Adeia - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $85.7M, GAAP diluted EPS $0.15 and non-GAAP diluted EPS $0.25; adjusted EBITDA was $45.7M, with cash from operations of $23.1M.
• Versus Wall Street consensus, EPS was modestly above ($0.25 vs $0.2435) while revenue was below ($85.7M vs $88.5M); 4 estimates for each metric. Bolded for significance: EPS beat, revenue miss*.
• Management reiterated FY2025 revenue guidance ($390–$430M) and lowered both GAAP and non-GAAP OpEx ranges; GAAP net income and adjusted EBITDA ranges were raised, and diluted share count guidance trimmed.
• Strategic/catalyst updates: five Q2 deals including new customers in semis and e-commerce, an OTT renewal, continued debt paydown ($11.1M) and the unveiling of RapidCool direct-to-chip liquid cooling for AI semiconductors. CEO emphasized multiple paths to reach the high-end of guidance even if the large semiconductor deal slips, supporting the near-term narrative.

What Went Well and What Went Wrong

What Went Well

• New customer momentum: three of five Q2 deals were with new customers (STMicroelectronics; two e-commerce including Warby Parker), plus an OTT renewal; non-pay TV recurring revenue up 28% YoY.
• Operating discipline and deleveraging: interest expense fell sequentially; effective interest rate ~7.8% and $11.1M term loan principal paid down, surpassing $300M repayments since separation.
• Technology narrative: RapidCool introduced; “lowers thermal resistance by 70%… manage heat at three times today’s current power densities,” positioning Adeia in AI data center cooling over the mid/long term.

What Went Wrong

• Sequential revenue and profitability compression: revenue fell to $85.7M from $87.7M in Q1; GAAP operating income declined to $16.4M; litigation expense rose due to Disney case.
• Revenue missed consensus and recurring impact of back-half weighted deal timing created near-term optics headwinds; management reiterated guidance but acknowledged timing uncertainty.
• Pay TV headwinds persist; while non-pay TV recurring grew 28% YoY, aggregate recurring growth must offset pay TV declines to sustain trajectory.

Transcript

Speaker 2

Good day, everyone. Thank you for standing by. Welcome to Adeia's second quarter 2025 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will open up for questions. I would like to now turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead.

Speaker 3

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.

Speaker 0

Thank you, Chris, and thank you everyone for joining us today. I'm glad to be here again to share the results and progress we've made in the second quarter. Our second quarter results were in line with what we indicated on our last earnings call. We delivered $85.7 million in revenue, and cash from operations of $23.1 million. We also reduced our debt by $11.1 million, bringing our total debt paydown since separation to over $300 million, a testament to our cash-generative business model and our disciplined capital allocation approach. We have good visibility into the second half of the year and are reiterating our full-year revenue guidance. Based on the progress we've made in the first half of the year, we now have multiple paths to achieve our revenue goals.

While the significant semiconductor opportunity we previously referenced remains an attractive opportunity and a key focus of ours, it is not the only path to achieving our revenue target for the year. We have also advanced other high-potential opportunities to the point that we see a path to close them this year, and these other opportunities could help us achieve our revenue target for 2025, even if we need to take a different strategic direction with the semiconductor customer. Collectively, these opportunities both reinforce our confidence in achieving our goals for the year and achieving our long-term objectives. Keith will walk through our financials and outlook in more detail shortly. Before diving into our second quarter deal activity, I'd like to highlight an exciting recent development in our semiconductor business.

As you are all aware, the pervasiveness and rapid adoption of AI has created tremendous demand for data centers throughout the world. In those data centers, our servers run the most advanced, high-performance semiconductors. These semiconductors not only consume an enormous amount of power, but they also create a tremendous amount of heat. The AI era is driving up the power densities of these semiconductors, and traditional cooling solutions are unable to meet the thermal loads. In late May at the iTHERM and ECTC conference in Dallas, we introduced RapidCool, a revolutionary direct-to-chip liquid cooling technology for high-performance semiconductor devices. This groundbreaking technology, which has evolved from our deep experience in hybrid bonding and advanced packaging technologies, eliminates thermal interface materials used in conventional processes. RapidCool thereby increases heat dissipation efficiency and lowers the temperature of the semiconductor.

