Adeia Inc. (ADEA) Earnings Call Transcript & Summary

Hello. Good afternoon to those on the East Coast and I think a good late morning to those on the West Coast. And welcome to the Bank of America Leveraged Finance Conference and to our session with Xperi. I'm Ana Goshko. I'm the credit analyst that covers technology, and I'll be moderating our discussion today. And we're thrilled to have with us Rob Andersen, Xperi's CFO. And then a quick note first to the audience, you have a tool through which you can submit questions. So feel free to do so during the course of our discussion, and we'll check in on that. So with that, let's get started. So Rob, thank you so much for being with us. We really appreciate it. And by way of introduction, for investors that may not be super-familiar with Xperi, if you could just provide us a brief overview of the company, its histories and its kind of key product lines, that would be great.

Okay. Most sure thing and nice to be with you today, Ana. So I appreciate you having me. Xperi is really the combination of several different legacy companies, most of which trace their origins back to the 1990s. Xperi was really formed with the business combination of Tessera Technologies and DTS Inc. In December of 2016, the name Xperi was chosen after the combination to kind of identify the experience that our products bring to our customers. At around the same time, Rovi Corporation acquired TiVo and took the name, of course, a well-known brand, TiVo, as its primary name. And of course, TiVo and Xperi merged in June of this year. So that's the origin of the company. Xperi is really just a holding -- a name for the holding corporation. We sell our products under various brands in our portfolio, including TiVo, of course; DTS, which is a sound standard; HD Radio, which is the sole standard for digital radio in North America; IMAX Enhanced, which brings a theater-level experience into the living room; and of course, Invensas, which deals with our semiconductor technologies. So that's just a very brief history.

Okay. Great. And then could you maybe describe the logic and vision of bringing together Xperi, which has a semiconductor license end market; and then TiVo's Pay-TV, consumer experience and connected car business?

Yes, sure thing. Well, so there's an interesting symmetry between Xperi and TiVo, each as a product business and an IP business. And as we looked at the combination, we believe that scale is important to service customer needs and to license IP. On the product side, TiVo is a leader in content discovery and recommendation and aggregation. And so -- and the amount of content has actually exploded. So making services that help customers navigate is extremely important to consumers. TiVo Stream 4K helps consumers find, watch and enjoy entertainment. So as we looked at this kind of combination, there's some obvious synergy channels, because Xperi really has the relationships -- legacy Xperi, if you will, has relationships on embedding audio solutions with the top TV manufacturers. So there's getting TiVo's content discovery directly on to TVs is one of the kind of key drivers for the business combination. We also see benefits of getting sort of TiVo's metadata solutions into automotive, where Xperi already has a very good franchise through the HD Radio. So that's already underway. On the IP side, we felt that scale was also important. We have a broader IP portfolio. We have over 10,000 patent and assets -- patented assets. To offer customers, we combine our expertise. We're able to enter new markets and just a broader R&D footprint and really actually very little customer overlap. So that's I think when we think about its scale, its breadth of offerings and its synergies on both the cost and the revenue side.

Great. That's super-helpful. So to present a topic, so the pandemic, if you look back to your pre-pandemic outlook for the combined company and then compare that to where you stand today and what the impacts have been, how do you stand? What's different from what you expected and what's not?

Yes. It seems like a long time ago when we were looking at the outlook back in February when we gave our Q4 numbers. It's a little bit difficult, because Xperi originally looked at the -- the legacy Xperi looked at the business on the basis of billings. And now as we talk about the combined company, we're really looking at revenue. But on the product side, we probably saw about a 10% impact from the pandemic. This was really focused on automotive production, which was more or less shut down during Q1, and that continued -- and a slowdown in Q2. We have seen some recovery there. And -- but it's still early innings in terms of how that's going to look. On what we call the consumer experience side, this is really consumer electronics, there was retail shutdown, which had some temporary holding pattern earlier in the year. Again, we're seeing recovery in Q3 and Q4. But it definitely had an impact for the year. Streaming consumption is actually up significantly. And so there's strong demand for linear and OTT content. That's helped us a bit. And we saw initially some impact on the IP side of our business due to kind of new deals and priorities from customers, but that's been more than made up by completing the Comcast relicense this year.

Okay. That's great. And then the good news about the vaccine and fingers crossed that we [indiscernible] of that pretty quickly. I know you haven't provided any guidance yet on 2021. But just directionally, does that bring you back to -- if we're in a post-pandemic period, does that bring you back to normal? Or is there a catch-up or a rebound that you might actually get the benefit from?

