Adeia Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 6, 2023

There are 8 speakers on the call.

Operator

Good day, everyone. Thank you for standing by. Welcome to Adia's Third 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 Audia. Chris, please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining us as we share with you details of our Q3 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 Q3, and then Keith will give further details on our financial results and guidance. We will then conclude with a question and answer period.

Speaker 1

In addition to today's earnings release, there is an earnings presentation, which you can access along with the webcast in the IR portion of our website. Before turning the call over to Paul, I would like to provide a few reminders. 1st, today's discussion contains forward looking statements that are predictions, Projections or other statements about future events, which are based on management's current expectations and beliefs and therefore, subject to risks, uncertainties and changes in circumstances. For more information on the risks and uncertainties that could cause our actual results to differ materially From what we discuss today, please refer to the Risk Factors section in our SEC filings, including our annual report on Form 10 ks 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.

Speaker 1

To enhance investors' understanding of our ongoing economic performance, We will discuss non GAAP information during this call. We use non GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results as we do internally. We have provided reconciliations of these non GAAP measures to the most directly comparable GAAP measures in the earnings release, the earnings presentation and on the Investor Relations section of our website. A recording of this conference call will be available on the Investor Relations website at adia.com.

Speaker 1

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

Speaker 2

Thank you, Chris, and thank you, everyone, for joining us today. During the Q3, our strong deal momentum continued as we signed 7 agreements with customers in consumer electronics, pay TV, OTT, and Semiconductor. We delivered strong financial results with $101,400,000 in revenue and a non GAAP operating margin of 69%. In addition, we continued to deleverage our balance sheet as we paid down $15,100,000 on our term loan. We are happy to announce we also strengthened our executive team with Jarl Burnson joining as our Chief Corporate Development Officer.

Speaker 2

And we announced today we appointed Phyllis Turner Brim as an independent director to expand the depth and breadth of the IP experience on our Board. Our deal momentum continued in the 3rd quarter with a significant long term renewal with Samsung, the largest smartphone producer globally, for access to our media portfolio for use in their mobile devices. This agreement is especially meaningful because Samsung is collectively a top 10 customer and has been a licensee of ours for approximately 25 years. Over this period, Samsung has renewed agreements with us multiple times, and our relationship touches every aspect of both our media and semiconductor businesses, from mobile devices to connected TVs to semiconductors. Our long history of renewals with Samsung illustrates our strong relationships with our customers and the value they place on our evolving and expanding IP portfolio.

Speaker 2

We also signed an important renewal with Starz, the 2nd OTT deal in as many quarters. Starz is a leading media and entertainment provider, offering a premium OTT service. Our recent success with DAZN and now Starz are further proof points of our Media portfolio's value to OTT providers. Our expanding media portfolio includes fundamental patents, which we believe are relevant to the leading OTT providers. I am encouraged with the progress we are making in OTT and believe the recent momentum should serve as a springboard for our further success.

Speaker 2

During the Q3, we were pleased to have signed a settlement agreement with NVIDIA, which resolved an outstanding litigation related to certain Importantly, this agreement did not cover either our hybrid bonding or advanced processing node portfolios. We believe with this litigation now behind us, we can begin discussions on these newer and valuable aspects of our semiconductor portfolio. As demonstrated by the many semiconductor memory customers we have today, Market leaders have recognized the value of our IP. Similarly, we believe there is a significant opportunity in the logic market, where our semiconductor portfolio is increasingly relevant as logic companies try to address the slowing of Moore's Law. I'm excited with the progress we have made in almost all aspects of our business, including the continued execution of renewals and new deals.

Speaker 2

As evidenced by the 24 deals we have signed in the 1st 9 months of the year, The relationships with our customers remains very strong. However, occasionally a dispute can arise between us and a customer. Our preference is always to work with our customers to resolve any such disputes amicably, and in most cases, we can do just that. In the rare instance we are unable to do so, we believe it's important to defend our contractual rights. Accordingly, we filed a breach of contract lawsuit against Shaw in the Southern District of New York per the terms of the agreement.

Speaker 2

We believe Shaw's stated positions for ceasing payments under the agreement are entirely baseless. After our repeat attempts to resolve the matter, we were met with resistance and roadblocks, and we're left with no choice but to file this case. It is important to recognize that this is a unique situation with Shaw and only began after Rogers Management took over the combined company following their merger. Our long term strategic objective for the Canadian pay TV market remains unchanged, and we will continue to pursue all opportunities to license the Canadian pay TV operators and get Shaw back as a paying customer. Shaw's breach of contract was not contemplated when we gave our guidance earlier this year.

