Adeia Inc. Q2 FY2025 Earnings Call

Good day, everyone. Thank you for joining us. Welcome to Adeia's Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please proceed.

Good afternoon, everyone. Thank you for joining us as we share with you details of our quarterly 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 the quarter, and then 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 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. 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. 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. 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 made available on the Investor Relations website at adeia.com. Now I'd like to turn the call over to our CEO, Paul Davis.

Thank you, Chris, and thank you, everyone, for joining us today. I'm glad to be here again to share the results and progress we've made in the second quarter. Our second quarter results were in line with what we indicated on our last earnings call. We delivered $85.7 million in revenue and cash from operations of $23.1 million. We also reduced our debt by $11.1 million, bringing our total debt paydown since separation to over $300 million, a testament to our cash-generative business model and our disciplined capital allocation approach. We have good visibility into the second half of the year and are reiterating our full-year revenue guidance. Based on the progress we've made in the first half of the year, we now have multiple paths to achieve our revenue goals. While the significant semiconductor opportunity we previously referenced remains an attractive opportunity and a key focus of ours, it is not the only path to achieving our revenue target for the year. We have also advanced other high-potential opportunities to the point that we see a path to close them this year. And these other opportunities could help us achieve our revenue target for 2025 even if we need to take a different strategic direction with the semiconductor customer. Collectively, these opportunities both reinforce our confidence in achieving our goals for the year and achieving our long-term objectives. Keith will walk through our financials and outlook in more detail shortly. Before diving into our second quarter deal activity, I'd like to highlight an exciting recent development in our semiconductor business. As you're all aware, the pervasiveness and rapid adoption of AI has created tremendous demand for data centers throughout the world. In those data centers are servers running the most advanced high-performance semiconductors. These semiconductors not only consume an enormous amount of power, but they also create a tremendous amount of heat. The AI era is driving up the power densities of these semiconductors and traditional cooling solutions are unable to meet the thermal loads. In late May, at the iTherm and ECTC conference in Dallas, we introduced RapidCool, a revolutionary direct-to-chip liquid cooling technology for high-performance semiconductor devices. This groundbreaking technology, which has evolved from our deep experience in hybrid bonding and advanced packaging technologies, eliminates thermal interface materials used in conventional processes. RapidCool, thereby increases heat dissipation efficiency and lowers the temperature of the semiconductor. Our RapidCool technology bonds the silicon cold plate directly to the semiconductor, thereby eliminating the thermal interface materials others use and lowers thermal resistance by 70%. This allows RapidCool to effectively manage heat in semiconductors running at 3x today's current power densities. Additionally, RapidCool targets specific hotspots on the semiconductors, further enhancing thermal management. We are currently working with industry partners who have requested RapidCool prototypes to evaluate for their future products. As part of our roadmap, we continue to develop options that address the growing thermal demands of high-performance processors and high-bandwidth memory devices. We are extremely excited about the potential of this technology and see it as a growth driver for us in the mid- to long term. Turning to our second quarter momentum. We signed 5 license agreements, consisting of 4 in media and 1 in semiconductors. Three were with new customers in key growth areas of semiconductors and e-commerce. We are making great progress bringing on new customers, which is critical to our growth strategy. Over the last 3 quarters, 11 of the 25 license agreements we have signed have been with new customers. Our strategy of targeting new customers in growth markets is producing results. Our second quarter recurring revenue was up modestly year-over-year, and our non-pay TV recurring revenue was up an impressive 28% during the same period. We signed a multiyear license agreement with STMicroelectronics, a global leader in analog and digital semiconductors. This deal was driven by our hybrid bonding technology, which continues to gain traction as a key enabler for AI and high-performance semiconductor devices. We also signed 2 renewals in the second quarter. These renewals continue our strong track record of over 90% of our customers renewing their license agreements with us. Renewals provide predictable revenue and validate the ongoing relevance of our IP as customers continue to rely on our innovations to deliver value to their end users. One of these agreements was a multiyear renewal with a popular domestic OTT streaming service. OTT remains one of our high-priority growth markets due to our media portfolio's applicability and the OTT market's sheer size and subscriber growth trajectory. Having penetrated only a portion of this market today, there is significant opportunity as we continue to pursue large customers in this key market. We signed multiyear license agreements with 2 new e-commerce customers for access to our media portfolio. One of these agreements is with Warby Parker, a popular and rapidly growing eyeglass retailer. This follows the success we had last year signing Neiman Marcus. E-commerce is particularly exciting to us because of the sheer breadth of potential customers across numerous industries where the possibilities are virtually unlimited. Our initial license agreements mark an important entry point in validating our media portfolio for the e-commerce market. These early wins lay the foundation for scale, and we expect deal volume to build as our market presence expands. We are on track to achieve our goal of delivering sustainable long-term growth. The renewals we've signed with existing customers and, importantly, the license agreements with new customers in our key growth markets, such as semiconductors and e-commerce last quarter, will contribute to achieving this goal. In the second quarter, our patent portfolio grew by 2% to over 13,000 assets. This brings our first half portfolio growth to a little over 6% as we continue to evolve our portfolio to meet the needs of our fastest-growing markets. While growth may moderate over the rest of the year, our focus remains on quality and relevance, not just volume. Our strong cash generation supports a balanced capital allocation strategy, investing in strategic tuck-in acquisitions, reducing debt, and returning capital to shareholders through dividends and share repurchases. Keith will share more on our capital allocation activity in a moment. Finally, I'm proud to share that for the second year in a row, Adeia was named a Best Company to Work for by U.S. News and World Report. This recognition reflects our strong culture and helps us attract and retain world-class talent. With that, I'll turn the call over to Keith for a review of our financial performance.

