Participants

Chris Chaney; Vice President of Investor Relations; Adeia Inc

Paul Davis; President, Chief Executive Officer, Director; Adeia Inc

Keith Jones; Chief Financial Officer; Adeia Inc

Maddie De Paola; Analyst; Rosenblatt Securities

Hamed Khorsand; Analyst; BWS Financial Inc

Matthew Galinko; Analyst; Maxim Group

Presentation

Operator

Good day, everyone. Thank you for standing by. Welcome to Adeia's third quarter, 2024 earnings conference call. During today's presentation, all parties will be in a listen-only mode following the presentation, the call will be open for questions.
I would now like to turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead.

Chris Chaney

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 result to differ materially from what we discussed 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.

Paul Davis

Thank you Chris and thank you everyone for joining us today. I am pleased to be here to share the results of our third quarter and the progress we have made in our business. I want to first cover a significant recent development, the filing of patent infringement litigation against Disney.
We have had great success over the past several years in signing license agreements without the need for litigation, as evidenced by our over 100 agreements we have signed in the past three plus years, we always prefer to reach a mutually agreeable resolution. However, sometimes we are left with no choice. To that end let me briefly discuss the litigation we filed earlier today against the Walt Disney Company and certain of its subsidiaries including Hulu and ESPN for their unauthorized use of our IP.
The lawsuits we filed include six patents in the US and three in Europe, all related to various aspects of our media streaming technology utilized by their streaming platforms. While we remain willing to negotiate a resolution that fairly compensates Adeia for our valuable IP. We are also fully prepared to proceed through the entirety of the legal process to protect our rights and we are confident in our ability to achieve a positive outcome.
Finally, I'd like to emphasize that Disney was not contemplated in our prior or current revenue guidance for 2024. As we look at other progress in our business, our pipeline of new opportunities in key verticals such as OTT semiconductor and e-commerce continues to strengthen and we are advancing many of these to the final stages of negotiation.
Following the end of the third quarter, we closed a multiyear e-commerce license agreement with Neiman Marcus, a leading luxury retailer with a growing e-commerce presence. This agreement with Neiman Marcus represents early success for us in our e-commerce media adjacent market and is an important milestone that we intend to build on.
Additionally, we are making great strides towards closing two significant agreements, one in OTT and one in semiconductor. As with all complex agreements, it is difficult to pin down exactly when they will close.
Our priority is to secure the best long term outcome that fairly values RIP.
This is particularly important. Given the long term nature of our agreements with an average contract length of five years, the trajectory of both of these deals remains positive and we look forward to sharing further details on them soon. As Keith will discuss, we have adjusted our revenue guidance for the year to reflect the possibility that one of these deals moves into 2025.
More importantly, our long term goal of growing our annual revenue to over $500 million remains the same and we are confident that with our robust pipeline of opportunities, we will be able to achieve this milestone in the third quarter. We continued to make progress towards our goals for the year as we signed seven deals in the quarter, bringing our total to 22 deals signed in the year.
These agreements were across multiple verticals including consumer electronics, Pay-TV, semiconductor and OTT. Six of the deals we signed in the third quarter were renewals, further strengthening our high renewal rate which continues to exceed 90%.
We delivered revenue of $86.1 million in EBITDA of $51.3 million and we continued to reduce our term loan balance with another $12 million accelerated payment.
Lastly, given the confidence in our long term prospects. Our board increased the authorization under our share repurchase program to up to $200 million. And we intend to begin executing towards a more balanced capital allocation approach. This quarter, I'd like to share some more details of the deals we signed in the third quarter, we signed a multi year renewal with LG Electronics for access to our media portfolio.
As many of you know, LG is a global producer of consumer electronics such as smart TVs. This renewal highlights our position as a technology innovator and our 25 plus year relationship with LG is a great example of the positive influence our R&D investment has on the enduring relevance and value of our portfolios.
