacent market for the company.

Cost Management and Profitability Insights

Operating expenses for the quarter stood at $35.3 million, up marginally by 1% from the previous quarter. This was mainly due to a rise in Selling, General, and Administrative expenses, indicating increased personnel costs and higher investments in sales efforts for the media and semiconductor sectors. Notably, litigation expenses fell significantly by 38%, indicating better management of legal costs during this period. Adjusted EBITDA reached an impressive $51.3 million, which corresponds to an adjusted EBITDA margin of approximately 60%, illustrating the company's efficiency in converting revenue into profitability.

Debt Management and Capital Allocation Strategy

The firm is actively managing its debt, having reduced its term loan by $12 million during the quarter, leaving a balance of $537.1 million. The effective interest rate on its debt decreased to 9.2%, reflecting the benefits derived from the recent repricing of the term loan, which further supports the company's deleveraging efforts. Adeia's Board has authorized a $200 million share repurchase program, signaling confidence in capital efficiency and a commitment to returning value to shareholders.

Guidance and Future Expectations

Looking ahead, Adeia adjusted its revenue guidance for 2024 to a range of $370 million to $400 million. This revision accounts for potential shifts in the timing of closing significant agreements, particularly in the OTT and semiconductor sectors. Operating expenses for the year are now expected between $144 million and $148 million, and interest expenses are estimated to range between $52 million and $53 million. The projected adjusted EBITDA margin is around 62%, and a consistent non-GAAP tax rate of 23% is anticipated. Adeia remains focused on its long-term goal of exceeding $500 million in annual revenue, showcasing ambition despite short-term fluctuations.

Strategic Focus on Innovation and Technology

Adeia’s commitment to innovation is evident in its successful R&D initiatives, having developed over 11,750 global patent assets, up from 11,500 in the previous quarter. The company actively seeks acquisitions to enhance its media assets, investing approximately $20 million this year in key areas. This focus on advancing technologies such as hybrid bonding in semiconductor applications signals Adeia's strategic positioning to leverage market trends and maintain competitive advantage.

Navigating Market Challenges and Opportunities

While traditional Pay-TV subscriber numbers continue to decline in the U.S., Adeia is confident in offsetting these declines with growth in the OTT sector and virtual multi-channel video programming distributors (MVPDs). The company is closely monitoring these trends and remains optimistic about achieving growth in its core areas, particularly given the robust nature of its deal pipeline. Moreover, the recent litigation against Disney regarding unauthorized use of Adeia’s technology highlights the company’s determination to protect its intellectual property and maximize long-term shareholder value.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone. Thank you for standing by. Welcome to Adeia's Third Quarter 2024 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead.

[Chris Chaney, executive]

Good afternoon, everyone. Thank you for joining us as we share with you details of our quarterly 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 regarding the 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 discuss 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 made available on the Investor Relations website at adeia.com.

Now, I'd like to turn the call over to our CEO, Paul Davis.

[Paul Davis, executive]

Thank you, Chris, and thank you, everyone, for joining us today. I am pleased to be here to share the results of our third quarter and the progress we have made in our business.

I want to first cover a significant recent development, the filing of patent infringement litigation against Disney. We have had great success over the past several years in signing license agreements without the need for litigation, as evidenced by our over 100 agreements we have signed in the past 3 plus years. We always prefer to reach a mutually agreeable resolution. However, sometimes we are left with no choice.

To that end, let me briefly discuss the litigation we filed earlier today against the Walt Disney Company and certain of its subsidiaries, including Hulu and ESPN for their unauthorized use of our IP. The lawsuits we filed include 6 patents in the U.S. and 3 in Europe, all related to various aspects of our media streaming technology utilized by their streaming platforms. While we remain willing to negotiate a resolution that fairly compensates Adeia for our valuable IP, we are also fully prepared to proceed through the entirety of the legal process to protect our rights, and we are confident in our ability to achieve a positive outcome. Finally, I'd like to emphasize that Disney was not contemplated in our prior or current revenue guidance for 2024.

