Q2 2023 Adeia Inc Earnings Call

Operator: Good day everyone. Thank you for standing by. Welcome to Adeia's second-quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will open up for questions.

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

Christopher Chaney: Good afternoon everyone. Thank you for joining us as we share with you details of our second quarter 2023 financial results.

Christopher Chaney: With me on the call today are Paul Davis, our president and CEO and Keith Jones, our CFO.

Christopher Chaney: Paul will share with you some general observations regarding our second quarter and then Keith will give further details on our financial results and guidance. We will then conclude with a question and answer period.

We will then conclude with a question and answer period.

Christopher Chaney: 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.

Christopher Chaney: Before turning the call over to Paul, I would like to provide a few reminders. First, today's discussion contains forward-looking statements that are predictions, projections, or other statements about future events, which are based on management's current expectations and beliefs, and therefore subject to risks, uncertainties, and changes in circumstances.

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.

Christopher Chaney: 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.

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.

Christopher Chaney: 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'll 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.

Christopher Chaney: 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.

Christopher Chaney: A recording of this conference call will be available on the Investor Relations website at Adeia.com.

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

Paul Davis: Thank you Chris and thank you everyone for joining us today.

Paul Davis: During the second quarter, our deal momentum continued as we signed nine agreements with a diverse group of pay TV and OTT, consumer electronics and semiconductor customers in both domestic and international markets.

OTT consumer electronics. Semiconductor customers.

Semiconductor customers.

Both domestic and international markets.

Paul Davis: We delivered another quarter of strong financial results with revenue of $83 $2 million and adjusted EBITDA. The $1 7 million. We paid down approximately $20 million of debt in the second quarter. Bringing our debt paydown since separation to over $114 million. In addition, we are on track to expand our patent portfolios by 10% this year.

The $1 7 million.

We paid down approximately $20 million of debt in the second quarter. Bringing our debt paydown since separation to over $114 million. In addition, we are on track to expand our patent portfolios by 10% this year.

Bringing our debt paydown since separation to over $114 million.

In addition, we are on track to expand our patent portfolios by 10% this year.

I am also excited to announce that we have expanded our board with the addition of Adam Rimer.

Adam is a well respected executive with over 20 years of experience in the technology media and entertainment industries and he has hands on experience leading organizations in gaming TV film music and live streaming.

With his impressive track record of driving innovation at a wide variety of organizations I am confident Adam will be a valued addition to our board.

Turning back to the quarter our deal momentum continued.

Of the nine deals we signed in Q2 eight were in media and one was in semiconductor.

Within media, we signed a significant long term license renewal with Cox communications.

With the Cox renewal, we have now signed three multiyear renewals with the top 10 U S pay TV providers in the first half of the year.

These renewals continue to validate the strength of our media portfolio in this market.

Additionally, we signed an important new license agreement with the zone.

Our leading OTT provider of global sports programming.

This is an exciting deal in an emerging market for us.

OTT will be a catalyst for our future growth.

We continue to expand our customers in this market.

Other deals we signed in the quarter included multi year renewals with NCO, a domestic provider of technology services to the hospitality industry.

We view, Australia, a free digital television service provider.

<unk>, a German provider of digital video consumer electronics products, and Massillon cable a domestic pay TV operator.

These deals illustrate the breadth of our portfolio and applicability to customers in multiple jurisdictions in markets.

Our commitment to innovation drive deals with new customers and our high renewal rate, which has averaged over 90% the past several years.

We grow our patent portfolio is primarily through investment in internal R&D.

Where we strategically invest in new technologies, we anticipate emerging in our core markets and beyond.

Growing our IP portfolio is important for several reasons.

First it allows us to retain our current customers.

<unk> maintains the preexisting revenue base.

Our customers benefit because they can utilize not only the patents existing in our portfolio when they initiated their license agreements.

But they also typically get access to new IP, we add during the term of those agreements.

Second expanding our portfolio also attracts new customers as they find value in our innovations, which enable them to differentiate their products and services in their markets.

We take great pride in our long history of being pioneers and innovators and both the media and semiconductor markets.

That history of success is based on being a visionary of emerging trends that drive the evolution of technology.

Our R&D teams are always focused on the future and what technologies will be adopted in our customers' upcoming products.

