Q1 2023 Adeia Inc Earnings Call
Good day, everyone. Thank you for standing by welcome to <unk> first quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode.
In the presentation the call will be open for questions I would now like turn the call over to Chris Cheney, Vice President of Investor Relations for idea.
Chris. Please go ahead.
Good afternoon, everyone. Thank you for joining us as we share with you details of our first 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 first quarter.
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 was an earnings presentation, which you can access along with the webcast on 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 chi.
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.
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 financial information on this call.
We use non-GAAP financial measures internally to evaluate and manage our operations we.
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 Adia dotcom.
Now I would like to turn the call over to our CEO Paul Davis.
Thank you, Chris and thank you everyone for joining us today.
The first quarter of 2023 represented our second successful full quarter as an independent IP licensing company.
We are making excellent progress towards our 2023 goals and we delivered strong operational and financial results.
We signed eight license agreements highlighted by key new wins with Kyocera and western digital in our semiconductor business.
And renewals completed ahead of plan with Verizon and Altice in our media business.
Our commitment to R&D is paying dividends with customers and is driving growth in our patent portfolios.
Our investment in R&D helps in the near term with renewals like Verizon and all peace and new license agreements, such as Kyocera and Western digital.
It will also be the basis of our long term revenue growth as we continue to focus on our next generation innovations for the media and semiconductor industries.
Our patent portfolio is now number nearly 10000 patent assets and aggregate.
From an approximately 9750 in December .
With the patent additions in the first quarter, we are on track to meeting our goal of 10% annual patent growth this year.
As we anticipated we had a strong first quarter.
Revenue was $117 million up 14% from the prior quarter and.
And adjusted EBITDA was approximately $86 million up 10 million from the prior quarter.
These excellent first quarter results position us well to achieve our annual outlook and again demonstrate our ability to monetize our robust IP portfolios with an increasing pipeline of opportunities.
Our deal momentum remained strong.
In the first quarter, we signed significant license agreements across both our semiconductor and media businesses.
First I would like to highlight the agreements we signed with two leading flash memory companies Tioga and western digital.
These agreements will deliver significant value to us over time.
These deals were structured in line with our new business model for our semiconductor business and revenue will be recognized over the term of the agreements as opposed to prior deals in which much of the revenue was recognized upfront.
These agreements are also an important validation of our semiconductor portfolio and in particular, our transformative hybrid bonding technology.
Hybrid bonding as a key enabler for memory producers.
Helping them solve issues related to the stacking of hundreds of memory cell layers together with logic on a single die.
This capability is important to achieving higher memory density.
Higher density means lower cost and in the memory business driving down cost is fundamental to success.
With the addition of these two new customers.
Every major flash memory producer is a licensee of our hybrid bonding portfolio.
Recently, Kiyoshi and Western digital announced new three D. NAND products utilizing wafer bonding technologies, which we believe will begin ramping within the next 12 months.
These announcements are significant proof points for the benefits of hybrid bonding to the memory market.
And we believe they will lead to more memory products and entering the market that use hybrid bonding, which will expand our future revenue opportunity.
Moving forward the next significant growth opportunity for us in our semiconductor business is in the logic market.
We believe our hybrid bonding technology and advanced processing node portfolio will help solve challenges with the slowing of Moore's law and will drive new license agreements for us in that market.
AMD, Intel and others have recently begun shipping or have announced products that use hybrid bonding and we believe this trend will continue to accelerate.
Turning to our media business, we signed six renewals in the quarter.
The Verizon and Lt's agreements are evidence of our continued success in pay TV.
As both renew their license agreements ahead of plan and for multi year terms, confirming the value and longevity of our media IP portfolio.
Other media license renewals in the quarter included a leading provider of set top box middleware and the Korean pay TV market.
And a leading Japanese video on demand anime content creator.
We also closed a renewal with a large Korean pay TV and telecom provider.
Well audio maybe new as an independent IP licensing company our business model has proven to consistently generate impressive cash flows over the year and over $9.5 billion of IP licensing revenue recognized in the past two decades.
Since the beginning of 2021 alone we have closed over 70 license agreements with an aggregate total contract value of $1 billion.
These 70 plus deals our strong track record of renewals and our pipeline of new opportunities provides us with confidence that we are well positioned to grow.
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Our resilient business model focus on a diversified base of long term license agreements that often span multiple economic cycles.
Insulate us from temporary swings in the economy or in a particular industry.
Supporting our business as a broad diversification of customers across multiple verticals in the media and semiconductor industries.
Our contracts average over five years in length.
Which drive long term revenue streams and strong cash flow generation.