Speaker 2

And accordingly, We have narrowed our revenue guidance to the lower end of our original outlook. Importantly, and as a result of our expense management, Our non GAAP net income and operating margins are now forecasted to be at or above the original midpoint of the outlook we provided in February. Keith will provide more details on our updated guidance shortly. Before I turn the call over to Keith, I'd like to provide an update on our measures of success. We measure our success by several factors, including revenue growth, expanding our IP portfolio, executing renewals and new licenses and entering adjacent markets.

Speaker 2

The significant renewals we signed year to date with Cox, Verizon, Altice, Samsung and Starz further solidify our long term revenue outlook. We are very pleased with the new license agreements We have signed this year with Western Digital, Keyoksha and DAZN as new deals are the basis for our revenue growth. Growing our patent portfolios is key to successfully renewing licensees and signing new deals. We continue to track to our goal of growing our portfolio 10% annually. 1 year has now passed since becoming an independent IP licensing company, and I am extremely proud of what we have accomplished.

Speaker 2

We have signed over 30 deals in the last 12 months, while strengthening and expanding our deal pipeline with numerous new engagements. We have also delivered strong financial results, enabling us to pay down $129,000,000 of our debt. Operationally, we And I'm happy to announce we have added another new independent director to our Board. Phyllis Turner Brim brings to us 3 decades of IP experience and executive experience with Fortune 500 and IP Development and Licensing Companies. Her experience and guidance will be of great value to us as we grow our business.

Speaker 2

With that, let me turn the call over to Keith to review our Q3 financial results and our 2023 guidance.

Speaker 3

Thank you, Paul. I'm pleased to be speaking with you today to share details of our Q3 2023 financial results. We turned in a strong 3rd quarter, delivering revenue of $101,400,000 an increase of 22% from the prior quarter. Our strong revenue was driven by the execution of 7 agreements in the quarter. This includes executing a long term agreement with Samsung for their mobile phones, which complements our existing consumer electronics and semiconductor agreements.

Speaker 3

We are also very pleased to announce the renewal of our OTT licensing agreement with Starz, which further validates our value to the OTT market. Now I'd like to discuss our operating expenses, for which I will be referring to non GAAP numbers only. For the Q3, operating expenses were $31,100,000 a decrease of $800,000 up 3% from the prior quarter. Research and development expenses increased $621,000 or 5% from the prior quarter, as we remain committed to growing both our media and semiconductor IP portfolios and fostering our pioneering innovation. Selling, general and administrative expenses decreased $1,300,000 or 8 percent from the prior quarter, primarily due to lower corporate administrative costs and outsourced services.

Speaker 3

Litigation expense was $2,200,000 a decrease of $129,000 from the prior quarter due to the timing of expenses related to various legal matters. Interest expense during the 3rd quarter was $15,700,000 an increase of $119,000 from the prior quarter due to rising interest rates, which is in spite of continued debt repayments and a lower principal amount. Our current effective interest rate, which includes amortization of debt issuance costs, is approximately 9.8%. Other income was $1,500,000 and was primarily related to interest income recognized on revenue agreements with long term billing structures under ASC 606 and due to interest earned on our cash and investment portfolio. Our adjusted EBITDA for the 3rd quarter was $70,700,000 reflecting an adjusted EBITDA margin of 70%.

Speaker 3

Depreciation expense for the quarter was $382,000 Our non GAAP income tax rate remained at 23% for the quarter. Our income tax Now for a few details on the balance sheet. We ended the 3rd quarter with $82,100,000 in cash, cash equivalents and marketable securities. During the quarter, we generated $21,200,000 in cash from operations. Additionally, we made $15,100,000 in principal payments on our debt.

Speaker 3

As a result, We ended the quarter with a term loan balance of $630,400,000 During the Q3, we paid a cash dividend of $0.05 per share of common stock. Additionally, our Board approved the payment of another $0.05 per share dividend to be paid on December 18 to shareholders of record as of November 27. Now I will go over our guidance for the full year 2023. Our operational execution year to date has been in line with what we outlined earlier this year. We have made solid progress with very strong renewals and executing new licensing agreements.