Thank you, Paul. I'm pleased to be speaking with you today to share details of our second quarter 2025 financial results. During the second quarter, we delivered revenue of $85.7 million, driven by the execution of 5 license agreements from our strategic end markets, including semiconductor, OTT, e-commerce, and pay TV. This includes 3 new customers that we added during the period, which further expands our customer base. Now I would like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the second quarter, operating expenses were $40.6 million, a decrease of $297,000 or 1% from the prior quarter. Research and development expenses decreased $798,000 or 5% from the prior quarter. The decrease in the quarter is primarily due to lower patent filing administrative fees and personnel costs. Selling, general and administrative expenses decreased $819,000 or 4% from the prior quarter, primarily due to lower personnel costs. Litigation expense was $7.2 million, an increase of $1.3 million, or 23% compared to the prior quarter, primarily due to spending associated with our ongoing litigation with Disney. Interest expense during the second quarter was $10.2 million, a decrease of $433,000, primarily due to our continued debt repayments. Our current effective interest rate, which includes amortization of debt issuance costs, was 7.8%. Other income was $1.4 million and was primarily related to interest earned on our cash and investment portfolio and due to interest income recognized on revenue agreements with long-term billing structures under ASC 606. Our adjusted EBITDA for the second quarter was $45.7 million, reflecting an adjusted EBITDA margin of 53%. Depreciation expense for the quarter was $488,000. Our non-GAAP income tax rate remained 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 ended the second quarter with $116.5 million in cash, cash equivalents, and marketable securities and generated $23.1 million in cash from operations. As a reminder, we experienced fluctuations in our cash flows due to the billing structures of some of our agreements, whereby we receive lump-sum annual payments. As a result, our first and fourth quarters tend to be significant cash generation quarters for us, whereas our second and third quarters tend to be more modest. We made $11.1 million in principal payments on our debt in the second quarter and ended the quarter with a term loan balance of $458.9 million. During the quarter, we reached a significant milestone as we have now paid down more than $300 million since our separation in October 2022. This is a clear testament to our highly cash-generative business model and our disciplined focus on deleveraging our balance sheet. During the second quarter, we paid a cash dividend of $0.05 per share of common stock. Our Board also approved a payment of another $0.05 per share dividend to be paid on September 16 to shareholders of record as of August 26. Now I'll go over our guidance for the full year 2025. We are reiterating our prior revenue guidance for the full year. We expect revenue to be in the range of $390 million to $430 million. We're pleased with the progress that we continue to make in both adding new customers and growing our sales pipeline. As always, we remain actively engaged with our customer base as we monitor how their businesses are progressing during this dynamic economic environment. As a result of the relative uncertainty witnessed in the first half of the year, many companies were cautious yet optimistic on how their businesses would be impacted and thus reflecting a more heavily loaded second half for our revenue outlook. Today, as anticipated, we see an increased level of engagement supporting our revenue forecast for the second half of the year. As we noted during our prior call, we made a conscious effort to be prudent in spending in light of the broader economic environment. Due to our efforts, we now expect operating expenses to be in the range of $160 million to $166 million. Within that guidance range, we anticipate that our litigation expense will decrease modestly in the second half of the year, primarily due to the completion of the trials associated with our litigation against certain Canadian pay TV operators. We expect interest expense to be in the range of $40 million to $42 million. We expect other income to be in the range of $5.5 million to $6.5 million. We expect a resulting adjusted EBITDA margin of approximately 60%. We expect the non-GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be approximately $1 million for the full year. The second quarter was in line with our expectations. With improved stability within the broader macroeconomic environment and the strength of our sales pipeline, we remain encouraged about both our short-term and long-term prospects. That brings it 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.

And our first question comes from the line of Hamed Khorsand with BWS Financial.

