Adeia Inc. (ADEA) Earnings Call Transcript & Summary

Hello, and welcome to our JPMorgan TMC Conference. We have Xperi CEO, Jon Kershner here today. And before we get started, I wanted to remind everyone that if you have any questions, you can submit them into the queue, and I'll try to incorporate them into the session. But first off, thanks, Jon, for being here.

My pleasure, nice to be with you.

Great. And just to level set, can you provide an overview for the firm?

Sure. So Xperi -- sorry.

No, go ahead.

Xperi one of the world's leading licensors of solutions and IP that enhances the entertainment experience in the home, in the car and on the go. Xperi is also a house of brands that people are probably more familiar with, including brand names like DTS, TiVo, HD Radio, IMAX Enhanced, among others, on the product side and then also Rovi and Invensas on the IP side. Today, we have 11,000 patents that are relevant to media and entertainment, and we continue to work to grow the business in a number of different dimensions along the product and on IP side.

Okay. So let's just jump right in, so right into the products business. So kind of what products are you offering, what verticals really matter, et cetera?

Sure. So we have basically 3 verticals within our product business, what we call consumer experience, connected car and Pay TV. In the consumer experience category, it includes audio and imaging solutions for the home and the phone. And our TiVo stream UX product that relates to search and discovery, and monetization for not only the stream platform as well as our Pay TV set-top box business. And then in the car business, we essentially focus on 2 areas, infotainment and safety. And we have a number of solutions that enhance the audio experience and then downstream, ultimately, audio and video. And then we have solutions that focus on in-cabin monitoring for safety purposes. And then within Pay TV, this is the legacy TiVo business that I'm sure many folks are familiar with. We are licensing solutions into the set-top box space, although increasingly, of late, we're really working to help grow the IPTV business, which we think is one of the ways to offset some of the churn through greater monetization and whatnot, and really begin to do a better job of integrating linear TV with OTT-based solutions. All in all, as we look at the product business, we think we have a number of very attractive opportunities that will help the business grow over the next 4 or 5 years, and we're kind of expecting a CAGR over that period, roughly somewhere between mid-single digits and low teens, depending on the timing of when certain things hit. And then lastly, on the product side, we have a small startup, the so-called spin-in called Perceive, that effectively is developing edge-based machine learning technology that will bring data center class compute capability and accuracy to the edge. And that's targeted devices initially around things like video security cameras, but ultimately, it can apply to mobile, to white goods, to automotive, to wearables. It really is a very, very exciting product platform. We think, over time, will find its way into lots of things is there's a desire for greater intelligence on the edge across a number of applications. And the first products that will include the Perceive chip and platform should come to market early in '22.

Okay. Great. So just to dig a little deeper on the consumer experience, just a level set, like how big -- how big is this business? You kind of mentioned some of those CAGR growth rates and some opportunities with Perceive, but just to say, how big is this business and where you see it growing?

Sure. First, a clarification around Perceive. The growth rates, I talked about in the product business, are ex-Perceive, because that in of itself has potentially got a pretty explosive opportunity over the next 3 to 5 years. Consumer experience is about a little over $200 million annually. And we expect essentially to grow that business through a couple of key programs. The first is we manage the licensing of the IMAX Enhanced brand and program in the CE space. This brings an IMAX entertainment experience to your TV, along with unique content that is exclusively shot or enhanced by IMAX. And that's one vector that we think will continue to grow, particularly in the living room around the higher end Connected TV space. Secondly, we have a product called TiVo stream, which is a platform that initially is in the form of a dongle. So think -- the stick that plugs into your TV that offers a better way to find, watch and enjoy entertainment. There is growth related to that search and discovery and monetization that we think will be significant as we move the technology stack off of the dongle directly into connected TVs. Our focus originally is naturally not on the bigger brands, but on Tier 2 TV makers, as well as perhaps outside North America, given some of the competition from folks like Roku and others that people are familiar with in that space. But we really believe we have a very unique solution that's kind of content centric. You look for the content you want, not necessarily the app that you want. And that allows you faster times to finding content, as well as a more satisfying and engaged user experience, which, in the end, translates to higher monetization.

So it kind of helps user. You don't really have to kind of switch between apps, it's all in 1 platform to help you search. If you can kind of expand on that?

