Adeia Inc. (NASDAQ:ADEA) Q4 2023 Earnings Call Transcript

Adeia Inc. (NASDAQ:ADEA) This fall 2023 Earnings Name Transcript February 20, 2024

Adeia Inc. beats earnings expectations. Reported EPS is $0.27, expectations had been $0.26. ADEA isn’t one of many 30 hottest shares amongst hedge funds on the finish of the third quarter (see the small print right here).

Operator: Good day, everybody. Thanks for standing by. Welcome to Adeia’s Fourth Quarter 2023 Earnings Convention Name. Throughout in the present day’s presentation, all events shall be in a listen-only mode. Following the presentation, the decision shall be opened for questions. I might now like to show the decision over to Chris Chaney, Vice President and Investor Relations for Adeia. Chris, please go forward.

Chris Chaney: Good afternoon, everybody. Thanks for becoming a member of us as we share with you particulars of our fourth quarter 2023 monetary outcomes. With me in the present day on the decision are Paul Davis, our President and CEO; and Keith Jones, our CFO. Paul will share with you some normal observations concerning our fourth quarter. After which Keith will give additional particulars on our monetary outcomes and steering. We’ll then conclude with a question-and-answer interval. Along with in the present day’s earnings launch, there may be an earnings presentation, which you’ll entry together with the webcast within the IR portion of our web site. Earlier than turning the decision over to Paul, I want to present a couple of reminders. First, in the present day’s dialogue accommodates forward-looking statements which can be predictions, projections or different statements about future occasions, that are primarily based on administration’s present expectations and beliefs, and due to this fact topic to dangers, uncertainties and modifications in circumstances.

For extra info on the dangers and uncertainties that might trigger our precise outcomes to vary materially from what we focus on in the present day, please discuss with the Danger Components part in our SEC filings, together with our annual report on Kind 10-Okay. Please be aware that the Firm doesn’t intend to replace or alter these forward-looking statements to mirror occasions or circumstances arising after this name. To boost and understanding of our ongoing financial efficiency, we are going to focus on non-GAAP info throughout this name. We use non-GAAP monetary measures internally to guage and handle our operations. We now have, due to this fact chosen to supply this info to allow you to carry out comparisons of our working outcomes as we do internally. We now have supplied reconciliations of those non-GAAP measures to essentially the most instantly comparable GAAP measures within the earnings launch, the earnings presentation and on the Investor Relations part of our web site.

A recording of this convention name shall be out there on the Investor Relations web site at adeia.com. Now I’d like to show the decision over to our CEO, Paul Davis.

Paul Davis: Thanks, Chris, and thanks, everybody, for becoming a member of us in the present day. We had an incredible yr in 2023, our first full-year as a standalone firm. I’m wanting ahead to sharing with you our outcomes and progress we made in 2023 and our outlook for 2024. However earlier than I do this, I want to present a evaluate of our fourth quarter. With the continued momentum all year long, we signed eight agreements within the fourth quarter, represented by prospects throughout our social media, Pay-TV and Client Electronics verticals. This consisted of two new agreements and 6 renewals. We’re notably enthusiastic about our new license settlement with a number one worldwide social media firm. This additional validates the energy of our media portfolio throughout social media platforms.

Moreover, our lengthy historical past of success inside the Pay-TV market was additional enhanced by the addition of a brand new settlement with Breezeline, a big cable operator in america. Inside Client Electronics, we’re happy to have renewed and prolonged our relationship with Funai a world producer of related TVs. We delivered sturdy monetary ends in the fourth quarter with income of $87 million and adjusted EBITDA of $54 million. With our vital money movement technology, we paid down $29 million of our debt within the fourth quarter as we proceed to deleverage our stability sheet. We additionally additional strengthened our govt workforce, with the appointment of Joe Guiliano as our Chief Mental Property Officer. Joe will primarily be chargeable for driving our technique and development of our patent portfolios.