Our RapidCool technology bonds the silicon cold plate directly to the semiconductor, thereby eliminating the thermal interface materials others use and lowers thermal resistance by 70%. This allows RapidCool to effectively manage heat in semiconductors running at three times today's current power densities. Additionally, RapidCool targets specific hotspots on the semiconductors, further enhancing thermal management. We are currently working with industry partners who have requested RapidCool prototypes to evaluate for their future products. As part of our roadmap, we continue to develop options that address the growing thermal demands of high-performance processors and high-bandwidth memory devices. We are extremely excited about the potential of this technology and see it as a growth driver for us in the mid to long term. Turning to our second quarter momentum, we signed five license agreements consisting of four in media and one in semiconductors.

Three were with new customers in key growth areas of semiconductors and e-commerce. We are making great progress bringing on new customers, which is critical to our growth strategy. Over the last three quarters, 11 of the 25 license agreements we have signed have been with new customers. Our strategy of targeting new customers in growth markets is producing results. Our second quarter recurring revenue was up modestly year over year, and our non-KTV recurring revenue was up an impressive 28% during the same period. We signed a multi-year license agreement with STMicroelectronics, a global leader in analog and digital semiconductors. This deal was driven by our hybrid bonding technology, which continues to gain traction as a key enabler for AI in high-performance semiconductor devices. We also signed two renewals in the second quarter.

These renewals continue our strong track record of over 90% of our customers renewing their license agreements with us. Renewals provide predictable revenue and validate the ongoing relevance of our IP as customers continue to rely on our innovations to deliver value to their end users. One of these agreements was a multi-year renewal with a popular domestic OTT streaming service. OTT remains one of our high-priority growth markets due to our media portfolio's applicability and the OTT market's sheer size and subscriber growth trajectory. Having penetrated only a portion of this market today, there is significant opportunity as we continue to pursue large customers in this key market. We signed multi-year license agreements with two new e-commerce customers for access to our media portfolio. One of these agreements is with Warby Parker, a popular and rapidly growing eyeglass retailer.

This follows the success we had last year signing Neiman Marcus. E-commerce is particularly exciting to us because of the sheer breadth of potential customers across numerous industries where the possibilities are virtually unlimited. Our initial license agreements mark an important entry point in validating our media portfolio for the e-commerce market. These early wins lay the foundation for scale, and we expect deal volume to build as our market presence expands. We are on track to achieve our goal of delivering sustainable long-term growth. The renewals we've signed with existing customers and, importantly, the license agreements with new customers in our key growth markets, such as semiconductors and e-commerce last quarter, will contribute to achieving this goal. In the second quarter, our patent portfolio grew by 2% to over 13,000 assets.

This brings our first half portfolio growth to a little over 6% as we continue to evolve our portfolio to meet the needs of our fastest growing markets. While growth may moderate over the rest of the year, our focus remains on quality and relevance, not just volume. Our strong cash generation supports a balanced capital allocation strategy, investing in strategic tuck-in acquisitions, reducing debt, and returning capital to shareholders through dividends and share repurchases. Keith will share more on our capital allocation activity in a moment. Finally, I'm proud to share that for the second year in a row, Adeia was named a Best Company to Work For by U.S. News & World Report. This recognition reflects our strong culture and helps us attract and retain world-class talent. 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 second quarter 2025 financial results. During the second quarter, we delivered revenue of $85.7 million, driven by the execution of five license agreements covering our strategic in-markets, including semiconductor, OTT, e-commerce, and paid TV. This includes three new customers that we added during the period, which further expands our customer base. Now I would like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the second quarter, operating expenses were $40.6 million, a decrease of $297,000, or 1% from the prior quarter. Research and development expenses decreased $798,000, or 5% from the prior quarter. The decrease in the quarter is primarily due to lower patent filing administrative fees and personnel costs. Selling, general, and administrative expenses decreased $819,000, or 4% from the prior quarter, primarily due to lower personnel costs.