Yes. It's certainly positive if we have the kind of efficacy we've seen with the vaccine and we have kind of a full recovery later next year, that would be fantastic. It's difficult to gauge the impact at this moment. I don't know that we would have a catch-up so much as a rebound. In other words, I think we would get back to where we were. There are certain product categories like Stream that we expect to grow year-over-year significantly. So that certainly helps the business. I think we would see, obviously, some benefit on the automotive side year-over-year from improved shipments on the HD Radio. And I think improved demand for CE devices helps as well.

Okay. Great. And I know you covered this on your earnings call, but just to make sure everyone listening is updated. Could you provide us with just kind of highlights of your recently announced settlement with Comcast on the size of proceeds that you're receiving from that?

Yes. It's one of the difficulties of doing a legal settlement that we can't always give all of the details related to the settlement. We did raise our number for this year by about $235 million. So that will give you a feel for the back part of Comcast and the impact it has to the second half of the year. So it's really -- the deal was signed in Q4. We announced it early last month. In terms of the go-forward, we had indicated that the baseline for the IP business was about $300 million on the media side, and we raised that number to $350 million for next year. So it'll give you a feel for the annual amount of the deal. And the one thing we could announce was that it goes through 2031. So that's -- it really goes to the longevity of the IP portfolio. I think the other key factors we really -- we have a great track record of licensing IP into the market. And so for us, getting these -- getting this settled sort of really underpinned our ability to not just get deals done, but I think our, as a combined business, how important it is to have the scale that we do.

Okay. Great. I think we'll, in a bit, touch on some of the future IP licensing potential. But just on TiVo, if you could just give us an update on integration and where you're standing right now with regard to the cost synergies as well as the revenue synergies?

Sure thing. So we indicated that we would be looking for $50 million savings from a cost synergy standpoint. We are on an annualized basis at about $35 million through the end of the third quarter. And so we're on track to meet those projections on an annualized basis by the end of next year. There are certain parts that are system-related that just take longer to actually get done, but we're on track to get that by sort of late next year.

So that was on the cost side. And what can you tell us about anticipated revenue synergies?

Yes. Thank you. On the revenue side, these take longer, of course. One of our -- there were 2 approaches. One is getting the streaming, discovery and recommendation solutions directly on the TV. So we've had customer discussions on those. They're underway. They've been very positive. And we should have more to say on that topic as we go forward. On the metadata, getting into the connected radio solution, we've got good engineering work underway, and we've already incorporated metadata and personal recommendations into that connected radio solution that we've been working on. So that's so far, so good there.

Okay. Great. So I wanted to kind of focus on each of the kind of product areas a little more to just understand current performance and what you see as the growth drivers or the growth potential. So if we start on the product licensing side, TiVo Stream and the related monetization there.

Yes. So that product was released in May of this year. So we are -- we've got strong initial reviews on the product and it's actually starting to make its way on to various Christmas list, which is nice to see, recommendations from various organizations. On that, we take a content-first approach, which is somewhat unique in the market. And so if you're looking for something specific, it'll basically tell you where you can find it as opposed to having to go into each of the apps or different places to find specific content. And that's I think is a real differentiator for the product. I think it helps us to be an independent player, so we're agnostic on the content. And I think on this one, we're -- this is ultimately seeding the market with our solution. We ultimately feel we can get a recurring ARPU on this in the single digits, ultimately into the teens. So it's a Roku-like device, if you will, so a similar business model to that business.

Okay. So then moving on to IMAX Enhanced. I think, in particular, the company has cited traction in China. You could just expand upon that potential.

Yes. It probably helps to even understand, IMAX Enhanced is a brand that we are licensed, and we're doing this with IMAX to bring a movie type level experience into the living room. It's an ecosystem build-out, which is to say that the devices, the TV, the soundbar, et cetera, needs to be certified, and also you need IMAX-based content, certified content to play on those devices. So it takes a little while to build it out, but the experience is really extraordinary. And we are really seeing some nice traction in China. It's a very large movie-going audience in China. So I'd say, initially, we're encouraged by the progress on that product.

Okay. And then Connected Car. So you've got connected media and in-cabin monitoring. What's the outlook for that?

