Adeia Inc. Q4 FY2025 Earnings Call

Good day, everyone. Thank you for being with us. Welcome to Adeia's Fourth Quarter 2025 Earnings Conference Call. I would now like to turn 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 are 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 pleased to be here to share our results for the fourth quarter and full year 2025. We delivered an outstanding year both financially and operationally. Our record annual revenue exceeded the high end of our guidance range, and we delivered excellent operating income and EBITDA, also exceeding the high end of our guidance. Our record revenue for both the quarter and the year was driven by our dedicated focus on key growth areas, including OTT. I'm proud of our team's commitment to maintaining relationships and finding ways to resolve litigation matters efficiently, resulting in outstanding outcomes for our stakeholders. As we mentioned during the prior call, we were pursuing multiple opportunities that would lead to a strong start for 2026. With this deal momentum, we have already executed several new agreements this year, most notably a multiyear license agreement with Microsoft, a leading technology company. This agreement covers our media portfolio with broad applicability to Microsoft's business including their consumer electronics and social media products and services. Let me discuss our fourth quarter results in a little more detail. In the fourth quarter, we delivered revenue of $183 million, highlighted by 9 deals, including 8 in media and 1 in semiconductors with 4 new customers. Our efforts to diversify our revenue base continue to show results with non-Pay-TV recurring revenue growing 30% in the quarter year-over-year. We are pleased to have signed Disney, our biggest new customer in the quarter. With Amazon and Disney, we now have licensed 2 of the largest OTT providers in the world. After an extended period of engagement with Disney, we took formal steps to protect our intellectual property while continuing constructive dialogue. Through the course of the litigation, which lasted approximately 1 year, we believe we are able to demonstrate to Disney, the applicability of our portfolio to their services and both parties reached a comprehensive agreement resolving all disputes. Concluding this matter efficiently reinforces the strength and broad applicability of our IP portfolio and provides additional momentum as we pursue further OTT opportunities. Another new customer in the fourth quarter was Major League Baseball, the second major U.S. professional sports league to sign a multiyear agreement for access to our media portfolio. We were also pleased to sign a multiyear renewal with Vodafone, reaffirming our relevance and strength in international Pay-TV markets. In addition, during the quarter, we signed a new OTT customer in South Korea, a new Consumer Electronics customer in Japan, a domestic Consumer Electronics renewal and 2 Pay-TV renewals, further demonstrating the breadth of our licensing platform. In semiconductors, we signed a prototype development agreement with an existing customer following an initial license agreement with them last year. The customer recognized early on the value of our hybrid bonding technology for high-performance imaging and detection systems. Now I'd like to provide a brief review of our accomplishments for the year. Turning to the full year. 2025 was a record year for Adeia. Revenue reached $443 million, exceeding the upper end of our revised guidance with operating income of $276 million and adjusted EBITDA of $278 million, both above the high end of our guidance. Our results were driven by the execution of 26 license agreements across a diverse customer base spanning OTT, semiconductors, consumer electronics, Pay-TV and e-commerce verticals. Importantly, we added a record 12 new customers, significantly expanding and diversifying our licensing base. Momentum was strong across both core and growth verticals, including 9 Pay-TV deals, 7 in OTT and 4 semiconductor deals. New customers such as Disney, STMicro, Major League Baseball and several e-commerce platforms contributed meaningfully to growth. Renewals with customers including Altice USA, Vodafone and others continue to support the stability and predictability of our recurring revenue stream. Balanced capital allocation remained a priority in 2025. During the year, we reduced debt by $60 million, returned capital through dividends and share repurchases, and acquired 6 tuck-in patent portfolios, all while growing our cash balance. Our semiconductor innovation also received industry recognition. Our hybrid bonding technology was awarded Best of Show for Most Innovative Technology at the Future of Memory and Storage Conference. In addition, RapidCool received the Global Brands Award for Technology Excellence as demand for high-performance computing, driven by AI continues to grow; we believe the effective thermal solutions will be increasingly