Our focus on advanced R&D, and IP development have positioned us, particularly well in both our media and semiconductor businesses to capitalize on the recent explosion of generative AI.

In our media business, we have been investing in AI, enabling technologies, such as computer vision machine learning and natural language processing for years.

<unk> our portfolio contains significant coverage in these areas.

And this has helped drive license agreements in multiple verticals of our media business.

And we believe these and other innovations will enable us to expand our customer base and new media verticals, such as AD Tech and E Commerce.

Generative AI also requires high performance computing and advancements in semiconductor technologies the.

The demand for emerging logic nodes next generation high bandwidth memory and.

In advanced system packaging is increasing to meet those needs.

Our advanced processing node portfolio and our investment in hybrid bonding have established us as a recognized pioneer in enabling technologies that will drive Tomorrow's AI.

Before I turn the call over to Keith to further discuss our financials.

I'd like to briefly provide an update on our measures of success.

I am very pleased with the progress we have made to date in each of these key areas.

Future revenue growth will be primarily driven by opportunities in OTT, such as our recent deal with the zone.

In addition to adjacent market opportunities such as AD Tech automotive E Commerce gaming music streaming and sports gambling.

Importantly, these adjacent markets are entirely greenfield opportunities and we believe they can be significant revenue contributors in the future.

We continue to make progress in OTT in our adjacent markets and customer engagements are at various stages.

We also remain very excited about our hybrid bonding and advanced processing node portfolio has applicability in the logic market for our semiconductor business.

As we see these technologies being a catalyst for leading edge logic devices.

Our pipeline of deals remains diverse and robust and we believe our deal momentum will continue for the rest of the year.

Lastly, as noted earlier, we remain on track to grow our patent portfolio is 10% this year.

With that let me turn the call over to Keith to cover our second quarter financial results and our guidance for 2023.

Thank you Paul I am very pleased to be speaking with you today to share details of our second quarter 2023 financial results.

Our second quarter results were very much in line with the guidance provided during our last call.

Revenue for the second quarter was $83 2 million a decrease of 29% from the prior quarter.

Last quarter, when we gave color on the revenue trends, we expect to see during the course of the year. We noted that the second quarter would be the low point due to certain renewals, we anticipated closing in the second half of the year and.

And we also noted that we expected the first half of the year in the second half of the year to be evenly split relative to the midpoint of the annual guidance we provided.

In the first half of the year, we delivered revenue of $205 million.

This is exactly in line with what we laid out in last quarter's call and with our strong pipeline. We remain on track to reach our full year revenue guidance.

We generated revenue from the execution of nine license agreements in the quarter, including a significant renewal with Cox communications and a new license agreement with OTT sports program provider to zone.

Seven of the nine license agreements, we signed in the second quarter were renewals.

Our renewal rate remains very strong at greater than 90%.

As Paul discussed this is driven by our ongoing dedication to growing and evolving our IP portfolios, which are fueled by our continued investments in R&D.

Now I'd like to discuss our operating expenses for which I will be referring to non-GAAP numbers only.

For the second quarter operating expenses were $31 $9 million flat compared to the prior quarter.

Research and development expenses were relatively consistent as we remain committed to growing our IP portfolios.

Selling general and administrative expenses increased $377000 or 2%, primarily due to higher expenses related to personnel costs as we continue to build out our sales and administrative teams.

Litigation expense was $2 $3 million.

Decrease of $288000 from the prior quarter due.

Due to the timing of expenses related to various legal matters.

Interest expense during the second quarter was $15 $5 million down.

Down $398000 from the prior quarter due to the continued debt repayment.

Our current effective interest rate, which includes amortization of debt issuance costs remains at approximately nine 5%.

Effective July one the variable component of our interest rate will be based on the secured overnight financing rate or sulfur due to the discontinuation of LIBOR going forward.

This change will not have an impact on our interest expense as both rates mirror each other.

Other income was $1 6 million and was primarily related to interest income recognized on our 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 second quarter was $51 7 million.

Net adjusted EBITDA margin of 62%.

Depreciation expense for the quarter was approximately $385000.

Our non-GAAP income tax rate remained constant 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.

We ended the second quarter with $84 3 million in cash cash equivalents and marketable securities.