Yes. This is actually -- it takes a while to make progress in the car space. As you know, just the design cycle is very long. We've been doing this for quite some time. We currently have a very solid franchise as HD Radio. So that's where we make the bulk of our Connected Car revenue at this point. And we have a key position in the North American market. We are just starting to ship the connected radio solution that we talked about earlier. It's shipping in the Mercedes S-Class. And this is very typical, it usually starts in the highest and it works its way through the product line. So we expect that to occur at Daimler. And it's -- the interesting thing about Connected Radio, it is an enhanced radio experience, but it also has a worldwide TAM. So it'll work -- once the OEM designs it into a car, it'll work anywhere in the world. So great to get that starting to shift, and I would expect we'll continue to make more announcements on new wins -- design wins for that capability. And last you mentioned is in-cabin monitoring. So we have been working on that for many years now. And we expect that to ship in the second half of next year with a major European manufacturer. So that's monitoring what's occurring within a cabin. So it's imaging technology specifically for automotive.

Okay. And that's second half of next calendar year, you think that's...

Of next calendar year.

Got it. Okay. And then finally, Perceive, I think that's in startup mode, but if you could just explain what that is.

Sure. Perceive is a machine-based learning effort that we've had underway for a few years. We've seeded the startup within Xperi. It's not part of the combined Xperi. Our initial product is a neural network inferencing chip. And this sits between a sensor and an SoC on a device and provides unique capabilities that can be done better and more efficiently outside the SoC. It's probably better to give an example. So -- and our first market for this is home security cameras, that market. And what we can bring is, in those devices, a reduced cost for the manufacturer so that the data is not always being transferred up to the cloud to be analyzed. It can be done resident on the device. In effect, it's trying to say is that what's occurring in the scene? Is that [indiscernible]? Is that a tree that's brushing against the window? Is that a package delivered at the door? These type of things can be done. And then it's also being able to done at a very low cost, so by not sending the data up to the cloud and an extremely low power. And that's also one of the other key things about this device. And they all reduce latency, so you can do things quickly, because you're doing them locally. So that's the first market. It'll start to ship in the second half of next year right now. I think there are many other markets for this product like enterprise security, consumer appliances, consumer computing. So we're pretty excited about it. Fairly early, but a really truly unique product.

Okay. Interesting. It's fascinating actually. I thought it...

You didn't think we'd be talking about neural network inferencing, did you?

[indiscernible] my, like, brain, but okay.

[indiscernible]

Moving to IP licensing. I think the 2 big buckets you've got are media licensing and semiconductor licensing. So if you could just kind of update us kind of what the strategy and outlook is there?

Sure thing. So the media licensing comes from the TiVo side, as we talked about a little bit. We've obviously just settled Comcast. So that was a great outcome for the business. We have active litigation in Canada against Bell Canada, TELUS and Videotron. Those cases go to closing arguments in mid and late January. And we'll see how that goes. That probably gets to be more of a right time to try to get something done. This -- I get asked a lot about the size of those opportunities. And it's often hard to say in the course of litigation. But if you do kind of some basic math, using a higher ASP, because there are smaller footprints within Canada, the ASP is higher than compared to a Comcast. So it actually -- it -- back-of-the-envelope math, the annual rate for settling those 3 could be in the range of what we just got with Comcast. To your other part of the semiconductor licensing, I think the driver for our new deals here is really going to be hybrid bonding. And we currently ship that technology in backside illuminated image sensors. Sony is one of the early licensees of that technology. And that, I think, we'll start to see -- it's already been licensed into memory with a couple of the players. There's other places to go there. And I think one of the growth areas for that business is logic. So that's -- those discussions, of course, are underway. So that kind of gives you a feel for the media and the semi IP side. The media is the underpinning that when I described the $350 million next year, that's media. Semi IP, as we licensed new deals, a lot of that revenues were taken upfront, just by the way the rolls work these days. So as we book new deals, we'll -- those will be sort of on top of what we describe in terms of the run rate of the business.

Okay. So that's great. So thanks for taking us through all those product categories. So the company has outlined 3 key areas of growth. And one is the hybrid bonding for the memory and logic chips, which you addressed, the ongoing litigation in particular with the North America, the Canadian Pay-TV and then also kind of OTT and new media. Is there anything else that we've missed in this discussion that you've got with regard to your growth driver?

I think you're kind of on the -- on the IP side, those were -- I would identify as the growth drivers. OTT and new media, just -- we haven't sort of set the scale for that market in terms of size. But I think that's a large and certainly growing addressable market.

