Adeia Inc

NASDAQ:ADEA

Earnings Call Analysis

Company Narrows 2023 Guidance, Projects Growth

In their recent earnings call, the company announced an adjusted EBITDA of $0.7 million for Q3, with a margin of 70%. For full-year 2023, revenue expectations have been narrowed to $385-$395 million, a slight tightening of the range, with adjusted EBITDA margins forecasted at 67%. Operating expenses are projected to decrease to $130-$133 million, and cash flow from operations is anticipated between $150-$155 million. Looking ahead to 2024, the company expects low to mid-single-digit revenue growth, operating margins in the 60s, and continued debt repayment and dividends.

Q3 Financial Performance and Shareholder Returns

The company reported an adjusted EBITDA of $0.7 million for the third quarter, which reflected a robust adjusted EBITDA margin of 70%. They ended the quarter with a healthy $82.1 million in cash and equivalents, indicating strong liquidity. They also demonstrated their commitment to shareholders by approving a $0.05 per share dividend. Operationally, the company managed $21.2 million in cash from operations during the quarter while also focusing on debt reduction, having made $15.1 million in principal payments, resulting in a term loan balance of $630.4 million.

Full Year 2023 Narrowed Revenue Guidance and Reduced Expenses

For the upcoming year, the company has narrowed their revenue guidance to a range of $385 million to $395 million, indicating a precise targeting in their financial projections. To optimize their financial structure, they have also reduced their expected operating expenses to a range of $130 million to $133 million. With an eye on cost management, they forecast interest expenses to range between $63 million to $63.5 million, while projecting other income between $5 million to $6 million. Collectively, these measures are expected to yield an adjusted EBITDA margin of 67%.

Operational Priorities Impacting Cash Flows

The company expects cash flows from operations to be in the range of $150 million to $155 million, which has been adjusted to reflect three primary factors. First, there's an emphasis on maximizing licensing agreement economics, which has led to the strategic deferment of certain customer payments into 2024. Second, the figures have been affected by Shaw's failure to honor their commitments. Lastly, the anticipated renewal with a Canadian pay TV operator is now unlikely to occur in 2023, influencing cash flow projections. Despite these challenges, the non-GAAP tax rate is anticipated to stay consistent at around 23%, and capital expenditures are projected to be roughly $4 million for the year.

Looking Ahead to 2024: Revenue Growth and Operating Margins

The company offers a forward-looking statement for 2024, expecting low to mid-single-digit revenue growth. They aim to maintain non-GAAP operating margins in the 60s, coupled with a moderate increase in cash flows from operations. These forecasts suggest that the company is maintaining a positive outlook on its financial health and growth trajectory despite the present challenges.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone. Thank you for standing by. Welcome to Adeia's Third 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.

[Chris Chaney, executive]

Good afternoon, everyone. Thank you for joining us as we share with you details of our third 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 regarding our third 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 I turn 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 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. During the third quarter, our strong deal momentum continued as we signed 7 agreements with customers in consumer electronics, pay TV, OTT and semiconductor. We delivered strong financial results with $101.4 million in revenue and a non-GAAP operating margin of 69%. In addition, we continue to deleverage our balance sheet as we paid down $15.1 million on our term loan. We are happy to announce we also strengthened our executive team. With Jarl Berntzen joining as our Chief Corporate Development Officer. And we announced today, we appointed Phyllis Turner Brem as an independent director to expand the depth and breadth of the IP experience on our Board.

Our deal momentum continued in the third quarter with a significant long-term renewal with Samsung, the largest smartphone producer globally for access to our media portfolio for use in their mobile devices. This agreement is especially meaningful because Samsung is collectively a top 10 customer and has been a licensee of ours for approximately 25 years. Over this period, Samsung has renewed agreements with us multiple times. And our relationship touches every aspect of both our media and semiconductor businesses from mobile devices to connected TVs to semiconductors.

Our long history of renewals with Samsung illustrates our strong relationships with our customers and the value they place on our evolving and expanding IP portfolio. We also signed an important renewal with Starz, the second OTT deal in as many quarters. Starz is a leading media and entertainment provider, offering a premium OTT service. Our recent success with DEZn and now Starz are further proof points of our media portfolio's value to OTT providers.