During the quarter, we generated $28 7 million in cash from operations.

Additionally, we made $21 million and principal payments on our debt.

As a result, we ended the quarter with a term loan balance of 645 5 million.

Also during the second quarter, we paid a cash dividend of <unk> <unk> per share of common stock.

Additionally, our board approved the payment of another <unk> <unk> per share dividend to be paid on September 18 to shareholders of record as of August 28.

Now I will go over our guidance for the full year 2023.

Our progress is in line with what we communicated during our last earnings call and we remain on track for achieving the full year annual guidance, we set forth.

With that we reiterate our full year 2023 guidance with our revenue expectation of $385 million to $415 million.

As a reminder, our quarterly revenue can be lumpy from quarter to quarter as we tend to do a somewhat small number of large agreements that can impact the timing of revenue from quarter to quarter.

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 the range of two $5 million to $3 million.

We expect a 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 have also updated our guidance for the GAAP tax rate.

As it has been impacted by foreign currency re measurements associated with the Korean withholding taxes, which we expect to receive a refund for in future years.

As this is merely a re measurement it does not affect our cash taxes paid nor our non-GAAP tax rate.

We also continue to expect capital expenditures to be approximately $5 million for the full year.

The first half of 2023 has progressed as we have planned with nine deals signed in the second quarter. Our deal momentum has remained strong and I'm very optimistic our funnel of deals for the second half of the year positions us well to achieve our full year goals.

Our strong performance further reinforces our current baseline revenue of $375 million and with the.

<unk> of our pipeline, we are excited about the future growth opportunities that will allow our baseline revenue to grow.

That brings us into 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.

Thank you Mr. Jones, ladies and gentlemen at this time, but you do have any question simply press Star One and just a reminder, GE find with your question has already been addressed you can remove yourself from the queue by pressing star one again.

Our first question this afternoon from Ahmed Croissants at Dws financials.

Hi, just one clarification you were talking about your patent portfolio expanding is that all internal innovation or are you looking at acquiring patents in the near term.

Hi Ahmed good.

Yes, we are.

So far the growth has been almost entirely organic R&D efforts, which is what we focus on.

We do look for opportunities, though to acquire portfolios as well to augment our own internal R&D efforts.

Okay.

And then as far as the free cash flow is concerned.

Do you think it's going to be linear for the rest of the year as far as what you generate and do you think you are over the hump as far as interest expense rising in this environment as youre paying it down.

How are you doing.

In terms of the free cash flow, we actually expect that to kind of Goldman same general direction that our our revenues so.

To the extent that we have the deal being signed and the timing of billings. So we see volatility and we saw that from Q1 to Q2, and we would anticipate seeing a bit of that.

In Q3 with Q3.

Kind of been somewhat relatively consistent and then.

And having a little bit more forward momentum.

We closed out the year.

But.

In terms of the interest rate.

We're still a relatively conservative so we are.

We're still baking in some further increases.

So with that.

Oh.

We're kind of keeping that guidance the same on interest expense.

Okay and then.

Paul I know in the last couple of quarters, you've talked about.

Music streaming being one of your focuses as being an area of to expand on is that still the.

Case or do you think that you would get new licensees from other end markets first.

Yeah, it's still it's still the most likely to be first I think we're focused on music streaming.

AD Tech and E Commerce is kind of the soonest.

Adjacent markets.

But music streaming would still be my expectation.

What would come in first.

Yeah.

Okay. Thank you.

Thanks Aman.

Thank you we'll take our next question now from Sandler at Stephens.

Hey, guys How's it going.

So it sounds like performance this quarter was in line with your expectations and obviously, we saw most of the contracts signed in the quarter. They were renewals, but you did get the new OTT EMEA licensee in.

<unk> can you just talk about the full year revenue guide here it remains unchanged.

What has to happen.

You hit the low end of that guide.

What has to happen to hit the high end of the guide knowing that we've got a few months left five months left here. We've got one I guess, new licensees signed in <unk>.

As of recently.

But maybe you can just talk about those two scenarios and then if you can just.

I'll Peel back the onion on maybe how many deals you're currently working on and expectations or likelihood that they do get signed.

By year end.

We'll take one of the things I love about my job is going into sales meeting and looking at our pipeline.

