Adeia Inc. (ADEA) Earnings Call Transcript

Good day, everyone. Thank you for standing by. Welcome to Adeia's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Chaney, Vice President in Investor Relations for Adeia. Chris, please go ahead.

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 Dipti Vachani, our CEO; and Keith Jones, our CFO. Dipti 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 Dipti, I would like to provide a few reminders. First, today's discussion contains forward-looking statements that are projections, predictions, 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 would like to turn the call over to our CEO, Dipti Vachani.

Thank you, Chris, and good afternoon, everyone. I'm excited to be here and honored to lead Adeia. I've worked at some of the most cutting-edge companies in the world, and I chose Adeia for its technology, its team, and its timing. First, the technology. In media, AI is accelerating the shift to more personalized on-demand experiences, and our innovations in discovery and personalization sit right at the center of this change. In semiconductors, our innovations in hybrid bonding and thermal management help solve some of the biggest bottlenecks in scaling AI compute and memory. Second, the team. Throughout my career, I've been tasked with solving some of the most difficult problems in AI scale. As I get to know Adeia's prolific inventors, I've asked myself, where have you been in my whole life? I could have really used your help. Our engineers are addressing the greatest challenges the AI industry is solving today and well into the future. I've spent time with members of the senior leadership team, and I'm very impressed by their experience, their talent, and the culture of innovation they've built. Third, the timing. AI is reinventing how we discover and consume media, and it is transforming the compute infrastructure behind it. Adeia's IP sits right where those trends meet. Media is information. Semiconductors process information. In partnership with the ecosystem, our opportunity is to anticipate where the market is headed and invent the technologies it will need. Building upon my successful track record at Arm, Intel, Skyworks, and Texas Instruments, I am excited to share with you what I'll bring to Adeia. I have a proven track record of building businesses around leading-edge technologies. I maximize value by creating programs to monetize the technology and building ecosystems that help scale it. At Arm, that meant bringing new reoccurring revenue streams and bringing together hundreds of partners. I look forward to applying that experience here along with a leadership style built on candor, accountability, and staying close to customers and technology. My near-term focus is clear: Listen, learn, and execute. I am spending time with our employees, customers, and shareholders and working with our team to deliver the path towards our long-term annual revenue target of $600 million. I will continue to diversify our revenue streams and accelerate our innovation engines in both media and semiconductors. Keith will cover our third quarter results in more detail, but I will briefly cover a few highlights. Revenue was $80.2 million in the third quarter. As I have reviewed our pipeline and where our technology plays in the broader ecosystem, I am very excited and confident in the opportunities that lay ahead in the short-term and the long-term. However, our business is relatively sensitive to the ultimate timing of a small handful of deals. In an effort to be prudent and transparent, we have adjusted our revenue guidance to reflect the potential range to the extent that certain deals are executed beyond 2026. Even with this change in guidance, I am confident with the progress we're making. My goal remains to hit the high end of the range. Keith will provide additional color later in the section. I am proud of the work done in the third quarter. We signed 8 deals across Pay-TV, consumer electronics, e-commerce, and social media. Our business remains robust, and the momentum we are seeing across our pipeline provides us with the confidence for the remainder of this year and as we look forward to 2027. Before I turn the call over to Keith, I want to thank the Board for the trust they have placed in me to be the next leader of Adeia. I also want to thank Paul for all that he has done for Adeia over the past 4 years and for working with me through this transition period. I couldn't be more excited to be here and for the future of Adeia. Keith?

