Q3 2022 Adeia Inc Earnings Call
Good afternoon, everyone. Thank you for standing by and welcome to I hate it.
Third quarter 2022 earnings conference call.
During todays presentation, all parties will be in listen only mode.
Following the presentation.
The call will be open for questions.
As a reminder, this conference is being recorded.
I'd like to turn the countries over to Chill Copel. Although you have to do is go ahead.
Good afternoon, and thank you for joining us as audio reports its third quarter 2022 financial results with me on the call today are Paul Davis, Chief Executive Officer, and Keith Jones, Chief Financial Officer.
In addition to todays earnings release, there is an earnings presentation, which you can access along with the webcast and audio Investor Relations Web site.
Four we began I would like to provide a few reminders.
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 our 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 the call.
Second we refer to certain non-GAAP financial measures, which exclude onetime or ongoing noncash acquired intangibles amortization charges costs related to actual our planned business combination, including transaction fees integration costs severance facility closures and retention bonus.
Uh huh.
Separation costs stock.
Stock based compensation loss on debt extinguishment 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 IR website at Www Dot audio dot com.
Now I'll turn the call over to audio C E O Paul Davis.
Thank you Joe.
I want to welcome everyone to lobbyists first earnings call as a leading independent publicly traded IP licensing company.
On behalf of our management team that our board I want to extend a big Thank you to all of our employees and partners who have worked so diligently over the past few years to make our separation from the experian product business a success.
I also want to wish the experienced management team and its employees all the best as they begin their own journey as a standalone public company.
I am very proud of what the audio team has accomplished we have built an incredible licensing platform.
And World Class innovation engines in both our media and semiconductor businesses.
Our financial profile reflects strong recurring cash flows.
Driven by long term license agreements with companies in a diverse cross section of the technology and media landscape.
We are also excited about the growth opportunities that are in front of us, which I will cover in more detail shortly.
As a reminder, the product business spinoff closed on October one.
So our third quarter financial results are inclusive of the product business prior to separation.
However, Keith and I will focus todays comments on audio.
We would refer listeners to yesterday's replay of experience Inc's third quarter earnings call for more commentary on the product business.
As we prepare for separation from the very product business, we focused on positioning audio for continued long term success as a standalone business.
These efforts included assembly and the new management team and board of directors.
Presenting our long term vision for audited on a standalone basis for the first time during our Investor day in September .
And implementing new systems processes, and corporate governance policies and practices.
While work continues on these efforts I am proud of everything the team has accomplished and we believe we are well positioned to drive the business forward.
While preparing for separation. We also successfully closed a number of key deals.
Over the last four quarters, we executed nearly 30 license agreements, which include both new deals and renewals once again validating the strength and continued relevance of audience IP portfolios.
During the third quarter deal signed include a new multi year deal with silo, a leading entertainment focused pay TV streaming service and a long term renewal with Fox South Australia's leading pay TV provider.
The new license agreement with silo demonstrates our continued applicability and growth in virtual Mvpds and streaming services.
Only the Fox tail renewal demonstrates helped pay TV providers around the world use audience intellectual property to reach consumers in more innovative ways.
As we have mentioned before we remain committed to getting the most beneficial deals done for audio.
Which can sometimes lead to a push out and the timing.
This occurred in the third quarter with a few deals pushing out to the fourth quarter <unk>.
As a result revenue for the third quarter came in at approximately $90 million.
<unk>, we remain confident in our guidance for the year as the cadence and nature of the dialogue with multiple customers remains positive.
Accordingly, we have maintained the midpoint of our full year revenue expectations and have narrowed the range to $430 million to $445 million.
In addition to the normal review of the quarter.
Want to spend some time today covering the market opportunity for the media business as.
As we have noted previously growing our annual baseline revenue as a core objective for us are.
Our media business represents more than 90% of our baseline revenue and.
Several aspects of the media business represent important areas of growth for us.
As we look at the overall media opportunity. We believe it is helpful to provide a breakdown of our current addressable markets.
First U S pay TV, which in 2021, where the market in excess of $100 billion.
As an area in which we have historically been and continue to be very successful.
