Adeia Inc. (NASDAQ:ADEA) Q4 2022 Earnings Call Transcript

Adeia Inc. (NASDAQ:ADEA) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good day, everyone. Thank you for standing by. Welcome to Adeia’s Fourth Quarter 2022 Earnings Conference Call. Following the presentation, the call will be open for questions. I’d now like to turn the call over to Ned Mitchell, for Adeia. Ned, please go ahead.

Ned Mitchell: Good afternoon and thank you for joining us as Adeia reports its fourth quarter 2022 and full-year financial results. With me on the call today are Paul Davis, Chief Executive Officer; and Keith Jones, Chief Financial Officer. In addition to today’s earnings release, there is an earnings presentation, which you can access along with the webcast on Adeia’s IR website. Before we begin, 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. Second, we refer to certain non-GAAP financial measures, which exclude one-time or ongoing non-cash acquired intangibles amortization charges, costs related to actual or planned business combinations including transaction fees, integration costs, severance, facility closures, and retention bonuses; separation costs, stock-based compensation; loss on debt extinguishment; discontinued operations, expense debt refinancing costs, impairment of intangible assets, and related tax effects. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website.

The recording of this conference call will be available on the Investor Relations website at www.adeia.com. I will now turn the call over to Adeia’s CEO, Paul Davis.

Paul Davis: Thank you, Ned, and thank you everyone for joining us today. 2022 was a momentous year for Adeia. Our incredibly dedicated employees continue to drive the business forward, delivering a strong year operationally and financially. While also navigating the business operation from Xperi, which was successfully completed on October 1. Our total revenue for the year was approximately $439 million. We finished the year on a high note in the fourth quarter with over $103 million in revenue and an adjusted EBITDA margin of approximately 72%. These excellent results exceeded expectations and were driven by our diverse set of customers and growing pipeline of opportunities. Our strong fourth quarter results are a proof point of how we will continue to succeed as a standalone company.

We closed 10 license agreements in the fourth quarter alone, including both renewals and new deals highlighted by our long-term renewal with Samsung. In addition, we signed two significant social media renewals as well as renewals and new deals in Pay TV, OTT, and semiconductors. These deals not only help contribute to our successful fourth quarter, but given the long-term and recurring nature of many of these deals, they also enhance our visibility into future revenue and reinforce the strength and durability of our annual baseline revenue. Importantly, the momentum has continued into the New Year with the early renewal with Altice, which I will address in more detail shortly. Diving into the deal momentum in more detail, let me start with Samsung in the consumer electronics market.

As we announced last month, we signed a long-term license renewal with Samsung Smart TVs and related offerings. This renewal is a testament to how our innovation support global industry players in the rapidly growing connected TV services market. We see a significant shift in digital content consumption behaviors as consumers reevaluate their entertainment budgets. This is raising the popularity of streaming services, including advertising-based video on-demand or AVOD and free ad-supported TV or FAST. The trend has accelerated with the rapid growth of the connected TV market resulting in new relationships among advertisers, network operators, streaming providers, and consumer electronics manufacturers. We believe our current portfolio and technology roadmap will be well-positioned to capitalize on this trend.

Moving to Pay TV, as we announced this week, we signed an early renewal with Altice, a leading provider of broadband and video services. This early renewal extends our agreement with Altice and is a result of our leading IP position in Pay TV and our approach to customer relationships. We are committed to working with our customers to enter into multi-year agreements that provide access to our expanding IP portfolio at rates that recognize the value of our technologies. We are very pleased we signed this agreement with Altice, which serves as a further proof point of the longevity and applicability of our media portfolio in the Pay TV market. We also saw significant progress in the social media market, signing multi-year renewals with two leading social media companies.

Importantly, these deals now include access to our imaging IP, which is now part of our broader media portfolio. The inclusion of our imaging IP portfolio helped drive increased revenue contribution from both these companies. And we see similar opportunities moving forward. With the addition of our imaging IP and continued expansion of video consumption on social media platforms, we believe we are well-positioned to grow our revenue base in this market. In semiconductors, we also signed a new DBI license agreement with Qorvo, a leading provider of radio frequency solutions. This is a further validation of our leading market position in hybrid bonding. While the RF market opportunity is more modest than our other semiconductor markets, we are pleased with this new deal win.