Sure. Exactly. So today, a lot of the organization is really driven by you have sea of apps and you kind of have to know what app has the content you want, whereas we've kind of turned it on its head. And first of all, we've integrated live and OTT-based content in the same guide, if you will. And then we offer the ability to search for the content you want. So if you say, give me all the Tom Cruise movies, I want to watch Tom Cruise tonight. It will give you a list, and it will tell you not only what's available, but it will tell you where it's available. And it's that deep linking and connection that makes the UX experience much more satisfying. And so you can be fully aware of where it's available, including where you have subscriptions, where you maybe don't have subscriptions. And I think a key point here is in this broader strategy is that historically, legacy Xperi had relationships with all the Connected TV manufacturers, all top 15 or 15 of the top 50, excuse me. And TiVo brought a legacy of best-in-class UX technology out of the Pay TV space. And through our combination about a year ago, we've been able to take that technology stack and aggressively work on an initiative that will play out as we get into late '22 and into '23, where we believe we can bring this and ultimately establish not only a beachhead, but a real growth opportunity in Connected TV.

Got you. And just on TiVo, how big is that contribution today? And then you've already kind of touched upon the competition, whether it be Roku or Web OS, and then the target market you're attracting is probably Tier 2 OEMs, are there opportunities to kind of hit Tier 1 as well? So just give a little bit more detail on that.

Sure. I think initially, our focus really is on the Tier 2s, just given some of the competitive dynamics. That being said, I think it all comes down to the quality of the solution and the monetization it drives. And I think one of the things we're very confident, because we have data behind the scenes is that our UX interface is very, very good at driving higher user engagement. That translates to more economics. As there's more economics as you think about where there's commonly deals in this space, whether it's web share, ad share, whatever the case may be, there's a real opportunity for us to really take that higher monetization. So today, our initial stream 4K dongle that is being sold at retail, is still in the hundreds of thousands in terms of installation base. We only launched it roughly 1 year ago today or it came to market 1 year ago today. But we really believe based on productive discussions that there is both demand and interest in working with us as a provider of UX solutions on connected TV. And so we need to kind of take it 1 step at a time. But as we sit here today, I think it's a very exciting space with a lot of significant growth potential. Particularly given our capabilities in UX design and all the experience we have historically in doing this at a very, very high level.

Got you. So the kind of dongle will transition, hopefully, into the Connected TV itself. Does that change any of the business model or anything in that respect?

Well, I think at the end of the day, you need both, because you're always going to have legacy TVs that maybe just want the dongle solution, and so we certainly support that. But you're going to drive bigger, faster scale through direct design wins on TV, because when the product ships with the software embedded, there's no additional decision for a consumer to make. It comes on board, and it's just the natural way these things work. So you've got lower customer acquisition cost in that context. You have much more rapid scale building. And at the end of the day, we do think that over time, the lion's share of the installation base will exist directly through Connected TV, but it's a place where we're supporting both, because they're a lot more on similar strategy.

Okay. And then if you can talk or expand upon the Pay TV area, which -- who are you partnered with, how you want times that long tail, talk about how Mobi fits in and any kind of integrated cloud solutions?

Sure. So we have -- within the Pay TV space, we've got a sizable beachhead working extensively with some of your Tier 2, Tier 3 and Tier 4 providers, providing a range of services. And so I would say we're partnered in 1 way or another with most of your Tier 2 through Tier 4 players. We also believe that while we're seeing continued subscription churn, over time as you look ahead, eventually begin to bottom out, and I think you're seeing a desire amongst operators to really upgrade their systems to a more enhanced offering, which is today, I think, most sensibly done through IPTV. And you're seeing us invest in and around IPTV to drive that growth, support our customers and ultimately drive higher engagement and monetization. Last week, we announced that we had successfully purchased the assets of MobiTV in a bankruptcy auction. MobiTV has north of 100,000 subscribers. It has an end-to-end IPTV delivery system that has been built out. We think it's a nice complement to the offering that we've already built, and we think it will help us build greater scale and ultimately, efficiency and profitability within the Pay TV space, as we look to support our customers with broader IPTV solutions. So at the end of the day, I think what you're going to see is, certainly over the next 3 to 5 years, you'll see continued moderate declines in subscriber bases, but you're going to see a revenue offset as you see people shift into IPTV, and we can monetize that to a greater degree. And we've got a very, very strong franchise, a lot of capability. And I think with a business that's sizable there. I think it helps provide an important component of the broader entertainment delivery ecosystem into the home.