The U S pay TV market represents roughly 60% of our overall baseline revenue.
Pay TV will continue to be a significant contributor well into the future for us even as the industry remains in secular decline.
We anticipate offsetting.
Declines with growth in other markets, including.
The adjacent markets that are still emerging for us.
Moving to international pay TV, which in 2021 was roughly $60 billion and our target international markets.
Outside of Canada, We view this opportunity as a modest area of growth given the fragmentation of the international pay TV market generally.
Thus, we will focus our efforts on the more significant remaining unlicensed pay TV providers, but we don't believe we will reach the same level of penetration as a U S pay TV market given this fragmentation.
OTT, which in 2021 was already at $97 billion market is an area. We believe we will continue to grow.
While we have been successful in starting to penetrate this market with some key wins in dialogue with other potential licensees are progressing well we are still in the early innings of translating that into our financial results.
As of today much of the market remains a significant opportunity for us.
Moving forward. We also anticipate that we will be able to approach the OTT market more aggressively following our recent separation from the product business. Since we are no longer restricted by the channel conflicts we've discussed in the past.
When we look at this market. It is important to note that we anticipate the average per subscriber rate will be less than what we have established in the U S pay TV market.
However, given the average number of OTT services. Each household subscribes to this is a significant opportunity for us.
Next is consumer electronics first for the purpose of this presentation, we have excluded mobile from the CE market.
The total <unk> market in 2021 was $139 billion and continues to be an attractive licensing opportunity for us, especially for the global see providers that ship significant volume into the United States.
<unk> electronics provides us with strong visibility for our annual baseline revenue and represents an area of growth with further market penetration.
Lastly, social media is an attractive growth market for us and in 2021 was $136 billion market.
We have had early success in this market and we believe the opportunity will continue to expand with the explosion of video on social media platforms.
In addition to these already large and attractive markets. We are actively working to expand into AD tech.
Automotives gaming music streaming and sports gambling.
As these markets further develop we will provide additional details on these opportunities.
Supporting these growth opportunities as our world class team of engineers, inventors and ICU licensing team executives and professionals.
Our head count currently stands at approximately 110 employees and we expect to grow that in the near term to around 125.
I would like to highlight our media R&D team.
This impressive team averages over 20 years of experience at top tier companies, including Dolby, Amazon Qualcomm charter, Samsung and snap to name a few.
Approximately 60% of the team have phds in the Russell Masters degrees and they are all prolific inventors are.
Our strong internal team also collaborates with top R&D labs, and academia around the world to enhance our patent innovation engine.
Collectively this team is now producing more innovation disclosures than we had prior to separation with the combined product business.
It is these invention disclosures that will lead to organic growth and our patent portfolios.
Another benefit of the separation that we expected and are now beginning to realize.
Without the need to navigate the separate roadmaps and strategic priorities of the expiry product business. There is a greater focus and alignment and our R&D teams on the truly innovative and disruptive technology that will drive the value of our portfolio over the long term.
Turning to our semi business, we continue to focus on executing in our five core semiconductor market segments.
Image sensors, RF front end, DRAM NAND and logic.
We are actively engaging in partnership and licensing discussions with the remaining major unlicensed companies and each of these sectors with an emphasis on promoting the adoption of our hybrid bonding and advanced processing node technologies.
We also continued our efforts to promote our proprietary hybrid bonding technology and advancing the industry beyond Moore's law.
Our marketing thought leadership and promotion of hybrid bonding at industry events has increased significantly over the past year as the world began to emerge from the COVID-19 pandemic.
At these events and based on customer feedback we are widely recognized in the industry as a leader in hybrid bonding and we've recently seen an increased pull from our customers and partners.
We also significantly enhanced our internal semiconductor team with key additions, including our new senior sales executive and a new head of strategy.
These hires at decades of experience and domain expertise and will help drive success for the next chapter of our semiconductor business.
Before I turn it over to Keith I want to provide a high level look at 2023.
As a reminder, we will provide 2023 guidance on our fourth quarter earnings call in February of next year.
First we anticipate modest decline in revenue year over year. However.