In addition, we signed renewals and new agreements, across multiple media verticals and geographic regions, including with Fetch TV, SONIFI Solutions, and Naver. The diversity of our customer base and our ability to efficiently and consistently close license agreements in different markets and jurisdictions is a result of the breadth and applicability of our IP. We are focused on driving our customer diversification and believe we are well-positioned to do so given the way in which we innovate and monetize our intellectual property. At the heart of our success in signing such a diverse set of customers is our ability to leverage our unique innovation engines and portfolio development. At Adeia, we focus on big ideas that can expand across multiple applications and market verticals.

Adeia innovators and engineers are not burdened by product roadmaps and timelines, which enables them to work on horizontal technologies that cut across multiple applications and industries. We have depicted this horizontal technology approach on Slide 6 of the presentation. On the outer edge, we have the major markets and industries our technologies address. Moving inside, we have the applications, features, services, and products that use our technologies. And further inside, we have the core horizontal technology blocks that our media portfolio covers. In addition to our robust media portfolio, we believe our hybrid bonding and advanced processing node semiconductor technologies will be instrumental to advancing the next generation of semiconductor chips.

It is these chips that power the devices that deliver the entertainment that consumers watch and enjoy. Importantly, these devices increasingly require more and more computing power in an always connected and mobile world. Historically, advancements in computing power came via Moore’s Law. However, the increasing cost and slowing benefits of Moore’s Law is driving the semiconductor industry toward new technology solutions to continue to advance performance in a cost effective manner. Hybrid bonding and particularly our will play a key role in enabling cost effective advancements in chip architecture. Hybrid bonding provides a massive boost in communication bandwidth, condensed high architecture and footprint and improved speed and energy efficiency.

The leading foundries will continue to push the boundaries of smaller processing nodes despite the associated costs. And our advanced node portfolios well-positioned to cover those smaller nodes. However, we believe even the most advanced semiconductor companies will continue to move to hybrid bonding. As an increasingly attractive way to manage these costs and improve performance. In addition, given the cost effective performance advantages that hybrid bonding offers, it has the potential for pervasive adoption across the semiconductor supply chain rather than just with the two to three leading foundries. In particular, we remain very optimistic about the adoption of hybrid bonding in the logic market, one of the largest and fastest growing markets in the semiconductor industry.

Moving to media. Our core technology blocks such as user interfaces computer vision, machine learning and networking power a much bigger set of features, applications, services and products, which are deployed across the verticals we target. Our goal is to execute on a horizontal technology roadmap so that we can innovate once and license that innovation across multiple verticals. An example of this approach is an area we have been a pioneer in for decades, user interfaces, and user experiences. UI and UX technologies are in our DNA and we understand the importance of these technologies since it is what consumers see and experience. These technologies include integrated guides, auto play, , and playback speed. While we are best known for UI and UX technologies and Pay TV, with the proliferation of video, they also have applicability in social media, consumer electronics, music streaming, and the metaverse.

And consumers want a similar user experience regardless of the medium in which they are enjoying digital entertainment. We are continuing looking to replicate this horizontal innovation approach. Without traditional product company limitations, our engineers and innovators are free to think big and innovate in ways that will broadly apply across multiple verticals. Before I turn the call over to Keith to cover the financials, I want to touch on our areas of focus in 2023. Consistent with what we laid out at our Investor Day, this year, we will work towards increasing our annual baseline revenue, growing our patent portfolio, expanding the number and scope of our media and semiconductor license agreements, and making progress in adjacent verticals.

To increase our annual baseline revenue, we are focused on executing renewals, signing agreements with new customers, and making progress on large unlicensed OTT providers. Our portfolio development will be driven by our internal innovation engines. And targeted tuck-in acquisitions. Our internal horizontal innovation roadmap supports both core existing licensing programs and new verticals. We also see an attractive market for acquisitions of IP, as we believe many companies will look to divest of assets given the current macroeconomic environment. We are well-positioned to capitalize on this with our strong balance sheet and will continue to be selective as we look for opportunities that can accelerate our growth. We believe the deal momentum will continue in 2023, given our healthy pipeline of opportunities.