Just a first question here. On this OTT renewal, can you just talk about if the contract is structurally different than the previous one?

Sure, Hamed. Thanks for the question. Appreciate it. Yes, like most of our renewals, typically, they're pretty standard unless there's really a change in circumstances with the company. In this case, it was in line with the prior agreement.

And then the new opportunities that you talked about earlier, could you talk about where they fit as far as are they e-commerce or are they OTT?

Yes. We're not going to get into that in much detail right now. But what I can say is these are opportunities, one that we are excited about. They are opportunities that we had originally thought would be in 2026 and beyond. And because of the work of the team, we now believe we can pull into 2025. They are fairly sizable opportunities. And what it means is we have the ability to finish the year within our guidance range, even towards the high end of the guidance range, even without the large semiconductor agreement closing within the year, which is still our goal. But if we can't get that done, we now have multiple shots on goal to make that happen. So we're very pleased with the progress we've been able to make there.

And our next question comes from the line of Scott Searle with ROTH Capital.

Keith and Paul, maybe just to get quickly calibrated, I'm wondering if you could give us an idea about the recurring versus nonrecurring revenue and kind of the mix between media and semi? And then I had a couple of follow-ups on the semi front.

Scott, welcome. So for our recurring revenue, this quarter, a large portion or a substantial portion of our revenue this quarter was recurring. We had 3 new customers that we signed this period. A lot of that revenue is kind of based on future production and volumes. So the impact of those agreements will be kind of more picked up and more pronounced in the future. So what you're going to see is a relatively small percentage this period and probably a little bit less than we had seen in prior quarters. But nonetheless, the numbers that we're kind of posting really show, quite frankly, the stability in our overall revenue base. And with that being able to kind of maintain through our renewals. And then when we start adding some of the new deals that Paul is kind of alluding to, you're going to see a nice step-up in that and some growth in that recurring number.

Got you. And maybe just in terms of the split between media and otherwise and within media, if we were to exclude pay TV, what kind of growth rate are you seeing then with OTT, CE and e-commerce? What are we looking at as we go in the second quarter and kind of how that ramps into the second half?

Yes. I think what you're going to see is that while there will be some impact when we signed the semi deal, and that will definitely add to it. But what's also really exciting is that the growth on the media side, which really makes up the preponderance of the revenue today from a recurring standpoint, there will be an appreciable pickup as well. So you'll see growth on both ends.

Yes. And Scott, just to what I said in my prepared remarks, just as a reminder, we saw a 28% increase in our recurring revenue in the non-pay TV part of our recurring revenue, right, which is really a combination of, obviously, the semiconductor business growth and then also the non-pay TV parts of our media part of our business, which is obviously OTT, e-commerce, consumer electronics, social media, all are contributing to that growth. And we're seeing recurring revenue growth even when you put the declines in pay TV in there sequentially and year-over-year. So we're happy with the recurring revenue growth overall.

Okay. Great. Very helpful. And then, Paul, maybe on the semi front, I think you had some comments if the semi deal does not happen this year, I wonder if you could parse that a little bit more. I know this deal has been fairly complex, but is there an expectation that it maybe doesn't happen or it's just taking more time to close? Because it sounds like you've got multiple avenues now, like you said, or multiple shots on goal to get to the higher end of that range. But I'm kind of wondering where your enthusiasm with hybrid bonding and the large semi deal kind of sits and how we should be thinking about 2026 on that front?

I want to be clear that our goal and expectation are still to close that deal this year, but we have to prepare for other possibilities. We've been actively working on finding alternative deals, and I'm really proud of the team's efforts in that area. Now we have multiple options to achieve our revenue goals if something doesn't go as planned. Additionally, if for any reason we can't finalize that deal, we are prepared to take a different strategic approach with the customer. It's a decision we don't take lightly, but we will be ready to pursue that option if necessary.

Got you. Very good. And lastly, just to throw in, I'm wondering if you could provide a little bit more color on the RapidCool direct-to-chip. Sounds very exciting. I think you said medium or intermediate term to longer term. So in terms of the commercialization of that, maybe the process to get there and kind of maybe the time frame that you put around that. And one other high-level question. There had been some, I guess, commentary coming out of Washington a week or so ago about the taxation of intellectual property. I'm just wondering if you had any high-level thoughts on that.