However, after accounting for the impact of our revenue recognized from Micron in the first quarter of 2022, we anticipate revenue growth in 2023.
Second in our first full year as a standalone IP company, we will demonstrate the benefits of the leverage from our highly profitable business model with investments in our patent portfolio growth.
Returning capital to our shareholders, primarily through our quarterly dividend.
And paying down our debt through making accelerated payments.
Third we will continue to progress our efforts to expand into adjacent markets that will help accelerate our revenue growth.
We anticipate initial progress in music streaming.
Our IP portfolio already has significant applicability and we have begun the customer engagement process.
The entire management team is excited about sharing our progress in 2023 and beyond.
With that I'll turn the call over to Keith to discuss our financials Keith.
Thank you Paul as Paul mentioned earlier, we successfully completed the separation of the IP and product businesses on October one.
Thus, achieving a tremendous milestone in our history. However.
However, as of September 30, we were still operating as a combined company and our financial statements presented in our earnings release today reflect the results for both the IP and product businesses.
Additionally on November eight our counterparts are experiencing provided a comprehensive review of the operating results for the products business for the quarter ending September 30.
We refer you to their earnings release and earnings call replay for more color on the financial results and the future outlook of the product business.
While we have provided GAAP and non-GAAP results for the combined business. Our discussion today will focus on the results of audio on a standalone basis.
To aid our conversation today and to provide a more of a historical perspective audio as a standalone organization.
We have a supplementary provided historical income statements, but the business within our earnings deck.
The earnings deck also provides reconciliations of the GAAP to non-GAAP numbers.
Now, let me walk you through our operating results for the third quarter.
Revenue was $89 $3 million.
Presenting a 17% decrease from the prior quarter.
The decline was principally driven by the recognition of a significant catch up license fee in the prior quarter.
As Paul mentioned earlier.
A couple of deals in our pipeline, we anticipated to close in the third quarter.
Subsequently moved into our fourth quarter forecast.
We remain confident we will get these deals closed this year, which is reflected in the claims which I will cover later in the call.
During the third quarter, we signed several agreements covering both our media and semiconductor portfolios.
Kudos agreements with Phyllo and Fox Hill.
These multiyear agreements contributes to the stability of our $375 million.
Baseline revenue amount.
Now lets discuss our operating expenses, which I will be referring to non-GAAP numbers only.
Operating expenses were $34 million.
7% increase from the prior quarter.
Research and development expenses increased $466000 or 4%, primarily due to spending associated with our efforts to further build out our innovation and development engine.
Selling general and administrative expenses increased $1 3 million or.
Or 8% from the prior year period.
Primarily due to higher personal cost and administrative support functions as we continue to put in place the infrastructure to operate as a Standalone company.
In the third quarter interest expense to our term loan was $12 $3 million.
Up from $9 5 million in the prior quarter.
Primarily due to the impact of higher interest rates on the loan.
Other income was $900000 primarily to interest earned on our cash and investment portfolio.
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.
As we discussed during our Investor day, our financial model provides significant operating leverage.
Specifically, our EBITDA for the third quarter.
$59 $2 million, reflecting an EBITDA margin of 66%.
Depreciation expense for the quarter was approximately $400000.
Now let me provide you a few balance sheet details for audio post separation.
Following the separation, we had $89 6 million in cash cash equivalents and marketable securities.
Additionally, we maintained the outstanding term loan, which had a balance of $759 $4 million.
This balance reflects paying down $10 1 million during the third quarter.
Also during the quarter, we paid a cash dividend of <unk> <unk> per share of common stock.
Further our board approved the payment of a <unk> <unk> per share dividend on December 20, <unk> to stockholders of record as of November 30th.
Now turning to our guidance.
Alright license agreements tend to be quite large and complex by their nature.
As we look to ensure that we achieve the commensurate economic return now to the value of our patented inventions provide.
The timing and execution of our license agreements can vary greatly.
Fluctuations in our revenue from quarter to quarter.
As such we generally believe evaluate our performance on an annual basis is the most appropriate measure.
That's what we'd be focused on providing guidance on a full year perspective.