We have a proven approach to licensing in which we focus on building strong customer relationships, working tirelessly to find a deal and litigating only as a last resort. Lastly, we have continued to progress our efforts in breaking into adjacent verticals. These efforts are at various stages, but as I noted last quarter, we anticipate music streaming as our first area of success. Given the engagement and progress to date. With that, let me turn the call over to Keith to cover our fourth quarter and 2022 financial results and our guidance for 2023.

Keith Jones: Thank you, Paul. I am very pleased to be speaking with you as we reach another milestone for Adeia, as we are reporting financial results of the company on a standalone basis for the first time. We are excited as this provides greater insight and clarity into our operations as an independent company. Now, let me walk you through our operating results for the fourth quarter starting on Slide 8. Revenue was $103.3 million, representing a 16% increase from the prior quarter. The increase was driven by the execution of 10 license agreements in the quarter. We’re extremely pleased with this level of execution as it reflects the strength of our pipeline and it also validates the applicability of our patent portfolios across various verticals.

As Paul noted earlier, we signed license agreements covering multiple verticals, including consumer electronics, social media, OTT, Pay TV, and semiconductors, which is evidence of the widespread adoption of our technology and inventions. Now, let’s discuss our operating expenses, which I’ll be referring to non-GAAP numbers only. First, I want to speak to the guidance we provided during the call last quarter, which included approximately $5 million of expenses associated with a pre-separation commitment to Xperi Inc. At the time, we were still in the process of determining the proper accounting for those costs. During the course of the fourth quarter, we concluded on the appropriate accounting treatment for this agreement in determining that these costs should be treated similar to other pre-separation related expenses, and will not be included in our non-GAAP results.

Accordingly, for the fourth quarter, operating expenses were $28.8 million, a 5% from the prior quarter. For the sake of clarity, this excludes the $5 million of pre-separation costs that I previously referred to. Research and development expenses increased $590,000 or 5%, primarily due to continued investments to grow and accelerate our innovation and development engine. Selling and general administrative expenses were relatively flat from the prior quarter as increased personnel costs were largely offset by a decrease in outside spending. Litigation expenses decreased $1.6 million from the prior quarter. In the fourth quarter, interest expense primarily related to our term loan was $15 million, an increase of $2.7 million from the prior quarter, due to the impact of higher interest rates.

Other income was $1.2 million, primarily related to interest earned on our cash and investment portfolio. Our adjusted EBITDA for the fourth quarter was $74.9 million, reflecting an adjusted EBITDA margin of 72%. Depreciation expense for the quarter was approximately $385,000. 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. Now, let me provide a few balance sheet details. We ended the period with $114.6 million in cash, cash equivalents, and marketable securities. During the quarter, we generated approximately $41 million in cash from operations, which was negatively impacted by approximately $10 million in separation transaction related payments.

We ended the quarter with a term loan balance of $749.3 million. This balance reflects paying down $10.1 million during the quarter. The strong momentum in exiting the year, has provided significant cash generation as we start 2023. As a result of this start, and based on the strength of our financial outlook, we elected to make an additional $50 million paydown of our term loan balance following the end of the year. Also during the fourth quarter, we paid a cash dividend of $0.05 per share of common stock. Further, our board approved the payment of a $0.05 per share dividend on March 29 to stockholders of record as of March 15. Now, turning to our guidance. As a reminder, our license agreements tend to be quite large in complex by their nature.

As we look to ensure that we achieve the commensurate 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 believe evaluating our performance on an annual basis is the most appropriate measure. Thus we will focus on providing guidance on a full-year perspective only. For the full-year 2023, we expect revenue to be in the range of $385 million to $415 million. We expect operating expenses to be in the range of $135 million to $145 million. We expect interest expense to be in the range of $64 million to $67 million and we expect other income to be in the range of $2.5 million to $3.0 million.

We expect a resulting EBITDA margin of 66%. Additionally, we expect cash flows from operations to be in the range of $185 million to $215 million. 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 $5 million for the full-year. In closing, 2022 brought many milestones for Adeia, starting with the successful separation of the business on October 1. I am very pleased with our operating results and we are off to a very successful start in our journey as a leading stand-alone IP company. The business traction we have witnessed during the fourth quarter is a validation of our innovation efforts across both the media and semiconductor markets. Consistent with our mission, our inventions and technologies help our licensees, enhance their own product and service offerings, and accelerate their time to market.