I’ll start with the second question about the commentary from Washington. There was a Wall Street Journal article that speculated on an idea without providing many details, so there isn’t much to discuss at this time. Until more information is available, it’s not worth our focus because the specifics are unclear. Regarding RapidCool, we are very excited about its potential. Although it's still in the early stages, we have seen promising results in our prototype and R&D work. We are collaborating with industry partners and potential customers to discuss our test results. Our strength lies in understanding industry needs. A few years ago, our team identified key areas where we could leverage our strengths in hybrid bonding and advanced packaging. Our engineers proposed a direct bonding of the cold plate to the silicon, removing unnecessary components that complicate chip cooling. This may sound straightforward, but it’s a significant engineering achievement. Feedback from our partners and customers indicates that our solution surpasses existing options in the market. While we are excited about its potential, transitioning from our current stage to commercialization and generating revenue will take time. We view this as a medium- to long-term opportunity that could be quite significant for us in the future.

Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities.

Maybe to drill down a little more on RapidCool. It does seem a very exciting technology. Do you see this as applications in the data center? Or do you think it's in the high performance at the network edge where maybe liquid cooling isn't practical today?

Yes, we are currently focusing on data centers. As highlighted in my prepared remarks, this is where we've identified specific needs. Our technology is designed for direct-to-chip applications and can work alongside other cooling technologies. It doesn't aim to compete with existing cooling methods, like air or liquid cooling. This uniqueness has us quite excited. Additionally, our roadmap suggests potential for other applications, and we are exploring additional ways it can be utilized. Please stay tuned for updates on its future applications.

Okay. Great. And congratulations on landing the STMicro. You said it was hybrid bonding. Is that related to chiplets? And do you expect there to be a lineup of many other semiconductor companies that are looking to move to the chiplet technology?

Yes, we can't go into too much detail. We mentioned a portfolio license for our semiconductor offerings. What we discussed is the driving force behind our licensing agreements, which is hybrid bonding in the semiconductor industry. Chiplets, particularly in the logic sector, are a key focus area, distinguishing us from STMicroelectronics. We are noticing a growing number of companies announcing new chip designs they plan to launch in the coming months to years, which is very encouraging. Additionally, there are exciting developments in high-bandwidth memory, particularly with Samsung and others discussing advancements like HBM 4E and HBM 5 as we progress toward 16 layers and eventually 20 layers, highlighting the importance of hybrid bonding for memory applications as well.

And our final question comes from the line of Matthew Galinko with Maxim Group.

I know you're not guiding to quarters, but can you give us a little bit of sense of how the back half might shape up in terms of balance? Should we kind of be expecting a fourth quarter concentration just given the multiple opportunities you have? Or how should we be thinking about timing?

Matt, good talking to you. So for us, when we just take a look at our real focus is on getting the proper economics for the deals, right? I think the relative opposing of those deals that we have kind of talked about is our focus is within the year. I would just really kind of focus on that. So with that being said, I think the momentum that we see makes me quite excited and kind of where we're at in the particular stages. And then Paul did a really good job of talking about some of the progress that we're making on other deals that wasn't necessary on our original forecast for the year, and those are progressing quite well. So as we sit here, we're kind of in a really good position, quite frankly, in terms of there are many options that we have to kind of achieve that target. How that balances out from one quarter to the next is probably less important than closing those deals and getting them done. But in any event, we're very much dedicated to that guidance range. And just speaking up on that, what we really do see is that aspect of the range, we try to be very transparent in what you have. We're reiterating guidance. And then quite frankly, with the options that we have, the top end of the guidance as well is still in play, very much so as we typically talk about it from a midpoint perspective. But there is a great deal of momentum that we have in our business.

And maybe just as a follow-up on your comments about caution on spending and bringing the spending down a little bit. If you do find yourself finding some larger deals in the third quarter or early in the fourth, do you see potentially bringing some R&D back up in the back half of the year if you're feeling more comfortable with revenue levels in the back half and particularly at the end of the year?

No, that's a great question, Matt. And then specifically, one of our main priorities in our business is to continue to innovate, and we take that very, very seriously. The spending that we noted in that decrease from the midpoint of formerly $170 million to $163 million, that is primarily driven on the selling and general administrative side of things. For R&D, there are a few things that are a little bit much further out that we've adjusted the timing on that doesn't have a near-term impact on revenue. But with that dedication to innovation, quite frankly, you will see some growth, some slight modest growth on the R&D side of things. It's where on the SG&A, we tighten the belt, so to speak, and delay the timing on a few things on a strategic basis without harming our really our long-term prospects. But R&D is something that we're committed to as a company. And any time we see an opportunity that we can accelerate our business, we'll capitalize on, and we'll make that...

And with no further questions in the queue, I will hand the call back over to management.

Thank you, operator, and thanks to everyone for being with us today. I'd like to thank our employees for their continued dedication and hard work. In the third quarter, we will be participating in Rosenblatt's Age of AI Virtual Conference on August 18, and we will also be attending the BWS Investor Conference in New York on August 20. We look forward to seeing you at these and other upcoming events. Thank you for joining us today.