Good afternoon, everybody. My name is Gary Mobley. I'm with Wells Fargo Securities. I cover semiconductor companies, and the next company that we have featured today is Adeia, which is not necessarily a semiconductor company. It's a little out of my wheelhouse. It is a company that I don't cover, but I have experience here with Paul and Keith, who do join us here from the Adeia management team. And I've had experience dealing with Chris in back, in the back as well, who heads up investor relations. Experience all with their previous companies or their predecessor company. And so guys, I really appreciate you joining us here today for this fireside chat. To lay the groundwork for our discussion, maybe if you can just give us an overview of the company.
Sure
... where it came from, what the focus is, so on and so forth.
Thanks. Thanks, Gary, and thanks for having us. So Adeia is really the output of... We had a separation of the Xperi business. There was a product business and an IP licensing business, and we separated the two companies in October of 2022. The origins date back to TiVo, and Rovi, and Tessera, and a number of companies that came together, and then they had these IP businesses and product businesses and decided they were better separated, and so we completed that. At the heart of what we do, though, at Adeia, is we're an innovation company, and so we focus on innovating in really two different areas. In the media side of our business, which is what Gary's less familiar with, and then the semiconductor side of our business as well.
And that innovation is focused on technologies that we think are gonna be the future of media and the future of semiconductors in a five-to-ten-year horizon often. We take those innovations and we patent them and then we license our patent portfolios, which is really our primary area. And those technologies really drive the entertainment industry, the media industry, and our customers. You know, we take licenses to us 'cause they see the value in the innovations that we have developed over a long period of time. So we're about a... We're based in San Jose, about $400 million in revenue annually.
Tremendous operating margins of around 65%, which generates a ton of cash for us, and it's an exciting business that we are thrilled to be kind of on our own. We've been public now for almost 14 months, and it's been an awesome journey.
Maybe if you can give us a sense of the split in the $400 million in revenue?
Yeah
... that is, generated from the patents on the semiconductor side and those that are on the media side.
Sure. So today, our media business represents a little less than 90% of our total revenue. Semiconductors is kind of in the low teens. Over time, we see that changing a bit, where semiconductors will really grow to about 20% of our total revenue. We see some real growth aspects in our hybrid bonding and advanced processing node portfolios, which I'm sure I'll touch on later. The media business is really split up into a couple of key sectors. Primarily what we're known for is pay TV. It's about 60% of our total revenue today. In addition, we have consumer electronics, which represents about 10% of our revenue.
Then lastly, new media, which is a combination of social media companies, as well as OTT, which represents another, roughly about 10% of our total revenue.
Okay. Can you give us some examples on the media side of everyday use?
Yeah.
Maybe how we can might be familiar with the technology.
Sure. You know, it's pretty straightforward. It's largely around, you know, the user interface and, like, how people watch and enjoy entertainment and find the shows that they wanna watch. So on Pay TV, really started with interactive program guides. That's what we were known for, and so that guide that comes up, that you scroll through what's on a channel. It could be in your hotel room or at your house in while you're watching Pay TV. In addition, search and recommendation features, so knowing... You think back to the TiVo part of the portfolio, DVRs were a big part, so playback features and the like.
Today, we're focused as well on OTT features and the back end and the content delivery, how people, again, you know, know what they want, get content delivered, ad insertion, and the like. And so those are a number of the features that you see in your everyday use of various media entertainment platforms.
Okay. You mentioned $400 million in revenue, but only 130 employees. You can do the math and realize that that's one of the highest revenue per employee metrics that you'll see, you know, out there for a publicly traded company. Maybe related to that, maybe you can give us a sense of how you compete from an R&D perspective and then as well, you know, where your engineering talent focuses in terms of technology creation, both on the media and the semiconductor side.
Sure. Yeah, 130 employees, almost entirely in the U.S. So we focus on hiring people that have, usually, you know, 10, 15, 20 years of industry experience. We have a ton of PhDs, people that have, you know, worked in, in, in brand-name companies. Such as, you know, Amazon, Disney, Draper Labs, you know, all these technology-rich companies that understand the marketplace, that we can bring in, that are prolific inventors, but also know product cycles and know what people want. And so that is, that is where we're hiring from, and so we have just a tremendous cross-section of talent across our, our, our various different, R&D teams that we have. Same thing on the semiconductor side.