As we look at other progress in our business, our pipeline of new opportunities in key verticals such as OTT, Semiconductor and e-commerce continues to strengthen, and we are advancing many of these to the final stages of negotiation. Following the end of the third quarter, we closed a multiyear e-commerce license agreement with Neiman Marcus, a leading luxury retailer with a growing e-commerce presence. This agreement with Neiman Marcus represents early success for us in our e-commerce media adjacent market, and is an important milestone that we intend to build on.

Additionally, we are making great strides towards closing 2 significant agreements, one in OTT and one in semiconductor. As with all complex agreements, it is difficult to pin down exactly when they will close. Our priority is to secure the best long-term outcome that fairly values our IP. This is particularly important given the long-term nature of our agreements with an average contract length of 5 years. The trajectory of both of these deals remains positive, and we look forward to sharing further details on them soon.

As Keith will discuss, we have adjusted our revenue guidance for the year to reflect the possibility that one of these deals moves into 2025. More importantly, our long-term goal of growing our annual revenue to over $500 million remains the same, and we are confident that with our robust pipeline of opportunities, we will be able to achieve this milestone.

In the third quarter, we continue to make progress towards our goals for the year as we signed 7 deals in the quarter, bringing our total to 22 deals signed in the year. These agreements were across multiple verticals, including Consumer Electronics, Pay-TV, Semiconductor and OTT. 6 of the deals we signed in the third quarter were renewals, further strengthening our high renewal rate, which continues to exceed 90%.

We delivered revenue of $86.1 million and EBITDA of $51.3 million, and we continue to reduce our term loan balance with another $12 million accelerated payment. Lastly, given the confidence in our long-term prospects, our Board increased the authorization under our share repurchase program to up to $200 million, and we intend to begin executing towards a more balanced capital allocation approach this quarter.

I'd like to share some more details of the deals we signed in the third quarter. We signed a multiyear renewal with LG Electronics for access to our media portfolio. As many of you know, LG is a global producer of Consumer Electronics such as smart TVs. This renewal highlights our position as a technology innovator, and our 25 plus year relationship with LG is a great example of the positive influence our R&D investment has on the enduring relevance and value of our portfolios.

In addition, we also signed a multiyear renewal with VIZIO, a leading smart TV brand for access to our media portfolio. We are pleased to now have most of the major smart TV brands under license, including Samsung, LG, Sony, VIZIO and Panasonic. We further strengthened our international customer base in the third quarter with a long-term renewal with Liberty Global, a significant provider of Pay-TV services in Europe.

Other agreements we signed in the third quarter were renewals with a provider of streaming services and devices, a provider of online programming guides and an OTT provider in Korea, all for access to our media portfolio. We also signed a semiconductor agreement with an existing customer for advanced hybrid bonding engineering support. We ended the third quarter with over 11,750 worldwide patent assets, up from 11,500 in the prior quarter. Our future growth and ability to attract renewals and new customers is dependent on the relevance and value of our portfolios.

High quality portfolio assets are vital to maintaining our strong renewal rate and adding new customers in our key growth markets. Our commitment to driving innovation through investment in R&D has enabled us to generate approximately 85% of our portfolio organically while expanding the relevance of our portfolios to our existing and new markets. I am immensely proud of the way our visionary inventors anticipate future trends in our targeted end markets and develop fundamental innovations enabling those trends.

Although the majority of our IP is organic, we actively seek to augment our portfolio through M&A when we see opportunities that align with our strategy. We have augmented our media assets through multiple acquisitions, primarily focused on OTT for a combined investment of approximately $20 million this year, including acquisitions closed in the fourth quarter.

Our acquisition efforts are primarily targeted at accelerating our growth opportunities in both our media and semiconductor businesses. Our media and semi R&D teams continue to remain actively engaged in their respective ecosystems, and over the last quarter, shared their insights on topics such as video proliferation, AI and augmented reality with other experts and potential customers at numerous industry events.

As we look deeper into the semiconductor market, hybrid bonding adoption in flash memory, high bandwidth memory and in logic devices continues to gain traction. We believe the growth of hybrid bonding adoption in these areas will drive increased revenue opportunities for us with both existing and new customers. In addition, there is substantial interest in new semiconductor co-optimization innovation as the slowing of Moore's Law accelerates. 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 microLED displays instead of traditional OLED are recent market developments that we believe will be of growing relevance to Adeia. 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 TechExpo24 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. Adeia 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 are recently recognized by U.S. News & 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.