Our expanding media portfolio includes fundamental patents, which we believe are relevant to the leading OTT providers. I am encouraged with the progress we are making in OTT and believe the recent momentum should serve as a springboard for our further success. During the third quarter, we were pleased to have signed a settlement agreement with NVIDIA, which resolved an outstanding litigation related to certain legacy IP. Importantly, this agreement did not cover either our hybrid bonding or advanced processing node portfolios. We believe with this litigation now behind us, we can begin discussions on these newer and valuable aspects of our semiconductor portfolio. As demonstrated by the many semiconductor memory customers we have today, market leaders have recognized the value of our IP. Similarly, we believe there is a significant opportunity in the logic market, where our semiconductor portfolio is increasingly relevant as logic companies try to address the slowing of Moore's Law.

I'm excited with the progress we have made in almost all aspects of our business, including the continued execution of renewals and new deals. As evidenced by the 24 deals we have signed in the first 9 months of the year, the relationships with our customers remains very strong. However, occasionally, a dispute can arise between us and the customer. Our preference is always to work with our customers and we can do just that. In the rare instance we are unable to do so, we believe it's important to defend our contractual rights. Accordingly, we filed a breach of contract lawsuit against Shaw in the southern of New York per the terms of the agreement. We believe Shaw's stated positions for ceasing payments under the agreement are entirely baseless. After a repeat attempts to resolve the matter, we were met with resistance and roadblocks, and we're left with no choice but to file this case.

It is important to recognize that this is a unique situation with Shaw, and only began after or management took over the combined company following their merger. Our long-term strategic objectives for the Canadian pay TV market remains unchanged, and we will continue to pursue all opportunities to license the Canadian pay-TV operators and get Shaw back as a paying customer. Shaw's breach of contract was not contemplated when we gave our guidance earlier this year. And accordingly, we have narrowed our revenue guidance to the lower end of our original outlook.

Importantly, and as a result of our expense management, our non-GAAP net income and operating margins are now forecasted to be at or above the original midpoint of the outlook we provided in February. Keith will provide more details on our updated guidance shortly. Before I turn the call over to Keith, I'd like to provide an update on our measures of success. We measure our success by several factors, including revenue growth, expanding our IP portfolio, executing renewals and new licenses and entering adjacent markets. The significant renewals we signed year-to-date with Cox, Verizon, Altice, Samsung and Starz further solidify our long-term revenue outlook. We are very pleased with the new license agreements we have signed this year with Western Digital, Kioxia and [indiscernible] as new deals are the basis for our revenue growth.

Growing our patent portfolios is key to successfully renewing licensees and signing new deals. We continue to track to our goal of growing our portfolio 10% annually. One year has now passed since becoming an independent IP licensing company, and I am extremely proud of what we have accomplished. We have signed over 30 deals in the last 12 months, while strengthening and expanding our deal pipeline with numerous new engagements. We have also delivered strong financial results, enabling us to pay down $129 million of our debt.

Operationally, we expanded our world-class team of engineers and licensing professionals, including the addition of 2 key members of our executive team, and I'm happy to announce we have added another new independent director to our Board. Phyllis Turner Brim brings to us 3 decades of IP experience and executive experience with Fortune 500 and IP development and licensing companies. Her experience and guidance will be of great value to us as we grow our business.

With that, let me turn the call over to Keith to review our third quarter financial results and our guidance.

[Keith Jones, executive]

Thank you, Paul. I am pleased to be speaking with you today to share details of our third quarter financial results. We turned in a strong third quarter, delivering revenue of $101.4 million, an increase of 22% from the prior quarter. Our strong revenue was driven by the execution of 7 agreements in the quarter. This includes executing a long-term agreement with Samsung for their mobile phones, which complements our existing consumer electronics and semiconductor agreements. We are also very pleased to announce the renewal of our OTT licensing agreement with Starz, which further validates our value to the OTT market.