Absolutely exciting to me.

And for Us and when we grow and thinking about how we're going to get to the next level and then kind of maximize our opportunities.

It's just a matter of timing and it's a matter of timing in light of the economics that we're trying to reach in and these deals. So frankly, we get closed out a lot more deals than we can have some slightly different inflection points for our revenue, but to us that would be sacrificing long term benefit to the company.

So really what I'm getting at is that the pipeline is there. There is there is nothing in it thats fleeting.

It's really going to come down that have we reached the economic terms that we like at that point in time.

And to the extent that we don't.

We will let things play out a little bit more.

So that's really entirely the difference between us being at the low end of the range or the high end.

Yes, I would just add Nick that you know what.

Keith mentioned last quarter.

And we said earlier on this call is we had a few renewals that we fully anticipated being in the second half of the year and that's still our current expectation.

And Thats really the fluctuation you see in that quarter to quarter, but we still have high confidence in our.

And our guidance.

Our guidance range.

Got it I guess.

That said.

And I know you guys don't provide quarterly guidance, but.

How would you.

Recommend the street model.

Yes, <unk> relative to <unk> any way to kind of.

Frame that split between what <unk> look like.

Given the full year guidance.

<unk>.

It's a great question, you know really because of that volatility that we talked about we were really just focus on.

The back half in total is that.

Relative to the midpoint.

$400 million, and we said, it's being evenly split.

What we're focused in.

So there could be a little bit of volatility from one quarter to next from Q3 to Q4.

But in any event that $200 relative to the midpoint of guidance we remain confident.

Got it all right last one I'm glad you guys talked about it.

Everyone has to these days artificial intelligence can you just expand on the ways in which.

Does support the proliferation proliferation of AI in and if there's any way you could either tie your current revenue base or maybe your patent portfolio.

<unk> AI use cases at least just to gauge your.

Current exposure or how you think about exposure currently thanks.

Sure happy to expand on that I would really look at it both from the media and the semi conductor part of our business differently, but starting with media <unk>.

<unk> always been.

And innovator using using AI like natural language processing machine learning technology that is.

As part of our current portfolio.

Been part of our innovations that have actually helped drive current current license agreements that we have we're also today focused on AI technology is primarily around kind of a V or a mixed reality use cases as we see those developing in the marketplace going forward, though what excites.

Me and media is really the AI economy broadly as there's a proliferation of more content out there.

That's using AI and how we can capitalize on that development as well so for US. This generative AI explosion is very exciting.

We look forward in the in the media space and how much more is going to be out there in terms of our efforts and how our portfolio will continue to apply so our R&D team.

Led by.

<unk> is focused on this area they talk about AI all the time and we've got key inventors that have always been and continue to be looking at ways that they can use AI in our innovation cycle.

The semi side, it's really.

What has driven the ability has been around for a while the current.

Generative AI explosion that youre seeing today is because semiconductors now are able to process. So much of this rent and the next generation of semiconductor chips that are going to continue to be able to process more and more on the edge in particular is going to need advancements in semiconductor technologies and our hybrid bonding.

And our advanced processing node portfolios fit within that perfectly and so we're very we're very excited about.

That development as well and how we can continue to add to the ecosystem.

What's driving this development.

I appreciate it guys. Thank you.

Thanks, Nick.

Thank you.

Hey, Matthew.

Excuse me Mr. Davis, Mr. Jones for property lost Mr. Dillon Hill, ladies and gentlemen, any further questions at this time, Please press star one.

And Mr. Davis. It appears we have no further questions today I'd like to turn the conference back to you for any closing comments.

Thank you operator.

Our second quarter results were in line with our expectations. We continue to make progress executing our strong deal pipeline and we remain on track to meet our goals set out earlier this year.

Also we will be meeting with investors in the next couple of weeks at several events.

We will be attending the Bwl's conference on August 17th.

The Rosenblatt age of AI conference on August 23rd.

And the Deutsche Bank Technology Conference on August 30th.

We look forward to discussing our progress at these and other events later in the year. Thank.

Thank you for joining us today.

Thank you, ladies and gentlemen that will conclude the <unk> Q2, 2023 earnings call. Thank you all so much for joining US we wish you all a great day Goodbye.

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