Speaker 3

What we had not contemplated was, subsequent to the merger of Rogers and Shaw, that Shaw would fail to continue to honor its contractual commitments with us. Consistent with our Shaw press release on October 2, For the full year 2023, we are now narrowing our revenue guidance to be in the range of $385,000,000 to $395,000,000 We are also lowering our expected operating expenses to be in the range of $130,000,000 to $133,000,000 We expect interest expense to be in the range of 63 is $63,500,000 and we expect other income to be in the range of $5,000,000 to $6,000,000 We expect a resulting adjusted EBITDA margin of 67%. Additionally, We expect cash flows from operations to be in the range of $150,000,000 to $155,000,000 The adjusted cash flow guidance reflects the impact of 3 items that generally share equal weight. Specifically, it has always been a priority to maximize the economics of our licensing agreements. As such, we accommodated shifting certain payments from our customers to 2024 in order to achieve better overall deal economics secondly, we have been impacted by the failure of Shaw to honor their contractual obligations And lastly, we were further impacted on anticipated renewal with a certain Canadian pay TV operator, which we now believe will not take place in 2023.

Speaker 3

We expect the non GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be roughly $4,000,000 for the full year. I want to provide a high level look at 2024. As a reminder, we will provide more detailed 2024 guidance on our Q4 earnings call in February of next year. First, we anticipate revenue growth with a low to mid single digit increase.

Speaker 3

We anticipate our non GAAP operating margins to be in the 60s. Also, we anticipate a moderate increase in cash flows from operations, which takes into account the shift in customer payments I referred to earlier. Paying off our debt will continue to be our priority, and we'll continue to return capital to shareholders through our dividend program. I am so proud of our team as we reach our 1 year anniversary as a stand alone company. The strides we have made, including the continued deal execution and patent portfolio expansion paints a very bright picture for our future.

Speaker 3

Our future is supported by our investments in technology development, which enables the evolution of both the media and semiconductor industries. As such, Our pipeline remains strong, and we stay committed to the vision we initially set forth at separation. That brings an end to our prepared remarks. And with that, I'd like to turn the call over to the operator to begin our question and answer session. Operator?

Speaker 4

Thank you, Mr. Jones. We'll go first this afternoon to Nick Zangler at Stephens.

Speaker 5

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

Speaker 3

Hey, Nick. Thanks. Great question. So the guidance that we put up, the $385,000,000 to $3.95,000,000 First of all, let's kind of start with the bottom of the range. Quite frankly, we kind of see that as the floor.

Speaker 3

And then just like anything else, in terms of what we do, It's really kind of coming to terms that we think are just really in the best interest of us on a go forward basis. So that whole Comment around deal economics means a lot. Our pipeline is very robust. We are in deep stages with many of our customers. Quite frankly, it comes down just to economics that we think that we should get out of the deal versus not being in a position where we feel like we're forced to take something.

Speaker 3

So we have a lot of opportunities, and it's just a matter of just, quite frankly, making sure that we get the proper economics.

Speaker 5

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

Speaker 3

You know, a great question. And to be very, very precise, it all has to do with our litigation expense primarily. That's the biggest driver. Nicky, if you recall, when we talked about our guidance at the beginning of the year and even at the time of separation, we had said we have been running historically lower levels. Last year, we did about $10,000,000 And if you take a look at where we're at the 9 months now, we're at the same spot where we were a year ago this time.

Speaker 3

And with that being said, It's just really a matter of timing. Both Paul and I would have anticipated a little bit higher spend. That's not indicative of anything. It's just really amount timing. So that is the delta.

Speaker 3

But more precisely, what I'm really proud of is that if we take a look at the other line items being R and D and expense And SG and A, those are really spot on from what we had forecasted. So, I take great pride that our variance from what we forecasted as a company, It's, I'll just say, very low single digit delta from what we experienced. And if we take a look at that R and D, and you heard Paul talk about in his track How great of a job that we're doing for our patent innovation. We have not backed off that not one bit. So that spinning It's just really a matter of timing, and we've done a great job with that expense management as a company.

Speaker 2

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

Speaker 5

Great. And then just one final one for me, if you don't mind. Obviously, so many moving parts here within the TV landscape. You've got this breach with Shaw. You've got accelerating declines or churn within the pay TV segment, yet obviously, CTV continues to grow and proliferate.

Speaker 5

I know you guys had talked about targeting a $500,000,000 revenue number, I think by 2026 based Your prior outlook there, just given all these different dynamics that are going on, how do you feel about that $500,000,000 target now? Do you still think that's achievable, just given everything that's been going on in the landscape? Thanks.

Speaker 2

Yeah. Thanks, Nick. Great question. And absolutely, I mean, we had factored in the pay TV declines, and they're more or less tracking where our forecasts were. And so none of it's really been a surprise.