Okay. I'll switch gears. So DTS is kind of where we know each other from. But how big is that business today, what are the kind of primary markets they serve? And what are some opportunities for growth there?

Sure. So if you think about our business, years ago, we had an audio business as DTS. Because a lot of our solutions are bundled today, we no longer break out just the audio business, but what was the legacy DTS business is now integrated, obviously, in a home where we're continuing to license everything from the new game consoles to codecs into TV, continue to be part of the 2 primary players, maybe receivers and surround sound systems and the like, we license solutions in mobile phones as well as connected car. And 1 of the key things about our connected car franchise is that we own the HD Radio franchise, which is the sole digital terrestrial radio standard in North America. And we've been able to build on that standard and that business position by adding a successor technology that we think expands the TAM out of North America to the whole world. And through a product we call DTS AutoStage, which is effectively a next-gen radio offering that leverages not only terrestrial delivery through FM, AM, DAB, DAB Plus or HD Radio as a source. And couples it with an IP-based back in when you think about cars having 3G, 4G, 5G radios and then for different reasons. And you can pare the 2 data streams, you can offer a very content rich, metadata rich experience that makes radio look and feel very different. All in a very cost-efficient offering and easy for automakers to implement across the world. And the first such example of this product was shipped in Mercedes Benz S Class last fall. It's now offered in many countries. It's effectively the same middleware and provides a way for us to extend on a key franchise in automotive today, where we have more than 50% of your new vehicles shipped with HD Radio. We do business with all 41 brands. So it's -- automotive is a big part of where we're not only going, but with the addition of TiVo, we've seen -- and 5G, we see video interest amongst vehicle makers growing, and we think we're very well positioned in the dash to be able to offer search and discovery and high-end playback in vehicles. A second part of what we're doing and has been building on the DTS legacy as we combined with Tessera back in 2016, is bringing world-class imaging technology to the vehicle. And here's a case where, from a safety perspective, we've taken some knowledge and technology out of other markets like mobile, moved it into the vehicle for things like driver monitoring, where you're monitoring the driver for distraction, or monitoring something is happening in the cabin for safety reasons, or you're using the information about what you know about who's in the car to personalize entertainment offerings or some other aspect of the in-vehicle experience. And in this case, we're going to see the first vehicles shipped with our Willingness occupancy monitoring solution on board in the second half of this year by a major NOC automaker. And I think it's the beginning. We're still in the beginning innings of what is going to be a meaningful trend over the next 5 to 10 years, where increasingly, automakers are going to be putting these on-board safety systems into vehicles, and you're seeing standard setting bodies in automotive -- in the automotive area, whether it be in North America, Europe or Asia, beginning to think about your safety standards or safety criteria for the highest safety ratings, that involve these OMS or DMS systems. And I think we're in a really unique position to ride that growth as well. So I think when you think about these things, there's millions of units of vehicles where the technology content is high and the economic opportunity comparatively is high for an embedded software ingredient supplier. And we think we're very well positioned with both these infotainment and safety-based solutions to make a very, very strong run at it over the next 5 to 10 years.

Yes. It sounds pretty exciting. So just jumping back to your other kind of products. What is the IMAX Enhanced contribution there, growth aspirations as well?

Sure. So IMAX Enhanced is a program that we developed jointly with IMAX, where IMAX had some technology in theaters that's an experience that you can only get in the theater. And we got together and said, how do we deliver a best-in-class entertainment experience at home, what kind of audio and video delivery technology is required to deliver that same IMAX sound, and that same, in some cases, the IMAXs content, that you're bringing into the living room. And so we began licensing the program first to the TV space, that has expanded over the last couple of years outside of TV to other electronics devices, things like AVRs and whatnot to support the format. I would say we're still in the early to mid-innings there, but we have 20 or so brand partners that are shipping products with IMAX Enhanced. And we feel very good about the continued growth and evolution. And part of that is also signing of content services to deliver IMAX enhanced content. And I think we feel very good about some things that are coming here in the near future that will further expand the ecosystem. So at the end of the day, it's 1 of the contributors and a lot of levers in our consumer experience category. If you look at consumer experience, what's going to drive growth in it. It's got to come in part through IMAX Enhanced. It's going to come in part through development in the stream program that I talked about earlier around UX and Connected TV or through further sales of dongles. It's going to come from continued audio-based licensing in things like next-gen game consoles and whatnot. So -- and it's going to come through monetization -- ad related monetization across our various Pay TV platforms that are all part of that. So at the end of the day, these are both diverse, but very, very aligned ways to enhance the entertainment experience and drive more relevance in the living room, and then ultimately beyond as you see higher quality entertainment migrate down into other environments like car or even on the go.