Joe has labored with us for many years as our lead outdoors IP counsel for the media enterprise. Over his 30-plus yr profession, he’s recognized for his proactive methods and foresight resulting in revolutionary business-centered options. I’m very comfortable Joe has joined our workforce. As we glance again on 2023, we had nice success in deal execution. Throughout the yr, we signed 32 offers throughout a number of verticals. We added 5 new logos through the course of the yr with Western Digital, Kioxia, DEZn and Breezeline, in addition to the worldwide social media firm we signed within the fourth quarter. The Western Digital and Kioxia offers solidify our sturdy place with all the highest reminiscence corporations, and additional validate the worth of our hybrid bonding expertise within the reminiscence market.

These vital offers will contribute considerably in direction of our objective of producing $100 million in annual semiconductor income. Samsung, a repeat buyer throughout our media and semiconductor companies renewed its license to our media portfolio to be used in cellular gadgets. Cox, Verizon and Altice all prime 10 Pay-TV operators within the U.S. signed renewals to our media portfolio, once more, proving the worth of our media portfolio and the longevity of our main improvements in Pay-TV. The offers we signed with DEZn and Starz are an vital step ahead as we construct momentum in OTT. OTT is an thrilling development alternative for us as it’s a massive and increasing market. We anticipate our continued penetration in OTT to offset anticipated Pay-TV declines and grow to be a major income contributor for us within the coming years.

As well as, our funding in R&D is producing outcomes. We made wonderful progress rising our portfolio of patent belongings, a key goal put up separation and a proof level of our continued deal with innovation and expertise growth. Our objective was to develop our portfolio 10% in 2023. I’m comfortable to report we exceeded this objective, rising over 11% for the yr with a report variety of new authentic patent filings. We now have made key strategic investments in OTT, Pay-TV, e-commerce, Advert-tech and Semiconductors. These initiatives are elementary to fueling our long-term development. In 2023, we additionally achieved our objective of filling crucial govt and board positions. Over the previous yr, now we have added a Chief Individuals Officer, Chief Company Growth Officer and a Chief Mental Property Officer.

As well as, we expanded our Board with two new extremely certified impartial administrators. Having these roles crammed with extremely gifted people, positions the group properly for additional development. I want to thank our workers for his or her contributions and great accomplishments that made 2023 a hit. With the profitable 2023 behind us, I might now prefer to share with you our imaginative and prescient for 2024. This yr, we are going to put money into the enterprise to help our plans for development in our focused markets. We shall be including R&D assets to develop each our Media and Semiconductor portfolios. We may even be making additional investments this yr in our Individuals and Infrastructure to help elevated enterprise growth and gross sales actions. These investments will place us to reap the benefits of the expansion alternatives in entrance of us.

Long run, our goal stays reaching $500 million in annual income. To do that, now we have two major aims. First, to take care of our recurring income base by signing renewals with present prospects. And second, so as to add further income streams by additional penetrating massive and rising markets corresponding to OTT and semiconductors. We’re additionally positioning ourselves for fulfillment in adjoining markets, corresponding to Advert-tech, automotive, e-commerce, gaming, music streaming and sports activities playing. To do that, it is necessary that we proceed to make investments to reinforce our patent portfolio and additional complement the gross sales efforts to maximise alternatives. We’re making nice progress increasing our pipeline of alternatives, notably in OTT, semiconductors and adjoining verticals.

Our elevated dedication to R&D for portfolio growth and a further infrastructure to help elevated gross sales actions will increase our efforts. Our massive funnel of alternatives is being matched with our IP portfolio growth to kind a pipeline of enterprise alternatives that may proceed to develop. As we additional develop our IP portfolio with further filings this yr, so will our alternative pipeline. As we proceed to make investments in our enterprise and develop our pipeline of alternatives, we may even preserve our capital allocation technique. Our confirmed IP licensing enterprise mannequin is extremely money generative, permitting us to proceed to deleverage our stability sheet with accelerated principal debt funds. Our R&D investments and portfolio development embed us inside the industries we serve.

And being pioneers, incubators and evangelis of next-generation applied sciences is who we’re at our core. Our R&D groups and enterprise leaders develop partnerships with the ecosystem’s core to our technique. These partnerships are key to focusing our IP growth efforts in areas that may drive future income development. We consider it is very important be on the forefront of the newest developments in our key finish markets and partnering with the ecosystem demonstrates our dedication and allows us to anticipate growing developments. Our semiconductor and media groups are deeply concerned by means of their participation at key business conferences, and the publication of analysis and thought management items in trending topic issues. Moreover, we maintain management positions in outstanding business organizations.