Thanks, Dipti. Let me begin with a very warm welcome for Dipti as our new CEO. Speaking on behalf of all the employees here at Adeia, we are extremely excited to have you on Board, bringing your extensive experience, energy, and leadership. I am very much looking forward to our partnership for years to come. Now let me turn to a review of our third quarter results. Third quarter revenue was $80.2 million. Deal momentum was strong with 8 license agreements closing in the quarter across Pay-TV, e-commerce, consumer electronics, and social media. Four of these deals were with new customers. As we have mentioned before, adding new customers is critical to the continued diversification of our revenue streams. I would like to emphasize that Pay-TV is overall an important component of our business. The underlying revenue remains significant for us. As such, we continue to innovate in this area, and we are able to further leverage this technology in other growing areas such as streaming and e-commerce. With that being said, I am proud to announce that we signed a significant multi-year renewal with Charter. Charter is the largest provider of Pay-TV and broadband services in the United States and has been a valued customer of ours for over 20 years. We also signed a multi-year renewal with TCL, one of the world's largest manufacturers of connected TVs. This renewal highlights the importance of our consumer electronics business, which has consistently been greater than 10% of our total revenue. In e-commerce, we signed a new long-term license agreement with Fanatics, a leading sports apparel e-commerce company. This reflects the growing momentum we have had in the e-commerce space, leveraging the success of our RPX deal in the second quarter. Other notable agreements signed in the third quarter included new deals with a social media company and a consumer electronics company, as well as license agreements with 3 other Pay-TV providers. Since separation, we have aimed to support our revenue across our core Pay-TV market and to expand and grow revenue in both semiconductor and our adjacent media markets. We are proud of the progress we have made. With the tremendous number of opportunities that we see ahead of us, we recently increased our long-term annual revenue target to $600 million. With the widespread adoption of our technologies, our confidence is unwavering, and our long-term target remains unchanged. As part of this growth trajectory, increasing our recurring revenue is of paramount importance to the company's overall success. In the third quarter, we grew non-Pay-TV recurring revenue by 48% year-over-year, continuing a multi-quarter trend. We continue to be very excited about the expanding industry adoption of hybrid bonding across both the memory and logic markets. As noted in recent news, hybrid bonding will be essential to the manufacturing process at 20-plus layers in HBM in the next few years, as well as for future 3D DRAM, 3D NAND, and high-bandwidth flash. For Adeia, this timing aligns nicely with our contract renewals with the top 3 memory manufacturers. We view the ultimate pervasive adoption of hybrid bonding across both the memory and logic markets as a key to driving a sustainable and growing revenue stream for many years to come. Our IP portfolios are the foundation of what we do and are the lifeblood of our business. We ended the quarter with over 14,500 patent assets for both semiconductors and media. This commitment to innovation has resulted in our combined portfolios growing 6% year-to-date. Our patent growth is focused on areas of strategic importance, including hybrid bonding, thermal management, and media technologies that support AI-driven experiences. Our creative and talented inventors are critical to our continued success. Approximately 80% of our patents have been developed internally by this proud group, and we are dedicated to finding solutions that address important industry challenges. Now I'd like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the third quarter, operating expenses were $43.8 million, an increase of $3.6 million or 9% from the prior quarter. This anticipated increase was primarily driven by higher litigation expenses. Research and development expenses were up $176,000 compared to the prior quarter. Selling, general, and administrative expenses increased $1.6 million or 8% from the prior quarter, primarily due to portfolio maintenance costs and other expenses to support our strategic sales efforts. Litigation expense was $7.2 million, an increase of $1.8 million or 35% compared to the prior quarter, primarily driven by higher spending related to our various legal matters. Interest expense during the third quarter was flat at $8.1 million. Our current effective interest rate, which includes amortization of debt issuance costs, was 7.2%. Other income was $1.8 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 third quarter was $36.9 million, reflecting an adjusted EBITDA margin of 46%. Depreciation expense for the third quarter was $500,000. Our non-GAAP income tax rate was 21% for the quarter. Our income tax expense consists primarily of federal and state domestic taxes as well as Korean withholding taxes. We ended the third quarter with $127.7 million in cash, cash equivalents, and marketable securities, and we generated $5.1 million in cash from operations. We made $6.1 million in principal payments on our debt in the third quarter and ended the quarter with a term loan balance of $386.5 million. 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 14 to shareholders of record as of November 23. For 2026, we are reducing our revenue guidance to $375 million to $415 million. As Dipti mentioned earlier, our pipeline remains strong and robust. However, this reflects the impact of a small handful of deals we are actively working on. With the progress we have made to date, we are optimistic about closing these deals, which would place it at the high end of the range. However, these deals are relatively large and legally complex, which can take time to execute. Thus, to provide transparency, we have adjusted the range to reflect the potential impact to the extent certain of these deals are executed beyond 2026. We are lowering our operating expense outlook to $176 million to $180 million. This reflects both disciplined expense management within our R&D and SG&A functions, as well as expected lower litigation spending as a result of certain court delays, which would defer the anticipated costs. We expect interest expense to be in the range of $32 million to $34 million. We expect other income to be in the range of $6 million to $7 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 $2.5 million for the full year. Our entire team remains committed to executing on our goals for the remainder of this year. We remain confident in our technology, our team, and the strength of our growing pipeline. 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?