Got you. And you have a great slide in your deck kind of shows all the different technologies hitting the living room. If you could just talk about the demand trends you've seen overall. Given the pandemic, we've seen kind of a surge in demand across multiple different consumer electronics categories, but also kind of for the living room and sound and surround sound and whatnot. So what kind of the demand trends you're seeing there? How does that kind of look post pandemic as things start to open up?

Yes. I think overall, clearly, I think the pandemic has accelerated some trends to more home-based entertainment. That is positive in that the amount of user engagement through Connected TV platforms and on various content delivery platforms goes way up. I think that is a long-term trend that will benefit us in a big way. I think people clearly early on invested in electronics to enhance their experience. So I think it will be interesting to see as things kind of normalize back to a more, let's call it, just more normal environment from a spending perspective where things go. But I think there's no question that people are interested in having better quality entertainment. They're clearly going to spend more time in the living rooms that should yield demand for higher-performing products across all the categories that is interest in Connected TV, interested in better sound, better AVR and control products, as well as underlying demand for better UX and discovery technology, because there's so much content. One of the key issues is where you find what you want to watch and how long does it take. If it takes you 20 minutes to find an 18-minute show, it's not exactly a good trade. But if you can cut that down into a very small fraction of time to find what you want, then to watch it, I think it serves us well. So in short, long-term trend, very positive. I think there are some ups and downs in each market based on how they're deploying new technology versus rolling off old technology, and we're always in a cycle where this stuff is turning over. But I feel very good about the long-term direction for consumer experience in our business. I think things are set up very nicely coming out of the pandemic.

Okay. Let's switch gears to the IP licensing part of the business. So very nice cash flows there, obviously, but what's kind of generating the bulk of that cash flow? And where does that business grow from kind of the baseline $350 million annually that you mentioned?

Sure. So today, our IP licensing business has 2 areas of focus. One is media, which really represents the bulk of the revenue and the cash flow today. And the other is semiconductors. And I would describe the semi business, while historically generating billions of dollars of licensing fees, is kind of going through a bit of a reset as technology is changing in the semi business, and we're getting ready for a new wave. So I think the way we've tried to describe the business is we have a $350 million media baseline that we have very, very strong visibility to, because this relates to long-term contracts, some going out as far as 2031, that are either fixed in nature or the subscriber based, but we feel very good about that baseline and/or our intent to grow that baseline by mid-to-high single digits as we think over the next 4 or 5 years. I think there are a couple of things that will further grow the Media business. One is we have some Canadian litigation. We have a few key operators in Canada that are not licensed. We think there's a significant amount of back royalties that will be due when we resolve those things, as well as a go-forward licensing arrangement. And that will provide growth over and above the $350 million baseline. Secondly, we have an opportunity in new media, where you're seeing kind of a lot of our IP, and there's 5,000-plus patents on the media side that are very relevant to media delivery. They're very -- they're -- many of them are relevant to OTT-based delivery. And so as things shift from Pay TV into the OTT and media world, there's -- we're just beginning some new cycles of licensing there that we think will add further growth. And then I think a third area where we expect to drive growth is really semi, whereas 1 of the key things we've been investing in for the last 10 years is what is called hybrid bonding. And the quick analogy on this is that Moore's Law is effectively dying. So the horizontal shrinking down of everything to drive more power and lower price is kind of reason -- reaching its physics limitations. And the cost of developing chips in ever smaller geometry is unbelievable. Only a few people can really play that game. Yet -- so what do you do, much like New York City, you go up. And some of the key technology that's required to connect the layers of a chip and to bond them is done through a process called hybrid bonding. We've got some of the fundamental technology in hybrid bonding. We've seen it adopted in image sensors that you see in many of your cellphones today. We think there's a very large opportunity in memory and logic going forward. And I think that is something, while we've said the timing is uncertain, because the industry is still in the early stages of adopting the technology. Over time, we think it will be a meaningful add on top of our media business. So when you put it all together, we've got very good visibility to that $350 million baseline and a very profitable business that's cash generative. We've got an option on sending -- kind of coming back into the fall as the industry continues to move our direction. And we believe that these -- the expertise across the platform, where there's deep, deep IP knowledge, licensing knowledge, litigation knowledge, et cetera, that we can further extend that even beyond those 2 areas into perhaps a third leg of the stool, and we're looking very carefully at some additional licensing areas that we think could be fruitful to add into the mix.