Speaker 2

We do think within that timeframe, we're going We're going to turn around some of the headwinds we've had in Canada. But more importantly, our focus on growth Really comes from 3 areas that give us confidence in achieving that number. One is certainly new media, which is largely going to be driven by OTT. The second one, semiconductors, which we think is can be very significant within that time period. And then the last one is the new verticals.

Speaker 2

And on each of those fronts, we're seeing traction. So in OTT, Obviously, we've signed 2 deals in the last two quarters, as I mentioned in my prepared remarks. We're very excited about the progress that we're making there. In semiconductors, in addition to the large deals we signed with Kioxia and WD, which will continue to add to that recurring revenue, We continue to have tremendous traction in the logic space and seeing what other companies are doing that. And Very, very bullish on our efforts to achieve the revenue targets that we've set out for the semiconductor business.

Speaker 2

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

Speaker 5

Awesome. Great to hear. Thank you very much.

Speaker 4

Thank you. We go next now to Hamed Khorsand at BWS Financial.

Speaker 6

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

Speaker 2

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

Speaker 6

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

Speaker 2

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

Speaker 6

Okay. And then lastly for me is on your comments about accommodating for payments for the 2024, How much of those payments are one time in nature?

Speaker 3

So I think another way to look at it is that part of our business model is that For many of these situations, we ask customers to pay in advance, be it an annual fee. In A lot of that revenues that I'm referring to relates to that. So it wouldn't have been revenue to us. It would have been a prepayment, if you will, And deferred revenue, so just simply from negotiating and adjusting and You can pay us in early 2024. And they agreed.

Speaker 3

And quite frankly, it was good for them. It's good for us. So we maintain the longer economics of it. So it is not necessarily at all kind of a one time payment. It's just kind of the structure and what we leverage in our company of getting some advanced payments on long term contracts.

Speaker 7

Okay, great. Thank you.

Speaker 4

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

Speaker 7

Hey, good afternoon. Thanks for taking my questions. Can we start with the I think you mentioned the you had legacy semiconductor assets as part of litigation with Navidea, can you talk about how ending that Does that enable more meaningful conversations on the newer assets on the semiconductor side? Or Talk a little bit about the dynamic there and the sequence.

Speaker 2

Sure, Matt. Happy to touch on that. The litigation that we settled with NVIDIA was, as you mentioned, related to some legacy IP. It was not in connection with Either our hybrid bonding or our advanced processing node portfolios, which we believe currently have tremendous value, In the logic space, as we've noted, you know, in any situation when you're in litigation, it's hard to get past the, you know, that what's on the table in the litigation to have other conversations. And so, you know, whether, whether that's with NVIDIA or or any other party, frankly.

Speaker 2

And so, Settling that really kind of resets the discussions and now we believe we're going to be able to have more meaningful discussions those more advanced technologies that we have in our portfolio.

Speaker 7

Got it. Okay. And then just on the high level 'twenty four outlook, I'm just wondering if we could take Operating cash flow projections, just proxy of what you've talked about and use that as What you might how you might scale your debt Payments or as we think about modeling 2024, especially around debt, Similar rate to a pay down to 23% or how should we be gauging that? Thanks.

Speaker 3

It's a great question. I one of the statements that we've made at separation and that we continue to make today is our commitment to paying off that debt prior to maturity. And there's a clear pathway for that. And we as a management team are committed. So I would roughly say that the pace that you're seeing us at this year of making reductions in our overall principal amount, we'll carry that forward, and in particular, in 2024.

Speaker 3

We've talked about that we want to commit stay committed to that pace. Well, our leverage ratio, until it reaches 1.3 times. And in 2024, we won't quite Dip below that measure, but we will consistently look to retire that debt amount.

Speaker 7

All right. Thank you.

Speaker 4

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

Speaker 2

Thank you, operator. In the Q3, we delivered strong financial results with continued deal momentum during the quarter. I'm excited about our future prospects as we continue to grow our portfolio and expand our pipeline of opportunities. I also want to thank our employees for their dedication and commitment to driving our success over the past year. Next week, we will be attending the Stevens Investment Conference in Nashville.

Speaker 2

And at the end of the month, we will be attending the Wells Fargo TMT Conference. We look forward to seeing many of you at these and other events through the remainder of the year. Thank you for joining us today.

Speaker 4

Thank you. And ladies and gentlemen, that will conclude the Adia 3rd quarter 2023 earnings conference call. Again, thanks so much for joining and we all wish you a great evening. Goodbye.

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