[Keith Jones, executive]

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 7 deals across multiple verticals, including Consumer Electronics, Pay-TV, Semiconductor and OTT. And shortly after we closed the third quarter, we signed a new multiyear 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 personnel 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 and was primarily related to interest earned on our cash and 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 27. 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 our 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 million 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 million 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 million to $53 million. We expect other income to be in the range of $5.5 million to $6 million. We expect the 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 IP 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?

[Operator]

[Operator Instructions] And it looks like our first question today comes from the line of Madison De Paola with Rosenblatt Securities.

[Madison De Paola, analyst]

So I'm just wondering, could you provide any more details around the semiconductor license signed during the quarter?

[Paul Davis, executive]

Maddie, this is Paul Davis. Thanks for the question. I hope you're doing well. We can't get into too much details on it. But I think what it really shows is the continued interest in hybrid bonding. We're getting tremendous interest and really across the board in a number of different customers. And it's really exciting for us as that hybrid bonding adoption, as I said in my prepared remarks, we're really seeing it across a number of industries, including obviously, flash memory, where we're seeing increased adoption after our signing of our deals with Kioxia 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 people are talking about in 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.

[Madison De Paola, analyst]

Okay. Great. And then I just was wondering what are the trends that you're seeing in Pay-TV subscribers from your customers' point of view?

[Paul Davis, executive]

Yes. I think it's like -- it's more of the same. It's really -- we're continuing to see declines in subscribers in our customer base in the U.S. 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 a few years is our expectations. But we've modeled that into our forecast, and it is what it is in terms of what we are, what our expectations are.

The one thing I would note, though, is there is tremendous growth in, obviously, OTT, the virtual MVPD players. And so that's the plan. That's how we're trying to offset those declines that we anticipated. And we're very confident in our ability to continue to execute towards that plan to offset the expected declines.

[Operator]

And our next question comes from the line of Hamed Khorsand with BWS Financial.

[Hamed Khorsand, analyst]

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?

[Paul Davis, executive]

Yes. Listen, Hamed, I think 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 also just our pipeline of opportunities continues to expand. And so, we've signed 7 deals in Q3. These deals, though, take time. Even those deals that we signed were -- 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 we think there -- our goal is to close both of them, but we wanted to be transparent about that there could be one of them that closes in Q4 and the other could slip into 2025. But our goal and what we're pushing the team to is still get both of them done this year.

[Hamed Khorsand, analyst]

So is it fair to assume that at least the one that you're saying that might go into 2025 is not Disney?

[Paul Davis, executive]

Yes. 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 we -- that was not one of the ones that we were counting on for 2024.

[Operator]

And our next question comes from the line of Matthew Galinko with Maxim Group.

[Matthew Galinko, analyst]

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 anything you could share with us about what the sticking point might have been? Is it really just kind of a price discovery issue? Or maybe just any background you could share on that.

[Paul Davis, executive]

Yes. Thanks, Matt. Unfortunately, we can't get into specific details. Like our conversations with our customers are often covered under confidentiality agreements. What I can say is, generally speaking, we pride ourselves on getting deals done and taking the time to get deals done, and we have lengthy discussions. I've mentioned multiple times, often our cycle is 18 to 24 months. Sometimes it can even take longer than that.

At some point, though, in discussions, it becomes clear if someone we're going to be able to get a deal done or not. And in this case, 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 something that we needed to do. We're confident in the cases that we filed today, and that we'll ultimately be able to get a good outcome from them.

[Matthew Galinko, analyst]

All right. And then I think you've referenced the shift in capital allocation for a couple of 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.

[Keith Jones, executive]

Yes. Great question, Matt. So I kind of start with the catalyst is kind of thinking about even with the guidance that we've talked about, the overall stability in our business. So 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 slightly above what we had realized in 2023 is absolutely on point today. Our outlook is that we see the strength in the cash flow, 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 opportunities, and then the cherry on top, quite frankly, is the repricing that we have and the interest rate, 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 2 calls.

[Operator]

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?

[Paul Davis, executive]

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.

[Operator]

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.