For instance, our semiconductor workforce introduced on hybrid bonding at ECTC in Orlando and a member of our govt workforce is a Board member of EvoNexus, a expertise start-up incubator. Our media R&D workforce is equally energetic, particularly in developments impacting our goal verticals, corresponding to OTT, client electronics, social media, e-commerce, ad-tech and automotive. Along with quite a few white papers and thought management logs, yow will discover on our web site, our media R&D workforce introduced technical analysis at many conferences all year long. At Augmented World Expo, we delivered a technical presentation on AI and Spatial Computing. On the SMPTE Media Expertise Summit, we introduced our paper on novel strategies of personalised rating and advice methods utilizing a Dynamic Queuing Method.

We additionally confirmed a demo of our prototype that drastically simplifies dwell buying experiences. Members of our media workforce additionally serve on quite a few management positions with IEEE and different organizations and have additionally acquired rewards for his or her pioneering analysis. I’m extraordinarily happy with the acknowledged management positions of so lots of our Adeia workers. Their participation not solely gives us with key insights into what issues the industries want to resolve, however usually results in new buyer engagements and partnerships inside the ecosystem. Earlier than I flip the decision over to Keith, I need to contact on one among our key new initiatives for 2024. Our semiconductor workforce’s mission is to resolve in the present day’s issues to allow tomorrow’s merchandise. And there’s no debate that the first drawback dealing with the business in the present day is overcoming the challenges associated to Moore’s Regulation.

Till now, Adeia’s strategy to overcoming these challenges have centered on our hybrid bonding and superior processing node applied sciences. These will proceed to be vital applied sciences to fixing this drawback. Nevertheless, as we and different consultants have come to understand, process-related options will solely advance the business to this point. Additional innovation requires a extra holistic strategy, one by which current and future superior processing applied sciences function a base for development and are then concurrently optimized for each design and system views to maximise effectivity and cut back value. This holistic strategy is often known as co-optimization and it’s key to transferring past Moore’s Regulation. With that in thoughts, this yr, we’re launching a co-optimization initiative to develop the worth proposition of our current and future revolutionary options to our prospects, notably within the logic area by making them extra environment friendly, simpler to implement and more economical.

We’re uniquely positioned to capitalize on this pattern with a mix of transformative applied sciences, acknowledged thought management, deep area experience and engineering expertise. We make use of among the most prolific inventors on this planet, which places us in a robust place to proceed to ship impactful improvements and develop our addressable market. With that, I want to now flip the decision over to Keith for a evaluate of our fourth quarter monetary outcomes and our 2024 steering.

Keith Jones: Thanks, Paul. I’m happy to be talking with you in the present day to share particulars of our fourth quarter 2023 monetary outcomes. Throughout the fourth quarter, we delivered income of $86.9 million, lining our 2023 annual income close to the midpoint of our steering vary. Our sturdy income was pushed by the execution of eight license agreements within the quarter, together with a brand new settlement with a number one worldwide social media firm, and a brand new settlement with Breezeline, a Pay-TV supplier. Now I want to focus on our working bills, for which I shall be referring to non-GAAP numbers solely. For the fourth quarter, working bills had been $33.2 million, a rise of $2.1 million or 7% from the prior quarter. Analysis and growth bills elevated $554,000 or 4% from the prior quarter.

R&D bills have grown by means of the course of the yr as we glance to extend our dedication to fueling our innovation engine. It’s this dedication to R&D, which propels our future income development for each the media and semiconductor markets. Most notably, we elevated our investments in OTT, adjoining media markets and our semiconductor enterprise, all key income development drivers for us. Promoting, normal and administrative bills elevated $1.6 million or 10% from the prior quarter, primarily as a consequence of increased spending to help development initiatives within the OTT and adjoining media markets. Litigation expense was $2.2 million, flat from the prior quarter. Curiosity expense through the fourth quarter was $15.5 million, a lower of $222,000 from the prior quarter quantity as a consequence of our continued debt repayments leading to decrease principal balances.