Now I'd like to discuss our operating expenses, which I will be referring to non-GAAP numbers. For the third quarter, operating expenses were $31.1 million, a decrease of $800,000 or 3% from the prior quarter. Research and development expenses increased $621,000 or 5% from the prior quarter as we remain committed to growing both our media and semiconductor IP portfolios and fostering our pioneering innovation. Selling, general and administrative expenses decreased $1.3 million or 8% from the prior quarter, primarily due to lower corporate administrative costs and outsourced services. Litigation expense was $2.2 million a decrease of $129,000 from the prior quarter due to the timing of expenses related to various legal matters.

Interest expense during the third quarter was $15.7 million, an increase of $119,000 from the prior quarter due to rising interest rates, which is in spite of continued debt repayments and a lower principal amount. Our current effective interest rate amortization of debt issuance costs is approximately 9.8%. Other income was $1.5 million and was primarily related to interest income recognized on revenue agreements with long-term billing structures under ASC 606 and due to interest earned on our cash and investment portfolio.

Our adjusted EBITDA for the third quarter was $0.7 million, reflecting an adjusted EBITDA margin of 70%. Depreciation expense for the quarter was $382,000. 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 $82.1 million in cash, cash equivalents and marketable securities.

During the quarter, we generated $21.2 million in cash from operations. Additionally, we made $15.1 million in principal payments on our debt. As a result, we ended the quarter with a term loan balance of $630.4 million.

Additionally, our Board approved the payment of another $0.05 per share dividend to be paid on December 18 to shareholders of record as of November 27th. Now I will go over our guidance for the full year 2023. Our operational execution and licensing agreements. But we had not contemplated was subsequent to the merger of Rogers & Shaw that Shaw but failed to continue to honor its contractual commitments with us. Consistent with our Shaw press release on October 2, for the full year 2023, we are now narrowing our revenue guidance to be in the range of $385 million to $395 million.

We are also lowering our expected operating expenses to be in the range of $130 million to $133 million. We expect interest expense to be in the range of $63 million to $63.5 million, and we expect other income to be in the range of $5 million to $6 million. We expect a resulting adjusted EBITDA margin of 67%. Additionally, we expect cash flows from operations to be in the range of $150 million to $155 million. The adjusted cash flow guidance reflects the impact of 3 items that generally share equal weight. Specifically, it has always been a priority to maximize the economics of our licensing agreements. As such, we accommodated shifting certain payments from our customers to 2024 in order to achieve better overall deal economics.

Secondly, we have been impacted by the failure of Shaw to honor their contractual obligations. And lastly, we were further impacted on anticipated renewal with a certain Canadian pay TV operator, which we now believe will not take place in 2023. We expect the non-GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be roughly $4 million for the full year.

I want to provide a high-level look at 2024. As a reminder, we will provide more detailed 2024 guidance on our fourth quarter earnings call in February of next year. First, we anticipate revenue growth with a low to mid-single-digit increase. We anticipate our non-GAAP operating margins to be in the 60s. Also, we anticipate a moderate increase in cash flows from operations, which takes into account the shifted customer payments I referred to early. Paying off our debt will continue to be our priority, and we'll continue to return capital to shareholders through our dividend program. I am so proud of our team as we reach our 1-year anniversary as a stand-alone company. The strides we have made, including the continued deal execution and patent portfolio expansion paints a very bright picture for our future.

Our future is supported by our investments in technology development, which enables the evolution of both the media and semiconductor industries. As such, our pipeline remains strong, and we stay committed to the vision we initially set forth at separation. That brings it in 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]

We'll go first this afternoon to Nick Zangler at Stephens.

[Nicholas Zangler, analyst]

A few questions here. Starting with the top line guide. So 2 months to go for the year. Just wondering what the gating factor is now I guess, separating the low end of the range versus the high end. Wondering if you're willing to provide whether that's winning a new client, whether it's a variable component of an existing deal or resigning an existing client, whatever variables they might be just looking for more clarity on what gets you to the low versus the high end of that range?

[Keith Jones, executive]

Nick, thanks. Great question. So the guidance that we put at the $385 million to $395 million. First of all, just kind of start with the bottom of the range. Quite frankly, we kind of see that as the floor. And then just like anything else in terms of what we do, it's really kind of coming to terms that we think are just really in the best interest of us on a go-forward basis. So that whole comment around deal economics means a lot. Our pipeline is very robust. We are in deep stages with many of our customers. But quite frankly, it comes down just to the economics that we think that we should get out of the deal versus not to be in a position where we feel like we're forced to take something. So we have a lot of opportunities, and it's just a matter of just, quite frankly, making sure that we get the proper economics.