[Operator Instructions] And your first question comes from Kevin Cassidy, Rosenblatt Securities.

Congratulations, Dipti, and welcome. Just how should investors be estimating the time for signing new license agreements with semiconductor customers? Is this more complicated than the media customers? Or maybe -- and I guess I'm assuming that's where some of these handful of deals that might be delayed are coming from the semiconductor market.

So you're right. The semiconductor market is different than the media market in such that the media market is much more fragmented, the semiconductor market being a more concentrated group of customers within logic and memory. Though the handful of deals that we're referring to for this quarter were media deals, we expect semiconductor, especially in the logic side, to kick in sometime next year, in the 2027, '28 time frame. And then memory renewals, '28, '29. And so we will expect that to be in our revenue forecast in that time frame. But right now, the handful of deals that we're looking at are on the media side. And honestly, we see a -- the pipeline hasn't changed. It is strong, and it's exactly the pipeline we looked at last quarter, but this is -- as we get closer, it's about deal timing. And that's it. It's deal timing and being transparent on that timing, we've decided to adjust the range.

And just going again to the semiconductor side of it, of the ones you have in the pipeline, are they more data center products? Or is it across all end markets?

It's all end markets. So I'll categorize them into 3. We have the logic market, and you've heard about our AMD business, as well as other customers that we know are engaged in hybrid bonding with Broadcom, Intel, NVIDIA Feynman. And so there is the logic group of customers. Then you have your media -- I'm sorry, your memory customers. And so there's a group of customers there. SanDisk and Kioxia are on the NAND side and then other memory providers on HBM. And then I think you'll see it more holistically across the board with data center companies acting more like semiconductor companies. And we know that, that's happening today. They're building their own silicon. And as they do, hybrid bonding will be of value to them. And so we'll see them step in as well as customers for us.

And your next question today will come from Scott Searle with ROTH Capital.

Dipti, congratulations, and look forward to working with you. Maybe just a quick clarification. Just in terms of the mix of revenue in the quarter, Keith, I'm not sure if you could provide some color in terms of media-semi mix, recurring and catch-up. And I want to clarify whether all of those deals that you guys were referring actually occurred in the quarter because I think press releases for TCL and Spectrum came out after the quarter? So wondering if that made it into the third quarter results. And then as you're looking into the wide range of implied expectations in the fourth quarter, and Dipti, can you take us through what's at the lower end versus the higher end, the big gating swing factors in that $40 million range from the low end to the high end?