Over the years, our focus on cultivating strong customer relationships has resulted in a number of significant customers renewing and expanding their licenses.
These customers include the major North American pay TV operators.
And leading semiconductor and consumer electronics companies.
Large well known multinationals, such as Samsung Sony and SK Hynix are among those have renewed their licenses with us many times over the past 25 years.
Other major domestic customers such as AT&T com.
Comcast dish and micron have renewed their licenses with us again and again over nearly 20 years.
It is these long term customer relationships that are the foundation of our business model.
As we grow our business our goal is to cultivate similar long term relationships and other target markets.
One of those target markets is O T T.
Which represents a significant growth opportunity for us.
We believe this vertical alone can more than offset the anticipated subscriber declines and pay TV.
Slide seven of our earnings deck depicts the estimated subscriber growth in OTT as compared to the decrease in pay television.
Given our long term contracts and pay TV and track record of renewals, we expect pay TV to continue to be a significant revenue contributor while we simultaneously grow our OTT business.
It is also important to note that OTT is largely a greenfield opportunity for us today.
Prior to separation, we are not able to fully pursue this opportunity due to channel conflicts.
Since the separation, we have accelerated our efforts in O T T.
And engagements are at various stages.
With roughly 10 times, the number of OTT subscribers to pay TV.
OTT represents a very large opportunity for us and we are focused on securing long term deals with the major OTT providers that reflect the value of our robust patent portfolios.
Given the size and growing and largely unlicensed OTT market.
Even with modest additional penetration into this vertical we believe we will be able to more than offset the anticipated declines in pay TV.
Before I turn the call over to Keith to further discuss our financials I would like to briefly provide an update on our measures of success.
Consistent with what we described before we are focused on increasing our recurring revenue baseline growing our patent portfolio.
Expanding the number and scope of our media and semiconductor license agreements.
And making progress in adjacent verticals.
I am very pleased with the progress we have made to date in each of these key areas.
First we are maintaining our annual baseline revenue at $375 million.
Our deals with key Osha and western digital will help contribute to future baseline revenue growth as revenue from these deals is anticipated to ramp over time.
In addition to these new deal wins, our future revenue growth will be primarily driven by opportunities in OTT.
Jason media markets in the logic market for our semiconductor business.
Turning to our portfolio growth.
Our patent portfolio development is primarily from our internal innovation engine.
And supplemented with targeted tuck in acquisitions.
With nearly 10000 patent assets at the end of March we are well on the way to hit our growth target for the year.
Next we continue to expand the number and scope of our license agreements.
As evidenced this quarter by the new deals with key OCA in Western digital and the six renewals completed in our media business.
We believe our deal momentum will continue during the rest of the year, given our tremendous pipeline of opportunities.
Lastly, we are continuing to progress our efforts and breaking into adjacent verticals.
These efforts remain at various stages and we continue to anticipate music streaming will be our first area of success.
As a reminder, these adjacent verticals are entirely greenfield opportunities.
And will help drive future revenue growth.
With that let me turn the call over to Keith to cover our first quarter financial results and our guidance for 2023.
Thank you Paul I'm very pleased to be speaking with you today to share details of our first quarter 2023 financial results.
Revenue for the first quarter was $117.3 million up 14% from the prior quarter.
Our strong revenue during the first quarter is reflective of the continuation of momentum that we saw at the end of 2022.
In particular, the increase was driven by the execution of eight license agreements in the quarter, including two very large and significant deals in the semiconductor market.
These license agreements are a clear a further validation of the value of our semiconductor IP portfolio, especially our hybrid bonding technology.
We firmly believe that we'll continue to see increased adoption of our hybrid bonding in advanced node technologies as they provide real world solutions to the underlying challenges and the progression of Moore's law.
We're a bit more color both of these agreements are long term arrangements that are similar in structure.
As we discussed previously we have been pursuing licensing structures that are more in sync with the economics of all parties by better aligning the revenue recognition measurement with the cash flow expectations.
These agreements are very much reflective of this change.
While a portion of the revenue has been recognized in Q1. The vast majority of expected revenue will scale and be recognized in future periods as production volumes increase accordingly.
Now I'd like to discuss our operating expenses for which I will be referring to non-GAAP measures only.
For the first quarter operating expenses were $31.8 million, an increase of 11% from the prior quarter.
Research and development expenses increased $970000 or 8%.
Primary due to increased spending and investments towards achieving growth in our media and semiconductor portfolios.
Selling general and administrative expenses increased $958000 or 6% due to increased consulting and bad debt expenses related to a certain social media company.
