Adeia Inc. Q3 2025 earnings call

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 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.

Thank you, Chris, and thank you, everyone, for joining us today. Our third quarter revenue of $87.3 million was in line with our expectations, and we remain confident in the strength of our business. Importantly, our non-Pay TV recurring revenue was up 31% year over year for the third quarter. Let me first address the change to our revenue guidance we announced this morning. While we continue to have paths to achieve our original revenue guidance range for the year, we have taken a prudent approach and adjusted our 2025 full-year revenue guidance primarily to reflect that we have now filed litigation against AMD. Closing a license agreement in the fourth quarter, as previously expected, is now unlikely. We have continued to make good progress on other significant deals in our pipeline, and we remain focused on getting the best economics we can over the long term.

Our revised revenue guidance range reflects multiple opportunities that we are actively pursuing. To the extent that they do not close in 2025, they become a strong catalyst to growth in 2026. Before I get into the details of the third quarter results, I want to cover today's announcement regarding our litigation against AMD for patent infringement. I will also provide a brief update on the progress we have made in our other pending litigation. This morning, we issued a press release announcing we filed multiple patent infringement lawsuits against AMD in the Western District of Texas. Our decision to file litigation was not taken lightly and followed significant efforts to reach a business resolution. The action we took today reflects our firm commitment to ensure we realize appropriate value for our substantial investments we have made in our foundational semiconductor technology.

For years, AMD's products have incorporated and made extensive use of our patented semiconductor technologies, which have enabled them to be a market leader in the semiconductor industry, including those related to hybrid bonding and advanced process nodes. We sought to enter into a license agreement with AMD, and we have been referencing this opportunity since last year and have been pursuing a deal for even longer. Despite our efforts to reach a business resolution, AMD continues to use Adeia's patented semiconductor innovations without authorization. The lawsuits we filed today seek to stop this unauthorized use and include patents covering hybrid bonding and advanced process node technologies. Our hybrid bonding technology is used in AMD's most advanced semiconductor products, including those for AI workloads, data centers, and high-performance cloud computing. Our advanced process node technology is used in the vast majority of AMD's current semiconductor products.

We believe in the strength of our patent portfolio, the value of our innovations, and we are committed to protecting our intellectual property. We are confident in our ability to achieve a positive outcome. Turning to the progress in our other pending litigation, it has been a year since we filed litigation against Disney, and the cases have been progressing well and collectively better than we expected. First, in Delaware, the court denied Disney's motion to dismiss certain of the patents in the case. As such, the litigation will continue to proceed on all six patents. In Brazil, our request for a preliminary injunction was granted and further upheld on appeal. We have initiated enforcement proceedings on the injunction. In Europe, the three cases are proceeding as planned and are all scheduled to go to trial in the first quarter of 2026.

I am optimistic about this early progress in our Disney litigation, and our goal remains to ultimately reach an agreement with Disney that fairly values our intellectual property. Turning to Shaw, the court recently ruled in our favor and denied Shaw's motion to dismiss our breach-of-contract case, meaning the litigation will now move forward. In our patent litigation case against Vidéotron, we recently received a positive ruling from the court. While details of the decision are still confidential, we are pleased that the court found two of the four patents in the case are valid and infringed. Further, the court awarded damages with respect to both patents and an injunction with respect to one of them. Finally, in our patent litigation against Bell, we expect a ruling in the second or third quarter of 2026. Now for some additional commentary on our business results.

During the third quarter, we closed two long-term license agreements. One was a renewal with Altice, one of the largest broadband and video service providers in the United States, for access to our media portfolio. The agreement supports their Optimum services, including broadband, cable television, and OTT streaming platforms, ensuring subscribers enjoy advanced content discovery and navigation experiences. The second agreement was with a new e-commerce customer, also for access to our media portfolio. We have now signed four e-commerce customers since entering this exciting new market last year, and we anticipate many more in the coming quarters. We recently celebrated our third anniversary as a standalone company, and I am tremendously proud of all we have accomplished. The separation unleashed the opportunity for us to expand our pipeline and grow as an independent organization.

We have continued to expand beyond Pay TV, which has been our core business historically, and into new growth opportunities in semiconductors, OTT, social media, and e-commerce. License agreements we have signed in these verticals are now driving growth in our non-Pay TV recurring revenue stream. In the third quarter, our non-Pay TV recurring revenue was up 81% since separation, providing evidence of our early success in these new verticals. This growth includes new agreements with large semiconductor companies such as Sandisk, Kioxia, and STMicroelectronics, and OTT deals with Amazon, Paramount, and Starz, and social media and consumer electronics deals with X, Samsung, LG, and Canon. We have also renewed key Pay TV deals with customers such as Altice, Verizon, and Cox, which we've had relationships for many years and have renewed time and time again.

These deals provide a solid foundation from which we can grow as we add new customers. One of our key priorities at separation was to grow our IP portfolio. Growing our portfolio adds value to help secure new customers and renewals, which drive ongoing recurring revenue. At the time of separation, we had approximately 9,500 patent assets. With a commitment to expand and evolve our portfolio, we have seen our portfolio increase to over 13,000 patent assets, reflecting an impressive growth of over 35%. The vast majority of this growth has been from internal R&D focused on new patent filings in OTT, AI, hybrid bonding, and thermal management. Additionally, we have built a positive, healthy culture and have been widely recognized as a leading innovator.