Scott, thanks for your question. So a few parts there. So we'll break them down one by one, my friend. So just kind of giving the numbers on media versus semiconductor. And just to be very transparent, I'm talking about just Q3 in and of itself. So media was $65 million. Semiconductor was $15 million. So we're seeing some growth quarter-over-year, year-over-year on semiconductor. So once again, a great story in that perspective. And then for recurring versus nonrecurring, just using kind of some simple round numbers, the recurring revenue was $76 million, and then the nonrecurring was about $4 million in that regard. So trying to make sure I remember all your questions because there were several multiple parts to that. The revenue growth that we're seeing is actually kind of aligned with what we anticipated. I think Dipti will get into a little bit more. But once again, where we're seeing our revenue opportunities, our pipeline is extremely strong. It's very strong. And at the end of the day, quite frankly, it's timing. And ultimately, where we're at, I could not be more pleased. If we look year-over-year, where we were at last year at the same time, we're actually ahead business-wise in terms of total revenue. And then even on operating margins, we're doing absolutely fantastic. And then when you -- our company, our team, we are entirely focused, as you heard in my prepared remarks, of hitting $415 million. $415 million is the number that we're really focused on. $415 million was the midpoint of the guidance that we previously had, and those opportunities still align. What we are a little bit want to be transparent about is, like we said, there's a small handful of deals that kind of move that quarter, and it's really execution of those deals that get us to the midpoint or the high point of that range or otherwise. So we're really focused. And to be blunt, it's a matter of when, not if. It's 1,000% on timing, and we're locked in on that. So our best days are really to come. I think Dipti can add a little bit more color on that backdrop as well. Dipti?

Yes. I mean, the beauty of this business is the business doesn't go away, right? The accounts don't go away. It is all about timing. And I see a path to $415 million. Like Keith mentioned, we have a path to close it, and we are 110% focused on that. But I wanted to be -- we wanted to be transparent that there is, because of timing, it could swing one way or the other, and we wanted to give you that range.

And Dipti, if I could follow-up in terms of semiconductor in '27 and '28, I know it's early. But if you could take us through some of your high-level thoughts in terms of how this progresses? It sounds like we see logic next year. And then if you could dive into a little bit more the adoption in HBM DRAM. There's been a lot of discussion and dialogue in the marketplace about layers and timing and available capacity in the industry. But it seems like it's lining up with when we start to move to 16 layers and 20 layers with your renewal timeline. So I wonder if you could extrapolate on that and maybe provide just a little bit more color in terms of the diversity within the logic pipeline.

You're absolutely right. It is lining up very well with the timing of 16-layer and 20-layers, and we'll see it with HBM4 and 5. But I think if you look at this more holistically, as we -- in the logic space, we're seeing that traction happening already with AMD. We know that NVIDIA is going to be incorporating HBM -- I mean, is going to be incorporating hybrid bonding, right? And then the traction at Intel and Apple and Broadcom. So the logic space, we see it happening already. We know what's happening in the memory space is exactly the way you mentioned it, with 20 layers and 16. And so across the board, '27, '28, '29 are going to be great years for us in the semiconductor space. Think about also overlaying on top of that, this idea of heterogeneous compute. When we look at the world of physical AI or edge computing, we're talking about lots of different kind of processing coming together and chiplets. And chiplets are also a very big opportunity for hybrid bonding. And so again, I think there's multiple vectors here in play, '27, '28 on the logic side, '28, '29 on the memory side and holistically a very, very strong business. And Keith, you wanted to add on the memory side as well?

Sure. No, Scott, you're very perceptive. It's almost because if you walk our hallways and you see us jumping up and down about every product announcement that we hear kind of coming out. So there has been a lot of conversation about when do you start seeing the impact of hybrid bonding in high-volume manufacturing. That very much is kind of lining up with HBM5. And quite frankly, we're completely excited about that. And you hit the nail on the head. By the time we start getting into high-volume manufacturing, that aligns perfectly with our renewal cycles with the top 3 semiconductor memory manufacturers. So that's really a great thing for Adeia. And that is something that we look forward to. And frankly, it's beyond a proof point of the adoption of our technology. It really talks about our resilience, our technology, and how it's kind of shaping things because once again, hybrid bonding, we do hear in the media, it's quite frankly it's the only way to move forward. There is not another alternative to get to from a performance perspective, and that really makes us excited. So once again, it's a great opportunity. You picked up on it. We see that kind of, as Dipti talked about, playing out really kind of latter half of '27, but more in '28 and '29, which aligns perfectly from all the news releases in terms of when high-volume manufacturing kicks in.