Litigation expense was $2.6 million, an increase of $1.1 million from the prior quarter.
Interest expense for the first quarter was $15 $9 million up $915000 from the prior period due to higher interest rates on our term loan.
Our current effective interest rate, which includes amortization of debt issuance cost is approximately 9.5%.
Other income was $1.3 million and was primarily related to interest income recognized on revenue agreement with long term billing structures under ASC 606.
And due to interest earned on our cash and investment portfolio.
Our adjusted EBITDA for their first quarter was $85.8 million, reflecting an adjusted EBITDA margin of 73, 2%.
Depreciation expense for the quarter was approximately $384000.
Our non-GAAP income tax rate remained constant at 23% for the period.
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 first quarter with $82 $4 million in cash cash equivalents and marketable securities.
During the quarter, we generated approximately $63 $4 million in cash from operations.
We made $83.6 million in principal payments on our debt in the first quarter.
Our ability to pay this amount is reflective of our tremendous cash generation and belief and our strong financial outlook.
As a result, we ended the quarter with a term loan balance of $665.6 million.
Also during the first quarter, we paid a cash dividend of five <unk> per share of common stock.
Additionally, our board approved the payment of another five cent per share dividend to be paid on June 20th to shareholders of record as of May 30th.
Now I will give you an update on our guidance for the full year 2023.
We are very pleased with the progress that we've made and we're very much on track for achieving the annual guidance, we set forth during our last earnings call.
With that we reiterate our full year 2023 guidance with.
With our revenue expectation about $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 million.
We expect the resulting adjusted 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 continue to expect capital expenditures to be approximately $5 million for the full year.
While we give guidance on an annual basis, we wanted to provide additional color on the revenue trends that we expect to see during the course of the year.
But the momentum of the kiosks here in western digital agreements, we fully anticipated the first quarter being our strongest quarter of the year.
Looking forward our pipeline is very strong and is growing.
However, we anticipate Q2 being a low point during the course of the year, primarily due to the timing of certain renewals that we currently anticipate occurring in the second half of the year.
Overall relative to the midpoint of guidance, we have provided we see both the first half and the second half of the year being evenly split.
This quarterly Lumpiness is reflective of our business as we tend to do a somewhat small number of large agreements that can impact the timing of revenue from quarter to quarter.
But that being said we remain confident in our outlook for the full year and we are excited about the opportunities that lay ahead.
2023 is off to a strong start at audio and our results set us on the path for a successful year.
Our deal momentum has remained strong and I'm optimistic our funnel of prospective deals will continue to provide many opportunities for growth.
Our strong performance further reinforces our current baseline revenue of $375 million.
And with the strength of our pipeline. We are excited with the future growth opportunities that will allow our baseline revenue to grow.
I am very pleased with the strides the audio team has made in our current achievements provide a springboard for our long term growth and success.
That brings an in to our prepared remarks, and with that I'd like to turn the call over to the operator to begin the question and answer session operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for parts.
Using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you.
Our first question comes from Hamid.
Hamid correspond with B Ws financial please proceed with your question.
Hi, So the first question I had was.
You had 10 deals announced for Q4 than in Q1.
And what good rate of assuming that you could be a key.
Keep this momentum going.
Yeah. Thanks, Amit.
Appreciate the question so a couple of ways I look at it.
You look at.
Over the last two quarters, you're right about 18 deals where we're very pleased with that it certainly can fluctuate quarter to quarter, because it's just the timing of when deals come out so not all quarters will start equally because you'll have a different number of deals that will come up that you are trying to get done but over over a longer period of time, we talk about.
70 license 70, plus license agreements that we've signed over the last nine quarters since the beginning of 'twenty 'twenty. One. So on average you know that gets you kind of just about eight deals a quarter. Some will be less you'll see ones that are you know some quarters there'll be three or four and other quarters. We'll have you know kind of in the low teens, even at a high point.
Okay, and then historically Q3 used to be your.
Slow period as far as revenue is concerned.
It sounds like that's going to be different is that purely from the timing of the <unk>.
Contracts are you looking to renew.
I am a good great question. So if we take a look at our business, we've had inflection points in different quarters and different periods in time. So Q3 to your point of 'twenty 'twenty. Two we had of a lower point, we had a bit of a dip but if you also go back a little bit further Q4 'twenty.
21 was that.
And it's just really has to do with the the phenomenon that our business is really doing a relatively small number of large deals. So it's a it's a timing thing there's nothing that's really sequence in terms of renewals that we have at any particular given quarter. What we have in Q2. There's a few more renewals that were just kind of working on that will be.