Litigation expense was $7.2 million, an increase of $1.3 million, or 23% compared to the prior quarter, primarily due to spending associated with our ongoing litigation with Disney. Interest expense during the second quarter was $10.2 million, a decrease of $433,000, primarily attributable to our continued debt repayments. Our current effective interest rate, which includes amortization of debt issuance costs, was 7.8%. Other income was $1.4 million, which 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 second quarter was $45.7 million, reflecting an adjusted EBITDA margin of 53%. Depreciation expense for the quarter was $488,000. 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 second quarter with $116.5 million in cash, cash equivalents, and marketable securities, and generated $23.1 million in cash from operations. As a reminder, we experienced fluctuations in our cash flows due to the billing structures of some of our agreements, whereby we receive lump sum annual payments. As a result, our first and fourth quarters tend to be significant cash generation quarters for us, whereas our second and third quarters tend to be more modest. We made $11.1 million in principal payments on our debt in the second quarter and ended the quarter with a term loan balance of $458.9 million. During the quarter, we reached a significant milestone as we have now paid down more than $300 million since our separation in October 2022.

This is a clear testament to our highly cash-generative business model and our disciplined focus on deleveraging our balance sheet. During the second 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 September 16 to shareholders of record as of August 26. Now I'll go over our guidance for the full year 2025. We are reiterating our prior revenue guidance for the full year. We expect revenue to be in the range of $390 to $430 million. We're pleased with the progress that we continue to make in both adding new customers and growing our sales pipeline. As always, we remain actively engaged with our customer base as we monitor how their businesses are progressing during this dynamic economic environment.

As a result of the relative uncertainty witnessed in the first half of the year, many companies were cautious yet optimistic on how their businesses would be impacted, thus reflecting a more heavy-loaded second half for our revenue outlook. Today, as anticipated, we see an increased level of engagement supporting our revenue forecast for the second half of the year. As we noted during our prior call, we made a conscious effort to be prudent in spending in light of the broader economic environment. Due to our efforts, we now expect operating expenses to be in the range of $160 to $166 million. Within that guidance range, we anticipate that our litigation expense will decrease modestly in the second half of the year, primarily due to the completion of the trials associated with our litigation against certain Canadian paid TV operators.

We expect interest expense to be in the range of $40 to $42 million. We expect other income to be in the range of $5.5 to $6.5 million. We expect a resulting adjusted EBITDA margin of approximately 60%. 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 $1 million for the full year. The second quarter was in line with our expectations. With improved stability within the broader macroeconomic environment and the strength of our sales pipeline, we remain encouraged about both our short-term and long-term prospects. That brings it to the end of 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?

Speaker 2

To ask a question, simply press star followed by the number one on your telephone keypad. Our first question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hi. Just the first question here. On this OTT renewal, can you just talk about if the contract is structurally different than the previous one?

Speaker 1

Sure, Hamed. Thanks for the question. Appreciate it. Yeah, like most of our renewals, typically they're pretty standard unless there's really a change in circumstances with the company. In this case, it was in line with the prior agreement.

Could you talk about where the new opportunities that you talked about earlier fit as far as are they e-commerce or are they OTT?

We're not going to get into that in much detail right now, but what I can say is these are opportunities that we are excited about. They are opportunities that we had originally thought would be in 2026 and beyond, and because of the work of the team, we now believe we can pull into 2025. They are fairly sizable opportunities, and what it means is we have an ability to finish the year within our guidance range, even towards the high end of the guidance range, even without the large semiconductor agreement closing within the year, which is still our goal. If we can't get that done, we now have multiple shots on goal to make that happen. We're very pleased with the progress we've been able to make there.

Okay, thank you.

Speaker 2

Our next question comes from the line of Scott Searle with Roth Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. Hey, Keith and Paul, maybe just to get quickly calibrated, I'm wondering if you could give us an idea about the recurring versus non-recurring revenue and kind of the mix between media and semi. I had a couple of follow-ups on the semi front.

Speaker 0

Hey, Scott, and welcome. For our recurring revenue this quarter, a large portion or a substantial portion of our revenue this quarter was recurring. We had the three new customers that we signed this period. A lot of that revenue is based on future production and volumes. The impact of those agreements will be more picked up and more pronounced in the future. What you're going to see is a relatively small percentage this period, probably a little bit less than we had seen in prior quarters. Nonetheless, the numbers that we're posting really show, quite frankly, the stability in our overall revenue base. With that being said, being able to maintain through our renewals, and then when we start adding some of the new deals that Paul's alluding to, you're going to see a nice step up in that and some growth in that recurring number.

Gotcha. Maybe just in terms of the split between media and otherwise, and within media, you know, if we were to exclude paid TV, what kind of growth rate are you seeing then with OTT, CE, and e-commerce? You know, what are we looking at as we go in the second quarter and kind of how that ramps into the second half?