Our capital allocation strategy remains focused on growing our business through continued innovation. Both organically and inorganically. We will also look to continue to make accelerated payments against our term loan in order to further strengthen our balance sheet. As part of our long history of returning capital to shareholders, we remain committed to continuing our dividend program. I am very pleased with the strides the audio team has made. And our current achievements provide a springboard for our long-term growth and success. That brings an end to our prepared remarks, and with that, I’d like to turn the call over to the operator for questions. Operator?

Q&A Session

Operator: Thank you. We take our first question from the line of Nick Zangler with Stephens. Please go ahead.

Nick Zangler: Hey, guys. Great quarter. I do have a few questions here to go through. As we look to the guide for next year, is the baseline revenue unchanged at , I didn’t see any update there, but I’m assuming maybe that’s left alone?

Keith Jones: Hey, Nick. Great to hear from you. On the 375 for the baseline revenue, let’s just think about baseline revenue and what it represents. It represents our current look under agreements that we have currently under contract or that up for renewal. I look at it as more as a point in time, but as we progress in our business throughout the years, we signed new deals and new license agreements and that momentum, you will start to see us reporting a shift in to that baseline revenue when we see some movement that we deem to be somewhat significant from a reporting standpoint. So, really that baseline of revenue is a point in time in our operations right now. It’s not necessarily indicative of future outlook.

Nick Zangler: Got it. So, am I thinking about this right though like, let’s say, 375 was the baseline as of like a quarter ago, we pushed that into next year. And then on top of that, into 2023, on top of that, you’re talking about an additional $10 million to $40 million when you get to that guide of 385 to 415. So, I guess the question is, what exactly is that incremental 10 to 40 off of that baseline? Does it represent agreements that €“ or licensing agreements that you have yet to win, but hope to or is part of that new agreements that have been signed, but just might not be included in the baseline? Again, just trying to €“ if I assume that 375 is flat, how do €“ what is the spread that gets you to total revenue? Like how should I think about that?

Keith Jones: No, it’s a great question. How Paul and I look at it is that the 375 as you said, it’s kind of the baseline. So that’s going to represent contracts that we have under agreement today and then renewals that we have a high degree of confidence for. Now that incremental delta when we manage our business, by the structure of their contracts, we’re going to have a combination of for licensees you were out of license, you could have a catch up in a period. So that would create a blip that’s not necessarily ongoing and reflective or in some contract structures, there could be minimum amounts or fixed fee amounts that we have in our semiconductor deals that will have an impact. A great example of that is Micron that we had in 2022.

So, how we manage the business? We generally anticipate about 10% of our revenue profile as they come from that mixture of be it a €“ back payments that are due for folks who are at a license and we ultimately signed that agreement with them or some combination of non-recurring revenue like we talked about for the minimum fees or something that we have to take immediately.

Nick Zangler: Got it. So, I guess on that thought then, like, sort of delve on this so harshly, but like thinking about like the Qorvo announcement, right, like, I would have maybe thought that, okay, if baseline revenue stay the same at 375, you announced Qorvo, that’s obviously a new win, right there, I mean, obviously, I don’t know how much that’s worth, but I would imagine it’s relatively sizable. You could take 375 at Qorvo and you’d be at 385 maybe already. So, is that is that an incorrect way of thinking or is that logic off?

Paul Davis: Yes, Nick, this is Paul. Great to hear from me and thanks for the questions. I think the Qorvo announcement or any other deal, they are structured in different ways. As I noted on my call as well, RF is a more modest semiconductor market for us as well. So not all deals when we announced them, even if they’re a new deal win that we will have visibility into increasing that baseline. I’d also say with the semiconductor business, a lot of our technologies are emerging, right. And so, some of the structures do take time, as you noted, to see that incremental increase in the baseline. We need to see how that plays out as the technology is developed in the revenue from those associated deals, starts changing. So, there is that aspect of it as well.

So, right now we’re not ready to increase that baseline revenue, but we do have high confidence in our guide for the year nonetheless. That’s why we put it out. We feel like it’s where we’ll end the year within that range, but €“ and there certainly are opportunities as the year goes on to see if we can increase the baseline as well. And as soon as we have that level of confidence over a longer period of time, we’ll certainly provide that.