critical and we remain focused on advancing RapidCool with partners and potential customers. Several opportunities we previously discussed have closed or are expected to close early in 2026, supporting our confidence in our annual revenue guidance. The opportunities in our pipeline continue to expand across both media and semiconductors. As we have previously mentioned, we are expecting Pay-TV as a percentage of revenue to decline below the historical average of approximately 50% to 60%. We are now anticipating Pay-TV will represent approximately 35% to 40% of our forecasted revenue this year. We are closely monitoring and taking direct action to challenges within our Pay-TV licensing program. Specifically, DIRECTV has filed certain litigation, which ultimately challenges the need for a new license agreement. We believe this is a clear violation of the agreements we had in place, and we have, in turn, filed a breach of contract suit against them. As we have demonstrated in recent disputes, including Altice USA and Disney, we are confident we will ultimately be able to successfully resolve this matter. As a reminder, the vast majority of U.S. Pay-TV operators are licensed to our media portfolio, several of which agreements extend into the next decade. We continue to diversify our customer base. One of our primary strategic priorities over the last few years has been to grow our revenue in non-Pay-TV verticals such as OTT, semiconductors, consumer electronics, social media and adjacent media markets. By adding new customers in these verticals, we have made tremendous progress. In 2025, we grew our non-Pay-TV recurring revenue by more than 20%. And since 2022, we have grown it by more than 60%. In semiconductors, we see the adoption of hybrid bonding broadening with new product releases anticipated in 2026. Hybrid bonding enables further advancement of Moore's Law in an environment where there is a growing need for innovations that support rapidly evolving AI ecosystems and related infrastructure. While AMD is already in production with their hybrid bonded products, other logic leaders such as Intel, Broadcom and Marvell have publicly disclosed product road maps that will utilize hybrid bonding. Hybrid bonding is also becoming critical in memory, especially in high-bandwidth memory and NAND, which are increasingly needed to process today's large language models and other AI applications. Micron, Samsung, and SK Hynix are all making significant multibillion-dollar investments in advanced packaging capacity that support their hybrid bonding strategies for HBM and NAND. Semiconductor equipment toolmakers involved in the hybrid bonding supply chain have further confirmed the rising adoption within their tool orders recently accelerating. With AI driving significant transitions in semiconductor architectures and the need for better cooling technologies only increasing, our hybrid bonding and RapidCool technologies position us well to capture meaningful opportunities in the next several years. Our patent portfolio underpins our future licensing activity. In 2025, we grew our portfolio by 13%, marking our third consecutive year of double-digit growth, driven by strategic R&D and targeted M&A. While portfolio expansion remains a priority, we expect growth to moderate over time. I'm pleased, once again, we were recognized by Harrity & Harrity as one of the most prolific inventors in the U.S., with our ranking rising compared to last year and ahead of industry leaders such as AMD, Broadcom, Verizon and AT&T. Among these industry titans, I'm extremely proud that we had the 66 most new U.S. patents issued in 2025, a remarkable achievement for a company of our size and testament to our commitment to innovation. We achieved a lot in 2025. We strengthened our predictable revenue stream while expanding into key growth markets, positioning Adeia for continued long-term value creation. We also recently enhanced our leadership structure to strengthen execution towards the company's long-term strategy and growth priorities. Specifically, we welcome back Craig Mitchell to the newly created role of Chief Semiconductor Officer, where he will lead the company's semiconductor technology and R&D organization and will be responsible for shaping Adeia's semiconductor vision. In addition, Dr. Mark Kokes was appointed Chief Revenue Officer. Mark will oversee our global sales and go-to-market strategy across the organization. Finally, Bill Thomas was appointed to Chief Strategy Officer, a newly created position to oversee our long-term planning, market analysis and growth initiatives. With this new leadership, I am confident we have the right team and structure to execute on our strategy. We are off to a strong start in 2026, supported by recent agreements and a growing pipeline. We remain focused on achieving our long-term goal of $500 million in annual licensing revenue. And now I'll turn the call over to Keith for further details on our financial results.