If you look at, you know, the pedigree of people that we bring in, usually they've got a number of years of experience that they bring, you know, with them, working at companies like, you know, Micron and Qualcomm, Samsung, and the like. That they come to Adeia because whether it's on the media or the semiconductor side, because they get to invent, you know, what's gonna come down the road in 5-10 years. They're not just trying to get the next product cycle out and make some incremental investment. They are trying to drive, you know, the future of really what those industries could be, and that excites them, right? And we're able to offer that to them.
And so they come up with big ideas that are gonna change the really the industry and where it's going, and we patent those, and then we ultimately license them. And so it's a tremendous way to kind of for them on the R&D side to think these big ideas where they're getting to be creative, and they love that platform that it provides for them.
Okay. If I'm not mistaken, your patent portfolio has been growing at about, roughly a 10% annual rate.
Yes.
How much of that growth is being driven by, I guess, acquisitions of patents?
Mm-hmm
... versus internal generation?
Yeah, so when we separated, you know, when it came together and we tried to figure out, okay, what's gonna differentiate us, right? And there's a couple things that are key. One, patents are really our inventory. They're kind of our primary asset. This is how we ultimately license our innovations. This is how we go to market in terms of, you know, getting people to take a license from us. And so, if you're gonna grow your business, you need to grow your key asset. And so one of the ways we're trying to grow is go into adjacent markets, where video is becoming more and more important.
So that can be in ad tech, it can in e-commerce, in the automobile, where the video and entertainment is becoming increasingly more like your living room than actually someone that's gonna transport you somewhere. So it's that proliferation of video and also in the semiconductor space and trying to get into these new markets. We looked at and said, "We have to focus on R&D. We have to focus on innovation and growing those portfolios in order to grow our overall, you know, business and revenue base." And so we put out this metric, or I did at on our Analyst Day in September of 2022, right before our separation, and we said, "We're gonna grow it by 10%." And yeah, so far we have been, we've been tracking towards that.
We're really proud of it, and it continues to expand. And what why is that important from a customer base as well, is even for our existing customers, when you can go to them and say, "Hey, when we talked to you last time, we had X number of patents in our portfolio. We now have, you know, X times," you know, whatever percentage, it is just a great starting point, and that's driven by innovations. Now, we do acquire portfolios as well from time to time. The mix is roughly about 85% homegrown, things that we've invented, and about 15% that we acquire. It can shift from time to time, but that's been, you know, where our metric has been for a while.
Focus on internal innovation, and then filling in gaps and adding to our portfolio through acquisitions.
Got it. What's the average license duration for your, for your patents?
Yeah, so we... You know, when we license, you know, customers, we do, we do typically about a five-year deal. That's the average that we will license. It's a term-based license agreement, and so that we, we have this renewals that we will always come up. Our average, you know, renewal, you know, success rate is incredibly high. It's over 90%, and because we're continuing to add to the portfolio, so we're able to go in there. You know, a patent's life is, you know, typically 20 years. It has a period of time where, you know, when you invent something and you patent it, it has to be a novel, new idea, right? You can't patent something that everyone already knows is out there, right?
So it has to be new, and that means it's also not in the marketplace at that point, right? And so you get it. There's a time period from innovation to market adoption to when that patent's really valuable, and often it's kind of 5-10 years after invention is really when you start seeing, you know, market adoption, if it's gonna be adopted. And then from there, you know, the rest of the patent has, you know, that kind of 10-15 years of useful life of when it's in the marketplace. And so having five years and then kind of continuing to add to the portfolio, it feels like the right mix of when we're able to go back and then show them something more that we've added to at that point.
Focusing specifically on the media side, which I believe you said is what? Roughly 60%?
Media is actually almost 90% of our total revenue.
Okay. Well-
Yeah
I guess I should clarify on the Pay TV.
Oh, Pay TV, yes. Yes.