Accordingly, we will be providing standalone guidance for the full year 2022.
However that Q4 will be the first time, we're reporting Standalone results on this particular occasion, we would like to give them more insight will also be described in the guidance for the fourth quarter of 2022.
For the fourth quarter of 2022, we expect revenue to be in the range of $95 million to $110 million.
We expect operating expenses to be in the range of $35 million to $39 million.
We expect interest expense to be in the range of $15 million to $17 million and.
And we expect other income to be approximately a half a million dollars.
For the full year 2022, we are narrowing our prior revenue guidance range to $430 million to $445 million.
We expect operating expenses to be in the range of $120 million to $124 million.
We expect interest expense to be in the range of $45 million to $47 million.
And we expect other income to be approximately $2 million.
We expect a non-GAAP tax rate to remain consistent at roughly 23% for both the fourth quarter and the full year.
Our tax rate a stand alone basis is higher than previously reported on a combined basis largely in part due to a greater mix of domestic based income and utilization of certain tax credits.
From a capex perspective, our overall needs are relatively light given our operating structure and convinced the operational footprint.
As such Capex for the fourth quarter.
<unk> to be approximately $200000.
In closing I am very pleased with our results.
Our immediate and semiconductor portfolios, providing exceptional opportunities in both markets that will drive our long term growth.
With the operating leverage our financial model provides we are well positioned to have a balanced capital allocation strategy that will help grow our business.
This consists of making both organic and inorganic investments in our company to help further expand our patent portfolio and drive adoption.
Additionally, we look to make accelerated payments against our term loan in order to strengthen our balance sheet.
As part of our long history of returning capital to shareholders. We remain committed to continue our dividend program.
Also I'd like to acknowledge and thank all the employees of <unk>.
Both the audio and experiencing.
All of their hard work and dedication throughout this process, we have successfully fulfill but long term vision that was set forth.
Several years ago.
And with that I'd like to turn the call over to the operator for questions.
Operator.
Thank you Sir.
We will now be conducting question and answer session.
Christian piece with Tom and then one on your telephone keypad.
A confirmation tone will indicate.
On easing the question queue.
You May press Star two.
Yes.
The question queue.
For participants using speaker.
Equipment.
Can you please pick up your handset before pressing this talkies.
Our first question comes from Nick Zheng Yan.
Yeah.
Yeah, Hey, guys.
So I think you're talking about a modest revenue decline in 2023, obviously when you're comparing to the micron deal if I recall at the analyst day, you talked about a 6% CAGR I think that was starting perhaps 'twenty, one and going through what I believe was up 25.
So would that imply that there is an acceleration in revenue as you look past 2023 to the.
24 of 2025 period, if I'm getting my math right there and if so just curious what the driver of that acceleration might be.
Yeah, Hey, Nick Thanks for the call.
I think that's a great question. Thanks for asking it in the CAGR was built from 2021 revenue as the baseline and went out about five years, so enter into 2026 and certainly we see revenue growth.
Expanding past 2023 and accelerating a bit.
But from you know 2020.
One into that into that 2026 period, and certainly it won't be linear as our business is often.
Hi, dollar small small number of deals, but high dollar deals and so you can see step ups.
During during that period of time.
Gotcha and as Theyre just actually on that then is there a way to think about I guess, the number and size of IP arrangements and agreements that come up for renewal each year, just I guess to gauge you know either the risk of a non renewal in the year, but also as well the likelihood.
That particular arrangement is renewed and at more favorable rates.
I think that's a great question.
I wish there was an easy answer.
The truth of matter is that.
Our deals do vary in size.
One thing to kind of point out is that we're a big dollar small volume shops, so with that being said all of the deals that we chase have some impact, but really what I would point to is if you take a look at our history, we've been incredibly successful ever doing it has created.
Greater than 90% so.
I think one parallel you can follow it as when we talk about our our baseline revenue at $3 75, its a combination of governments.
Combination of both we have signed today and those things that we have very good line of sight and a high degree of confidence of signing so.
From that risk profile.
We adjust.
But both.
Both.
We see that growing and we have great confidence in renewing in the future.