In addition, we also signed a multiyear renewal with VIZIO, a leading smart TV brand for access to our media portfolio. We are pleased to now have most of the major smart TV brands under license including Samsung, LG, Sony, VIZIO and Panasonic.
We further strengthened our international customer base in the third quarter with a long term renewal with liberty, global, a significant provider of Pay-TV services in Europe. Other agreements we signed in the third quarter were renewals with a provider of streaming services and devices, a provider of online programming guides and an OTT provider in Korea all for access to our media portfolio.
We also signed a semiconductor agreement with an existing customer for advanced hybrid bonding engineering support. We ended the third quarter with over 11,750 worldwide patent assets up from 11,500 in the prior quarter.
Our future growth and ability to attract renewals and new customers is dependent on the relevance and value of our portfolios. High quality portfolio assets are vital to maintaining our strong renewal rate and adding new customers in our key growth markets.
Our commitment to driving innovation through investment in R&D has enabled us to generate approximately 85% of our portfolio organically while expanding the relevance of our portfolios to our existing and new markets.
I am immensely proud of the way our visionary inventors anticipate future trends in our targeted end markets and develop fundamental innovations enabling those trends.
Although the majority of our is organic, we actively seek to augment our portfolio through M&A when we see opportunities that align with our strategy, we have augmented our media assets through multiple acquisitions, primarily focused on OTT for a combined investment of approximately $20 million this year including acquisitions closed in the fourth quarter.
Our acquisition efforts are primarily targeted at accelerating our growth opportunities in both our media and semiconductor businesses.
Our media and semi R&D teams continue to remain actively engaged in their respective ecosystems. And over the last quarter, share their insights on topics such as video proliferation, AI an augmented reality with other experts and potential customers at numerous industry events.
As we look deeper into the semiconductor market, hybrid bonding adoption and flash memory, high bandwidth memory and in logic devices continues to gain traction. We believe the growth of hybrid bonding adoption in these areas will drive increased revenue opportunities for us with both existing and new customers.
In addition, there is substantial interest in new semiconductor co-optimization innovation as the slowing of Moore's law accelerates, we believe our co-optimization program launched earlier this year will pay long term dividends especially in the logic market. In media, we are seeing particular focus on image recognition in e-commerce in Ad Tech utilizing AI and the critical issue of network security, all areas where our media R&D team is driving exciting new solutions.
The introduction of the first augmented reality glasses utilizing spatial computing in innovative micro led displays instead of traditional [OLED] are recent market developments that we believe will be of growing relevance to audio.
Our media and semiconductor portfolios have important inventions that contribute to the advancements in these areas and can help drive long term revenue growth. Further our participation in related industry events, not only keeps us close to these industry trends but also brings new customer engagements.
Our media team participated in a panel on preventing unauthorized broadband sharing at SCTE TechExpo24 and presented a paper on groundbreaking solutions for copyright attribution in AI generated images at IEEE2024.
Further, our semiconductor team presented research on enabling cost effective micro led integration for near eye devices at micro led connect. Adeia continues to gain recognition through our participation in these conferences and contributions to the innovation ecosystem in our target markets. In October, we were honored to be included in the 2024 streaming media, 100 a list of the most innovative and influential North American based companies in the streaming ecosystem.
The progress we have made has been impressive both operationally and in terms of executing our highly cash generative and profitable business model and we remain committed to achieving the goals we set earlier this year.
Since separation, we have created an engaging, vibrant and healthy working environment where we are attracting and retaining top talent to that end. I'm proud we were recently recognized by us news and World Report as one of their best companies to work for now.
I would like to turn the call over to Keith for a review of our third quarter financial results.