[Nicholas Zangler, analyst]

Got it. And then obviously, a sizable chunk was removed on the OpEx side. That's obviously in conjunction with the lower revenue guide. Can you just talk about where you were able to pull back within OpEx and so quickly?

[Keith Jones, executive]

Great question, and to be very, very precise. It all has to do with our litigation expense primarily. That's the biggest driver. Nick, if you recall, when we talked about our guidance in the beginning of the year and even at the time of separation, we had said we have been running historically at lower levels. Last year, we did about $10 million. And if you take a look at we were at the 9 months now, we're at the same spot where we were at this time. We paid a little bit higher spend that's not indicative of anything. It's just really about timing. So that is the delta. But more precisely, what I'm really proud of is that if we take a look at the other line items being R&D and spend at SG&A. Those are really spot on from what we had forecasted.

So I take great pride that our variance from what we forecasted as a company. It's -- I'll just say, very low single-digit delta from what we experienced. And if we take a look at that R&D and you heard Paul talk about in his track how great of a job that we're doing for our patent innovation, we have not backed off that not 1 bit. So that spending is just really a matter of timing, and we've done a great job at that experience management as a company.

[Paul Davis, executive]

Yes. Nick, maybe just I'll add on that. I think what's exciting for me is that we've been able to maintain that lower level of expense and still invest in what we really need to invest in. And so on the R&D front, we've filed more patents this year, new patents than I think we have in our history. It's very exciting in terms of the innovation that we have going on here at Audio and it's showing up in our new patent filings in a big way so far.

[Nicholas Zangler, analyst]

Great. And then just 1 final 1 for me, if you don't mind. Obviously, so many moving parts here within the TV landscape. You've got this breach with Shaw you've got accelerating declines or churn within the pay TV segment, yet obviously, CTV continues to grow and proliferate. I know you guys had talked about targeting a $500 million revenue number, I think, by 2026 based on your prior outlook there. Just given all these different dynamics that are going on, how do you feel about that $500 million target now, do you still think that's achievable, just given everything that's been going on in the landscape?

[Paul Davis, executive]

Yes. Thanks, Nick. Great question. And absolutely, I mean, we had factored in the pay-TV declines, and they're more or less tracking where our forecasts were. And so none of it's really been a surprise. We do think within that time frame, we're going to turn around some of the headwinds we've had in Canada. But more importantly, our focus on growth really comes from 3 areas that give us confidence in achieving that number. .

One is certainly new media, which is largely going to be driven by OTT. The second one, semiconductors, which we think is -- can be very significant within that time period. And then the last 1 is the new verticals. And on each of those fronts, we're seeing traction. So in OTT, obviously, we've signed 2 deals in the last 2 quarters, as I mentioned in my prepared remarks, we're very excited about the progress that we're making there. In semiconductors, in addition to the large deals we signed with Kioxia and WD, which will continue to add to that recurring revenue, we continue to have tremendous traction in the logic space and seeing what other companies are doing that. And so very, very bullish on our efforts to achieve the revenue targets that we've set out for the semiconductor business.

And then lastly, on new verticals, we continue to just increase our pipeline there. And so the number of opportunities has really increased significantly as we look at over the course of this year in terms of what we're pursuing. And so all 3 of those are tracking to our expectations, and we're very excited about the growth opportunities there.

[Operator]

We'll go next now to Hamed Khorsand at BWS Financial.

[Hamed Khorsand, analyst]

So the first question I had was on the Starz renewal, are you able to talk about what kind of rate you achieved with them on the renewal rate? How significant of a step up it is for you?

[Paul Davis, executive]

Yes. We can't get into specifics, Hamed, just because of confidentiality, but we're very pleased with another multiyear agreement. Certainly, this is a space that we've talked about a lot as being important. And and Starz is really a premium offering, and it really sets a great precedent for us as we're trying to look to expand the number of OTT licenses we have in the next few years.