Got it and then.
Helpful and then last one for me.
Obviously, because your Standalone company now and we're getting used to the way that your guide, but obviously, 85% of your revenue base.
Is considered recurring.
Yes.
You look at like the guide for <unk>.
The range is $15 million between.
Peak and trough so basically like.
That's the 15% right there.
We're pretty close so just considering that so much of your revenue base is recurring.
Maybe you can help explain.
Like why the gap between the peak and trough revenue estimate is theoretically so wide like what what are you what considerations are being made when you put out that revenue range for the quarter.
Hey, that's a great question and I like the way you tied that question back into your previous question because they are related.
What that really means effect.
Once again, we have large sizeable deals and.
What I talked about the impact in any given deal in a quarter it could have some.
Influence on what we report from quarter to quarter and quite frankly.
Even though we manage the business.
Have targets, but really when you when we think about how we want our report card and how we score ourselves a semiannual basis.
The timing of those deals could shut there clearly could be a situation, where we're negotiating a contract in general commercial terms.
We need to as Paul said, we need to kind of hold the line and get the best tariff that began that might slip a month or something like that.
And that could have.
$10 million impact on revenue if they are they're out of license. If you will so with that Thats why youre seeing that that gap in the range and thats why its very difficult.
Just really to measure us on a quarterly basis and that annual guidance is much more reflective because.
Going back to your first question when I take a look at what we had talked about it Eric.
Eric The analyst day, and then looking at what our profile looks like.
Pipeline remains strong.
It's pretty much the consistent strong numbers, there's really no change in our outlook.
Got it.
I don't know if I said last one last time that this is the last one.
I don't know I don't know if you guys are willing to do it again obviously.
Now that you've broken out and new company and everything but is there obviously litigation expenses are recurring.
<unk>.
Cost for you guys are you willing to kind of like walk through everything Thats pending right now like all of your efforts that you're out the various potential companies that youre going after and trying to come to some sort of agreement is there any way to kind of just walk through the list of.
Of where your project Youre chasing.
Potential agreements.
So Nick maybe.
Maybe just a clarifying question first are you, referring to outstanding litigation or in a broader broader zones.
I'm more referring to I guess outstanding litigation I'm, just trying to determine like where there are opportunities.
Sure, where you have feet on the ground trying to come to resolution and therefore like a.
An agreement can be reached at any near term time.
Sure. If you if you look in our 10-Q, Nick It lists all of our outstanding litigation currently so it's really Canada and then there is a and older litigation matter, but with Nvidia, that's still outstanding as well and that's really that's really it.
That we currently have outstanding I think there is we will provide those updates.
Obviously on a quarterly basis in our in our 10-Q, and that's where you should look for them I would remind you though that the vast majority of our deals get done without litigation right and so it's it's not.
It's not a significant part we use litigation of the last resort, but our goal is to get deals done without litigation and we're very successful at that.
So.
I wouldn't look at for that is kind of the the driver necessarily for our success is really when we we ended up in litigation, it's because we need a third party to help validate the value of our portfolio.
Understood great. Thanks, so much for that really appreciate it good luck going forward. Thanks.
Thanks, Nick.
The next question comes from how much crude tank upbeat company exponential.
Hi could you just talk about the essence of <unk>.
Why is a pushout occurred and why you thought it would happen in Q3.
Did not.
Sure.
We did get deals done in Q3.
But the business as Keith mentioned earlier is a hard one to predict on a quarterly basis, because they are sizable deals that we're trying to get done and we wanted to make sure. We're getting the best deal done over a longer period of time and so the negotiations and discussions with the other parties are going well.
But we just weren't ready to close them out is that at that time and so we.
We decided as a company was better to go for the longer term values. So we see that from time to time, but on an annual basis and this is why Keith mentioned it earlier is that we will guide on an annual basis going forward because thats, how we see in value of the business.
Rather than on a quarterly because you can get those shifts from time to time.
Is this with our existing licensee.
There's multiple discussions it wasn't it wasn't just one.
One deal.
Okay, and then just given the fluid.
The fluid nature of the business with these negotiations.