I think what you're going to see is that there will be some impact when we sign the semi deal, and that will definitely add to it. What's also really exciting is that the growth on the media side, which really makes up the preponderance of the revenue today from a recurring standpoint, there'll be an appreciable pickup as well. You'll see growth on both ends.

Speaker 1

Yeah, Scott, just as I said in my prepared remarks, just as a reminder, we saw a 28% increase in our recurring revenue in the non-paid TV part of our recurring revenue, right? Which is really a combination of obviously the semiconductor business growth and then also the non-paid TV parts of our media part of our business, which is obviously OTT, e-commerce, consumer electronics, social media, all are contributing to that growth. We're seeing recurring revenue growth even when you put the declines in paid TV in there sequentially and year over year. We're happy with the recurring revenue growth overall.

Okay, great. Very helpful. Paul, maybe on the semi front, I think you had some comments if the semi deal does not happen this year. I'm wondering if you could parse that a little bit more. I know this deal has been fairly complex, but is there an expectation that it maybe doesn't happen or it's just taking more time to close? It sounds like you've got multiple avenues now, like you said, or multiple shots on goal to get to the higher end of that range. I'm kind of wondering where your enthusiasm with hybrid bonding and the large semi deal kind of sits and how we should be thinking about 2026 on that front.

Speaker 0

Sure. I want to be clear, our goal and our expectations are still absolutely to close that deal this year, but we have to plan for the alternative. We have been doing multiple things along that front. One, we have been working really hard to find ways that we can pull in other deals and really proud of the team's effort on that front. Now we have multiple paths. If something doesn't happen, it's always good to have multiple paths to achieve the revenue goals. The other thing is, if for some reason we can't get there with that, then we're ready to, we've referred to it before as a year of action, and we'll be ready to take a different strategic path if we need to with that customer.

It's something that we don't take lightly when we need to, but we'll be prepared to and ready to if we need to go down that path as well.

Gotcha. Very good. Lastly, just to throw in, I'm wondering if you could provide a little bit more color on the RapidCool direct-to-chip. Sounds very exciting. I think you said a medium or intermediate term to longer term. In terms of the commercialization of that, maybe the process to get there and kind of maybe a timeframe that you'd put around that. One other high-level question, there had been some, I guess, commentary coming out of Washington a week or so ago about the taxation of intellectual property. I'm just wondering if you had any high-level thoughts on that. Thanks.

Speaker 1

I'll start with that second question first because otherwise I'll forget because I'll get so excited about RapidCool. I'll start on what I'd say is really speculation out of Washington, and it's really nothing more than that. It was a Wall Street Journal article. I think someone wanted to float an idea that came across. There's really not a lot of details, and if and when there's more, we'll comment on it. Until that time, it's really not worth spending a lot of time on it because it's hard to know what's really even being floated out there, given the lack of detail there. With respect to RapidCool, we're very excited about this. It is still fairly early on, but we've seen some really exciting results in our prototype and our R&D efforts that we've had.

We're working, as I mentioned, with industry partners and potential customers about our test results and what it looks like. This is what we do really well, right? We focus on industry needs. A few years ago, the team looked at what are some of the key areas that are of need and what are our strengths, right? Hybrid bonding is clearly a strength of ours and something that we have focused on, as well as advanced packaging. The idea that came from our world-class engineers was, what if we were able to directly bond the cold plate directly to the silicon and really take out a lot of the unnecessary parts that make cooling the chip much more difficult? That's what the team came up. It sounds easy when I say it. It's an incredible engineering feat, what they've done.

What we're hearing from our partners and customers is it's better than anything else that they're seeing out there. We're very excited about the potential of it. It does take time to get from where we're at right now to ultimately commercialization and then revenue that we see. We do see it as a medium to long-term opportunity, but one that could be very substantial for us down the road.

Great. Thanks so much. I'll get back in the queue.

Speaker 2

Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Yes, thanks for taking my question. Maybe to drill down a little more on RapidCool, it does seem a very exciting technology. Do you see this as applications in the data center, or do you think it's in the high-performance at the network edge where maybe liquid cooling isn't practical today?