The Pay TV.
Yeah.
So, who are the customers there? Is it, is it the box makers?
Oh
... or is it the cable MSOs or Pay TV operators?
Yeah, it's the cable MSOs. So we, we've licensed, you know, really, the entire U.S. pay TV market. About 90% of that market is licensed today. So it is everybody that you have heard of, so, Comcast, Charter. You know, we just licensed this year, we did renewals with Verizon, Altice, Cox, right? And so it's the who's who of cable, you know, pay TV operators. That's where we've traditionally licensed. Many of them, we've licensed over, you know, 3 or 4 or 5 times, you know, just going back. They know us well. We have a tremendous track record in that space.
Okay. Our generation likes to-
Yeah
... sit down and turn on a set-top box and just scroll through the menu of channels.
Yeah, yeah.
The younger generation.
Yeah
... they like to bundle everything together, right?
Yep.
It'll be the over-the-top packages and whatnot. So how has that trend, you know, sort of altered your, your business model and your business activity?
Yeah, no, this is a great—it's a great growth area for us. You know, we have a significant part of our portfolio that is very applicable to the streaming and OTT providers. It is an area that we have focused on really since separation, where we believe we can really license that entire industry. So even though it doesn't have, like, that interactive program guide, which we were kind of known for historically on the media side, there's a lot of the same features. So, you know, how do you find a show? How do you search for a show? Is it voice activated? You know, do you... You know, what are the recommendations when it says, "Hey, you watched this, you might also like this," right?
A lot of the IP and the user interface in that is also things in the streaming environment that we have a tremendous amount of IP on that as well. Prior to separation, we had some conflicts with our product business as well, and it was one of the drivers for the separation. So we have been really approaching that market new. One of the key benefits of the separation was we were gonna be able to pursue that in a much more significant way post-separation, and we've really started that. Our sales cycle is fairly lengthy, and so you know, these are big deals that we're talking about.
Keith likes to refer to us as a small volume, high dollar shop, because, you know, we don't do a ton of deals, right, every year, but we do them for, you know, very large, dollar amounts. So what that means is they take a while for them to mature, and then ultimately get, ultimately get done. You know, 18-24 months is not, not atypical for us to, to get from, you know, initial discussions to, to ultimately getting a, a, a deal done. So, so that market is, is one that we've... You know, again, we're separated for about 14 months now, and we're, we're at various stages of, of discussions on, on that front.
I presume it's a relatively small percentage of revenue right now on the OTT side?
Yeah, relatively small, and, and... But certainly, it, it, could be very significant. When you think about the number of OTT subscribers, you know, that are out there, it, it, you know, it's, it's about 450-500 million in the U.S. alone. You know, pay TV subscribers are under 100 million. You know, but the... And the price point is very different as well. And so we're thinking about that as we approach that market space and kind of understand, you know, what the economics can be. Clearly there's a difference in terms of the ARPU, but the number of subscribers makes it a very attractive market for us as we look forward and to what that could be.
Okay. Rounding out the discussion on the media side-
Yep
... where do you guys sit on the, on the value chain in social media, consumer electronics, and ad tech, and e-commerce?
Yeah
... and music streaming, and-
Yeah
... sports gambling, and all those different-
Yeah
... different related opportunities?
Let me start with where we've traditionally had success. So on the consumer electronics side, you know, this is an area where we've had a very healthy business. Again, it represents, you know, roughly kind of 10%-15% of our total revenue in any given year. And, you know, we've announced 2 deals, you know, recently, with Samsung. So we got a deal done in the end of 2022, for their connected TVs, on the consumer electronics side. And then, just recently, last quarter, we announced a deal for their mobile devices. So again, this gets into kind of how you interact. The user interface primarily is where that IP plays.
And so, that has continued to be a great success for us in getting those deals done, and that IP has been relevant. And Samsung's just a great story for us, 'cause we've licensed them multiple times over on both the media and the semiconductor side.
Yeah.