Keith Jones

Thank you, Paul. I am pleased to be speaking with you today to share details of our third quarter 2024 financial results, we delivered revenue of $86.1 million in the third quarter driven by the execution of seven deals across multiple verticals including consumer electronics, Pay-TV, semiconductor and OTT.
And shortly after we closed the third quarter, we signed a new multiyear agreement with Neiman Marcus demonstrating early success in our e-commerce media adjacent market vertical.
Now, I would like to discuss our operating expenses for which I will be referring to non-GAAP numbers only. During the third quarter, operating expenses were $35.3 million an increase of $300,000 or 1% from the prior quarter.
Research and development expenses were $13.7 million and were consistent with the prior quarter.
Selling general and administrative expenses increased $1.9 million or 11% from the prior quarter. Primarily due to higher personal costs as a result of increases in staffing higher spending to support our sales efforts in both the media and semiconductor businesses.
And due to a non-recurring benefit on the recovery of bad debt expense in the prior quarter related to our settlement with X. Litigation expense was $2.7 million a decrease of $1.6 million or 38% compared to the prior quarter.
Primarily due to the timing of expenses related to certain legal matters interest expense during the third quarter was $12.8 million. A decrease of $540,000 from the prior quarter. Due to the benefit of a lower interest rate following the successful repricing of our term loan. And due to our continued debt repayments.
Our current effective interest rate which includes amortization of debt issuance costs was 9.2%. I would like to highlight that our year-over-year interest expense has decreased $2.9 million which is a significant accomplishment as we continue to deleverage our balance sheet and enjoy the benefits of repricing our debt agreement.
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, our adjusted EBITDA for the third quarter was $51.3 million reflecting an adjusted EBITDA margin of 60% depreciation expense for the quarter was $526,000.
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 third quarter with $89.2 million in cash, cash equivalents and marketable securities and generated $14.3 million in cash from operations.
We made $12 million in principal payments on our debt in the third quarter and ended the quarter with a term loan balance of $537.1 million.
During the third 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 December 18, to shareholders of record as of November 27.
Additionally, in October, the border proved an increase to our current repurchase program to repurchase up to a total of $200 million of our common stock.
The share repurchase program is part of our broader capital allocation strategy as a result of the increased flexibility that we have following our recent debt repricing.
As we discussed during last quarter's call, we now have greater capacity to have a more balanced approach in deploying our capital including continue to make accelerated payments on our debt continuation of our current dividend program commencing stock repurchases and increasing our capacity to make tuck in acquisitions to expand our patent portfolio.
Now I will go over our guidance for the full year 2024. We remain confident in the overall progress towards executing our sales pipeline. We continue to make great strides throughout our businesses which include significant new license agreements in both OTT and semiconductors.
As we have consistently emphasized obtaining the appropriate economics on each deal is of paramount importance to us as we maintain this discipline. And given the relatively large size of agreements, we enter into the timing of executing agreements can impact our reporting in the near term.
Given this dynamic as we close out 2024 we are adjusting our revenue guidance range to $370 million to $400 million.
Once again, this science is a reflection of the potential impact. A small subset of deals can have on our short term reporting and is merely timing related with the health of our sales pipeline and the progress we have made to date, we see no loss in business momentum and our ability to execute. Operating expenses are now expected to be in the range of $144 million to $148 million.
We have again reduced and narrowed our operating expense guidance range as we continue to leverage our internal resources better than we had initially planned. And also due to changes in the timing of certain litigation expenses, we expect interest expense to be in a range of $52 million to $53 million.
We expect other income to be in the range of $5.5 million to $6 million. We expect a resulting adjusted EBITDA margin of approximately 62%. 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 $2 million for the full year. Our sales pipeline of new opportunities is more robust than it has been since our separation. And I'm confident we will achieve our goals as we look to grow and expand our business.
We also view our current litigation with Disney as a step forward while we view this as a last resort. It is of the utmost importance for us to protect our it in order to drive shareholder value 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?

Question and Answer Session

Operator

(Operator Instructions)
Madison de Paula, Rosenblatt Securities.

Maddie De Paola

Hi, thanks for taking my question. So I'm just wondering, could you provide any more details around the semiconductor license signed during the quarter?

Paul Davis

Hi, Matty. This is Paul Davis. Thanks for the question. Hope you're doing well. You know, we can't get into too much details on it. But, I think it, what it really shows is the continued interest in hybrid bonding. We're getting a tremendous interest in, in and really across the board and in a number of different customers. And, and it's it's really exciting for us as, as that hybrid bonding adoption, as I said in my prepared remarks, we're really seeing it across, you know, a number of industries, including obviously flash memory where we're seeing increased adoption after our signing of our deals with [Kyocha] and Western digital last year.
And then also in logic, we continue to see more devices and then finally, we're continuing to monitor and look at what what people are talking about and high bandwidth memory as well. So we're very excited about it. Unfortunately though, because of confidentiality, I can't get too much more into details about a specific agreement.

Maddie De Paola

Okay, great. Thank you. And then I just was wondering what are the trends that you're seeing in Pay-TV? Subscribers from your customer's point of view?

Paul Davis

Yeah, I think it's like it's more of the same. It's really, we're continuing to see you know, declines in subscribers in our customer base in the US on with traditional Pay-TV. It's right in line with what our expectations are though. We put that into our forecast both for, for the year and in our long term forecast as well. So we, we continue to see that going down over a period of time, we do think it will level out after, you know, a few years is, is our expectations, but we've modeled that into our forecast and it is what it is in terms of what we are, what our expectations are.
The one thing I would note though is, you know, there is there's tremendous growth in obviously OTT the virtual MVPD players. And so that's the plan, that's what, how we're trying to offset those declines that we anticipated. And we're very confident in our ability to continue to execute towards that plan to offset the expected declines.