Thank you, Paul. I'm pleased to be speaking with you today to share details of our fourth quarter 2025 financial results. During the fourth quarter, we delivered strong financial results with revenue, operating income and adjusted EBITDA, all exceeding the high end of our guidance. Record revenue of $182.6 million was driven by the execution of 9 deals across a diverse mix of customers, including OTT, Pay-TV, consumer electronics and semiconductor. During the quarter, we signed 4 new license agreements. This includes signing a significant license agreement with Disney, which greatly adds to our presence in the OTT market. Now I'd like to discuss our operating expenses, for which I will be referring to non-GAAP numbers only. During the fourth quarter, operating expenses were $49.2 million, an increase of $12.1 million or 33% from the prior quarter. The increase is primarily due to increased variable compensation as a result of exceeding certain performance targets. Research and development expenses increased $3.1 million or 21% from the prior quarter. The increase is primarily due to increased variable compensation as well as increased portfolio development costs. Selling, general and administrative expenses increased $7.7 million or 44% from the prior quarter, reflecting increased variable compensation costs. Litigation expense was $6.5 million, an increase of $1.3 million or 25% compared to the prior quarter, primarily due to higher spending on AMD and Canadian litigation matters. Interest expense during the fourth quarter was $9.4 million, a decrease of $614,000, primarily attributable to our continued debt payments and due to lower variable interest rates during the period. Our current effective interest rate, which includes amortization of debt issuance costs, was 7.5%. Other income was $1.7 million and was primarily related to interest earned on our cash and investment portfolio and due to interest income earned on our revenue agreements with long-term billing structures under ASC 606. Our adjusted EBITDA for the fourth quarter was $133.9 million, reflecting an adjusted EBITDA margin of 73%. Depreciation expense for the fourth quarter was $484,000. 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 fourth quarter with $136.7 million in cash, cash equivalents and marketable securities, and we generated $60 million in cash from operations. As demonstrated by our results, the fourth quarter has historically been a very strong cash generation period for us. This strong financial performance allowed us to execute on all 4 pillars of our balanced capital allocation approach while growing our cash balance. This includes paying down our debt, repurchasing shares, paying our dividend and making 2 tuck-in acquisitions. We made $21.1 million in principal payments on our debt in the fourth quarter and ended the quarter with a term loan balance of for $426.7 million. In the fourth quarter, we repurchased approximately 718,000 shares for $10 million, bringing the remaining amount available for future repurchases to $160 million under our current stock repurchase program. 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 March 30 to shareholders of record as of March 16. Now I'll go over our guidance for the full year 2026. Our 2026 revenue guidance range is $395 million to $435 million. As we mentioned in our previous call, our sales pipeline was and continues to be very strong. This has manifested in not only a strong close to 2025, but serves as a springboard to early success in 2026, which we see propelling us through the remainder of the year with future wins. Overall, we see the first half of the year and the second half of the year being relatively equal in terms of revenue contribution. Operating expenses are expected to be in the range of $184 million to $192 million. We anticipate modest single-digit growth for both R&D as well as SG&A expenses. As we continue to prioritize investing in our technology and infrastructure in both our media and semiconductor businesses. We anticipate that our litigation expense will increase year-over-year. Even with recent settlements, our litigation docket remains active as we pursue additional large licensing opportunities. We expect interest expense to be in the range of $34 million to $36 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 55%. We expect the non-GAAP tax rate to be 21% for the full year. We also expect capital expenditures to be approximately $2 million for the full year. I could not be more pleased with our performance in 2025. Our operating results reflect significant records for Adeia for revenue as well as earnings. Our deal momentum and execution have led to a record number of new customers, which are a key catalyst for our future growth as we look to expand our business. We have shown that we have a relevant and sustainable licensing program, which is bolstered by our commitment to investing in our portfolio development. With momentum that we have generated, I am excited and encouraged by our prospects in 2026 and beyond. I'm incredibly proud of our dedicated employees who have worked tirelessly to accomplish our goals and thankful for their continued belief in our mission. Now I'd like to turn the call back to Paul for a few additional remarks.