We have a 25-year relationship with them and, you know, I think it just speaks volumes to our ability to kind of continue to get deals done in that space. So very, very proud of that. In the other areas, you know, again, it's around video and the interactivity of video, primarily. And so if you think about e-commerce, for example, e-commerce is getting more and more about, you know, how... You know, your e-commerce experience is not just finding a link on a website and buying something. There's an interactivity to it. There's a video component to it, where it shows, you know, how that might look in your home, or how, you know, an outfit might look on you, and there's a back and forth there.
That video part of it, and the navigation of it, and the playback features, and the recommendations is all still in that same wheelhouse. And so this goes to, as well as just how we think about innovation, right? We're trying to innovate in a way that is across a number of different verticals, and so our R&D team goes, "Okay, here's a big idea, right? Here's how it could play in maybe a core market, but I also think down the road, this could be adopted in a different market as well." And so we can innovate once, and then have an opportunity to really kind of, you know, license that type of innovation across multiple verticals.
And that's, again, getting back to your 130 employees on, you know, $400 million, that's part of the way we do it as well and how we're so successful, is thinking about those innovations across different types of markets.
Okay, rounding out the media discussion, in October, you filed a, I guess, a patent infringement suit against Shaw.
It's a breach of contract case.
Breach of contract-
Yeah
case against Shaw.
Yeah.
Maybe can you talk us through the lawsuit, you know, what the?
Sure
Dispute is?
Yeah, so we had a long-term agreement with Shaw. They are a Canadian pay TV operator, for those of you not familiar with the market. They had been a licensee of ours dating back to 2014. We signed a deal with them also in 2019 and been a paying customer in good standing for us for a long time. They recently merged with Rogers, another pay TV operator in Canada. And following that merger, you know, they ceased payments.
And so, after a while, you know, trying to figure out if there was some resolution that we could find, we ultimately decided that we needed to, you know, file litigation and get them back as a paying customer through that. It's not our preferred approach. You know, we've been tremendously successful in getting deals done without litigation. And, you know, we've signed 85 license agreements over the last 11 quarters. And, you know, virtually none of them are the result of litigation, right? And so, that track record is something we're really proud of, but when disputes do happen, and when there is a lack of payment, in this case, under an existing agreement, you know, we do feel like it's important to enforce our rights as well.
Okay. So, just to give you a little background, I wanted to shift gears to talk about the semiconductor side-
Sure
... of the business. So, you know, I know Paul and Keith. Paul from the Tessera days-
Yep
... which is one of the predecessor companies, you know, ahead of Xperi buying the company, and then ultimately the spin-out from Xperi for you guys. And then Keith and I date back to his time at Rambus. And so, so this is what I'm most familiar with, which is, unfortunately, a smaller chunk of your revenue versus the media. Maybe you can give us a little bit of background on the core technology that underpins your patents-
Sure
... and how you monetize that as well.
Sure. So, you know, dating back to the, you know, Tessera days, we were mostly known for chip-scale packaging. We really invented chip-scale packaging in 1990, licensed the, you know, taught and then licensed the entire industry on how to do chip-scale packaging. And then we went through an inflection point where, you know, trying to, trying to, you know, go into different areas. And ultimately, in 2015, we bought a company called Ziptronix, which had invented really a bonding technique, which we refer to as hybrid bonding, that allows, you know, to take two pieces of silicon, bond them together, and have interconnects through there, and so they act like one piece of silicon.
This is an area where started out in image sensors and RF devices with wafer-to-wafer bonding. Then we believe that there was a way to take it to really use it in both memory and in logic, which would require... In first of all, in memory, in NAND, you can still do wafer-to-wafer bonding, and we've signed recently two deals that we're very proud of with Western Digital and Kioxia at the beginning of this year. And those will... They announced products that will utilize hybrid bonding in that space.
Then, in addition, though, beyond just wafer-to-wafer bonding, we believed that you could also do die-to-wafer bonding or die-to-die bonding, and which is a something that we took from the acquisition in Ziptronix and really spent, you know, years developing and having that process. And today, you know, we've been able to demonstrate that to a number of our potential customers. And we're seeing that utilized in companies in the logic space that have a chiplet architecture, and they're using hybrid bonding to actually make that happen. And so that's a tremendous growth area for us, something that we're very excited about.