Executing the second half of the year, that's been leading to that fluctuation in the things normalize in the back half of the year.
Okay and my last question is yes you.
You have pretty good confidence of what you were going to sign in Q1 as far as the guidance was concerned how confident are you about the contracts that you were talking about some falling into Q3 and Q4.
Yeah, Amit, where we are we have strong confidence in our ability to get those done I'd say, it's very similar to what we saw at the end of last year, where we had we had some renewals that we.
Didn't get dining in Q3, because we wanted to really wait for those economics to be right and we ultimately got them done in Q4 as we anticipated.
So we have we have high confidence in our in overall number you know we've got a 90 plus percent renewal rate that we are a we know the timings can sometimes slip quarter to quarter, but overall as you look at is annually, we feel very strong on that.
Okay. Thank you.
Thank you. Our next question comes from Matthew <unk> with Maxim. Please proceed with your question.
Hey, congrats on the strong Q1.
So.
Can you remind me I guess of.
The cadence, we we might be able to expect from the NAND deal that you announced this quarter.
I understand it's all you.
And it's tied to the.
The timing or more tightly coupled with the timing of cash flows but.
Do you have a sense generally or specific to these deals if you can say when.
When that might.
Become a material contributor to revenue and cash flow.
So thanks, Matt you know, we're just absolutely aside about western digital kiosks here not only in terms of the size of the deals but the structure. You know everything is a big leap forward for us in audio and then it also speaks volumes to our hybrid bonding technology now what will your youre looking at.
And we send our presence as a long term agreement. So this is something that all parties are making a long commitment to and at this point in time, it's in its early stages of ramping but you know we're also excited that shortly after we sign a license agreement they enhance that they're they have products coming out and what we.
We expect to see is sometime in 2024 that those volumes start to pick up and Youll see some contribution at least the variable component.
From a revenue perspective, and then as that scales. That's just really the great structure of the deals and what we've been talking about that as their volumes grow our revenue will grow as well.
Thanks, and maybe as my follow up to that one.
When.
Given the variable nature and.
Coupling the.
The revenue to success.
Customer and their product launches.
How do you think about building red.
Revenue into the baseline structure that you talk about and at what point do you have the confidence to.
To build some level of that into the baseline number.
Yeah that that's a great question and it kind of plays into Tibet ramp cycles, you alluded to so in the beginning there the volumes will be modest in and with that that is not at a level would be significant enough for us to change the baseline Rubik's cubes.
As of today that production isn't significant suitor for the increase but once again. This is a big bet by us and some big bet by them and then you know we were just frankly excited on the potential on what these deals can look like over time, so as they start to get beyond that 24, and 25 kind of.
Production cycles, you'll see a movement in Ob a strong contribution to our baseline revenue amount yeah, Matt I would just add you know we are as Keith mentioned is thrilled with these deals in a noted in my in my prepared remarks that these these will be additive to that baseline revenue and our revenue growth as they are.
Scale.
And so where we are this is the type of deals that we plan to continue the structure in the semi business as we've been talking about since our Investor Day and you know this is the first one but as we look forward you know we're going to try to continue to use this as a model as we get into the logic space and beyond that we see now our semiconductor portfolio, having more and more applicability to.
Great. Thank you.
Thank you.
So a reminder press star one to ask a question at this time.
Thank you. Our next question comes from Matthew <unk> with Maxim. Please proceed with your question.
Oh, Hello again.
I just wanted to get.
Your thoughts on litigation expense and spending for the year.
I think clearly.
The pit up sequentially, but.
Not any sort of high that we've seen from the business over time so.
<unk>.
Is there anything there.
Yeah, I guess, just generally how would you how would you frame that that line item to kill us.
A year.
Sure, Matt I think as we as we noted last quarter, we anticipate lit.
Litigation expense, you know roughly doubling from from last year over the last couple of years in 2021 and 2022 it was really kind of a low point and so we do think do you see that increasing and it will ramp.
In the back half of the year. So it is up a little bit as.
As you noted and.
And we think that that trend will continue throughout throughout the year.
Okay. Thanks.
There are no further questions at this time I would like to turn the floor back over to Paul Davis for closing comments.
Thank you operator.
Our first quarter results demonstrate significant progress towards our goals for the year and our long term strategic plan.
We are pleased with our deal momentum, especially our two new semiconductor agreements.
Before we close the call I would like to mention that we will be attending the Needham TMT Conference in New York on May 16th and additional conferences later this year we.
We look forward to meeting with many of you at these and other events to further discuss our progress.
Thank you for joining us today.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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