Thank you, Keith. I'd like to take a moment to congratulate our employees for delivering a record year and setting us up for success in the future. I'd also like to note, we will be attending the ROTH Annual Conference in March. We look forward to seeing you at this and other upcoming events. I would now like to turn the call over to the operator to begin our question-and-answer session.

Your first question comes from Kevin Cassidy with Rosenblatt Securities.

Congratulations on the great year. As we look at Pay-TV customers, that will be down to 35% to 40% of your revenue, which reduces risk significantly. Do you see that the subscriber loss is slowing down, or do you anticipate that it will eventually reach a stable point? In the fourth quarter, Charter announced an increase in their number of subscribers. I'm curious about the trend you're observing in that regard.

Thank you, Kevin. I appreciate your comments. You are correct about what we're observing with Charter, where there is an increase in their video subscribers. We are noticing some moderation in the overall percentage of subscriber declines, and we anticipate this trend to continue. We've factored in these subscriber declines into our forecasts, which range from 30% to 45% moving forward. This is why we have concentrated on growing our non-Pay-TV recurring revenue. While Pay-TV remains a crucial component of our business, we have purposefully diversified our revenue streams since our separation over three years ago, achieving significant success in this area. We are quite satisfied with our results, particularly in OTT, semiconductors, and adjacent media markets. Nevertheless, Pay-TV continues to be important for us. As mentioned in my prepared remarks, we have several deals extending into the next decade, indicating that our Pay-TV customers still find a lot of value in our portfolio. We are still completing deals in that sector, although we have accounted for the subscriber declines in our expectations, believing they will moderate over time. Thank you for the great question, Kevin.

Okay, great. Yes. I would like to follow up on RapidCool. The interest is encouraging, and I’m curious about the competitive landscape. What other solutions are customers considering? What does their decision process look like when evaluating or adopting RapidCool?

Yes. What's unique about our business is we don't compete in the typical sense, right? We license our technology on a portfolio-wide basis, and RapidCool will be part of that moving forward. And we're getting a lot of interest, both on the logic side and on the memory side. We think there's applicability in both, especially as these AI workloads require more and more memory, as you know, Kevin. And we see RapidCool being relevant for HBM in addition to logic. And so we're getting a lot of pull on that. What's great about our solution and what we think differentiates it is it's plug and play, right? You can use the same equipment that is being used today. You can put it into a liquid cooling rack and data center, right, that is already set up liquid cooling today and use RapidCool in the same way that you would use a liquid cooling cold plate, so that's tremendous, and we're hearing a lot of benefits around our solution related to that. And so that's what excites us about our solution versus competitive solutions.

Your Next question comes from Scott Searle with ROTH Capital.

Nice to see the strong conclusion to '25 and strong start to '26. Maybe Keith, just to drive in, in terms of the mix of business in the fourth quarter. I'm wondering if you could provide a little bit more color in terms of recurring and nonrecurring and also media and semiconductor kind of the splits in terms of those businesses? And maybe a quick update in terms of, how sequentially the 3D NAND market has been progressing? And then I had a couple of follow-ups.

It's great to hear from you, Scott. In Q4, our recurring and nonrecurring revenue was nearly evenly divided, close to 50-50. This gives you an idea of the significant impact of the license agreement we signed with Disney, along with the revenue recognized from prior licensing periods. For the year, we ended with 80% recurring revenue and 20% nonrecurring, which aligns with our historical trends. Looking back a year, we anticipated this outcome and even slightly exceeded it. Regarding our business segments, I want to highlight the semiconductor group, which performed impressively. In comparing revenue from '24 to '25, we increased from about $18 million to $26 million—a 40% growth. The key deals signed late in '24 and early in '25, including a significant agreement with STMicro, have started gaining traction, particularly in the NAND flash market. It's noteworthy that certain minimums were included in our agreements, which required us to recognize some revenue upfront. This affects our revenue recognition in '25 and '24, but we anticipate a modest increase moving forward, with a more noticeable impact in '27. Our media business has also been outstanding, contributing roughly 94% of our total revenue. We are thrilled with how the year has begun as we've secured some new deals, including one with Microsoft and another in the semiconductor sector. Overall, we are off to a fantastic start and are on an upward trajectory.

Great. Very helpful. I would like to follow up on a clarification regarding NAND pricing. As I understand it, you are not benefiting directly from the price increases happening in the marketplace. Are these increases driven by unit volumes? Does that include overall NAND capacity that you are shipping? Is that what determines how the royalty agreement is priced?

Yes, you picked up on a great note there. So our agreements are not based on the selling price. When we go to renegotiate for those agreements, it's based on a fixed amount per unit. There is some degree of scaling in there, but usually it's more so of volume discounts. So the more they produce, the more benefit that we kind of give them later on down the road. So what you're seeing is that dynamic of two things: of increases in NAND; and then increases in volume. We benefit from the increase in volume and not the increase in pricing.

I would also just add, Scott, on NAND just as a reminder, we signed the deals with Kioxia and SanDisk in March of 2023. At that time, they had no NAND products that utilized hybrid bonding. And so there's been this ramp of the mix of their product lines that include hybrid bonded products, which also impacts as we see it. So as total NAND goes up, we're focused on what is the percentage of that that is a hybrid bonded as well.