Nick Zangler: Great. Cool. All right. I’ll leave it to the next one. Thanks guys.

Paul Davis : Thanks Nick.

Operator: Thank you. We have a next question from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand: Hi. My first question was regarding the comment you made during the script about pursuing the unlicensed OTT providers. Have you already engaged with them and how many are there that could actually move the needle for you?

Paul Davis: Yeah. There’s multiple Hamed. You know, I think we’ve got €“ we’ve certainly are €“ they’re at different stages. Some of them are more advanced than others, but certainly the big names that I’m sure you well know and others know are large opportunities for us. And that we feel like we ultimately have a significant revenue contribution that will obtain from that. Some of them will take longer than others, but we have high confidence that will ultimately succeed in that. And so, various stages and we’re €“ but we’ve got confidence that our IP reads on multiple aspects of those business models as we are approaching them.

Hamed Khorsand: And as far as the Altice renewal is concerned, is there any minimum guarantees attached to it?

Paul Davis: I’d say, Altice is similar to, it’s a renewal, right. And it’s similar to the type of deal that we had previously with them.

Hamed Khorsand: Okay. And then going to the guidance question. The confidence you have in this revenue guide that you provide, have you reduced the, kind of risk exposure that you had with the Q4 guide and the Q3 performance three months ago? I mean, that was €“ I mean, there were some push-outs involved, so are you taking that into consideration with this guidance?

Paul Davis: Yeah. I’ll start and then let Keith address it as well. But, you know, I think we felt like, you know, we want to provide annual guidance, right. In Q4, we did not provide a Q3 guidance number, right. In Q4, we did talk about though there were some expectations that in deals that shifted. And you can see by our execution in Q4 that we were able to get those deals done, right. And we got 10 deals done in the quarter. It was a very productive quarter for us. And we felt very good and those deals have long-term benefits for us as well as I noted in my prepared remarks. I think going forward, we are going to provide annual guidance. Our deals are €“ can be lumpy in nature and certainly so from a quarter-to-quarter standpoint, it’s difficult to exactly time when those deals will close and why we focus on annual guidance. Keith, would you add anything to that?

Keith Jones: No, I think Paul, that’s really good. I think really to, kind of focus on what we said in the prepared remarks is that if you take a look at our profile, once again, we’re a small volume, big dollar shop, by default. And I think what our Q4 results proved out that it is in our best interest to take our time to negotiate with our licensees on commercial terms preferably to get the best economics for the deals that we can. And you can see that in the results that we post for the quarter. So, when we talk about our results and how we guide, it is very much specifically we’re talking about an annual basis. And, you know, on top of that, our pipeline looks fantastic. It is just as strong, if not stronger, quite frankly, from when we talked to you in September versus talking to you in October to where we are at today.

And, you know, from my perspective, this is just a matter of execution incoming to the right commercial terms. So, in terms of that quarter-to-quarter outlook, that’s just not necessarily how we’re going to manage the business. And specifically, our guidance is very much honed in on that execution over time because our deals take time by their nature.

Hamed Khorsand: Got it. Okay. My last question was on those 10 license agreements signed in Q4, were any and all the revenue associated with it recognized in Q4 or some of it go into Q1? It’s all spread out. So, we have those €“ if I take a look at the terms for those agreements, it’s pretty much a typical profile where the license agreements go over roughly a five-year period of time. There were small amount of catch up payments in one particular instance, but a lot of that revenue is going to be over that license term. And then Paul hit a very great note as we take a look at our semiconductor business and the adoption of that technology. It’s emerging technology. The industry has taken hold of what we have to deliver, but the volumes are going to come. So, the revenue from those agreements come out in the future under how we’ve structured some of our current agreements.

Hamed Khorsand: Okay. Thank you.

Keith Jones: Thank you.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the floor back over to Paul Davis for closing comments. Over to you, sir.

Paul Davis: Thank you, operator, and thank you everyone for joining today’s call. As you can see, the results of the fourth quarter demonstrate the significant progress that we continue to make on our long-term strategic plan. We’re pleased with our strong execution and results in the fourth quarter, the excellent deal momentum, and our outlook for 2023. We look forward to meeting with many of you in the coming months to further discuss our progress. Thank you.

Operator: Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.