[Hamed Khorsand, analyst]

And secondly, on your comments about the Canadian operator renewal not taking place. And when you were expiry, there a disclosure that was 50% of the operators were being sued and 50% land or license. I'm assuming that Shaw and Rogers were under license and is the other operator now Rogers? And how are you going to about coming up with a form of settlement given that Rogers is now much a larger operator?

[Paul Davis, executive]

Yes. We can't get into the who of that Canadian pay-TV operator that we no longer expect to be to get the renewal from. But what I can tell you is that Rogers is not a current licensee of ours. And so when we look at the entire Canadian pay TV landscape, our goal, as I said in our prepared remarks, is to get Shaw back as a pain licensee and to get the rest of the Canadian pay-TV operators under license. That has not changed, and we still feel like our patent portfolio is still very relevant to the entire Canadian Pay-TV landscape, and we feel like they should all be under license to our portfolio. .

[Hamed Khorsand, analyst]

Okay. And then lastly for me is on your comments about accommodating for payments for 2024, how much of those payments are onetime in nature?

[Keith Jones, executive]

So I think another way to look at it is that part of our business model is that for many of these situations, we ask customers to pay in advance be it an annual fee in a lot of that revenues that I'm referring to relates to that. So it wouldn't have been revenue to us. It has been a prepayment, if you will, in deferred revenue. So just simply from negotiating and adjusting and trying to land where we wanted to on a longer-term deal, we said, fine, don't pay us right now at this moment. you can pay us in early 2024. And they agreed and quite frankly, it was good for them. It's good for us. So we maintained the longer economics of it. So it's not necessarily at all kind of a onetime payment. It's just kind of the structure and what we leverage in our company of getting advanced payments on long-term contracts.

[Operator]

[Operator Instructions]

We'll go next now to Matthew Galinko at Maxim Group.

[Matthew Galinko, analyst]

Can we start with the -- I think you mentioned the -- you have the semiconductor assets as part of litigation with NVIDIA. Can you talk about how ending that RECONNECT does that enable more meaningful conversations on the newer assets on the semiconductor side? Or can you talk a little bit about the financial?

[Paul Davis, executive]

Sure, Matt. Happy to touch on that. the litigation that we settled with NVIDIA was, as you mentioned, related to some legacy IP. It was not in connection with either our hybrid bonding or our advanced processing portfolios, which we believe currently have tremendous value, especially in the logic space, as we've noted. In any situation, where when you're litigation, it's hard to get past the -- what's on the table and the litigation to have other conversations. And so whether that's within video or any other party, frankly. And so settling that really kind of resets the discussions and now we believe we're going to be able to have more meaningful discussions about those more advanced technologies that we have in our portfolio.

[Matthew Galinko, analyst]

Got it. Okay. And then just on the high-level '24 outlook. I'm just wondering if we could take operating cash flow projections, just proxy of what you've talked about and used that as what you might -- how you might scale your debt payments? Or as we think about modeling '24, especially around debt, similar rate to pay down to '23? Or how should we be gauging that? .

[Keith Jones, executive]

It's a great question. One of the statements that you've made at separation and that we continue to make today is our commitment to paying off that debt prior to maturity. And there's a clear pathway for that. We, as a management team, are committed. So I would roughly say that the pace that you're seeing us at this year of making reductions in our overall principal amount, we'll carry that forward and in particular, in 2024. We've talked about that we want to stay committed to that pace, while our leverage ratio until it reaches 1.3x. And in 2024, we won't quite it below that measure, but we will consistently look to retire that debt amount

[Operator]

Thank you. And it appears we have no further questions this afternoon. Mr. Davis, I'll hand things back to you, sir, for any closing comments. .

[Paul Davis, executive]

Thank you, operator. In the third quarter, we delivered strong financial results with continued deal momentum during the quarter. I'm excited about our future prospects as we continue to grow our portfolio and expand our pipeline of opportunities. I also want to thank our employees for their dedication and commitment to driving our success over the past years. We will be attending the Wells Fargo TMT Conference. We look forward to seeing many of you at these and other events through the remainder of the year. Thank you for joining us today.

[Operator]

Thank you. And ladies and gentlemen that will conclude the Adeia Third Quarter 2023 Earnings Conference Call. Again, thanks so much for joining, and we all wish you a great evening. Goodbye.