Our present efficient rate of interest, which incorporates amortization of debt issuance prices, remained comparatively unchanged at roughly 9.9%. Different earnings was $1.6 million and was primarily associated to curiosity earnings acknowledged on income agreements with long-term billing constructions underneath ASC 606, and as a consequence of curiosity earned on our money and funding portfolio. Our adjusted EBITDA for the fourth quarter was $54.1 million, reflecting an adjusted EBITDA margin of 62%. Depreciation expense for the fourth quarter was $388,000. Our non-GAAP earnings tax charge remained at 23% for the quarter. Our earnings tax expense consists primarily of Federal and State home taxes in addition to Korean withholding tax. Now for a couple of particulars on the stability sheet. We ended the fourth quarter with $83.6 million in money, money equivalents and marketable securities and generated $39.4 million in money from operations.

Moreover, we made $29.1 million in principal funds on our debt within the fourth quarter and ended the yr with a time period mortgage stability of $601.3 million. In 2023, we repaid $148 million of our debt, using 99% of our free money movement technology for the yr on debt repayments. Along with these funds in February 2024, now we have made an accelerated cost of $30 million, additional lowering our time period mortgage stability to $570.3 million as of in the present day. This vital achievement is an incredible reflection of our enterprise mannequin with our skill to generate vital money flows, coupled with our objective to deleverage our stability sheet by paying down the time period mortgage previous to its maturity. Throughout the fourth quarter, we paid a money dividend of $0.05 per share of frequent inventory.

Moreover, our Board accepted a cost of one other $0.05 per share dividend to be paid on March 26 to shareholders of report as of March 12. Now I’ll go over the steering for the full-year 2024. For the full-year 2024, we anticipate income to be within the vary of $380 million to $420 million. We’re enthusiastic about our prospects, which embody not solely sustaining our great renewal charges, but additionally to make vital features by including new prospects in each media and semiconductor area. With that being stated, now we have persistently acknowledged that it’s our objective to realize financial phrases which can be reflective of the right worth of the [indiscernible] expertise that now we have invented. As such, we are going to proceed to stay diligent and affected person to realize these aims on a deal-by-deal foundation.

As a reminder, on condition that we [enter into] a comparatively small variety of massive offers, there could possibly be volatility all through the course of the yr. With that being stated, we anticipate that our 2024 income shall be extra closely weighted in direction of the again half of the yr extra particularly, with our first quarter of 2024 being comparatively in line with that of our second quarter of 2023. We anticipate working bills to be within the vary of $150 million to $160 million. The rise in working expense is pushed by three primary areas: First, we are going to proceed to put money into our R&D spending in strategic areas to strengthen our patent portfolio to assist drive each short-term and long-term income development. Secondly, we are going to see further SG&A spending associated to growing and increasing our gross sales efforts in new markets.

Lastly, our litigation expense has been comparatively low during the last a number of years. We see this quantity doubling, which shall be in step with historic developments. I want to level out that the rise in each R&D and SG&A displays our investments to assist construct out and develop the platforms which can additional propel our new alternatives in each the media and semiconductor markets. As we take a look at our working expense pattern for the yr, excluding litigation expense, we anticipate reasonable improve in every of the primary two quarters of the yr after which shall be comparatively flat thereafter. Nevertheless, we see this development as being distinctive to 2024 as we anticipate a extra reasonable improve in these areas sooner or later years. We anticipate curiosity expense to be within the vary of $54 million to $57 million and we anticipate different earnings to be within the vary of $5 million to $6 million.

We anticipate a ensuing adjusted EBITDA margin of roughly 62%. We anticipate the non-GAAP tax charge to stay constant at roughly 23% for the full-year. We additionally anticipate capital expenditures to be roughly $3 million for the full-year. We anticipate money flows from operations to be comparatively in line with the 2023 quantity. With the incremental contribution coming from the shifted cost we famous through the prior quarter earnings name, associated to an settlement signing Q3 2023 that has been collected in Q1 2024. Reflecting on 2023, I’m extremely happy with the great progress that now we have made in our first full-year as a standalone firm. By way of deal execution, increasing our patent portfolio and deleveraging our stability sheet, now we have made nice strides, and I’m excited concerning the prospects of 2024 and past.