In addition to that, we also have an advanced processing node portfolio, and this is really kind of addressing the opposite side of hybrid bonding, where, you know, companies are trying to maximize the value proposition as Moore's Law is slowing, and trying to find technologies that will really allow them to continue to move to more advanced processing nodes. And so this is a collection of different assets that allow for that to happen. And so going from, you know, 7 nanometers to 5 nanometers, to 3 nanometers, to 2 nanometers, the amount of technology that's needed to do that and really get the performance advantage that you need has just, you know, increased. And so we've got a substantial portfolio in that aspect as well.
In addition, we still have some advanced packaging patents as well.
For those who are not familiar, this is the concept of more, More than Moore , right?
Yeah.
So you can't drive monolithic-level scaling to the same degree you once did because-
Right
... the laws of physics, and so you have to find a new treadmill of innovation-
Right
- which is all about stacking die together. Yeah.
Yeah. Yeah, absolutely. And that we, you know, that is, that is what we are very excited on the hybrid bonding side, 'cause you can... You know, I like to think about it in concept of New York real estate, right? You know, you can't... You only can go vertical, right? And that's the same thing in the semiconductor spaces. Stacking vertically is where you can go, and hybrid bonding allows for an incredibly fine pitch. And so you're able to do it in the same, you know, footprint that you would, you know, conventional models, which would, you know, but with many more layers on top of it. And so it has tremendous advantages from a cost standpoint, and the performance is still is maintained, you know.
Okay. If I'm not mistaken, you've licensed roughly 10% of the logic semiconductor market in revenue terms. What's the maximum that you think you can have under license?
You know, we think we can license the vast majority of the logic market, and this is why it's such an attractive, you know, space for us. We think that that industry is gonna need to go more and more towards hybrid bonding. You know, I think there's very few solutions out there for them to deal with this challenge. And we think, you know, what you're seeing with chiplet architecture, in particular, is going to be, you know, the path forward to deal with this. And so we think that the vast majority of that logic market is going to move to hybrid bonding eventually.
Okay. So I think you have, roughly, you know, 10% of your revenue coming from the semiconductor side.
Yep.
So that'd be $40 million. How do you see maybe the annual opportunity for annual recurring revenue based on what you feel is under your patent footprint?
Yeah. I think what we said, you know, since separation is, you know, we see a path forward in, you know, kind of a five-year time horizon to get to $100 million plus. You know, one of the things that we really focused on since separation, too, is just building up that recurring revenue base and thinking through some of the structural elements of these deals. You know, in the past, you know, we did deals on a fixed basis, and some of the accounting implications meant we had to, you know, recognize a lot of that revenue upfront.
Luckily, my good friend, Keith, has a lot of experience in that from his prior experience, and so we came in with a concerted effort and really, you know, addressed that issue with our deals with Western Digital and Kioxia as well-
Okay
and so structured them in a new way.
Well, speaking of Keith, let's get him in the conversation.
Yeah.
So let's switch to the financials. Maybe if you can give us an overview of what you view as the financial model.
You know, our financial model by any stretch of the imagination is just incredible. You know, so today we're about $400 million in revenues, where our last guidance was $385 million-$390 million for the year—$385 million-$395 million for the year. But with that, there just comes a lot of leverage. Paul talked about our employee count. We have about 130 employees, and Gary, you mentioned how much that is a revenue per head, so we like to say we're tiny but mighty in that regard. So our operating profile is about 65%-66% operating income. We have relatively low CapEx needs, so our EBITDA margin is generally a point greater than that. So what does that mean? That's a lot of cash generation that we have.
We see our path to growth to be kind of in the low single. Well, about 5%-6% per year. And frankly, with the opportunities that we have for OTT, some of the new adjacent markets that you talked about, Gary, and then I just get wildly excited about the opportunities in semiconductor. And there's a real clear pathway to get to $500 million in recurring revenue for us. So at that profile, we'll continue to invest. We need to grow. We are a technology company at heart. R&D and innovation is really important to us. But with all that being said, our operating profiles will still throw off 60%+ operating margins. So what does that mean? It's capital allocation from there.