How do you.
Put them in to each bucket of whats a certain event and what's not so this doesn't happen again, especially when you look out into 'twenty three.
Sure.
Well I would say again.
We look at it.
Certainly on a on an annual basis in the quarterly.
Fluctuations can happen from time to time, but.
Say that.
We did look at as where they are in the cycle. You know the deal negotiation are we talking financial terms are exchanging draft agreement or are we at an earlier stage, where we're having technical discussions on the value of the portfolio and so we monitor that closely and we're very good at kind of gauging.
On where we're coming out on a on over a year and again those quarterly fluctuations can happen, but right now as we look at closing out the year, we feel very confident in our annual guide and that Hasnt changed.
Okay. My last question is.
Given the different end markets that you were talking about in your presentation slides.
What does the funnel look like for 'twenty. Three is there a particular end market that you think you'll be capturing more of when you look out the next 12 months.
Certainly we continue to have success in U.
U S pay TV and also in consumer electronics, we've had.
You know quite a bit of success in both of those areas.
But the other markets are large and attractive as well.
T.
And social media, we've had we've had deals there so theres deals across the and even international pay TV with our announcement of boxed out right. So we continue to have deals in all of those we signed 30 deals in the last two.
One five months as we mentioned earlier as well so you know.
Theres not one one deal.
So you know that we you know as we look out in each market there's opportunities everywhere not to mentioned we also have deals in semi as well. So that we're you know we're actively.
We are progressing as well those market segments that I highlighted today, where in media, but we also feel good about the progress we're making on the semi part of the business as well.
Okay. Thank you.
Thank you.
Okay.
Ladies and gentlemen, just a reminder, that you've got half a question you're welcome to Bristow.
One to pace yourself for the question Ken.
The next question comes from Matthew <unk> of Max.
With Maxim group.
Hey, good afternoon, and thank you for taking my questions.
I guess, maybe going to the.
On license opportunity in semi particularly around the addressable market for hybrid bonding how do you think about the pace of capture.
Capturing that opportunity.
Yes.
Excited about the opportunities that we see there is obviously.
Getting a lot of coal as I mentioned on the call. These deals take time, our average sales cycle is 18 to 24 months and then from start to finish and so were at various different time periods with a number of those discussions.
As I look at the semi market.
My memory.
Memory, we've had a lot of success and we continue to have some license opportunities there, especially in the NAND market.
That were actively pursuing but we also see logic, you know starting to come into play more and more in seeing more pull there obviously can't get into the details of the specific customers, but we're excited about the pipeline of opportunities in semi as that business continues to really kind of expand into its next to its next phase.
Got it thanks and.
Yeah.
I guess.
I think you mentioned plans to add to.
Head count modestly.
<unk>.
Guess what is the tea.
What does the cadence or how what should we expect in terms of that cadence.
In terms of how they hit between fourth quarter and.
Throughout 2023, and the T cell.
Does the current dynamics in the.
Tech labor market.
It more likely that you are able to make the hires that youre targeting.
Yeah, we certainly hope so I mean I think we're.
We're in a unique situation, where we were trying to expand our team, especially on the R&D effort as we've talked about before where you've got a 10% growth.
Target, we've already expanded that team significantly as I mentioned on the call.
But we do have some some higher specifically in that area that we're focused on and we think there'll be tremendous opportunity given given the market dynamics that we're seeing globally.
To answer your question on in terms of the timing it will really be spread out over the year I don't think there'll be a.
A big hire in Q1 or not but we are actively looking to expand the team. So you know it might be slightly front loaded, but yeah, I do see that spread out over over the course of the year.
Alright, thank you.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session I will now turn a corner.
<unk>.
Okay.
Thank you operator, and thank you everyone for joining today's call.
Keith and I look forward to seeing many of you at the Stephens Annual investment Conference next week in Nashville as.
As we close out 2022, we are excited about our path forward on a standalone basis, and demonstrating continued growth in our highly profitable business model.
Thank you again for joining us on the call Goodbye.
Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for your participation and you may now disconnect your line.
Yeah.
Okay.
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Yeah.
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