Okay. Great. So if we take a step back, there's a lot of moving pieces here. This is a debt-focused conference. We've got credit investors in the audience. I think for -- a good credit is -- recurring revenue kind of stability of free cash flow, what makes this a good credit model in your mind?

Well, I think the IP business itself, which is highly profitable and in the case of the media side is very recurring. So that creates a superb baseline for us to be a good debt credit. We have generally rated free cash flow in the $200 million to $250 million range plus per year. It will be higher this year because of the Comcast case. And the product business, at least on the Xperi side, has produced cash as well. I think there's opportunities to optimize that product side of the business as well to be a good cash flow provider. So I think we, as a credit, have a great track record. We -- Xperi had previously taken out a $600 million term loan B that we closed out as we redid the financing this time around. But we've been able to pay that down over 3 years down to $344 million. So we've been pretty thoughtful about reducing our debt load and improving our position as a company in terms of leverage. So I think we have -- I indicated when we first took that term loan up that we would use the cash flow from the first year to pay down debt, and indeed, we did that.

Okay. So then more specifically with the leverage that you have right now, how comfortable are you with it? And do you have a leverage target? And if so, what is that?

Sure. We're not highly levered at the moment. So I'm comfortable with our debt leverage. It's just over 3 at the moment. I think I would prefer it as a target to be in the 1 to 1.5x EBITDA range. I think that's a healthy level for a company of our size. But we can certainly handle where we are at the moment.

Okay. Great. And then capital allocation more broadly, so what is your overall approach to shareholder returns? And as part of that, let me just kind of throw a couple of follow-ups right here. So what determines the size of your dividend and then also kind of the pace of your share buybacks?

Sure. So the size of the dividend, of course, is determined by the Board. And in those discussions in terms of setting the dividend for the new combined Xperi Holding Corporation, I think that the Board looked at what the market does for companies of our complexion. And for those that do pay a dividend, it was closer to a 1% yield, which is pretty close to where we set it. And then in terms of the buybacks and other shareholder returns, we've given indications to the market that we'll return 50% of our free cash flow to shareholders through dividends and buybacks. But that leaves plenty of room for debt paydown. And we excluded from that calculation any large litigation settlements like Comcast. So we have the ability to use that to pay down debt.

Okay. And then what about other uses of free cash flow, in particular anything on the -- well, I guess, the inorganic side, but other M&A transactions or other areas of investment?

It's a fair question. I think of this -- we look at the business -- I think we do a fair amount of analysis on M&A. But we are very judicious, I think, about making a decision to do something. From where we are now, I think we -- if we did M&A, it would be small kind of tuck-in things. We've done obviously a fairly significant merger this year, which will take some time to work our way through. So I wouldn't say M&A is off the table, but I would not expect us to do anything highly significant in the near term.

Okay. Great. So I think this has been a very comprehensive discussion. Is there anything that you think is important that we haven't covered that -- any kind of final message that you'd like to leave with the credit investor audience?

I think we did a good job kind of covering the high points. It's hard to know exactly what people want to hear. So that's one of the reasons we're attending this conference to make sure we listen to credit investors and make ourselves available. So I think we're okay. Did you have other questions?

Yes -- no, I think we've provided a great framework for all of the product segments and the growth drivers and the credit kind of stability that the company can provide through its free cash flow.

Yes. One thing I will mention is it's -- I'm aware that the company has a degree of complexity due to the fact that we've combined 2 reasonable-sized companies that are in a bunch of different markets. So we have published on our investor website. There's a Analyst Center where we have placed a lot of historic information, including pro forma. So you can see what the combined companies looked like over the last couple of years. And so I think that you can download a spreadsheet and get all that information. I think that will be very helpful to investors. So that helps, at least in terms of building a model or looking at something that's linear over time. Because when you have to go back and do all that basic adding of the 2 legacy companies, it can be tricky. We've also shown what revenue looks like with the new markets that we have identified specifically. And we talked about Connected Car, consumer experience and Pay-TV. So those -- that information is on our website, the investor piece.

Okay. Great. So I think we're about effectively out of time. So Rob, thank you so much for being with us. We look forward to following Xperi and kind of wish you and kind of the company overall all the best in 2021.

Thank you so much, Ana. Really enjoyed.

Okay. Thank you.

Bye-bye.

Bye-bye.