Our future is vibrant and the targets that we set forth that separation stay the collective focus of the whole Adeia workforce. That brings an finish to our ready remarks. And with that, I’d like to show the decision over to the operator to start the question-and-answer session. Operator?

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Q&A Session

Operator: Thanks. [Operator Instructions] Your first query comes from Hamed Khorsand with BWS Monetary. Please go forward.

Hamed Khorsand: Hello. May you first simply discuss concerning the social media buyer – license that you simply signed, and what does that incorporate so far as their use of your patents? And the way versatile is that to use to different social media corporations?

Paul Davis: Hey, Hamed. Nice query. Thanks for asking that. So we’re actually, actually pleased with this deal, to begin with. Like lots of the social media corporations that we’ve licensed prior to now, sadly, we’re not in a position to title them, however it’s a massive vital worldwide social media firm. By way of the portfolio and its relevance, we’ve really licensed a big portion of the social media market already. For those who look in our investor deck, it’s roughly about 85% of the market in the present day. I imply that’s in line with what we had beforehand as properly, the place we’ve all the time had massive penetration and our portfolio actually reads on quite a lot of facets of video and video playback and search and advice, which is vital to quite a lot of the social media functions, to not point out our imaging portfolio as properly. So all of that continues to be related actually throughout most social media platforms, together with the one we simply licensed final quarter.

Hamed Khorsand: After which what’s your intention, if I heard you proper, your authorized expense is doubling? I imply are you extra lawsuits developing? Or are you having a snag in negotiations?

Paul Davis: Sure. Hamed, I wouldn’t say there’s something specific. It’s simply that we’re planning for it to return to extra historic norms like we’ve talked about earlier than. So we do have ongoing litigation, as you already know, and that contributes to it in addition to some planning within the case that we want it. My hope, as all the time, is that we don’t want it, after which that may return clearly to the underside line if we don’t. And so, our objective is all the time to seek out negotiated offers. We’ve been extremely profitable in doing so. Within the final three years, we’ve signed 95-plus agreements, virtually completely with none litigation in any respect. And so that is still our objective. And if we want it, although, we’re ready for it.

Hamed Khorsand: And my final query was that any probability you’ll signal or resign any OTT service suppliers this yr? And what the probability was for one thing like that?

Paul Davis: Sure. We definitely anticipate that. We constructed on our momentum on the offers that we received final yr, definitely getting DEZn accomplished after which getting the Starz renewal accomplished as properly. And OTT continues to be a major space of development for us as we transfer ahead. And so we do anticipate success in 2024 to proceed on the OTT entrance.

Hamed Khorsand: Okay. Thanks.

Paul Davis: Thanks, Hamed.

Operator: Your subsequent query comes from Nicholas Zangler with Stephens. Please go forward.

Dean Sublett: Hey, guys. That is Dean on for Nick. So within the script, you talked about elevated enterprise growth and gross sales actions fairly a bit. May you simply elaborate on what that may seem like for you guys precisely and simply how far alongside these efforts are at the moment?

Keith Jones: Hey, Dean. Good to speak to you. So from the place we at in separation and what we noticed as a plan to develop our enterprise rising past our base with Pay-TV. We had very a lot began that journey, of including assets, including subject material experience and making true investments from our R&D and extra so from an SG&A perspective as properly for these companies. So in case you check out our financials, you actually begin seeing that inflection in our financials actually in Q3 of final yr, the place we’ve seen steady sort of uptick in spend in these areas. And that may proceed all through 2024. Most notably, we’ll see one other uptick in Q1. We’ll see one other uptick in Q2, after which after we get to the again half of the yr, it is going to be a way more modest improve.

However what I’d prefer to say is although, specifically, within the SG&A perspective for us to make these investments is de facto crucial to drive our income, specifically, for the adjoining markets within the semiconductor enterprise in addition to OTT. So these are a lot a little bit bit extra shorter time period place that now we have, and it’s a crucial continued path that we’re on to develop and develop our enterprise.

Dean Sublett: Nice. Thanks. That’s useful. After which simply on the semi facet, as you guys strategy the anniversary of Western Digital and Kioxia, any incremental ideas on the inflection of volumes for his or her merchandise utilizing your IP? Or perhaps simply how we must always take into consideration the variable income element of these offers? And that’s it for me. Thanks.