We were named one of the best places to work by U.S. News & World Report for two years in a row and one of the world's most trustworthy companies by Newsweek. We were honored that Adeia's hybrid bonding technology received the Best of Show Award for the most innovative technology at the Future of Memory and Storage Conference in August. This recognition is a strong validation of the dedication, innovation, and technical excellence our team brings to advancing the future of memory and storage solutions. Our accomplishments do not end there because all of this contributes to our financial success. Our highly cash-generative business model has provided the strength to execute on our balanced capital allocation approach, as we have continued to pay our dividend, deleverage our balance sheet, repurchase stock, and make tuck-in acquisitions of strategic patent portfolios.

It has truly been a remarkable period for Adeia, and I'm excited about the road that lies ahead. Our goal since separation has been to deliver sustainable, long-term revenue growth, and we are making excellent progress, as evidenced by our non-Pay TV recurring revenue growth. Our disciplined balanced capital allocation strategy continues, and during the third quarter, we made debt payments of $11.1 million, continuing our commitment to pay down our debt at an accelerated rate. We have paid down an impressive $312 million of our debt since separation. Our accomplishments have put us on a trajectory for long-term success, and I'm truly grateful for all the hard work and dedication from our team. With that, I'll turn the call over to Keith for a review of our financial performance. Keith?

Thank you, Paul. I'm pleased to be speaking with you today to share details of our third quarter 2025 financial results. During the third quarter, we delivered revenue of $87.3 million, driven by the execution of two long-term media license agreements. This includes signing a significant renewal with Altice, further extending our long-term relationship with them. I'm also proud to announce the addition of another e-commerce customer as we continue to gain momentum in this growing market. We have now signed license agreements with four new e-commerce customers within a relatively short period of time, and we have built and are actively engaged with a large pipeline of additional opportunities.

Now I would like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the third quarter, operating expenses were $37.1 million, a decrease of $3.5 million, or 9% from the prior quarter. Research and development expenses modestly increased $117,000, or 1% from the prior quarter. Selling general administrative expenses decreased $1.6 million, or 8% from the prior quarter, primarily due to a decrease in corporate administrative expenses as well as lower personnel costs. These decreases align with the cost-saving initiatives that we previously highlighted. Litigation expense was $5.2 million, a decrease of $2 million, or 28% compared to the prior quarter, primarily due to lower spending on Canadian matters, which was partially offset by increased spending on Disney and AMD litigation. Interest expense during the third quarter was $10.1 million, a decrease of $162,000, primarily attributed to our continued debt repayments.

Our current effective interest rate, which includes amortization of debt issuance costs, was 7.8%, consistent with the prior quarter. Other income was $1.5 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 $50.7 million, reflecting the adjusted EBITDA margin of 58%. Depreciation expense for the quarter was $479,000. 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 $115.1 million in cash, cash equivalents, and marketable securities, and generated $17.8 million in cash from operations. We have made $11.1 million in principal payments on our debt in the third quarter and ended the quarter with a term loan balance of $447.8 million. Our highly cash-generative business model and our disciplined focus on deleveraging our balance sheet have produced outstanding results. Since separation, we have now paid down $311.6 million as we continue to focus on deleveraging our balance sheet.

During the third quarter, we paid a cash dividend of 5 cents per share of common stock. Our board also approved a payment of another 5 cents per share dividend to be paid on December 15th to shareholders of record as of November 24th. Now I will go over our guidance for the full year 2025. As Paul noted in his remarks, today we have filed litigation against AMD for patent infringement. In our prior calls, we had referenced our anticipation of signing a license agreement with a semiconductor company, which was in fact AMD. After a long negotiation period, we have reached an impasse, which has resulted in litigation. This anticipated license agreement was included in our prior guidance, as we have previously mentioned.

As a result of the litigation we have filed, we are adjusting our 2025 revenue guidance to reflect the likelihood that we will not close AMD this year. We are committed to obtaining the appropriate economics on each and every deal, which is of paramount importance to us, and we'll continue to remain disciplined on this front to maximize the long-term potential of Adeia. Accordingly, our new 2025 revenue guidance range is $360 million-$380 million. I would like to emphasize that our pipeline remains strong and is growing. We continue to have many paths to success, and the ultimate outcome of our short-term revenue outlook is largely due to the execution timing of that pipeline. I would like to mention that there still remains opportunities which could potentially result in revenue beyond the noted range for 2025.

To the extent that these opportunities do not close this year, they will act as a catalyst for a strong 2026. With this momentum and supported by our pipeline, we foresee revenue growth in 2026. Turning to our operating expenses, as a result of our ongoing cost-saving initiatives, we have now lowered our overall operating expense guidance. Our operating expenses are now expected to be in the range of $160 million-$164 million. Our expense guidance includes the expected costs associated with our litigation with Disney and now AMD. Relative to our Q3 litigation expense, we would anticipate litigation expense to increase by approximately $3 million in Q4. We expect interest expense to be in the range of $40 million-$41 million. We expect other income to be in the range of $5.5 million-$6.5 million. We expect a resulting adjusted EBITDA margin of approximately 56%.

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. As we reach our three-year anniversary of being a standalone publicly traded company, I reflect and take pride in the progress we have made in our business. These achievements are driven by the dedicated efforts of our employees, who work tirelessly to shape and execute our collective vision. Our long-term prospects remain strong, and the cumulative efforts we have made thus far will be a springboard for our future success. 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.