So the first step in that, at the time of separation, we had about $89 million in cash and $759 million in debt. So I heard a gasp in the audience when I said that, but no fear, we generate, you know, sufficient cash flows. Not only will we pay off that debt, which matures in 2028, but we have the ability to pay it off early, continue to invest in our company, to pay about a 2% dividend, which we're currently paying, and then as part of our annual operating process, we set aside specific dollars for M&A. That's a lot to do, and quite frankly, we're executing on that.
So we'll maintain just kind of paying down the debt and whatnot, but, you know, we have just a really strong financial profile.
Okay. So let me summarize that at the top-line level first. So roughly $395 million in revenue. You said growing the top line, what? 5% or 6%?
Yeah.
Eventually to $500 million. How many years does that work out to be? I don't have my compound annual calculator in front of me.
You're looking in, you know, a 3-5-year time horizon to get to that number.
Okay. You recently revised your revenue guidance, I believe, in your last call.
Yeah.
What drove that particular change?
Yeah, great question. So, Gary, you alluded to part of that in terms of the litigation that we have with Shaw. So, you know, they, as Paul said, post their merger with Rogers, they ceased paying that. And then when we went to litigation with them, you know, that's impactful for our revenue. And then we also alluded to that there was a renewal with another Canadian Pay TV operator that we had initially planned to take place in 2023, that we now see moving out of this year. So that was the adjustment. So our original guidance was $385-$415.
Okay.
I'm sorry, $385-$415, with a midpoint of $400, right? So us bringing that, that midpoint only $10 million actually bodes really well to what Paul was alluding to earlier, our ability to close deals-
Yeah
Throughout the course of the year. If it weren't for those two phenomena, quite frankly, we would be at or above—you know, the midpoint of what we had guided, which just would be just a fantastic year. But we're dealing with those phenomena. You know, we're moving forward, but I—you know, I take pride in that first year of execution that we've had. Yeah.
Do you have a separate OpEx line item for legal expense?
We do. We do. So, specifically for litigation. There's a lot of costs that we have in our company. Probably one of the bigger expenditures is litigation around patent filings and things of that nature. But for litigation, we keep a separate line item. We do not non-GAAP it out because it is somewhat of, you know, part of our profile to some degree. But that fluctuates from time to time. This year, it's running about $10 million-ish, which is about half of what we typically expect if we look at history.
Got it. Got it. I presume it's a little bloated this year because of,
No, it's actually, it's been relatively low. I think one thing about a breach of contract case, it's actually not that expensive compared to kind of a patent case, so...
Got it.
Yeah.
Okay. Well, my final question for you is, with such strong profitability, such strong cash flow, your stock trades with a relatively low valuation. So, what do you see as the impediments to getting, you know, re-rating the valuation higher? You know, what can you do as a management team to drive that valuation re-rating? Or, you know, we spent most of our time talking about the growth opportunities-
Yeah
... you know, from a revenue and EPS, but what about, you know, trying to get your point across to the investment community?
Well, I think what people, they see our stock and gets their attention is kind of what you point out, that they see this company that has this tremendous leverage and profile, and they look at any reasonable multiple, and it doesn't make a lot of sense. I think for us, we're early on in our story of being separated from Xperi, and people are capturing that. Then they're picking up on the nuances. So there was a lot of things that we set forth at separation, what we wanted to do, having significant wins in OTT, semiconductor being in a rebirth. And as that starts to add up, and Paul talks about it, it's about an 18- to 24-month process to get some of these deals done.
I think it's a matter of execution, because it's a validation of that mission, and that goal, because one of the challenges you have as an IP company is they see... People think of a cliff, where we talk about there's an opportunity for growth, and that growth comes from those new logos.
Okay. Well, Paul, Keith, Chris, I appreciate you guys spending the time with us today, and I appreciate everybody in the room here who joined us and everybody online as well. So thank you, guys.
Thank you, guys.
Thank you.
Really appreciate the time.
Appreciate it.