Got you. And how typical the tenor of these contracts for licensing, like how would you say investors should model at cash flows, essentially through each kind of revenue or cash flow stream or whatnot?

Well, we tend to -- oftentimes, I would say, deal structures are multiyear, and I'm talking media now. Semi the terms move around a little bit as you think about cash flows. But in Media, anywhere typically from a couple of years up to 10 years. There are no significant Media renewals, very large Media renewals until you get into the mid-20s. So we're a number of years out on that. But I think one of the biggest key data points for investors to understand is that the renewal rates in Media are in the mid-ish 90s and percentage of renewals. So we have a very strong position. We continue to invest in that position. We have a ton of knowledge about how to do it, worked effectively with partners to build these programs over a very long period of time. And so I think we feel very good about the visibility in and around that business. And again, semi is more episodic, but the history of our ability to successfully monetize innovation in semi, much of which is homegrown, by the way. It's -- we've developed 75%, 80% of all of our semi IP in-house. We've shown an incredible capacity to do that to the tune of billions of dollars. So we're just -- the beauty of the IP licensing business today is it you've kind of got this piece that's very stable with a long trajectory, good visibility, and you've got the addition of this episodic opportunity on top.

Got you. Yes, those cash flows are amazing. But so just on your cap allocation policy with that incoming strong cash flow. You centered on share buybacks, dividend, where else are you kind of thinking about cash and leverage overall?

I think we have spent the time going into the transaction combination a year ago, thinking about capital structure and what we came out and said is that roughly 50% of the free cash flow would be returned to shareholders in the form of dividends or buybacks. We've been very active buying back shares over the past year. And then the other 50% going to pay down debt. There obviously was a pre-existing debt on both sides coming into the transaction, and we have been able to materially pay down part of the debt balance. So I think we'll continue on that policy. We've talked about eventually separating the businesses. And when we do that, we'll obviously reassess capital structure going into separating the IP business from the product business. But I think we're busy and may even be slightly ahead of those percentages as we think about ourselves as we sit here, 9 months or going on 12 months after the combination.

Got it. Sure. And then I guess, question -- the interesting 1 is to expand timing, kind of rationale, where the debt will be hold any kind of details you can provide there?

Sure. We have said going, again, into the combination that we would look to combine the product businesses of TiVo and Xperi and the IP businesses of TiVo and Xperi. So having 2 businesses underneath the Xperi Holding Company umbrella and then would turn around and look to do a tax-free spin. So that investors can enjoy kind of a pure focused investment on either side. They have different growth opportunities, characteristics, capital needs, market positions, et cetera. And I think we believe at the end of the day, structurally, they will be more valuable in aggregate in the sum of the parts when they're separate. Preparing for that, though, is required. We do a ton of systems-related work to to enable internal separation. There's a bunch of tax planning, financial carve out work and getting teams set up. And we've now said that we expect to affect the spin in the first half of '22, well on our way to doing all the things we said we would do, including we had a target of $50 million in synergy coming into the transaction. We achieved those milestones a couple of quarters ahead of schedule, as we got into early this year. And I think we're going to continue to drive the internal execution to prepare us for the spin. One of the key things there is that the product business has enough visibility in a way that investors will be able to really, not only understand the story, but understand the progress, because we think there's some exciting things happening there. Whereas in the IP business, things are already well humming, and it's easy to kind of understand and look forward and see the cash flow of that business. And so we're balancing those issues as we get ready to spin, but first half of '22, and as we get there, we'll kind of discuss capital allocation priorities on what the balance sheets will look like as we get much closer.

Okay. I think that pretty much sums up the session here, but thank you again for taking the time to share your story. It's very interesting. And thank you. Thanks, Jon.

Thanks for the time. Appreciate it.