Maddie De Paola

Okay, great. Thank you guys so much.

Operator

Hamed Khorsand, BWS Financial.

Hamed Khorsand

Hi, So my first question is what gives you the confidence that you would sign at least one in Q4 and then the slippage into Q into 2025 actually happens.

Paul Davis

Yeah. Listen Hamed, I think it's a fair question. I think what gives us confidence is just the regular communication that we continue to have with these customers and also just our pipeline of opportunities continues to expand. So we've signed, we signed seven deals in Q3, these deals though, take time, even those deals that we signed were took quite a bit of time to ultimately conclude.
But where we're at in the progress we've made the, the frequency of communication that we're having. And we, we think there our goal is to close both of them, but we wanted to be transparent about that there could be one of them that closes in Q4 and the other could slip into 2025. But our goal and what we're pushing the team to is get, still get both of them done this year.

Hamed Khorsand

So, is it fair to assume that at least the one that you're saying that might go into 2025 is not Disney?

Paul Davis

Yeah, I mean, Disney was not in our near term opportunities as I noted on the call, it wasn't 2024 revenue projection for us. And so we that was not one of the ones that we were counting on for 2024.

Hamed Khorsand

Okay. Thank you.

Paul Davis

All right. Thank you, Hamed.

Operator

Matthew Galinko, Maxim Group.

Matthew Galinko

Hey, thanks for taking my questions. So maybe first could you give us a little bit of background on, I guess how long the negotiation with Disney was ongoing prior to you filing the infringement cases? And anything you could share with us about what the sticking point might have been, is it really just kind of a price discovery issue or maybe just any background you could share on that?

Paul Davis

Yeah, thanks Matt. Unfortunately, we can't get into specific details, like our conversations with our customers are often covered under confidentiality agreements. What I can say is generally speaking, we pride ourselves on getting deals done and taking the time to get deals done. And we have lengthy discussions. I've, mentioned multiple times, often our cycle is 18 to 24 months.
Sometimes it can even take, longer than that at some point though in discussions, it becomes clear if someone we're going to be able to get a deal done or not. And in this case, we determined obviously by following this litigation that we needed to move down that in that step. As Keith said, we see this as a step forward, right? That this is something that we needed to do. We're confident in the cases that we filed today. And that we'll ultimately be able to get a good outcome from them.

Matthew Galinko

All right, thanks. And then you, I think you've referenced the shift in capital allocation a couple for a couple of quarters now. So I'm wondering what the pipeline looks like for those sorts of tuck in M&A opportunities now that you're a little bit more able to execute on them.

Keith Jones

Yeah, great question, Matt. So I can start with the catalyst is kind of thinking about even with the guidance that we talked about the overall stability in our business. So really with that, and we talk about capital allocation. One thing that we didn't mention in some of our prepared remarks is that cash flow outlook that we've alluded to, noting that it was going to be slightly above what we had realized in 2023 is absolutely on point today.
Our outlook is that we see the strength in the cash flow and that's a minimum expectation that we have for ourselves. So if you take that strength and, and outlook in our business, coupled with our backlog coupled with opportunities, and then the cherry on top, quite frankly, is the repricing that we have and the interest rate, we have a tremendous amount more flexibility.
So in Q4, you're going to see a few things, you're going to see us paying down some of our debt and you're going to see us starting some of the share repurchase programs that we alluded to with the $200 million authorization that our board has lotted us. So we're quite excited. This is all part of our vision of returning capital shareholders and this is very consistent what we've been alluding to in the last two calls.

Paul Davis

All right. Anything else, Matt?

Matthew Galinko

No, that's it for me. Thanks.

Paul Davis

Okay. Thank you for the questions.

Operator

And that does conclude today's Q&A session. I will now turn the floor back over to President and CEO, Paul Davis for closing comments. Paul.

Paul Davis

Thank you operator. I want to thank our employees for remaining committed to executing our business plan and the progress we have made in 2024. In December, we will be participating in the Wells Fargo Technology and Media Summit and the UBS Global Media and Communications conference. We look forward to seeing you at these events and updating you on our progress. Thank you for joining us today.

Operator

Thanks Paul and ladies and gentlemen, that concludes today's call. Thank you so much for joining and you may now disconnect. Have a great day, everyone.