Very helpful. And if I could, in terms of the guidance for 2026, and this will be a little bit of a multipart question here, but I wanted to get calibrated on a couple of fronts. It seems like media, there's a lot of momentum that's building. We have the initial step down in the first quarter of non-Pay-TV customer. But given Disney, given some of the other momentum with Microsoft and otherwise, 2 things, are you expecting in media to see sequential growth throughout the course of the year from the March quarter on? And do you expect media to grow from a recurring standpoint on a year-over-year basis? And then as it relates to semi, I'm kind of wondering if you could frame your optimism for 2026. It seems like there's certainly momentum building with the existing 3D NAND customer base. But Paul, you called out some of the ongoing discussions that you've got with some of the larger logic players out there that will introduce products in the course of 2026. So I'm wondering what are you guys factoring in to that guidance. Are you assuming that there's a logic customer that comes in? Or is that basically a baseline view of just kind of growing the existing NAND business and what you've got visibility to in front of you on the media side?

Yes. A lot to unpack there, Scott, but let me attempt to address the second part of your question around the semiconductor business, and then I'll turn it back to Keith on the first part of your question. Our optimism in semi is still very strong. I think not only in logic, but as we look out further beyond 2026, what we're seeing in memory, not just in the NAND market, but also further down the road as we've talked about before, with HBM and the broader memory market as we have relicensing opportunities down the road, really just tremendous amount of investment today, as I noted in my prepared remarks. And in advanced packaging and hybrid bonding, specifically as the Big 3 really try to control their own destiny on hybrid bonding and advanced packaging, which is great for us as we move forward. So yes, we do have a lot of optimism in our guide overall; we actually have multiple paths to get to where we need to be. And I think our pipeline is stronger going into this year than it has been since we've separated in terms of the number of large opportunities that we have on the table. And so there's multiple ways that we can get to within our guidance range and could be continued to be driven by media, but there's some large semiconductor opportunities as well that are possible in addition to that.

Yes, Scott. To answer your question about the media business in 2026, there is a lot of great momentum. On the Pay-TV front, we see a shift of about 35% to 40%. However, the real highlight is on the OTT front, where we anticipate this business will account for over 30% of our total revenue next year, which is very exciting. We believe that a growth rate of 30% to 35% is a reasonable expectation, showcasing significant growth from where we started. Currently, our market share in the OTT sector is around 50%, which is driving this success. This positions us well to respond to your question regarding the media business. If we consider the recurring revenue components, it sets us up for a modest increase in revenue year-over-year, making this an exciting narrative for us.

Got it. That was very helpful. Lastly, I have one more question because the semi side is quite intriguing and exciting. Paul, it sounds like there are some opportunities this year, particularly in logic. However, there is a lot of press regarding the demand for HBM, especially in data centers, as well as pricing and the quicker evolution from HBM3 to HBM4 and 4E than anticipated. I'm curious about your perspective on this from the customer's viewpoint and the level of engagement. It seems the market is progressing faster than we expected about 12 or 18 months ago. Is that how you see it? Is this translating into productive conversations, even though we know that renewals are needed for the '27, '28 timeframe?

Yes. Thanks, Scott. I mean, we're tremendously pleased with what we're seeing from a marketplace standpoint on memory. And as you think about Micron, Samsung, and SK Hynix, not only on HBM, but what we're seeing with NAND, as we talked about before, we're thrilled to get the deals done with Kioxia and SanDisk. And we see the need for NAND and the other three providers as they get to around 400 layers to eventually go to hybrid bonding as well. And so I think there's an opportunity on both fronts and memory, both in NAND and with HBM. And so I don't want everyone to forget about NAND either because it's pretty significant for those players as well and what they're trying to provide. And we think hybrid bonding will be an important story. And when you think about AI, NAND is becoming more important as well on that side as well. So as people are trying to deal with these AI workloads. So it's exciting on both fronts and certainly the conversations and not just with hybrid bonding, as I mentioned earlier, with RapidCool as well being, I think, an enabling technology, not only for logic but also for the memory market, we see an opportunity there and certainly conversations are progressing with a number of folks on that front as well.

Your next question comes from Hamed Khorsand with BWS Financial.

Could you talk about the quarter's revenue? And you outperformed given the guidance you gave right before Christmas. So what drove that outperformance? Is there any recognition from '26 into '25. If you just give a little bit more details about that, please?