Speaker 1

Yeah, I think right now what we're targeting really is the data centers. If you look at my prepared remarks and the topic there, that's what we've focused on and seen the needs there. It is a direct-to-chip technology and one that can actually work with other cooling technologies as well. It's not something that is going to necessarily compete with other data center-related cooling technologies, whether it be air cooling or liquid cooling. It is unique in that way, and we're pretty excited about it. Our roadmap, though, does create potential for other applications for it, and we are looking at other ways that we could apply to other applications. Stay tuned on where it can go as well.

Okay, great. Congratulations on landing the STMicroelectronics. You said it was a hybrid bonding. Is that related to chiplets? Do you expect there to be a lineup of many other semiconductor companies that are looking to move to the chiplet technology?

Yeah, you know, you can't get too much into the details. What we said on the, it's a portfolio license to our semiconductor portfolio. What we talked about was what's driving our license agreements generally, which is hybrid bonding in the semiconductor space and certainly chiplets, especially in the logic space, which is different than what STMicroelectronics is focused on. It certainly is an area of focus for where we're seeing hybrid bonding adoption. Broadly speaking, we're seeing more and more companies announce new chip designs that they intend to launch or have launched here in the coming months to years.

We're very excited about that, as well as, as you know, Kevin, what's coming in high bandwidth memory here in the near term with what Samsung and others are talking about with HBM4e and HBM5 as we get to 16 layers and then ultimately to 20 layers and the need for hybrid bonding for memory as well.

That's great. Yeah, great progress. Congratulations.

Thanks, Kevin.

Speaker 0

Thanks, Kevin.

Speaker 2

Our final question comes from the line of Matthew Galinko with Maxim Group. Please go ahead.

Hey, good afternoon. Thank you for entertaining my questions. I know you're not guiding to quarters, but can you give us a little bit of sense of how the back half might shape up in terms of balance? Should we kind of be expecting a fourth quarter concentration just given the multiple opportunities you have, or how should we be thinking about timing?

Speaker 0

Hey, Matt. Good talking to you. For us, when we just take a look at our real focus, it is on getting the proper economics for the deals, right? I think the relative closing of those deals that we've kind of talked about is, you know, our focus is within the year. I would just really kind of focus on that. With that being said, I think the momentum that we see makes me quite excited, and kind of where we're at at the particular stages. Paul did a really good job of talking about some of the progress that we're making on other deals that weren't necessarily on our original forecast for the year, and those are progressing quite well. As we sit here, we're kind of in a really good position, quite frankly, in terms of there's many options that we have to kind of achieve that target.

How that balances out from one quarter to the next is probably less important versus closing those deals and getting them done. In any event, we're very much dedicated to that guidance range. Just speaking up on that, what we really do see is that aspect of the range, we try to be very transparent in what you have. We're reiterating guidance. Quite frankly, with the options that we have, the top end of the guidance as well is still in play, very much so, as we typically talk about from a midpoint perspective. There's a great deal of momentum that we have in our business.

Thanks. Maybe just as a follow-up on your comments about caution on spending and bringing the spending down a little bit. If you do find yourself signing some larger deals in the third quarter or early in the fourth, do you see potentially bringing some R&D back up in the back half of the year if you're feeling more comfortable with revenue levels in the back half, and particularly in the year.

Yeah, that's a great question, Matt. Specifically, one of our main priorities in our business is to continue to innovate, and we take that very, very seriously. The spending that we noted and that decrease from a midpoint of formerly $170 million to $163 million is primarily driven on the selling, general, and administrative side of things. For R&D, there are a few things that are a little bit much further out that we've adjusted the timing on that doesn't have a near-term impact on revenue. With that dedication to innovation, quite frankly, you will see some growth, some slight and modest growth on the R&D side of things. It's where on the SG&A, we tightened the belt, so to speak, and delayed the timing on a few things on a strategic basis without harming our really long-term prospects.

R&D is something that we're committed to as a company, and anytime we see an opportunity that we can accelerate our business, we'll capitalize on it and we'll make that commitment.

Great. Thank you.

Speaker 2

With no further questions in queue, I will hand the call back over to management.

Speaker 3

Thank you, Operator. Thank you to everyone for being with us today. I'd like to thank our employees for their continued dedication and hard work. In the third quarter, we'll be participating in Rosenblatt's Age of AI virtual conference on August 18, and we will also be attending the BWS Investor Conference in New York on August 20. We look forward to seeing you at these and other upcoming events. Thank you for joining us today.