Great question, Hamed. When we announced the deal with Disney, it was right after we signed, and the accounting processes weren't completed at that time. It was a substantial and intricate transaction. Ultimately, we settled the accounting, and some aspects were more advantageous for us. Additionally, the overachievement in revenue and our guidance was due to closing more business and having a strong finish to the year. For example, we discussed Major League Baseball, but there were other agreements fueled by our sales team's momentum. They didn't slow down at Baseline, especially with Disney, and we benefited from their hard work. Furthermore, we received significant royalty reports from both our media and semiconductor divisions, reflecting increased volumes. You might recall Kevin Cassidy mentioning Charter, which echoed across our Pay-TV numbers. Similarly, the semiconductor sector, particularly NAND, also showed favorable results. All these factors combined led to an impressive revenue figure that exceeded our initial guidance.

Okay. And then if you go into '26, you've announced Microsoft, that's obviously a great big name. But is that going to be material for you in '26? Is it going to be cash driven? Or is there a minimum guarantees? Could you rank that as to how big that opportunity is for you?

I'll start, Hamed, and then let Keith add anything. We're very happy about our agreement with Microsoft, especially being able to close it early in the year. As I mentioned at the end of 2025 during our November talk, we had numerous opportunities we were pursuing and some significant ones. We've successfully executed on a few in early 2026, with Microsoft being one of the highlights. We can't discuss the specifics of the financials, but it resembles many of our other deals, both in Pay-TV and non-Pay-TV. I want to emphasize that it will be a substantial customer for us.

Your next question comes from Matthew Galinko with Maxim Group.

I think, Keith, you mentioned and I didn't do the math, but 55% EBITDA margin implied in guidance. If that's correct, it seems like a step down from the last couple of years. So I was hoping you could maybe just go into the assumptions there of why we'd be seeing compression of what seems like a pretty strong revenue guide?

Yes. Matt, I want to highlight that when we look at our operating expenses for research and development and SG&A, we plan to grow those at single-digit rates, which has been consistent for the past several years. One key difference is related to our legal expenses for 2022, 2023, and 2024, which were historically low and not something we anticipated. Traditionally, we've thought that our litigation expenses should be in the 20s, something we've communicated before. In 2025, our litigation expenses were about $25 million, as mentioned previously. Looking at 2026, our litigation expenses are expected to increase by $5 million to $10 million above that $25 million. This increase is important because we take our intellectual property very seriously and aim to defend it just as our customers protect their own products. With our technology being widely adopted in the market, we want to ensure we are fairly compensated, which may involve litigation. This is primarily about being prepared. As Paul noted, we've seen significant benefits from this, but it does affect our margins, bringing them down from the low 60s to around 55%. I hope this provides you with further clarity.

Sure. It does. And maybe just a follow-up to that. I think Paul might have referenced the long-term goal of $500 million of annual revenue. And again, correct me if I got that wrong, but maybe if we sort of take that number and think about what the litigation expense might be to get there, is that $30 million, $40 million, right kind of level? Or do you kind of need to keep pushing that up a little bit to drive revenue to the long-term level?

Matt, that's a great question. I've consistently said that we prefer to finalize deals without resorting to litigation. This is our principle; we make significant efforts to avoid litigation and seek paths to finalize agreements without it. However, there are times when it's necessary. What we've demonstrated with Disney, and also with Altice, shows that when needed, we handle litigation effectively. This can yield excellent results for us. We are unafraid to pursue litigation when it's essential to protect our intellectual property, as Keith mentioned earlier. This litigation expense will always be a part of our budget, typically around $25 million to $35 million. There may be years when it is lower or higher, but we prepare for it because it can lead to significant outcomes. In the OTT market, there are notable examples: we achieved a great outcome with Amazon without litigation, wrapping things up by the end of 2024, and with Disney, we also saw positive results through litigation by the end of 2025. We can achieve excellent results whether we resort to litigation or not, although sometimes customers compel us to take that route. Ultimately, our intellectual property is robust, and I feel confident when we need to pursue litigation, even though I prefer to avoid it.

This concludes the question-and-answer session. I'll turn the call to CEO, Paul Davis, for closing remarks.

Thank you, operator, and thanks for everyone for being with us today.

This concludes today's conference call. Thank you for joining. You may now disconnect.