Xperi Inc. Q3 FY2022 Earnings Call

Good day, everyone. Thank you for being with us. Welcome to Xperi's Earnings Conference Call for the third quarter of 2022. I will now hand the call over to Jill Koval for Xperi. Jill, please proceed.

Good afternoon, and thank you for joining us as Xperi reports its third quarter 2022 financial results. With me on the call today are Jon Kirchner, Chief Executive Officer; and Robert Andersen, Chief Financial Officer. In addition to today's earnings release, there is an earnings presentation, which you can access along with the webcast on our Investor Relations website at investor.xperi.com. Before we begin, I would like to provide a few reminders. First, I would like to note that our third quarter earnings results are being presented on a carve-out basis to reflect Xperi Inc's financial results for the quarter prior to our separation on October 1, 2022 from Xperi Holding Corporation, which is now known as Adeia, Inc. Second, 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 a registration statement on Form 10. 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. Third, we refer to certain non-GAAP financial measures, which exclude one-time or ongoing non-cash acquired intangible amortization charges, costs related to actual or planned business combinations, including transaction fees, integration costs, headroom, facility closures and retention bonuses. Separation costs, stock-based compensation, impairment of goodwill, the impact of certain unrealized foreign currency adjustments, and related tax effects. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website. The recording of this conference call will also be available on our website. I will now turn the call over to Xperi's CEO, Jon Kirchner.

Thank you, Jill. And thank you everyone for joining us on our third quarter earnings call, and our first call as a newly independent company. We've accomplished a lot over the past two years, and I couldn't be more excited to take this next step of our journey as a standalone publicly traded company. On behalf of the Board of Directors and the entire management team, I want to extend a sincere thank you to all our employees and partners around the world for helping make the separation a success. We appreciate your extraordinary contributions and we look forward to the opportunities in front of us. We continue to be on track for the year despite the challenging global macro environment. I'm encouraged by our financial results for the third quarter as they demonstrate the strength of our business model, market position, and the quality of our execution. Total revenue for the third quarter was $121.6 million, representing a 3% increase from the year-ago period. We expect our full year 2022 financial results to be in line with the guidance previously provided at our Investor Day in September. We're extremely pleased with key customer wins during the quarter, demonstrating increased traction and momentum on strategic growth initiatives within our media platform, IPTV, and connected car businesses. We also drove strong operational execution on multiple critical projects, including our separation from Adeia as well as the integration of the Vewd acquisition that closed in July. Within our four markets, several product lines are growing significantly, while others are more mature. We think about these areas as growth and core respectively. At our Investor Day in September, we outlined our independent media platform growth strategy across three key markets. One is SmartTV. Analysts estimate that nearly 40% of the SmartTV market would benefit from a truly independent platform like ours. While our offering is new, our recent win with Vestel validates our value proposition that it is compelling and differentiated, enabling SmartTV OEMs to brand the experience, retain customer ownership, and participate in usage-based economics over the life of the product. During the quarter, we continued our momentum and strong execution in this market with the launch of TiVo OS at IFA, one of the world's largest consumer electronics trade shows. In addition to announcing Vestel as our first OEM partner to offer powered by TiVo SmartTVs in 2023, we more recently entered into an agreement with KTC. KTC is one of the top six SmartTV OEMs in the world, serving multiple brands and OEMs. This partnership will accelerate the adoption of TiVo OS by providing SmartTV OEMs cost-effective turnkey access to production writing designs that are powered by TiVo. These proof points demonstrate the significant opportunity we have to become a leading independent SmartTV platform. We recently posted the TiVo video trends report on our website, which affirms the tremendous opportunity for an independent media platform. The second market is IPTV within our Pay-TV business. I'm pleased to announce that during the third quarter we surpassed 1 million IPTV subscribers, which represents continuing momentum and sequential growth. Importantly, IPTV subscriber rates are meaningfully higher than our traditional classic guide subscription rates, contributing a growth element to our Pay-TV business. The third market is connected car with our DTS AutoStage solution. We continue to see broad industry initiatives and investments into the future of the connected car. During the quarter, in the infotainment area, we saw four automotive brands launch DTS AutoStage: Hyundai, Genesis, Kia, and a leading EV manufacturer. Also in connected car, in the safety area, we had design wins for DTS AutoSense programs, with a large European OEM and a top three Japanese OEM. Together, these wins continue to set the stage for meaningful long-term automotive revenue growth. Turning to our core business, consumer electronics had a strong financial performance in the third quarter with a 58% year-over-year revenue increase to $34 million. We brought in the IMAX enhanced ecosystem with new releases from Sony Pictures and Disney+, and new agreements with Rakuten TV and TCL. We demonstrated DTS as the benchmark for the highest quality sound as DTS Play-Fi launched on TVs and home theater speakers from Vestel and Philips. Additionally, we continue to see broad industry recognition of our innovative product portfolio. This quarter, DXOMARK, the industry standard in smartphone camera reviews, gave honors to IMAX enhanced certified Magic 4, a camera score of 147, beating out every other smartphone including the latest iPhone 14 Pro. Our TiVo OS and DTS Play-Fi wireless multi-channel audio solution both received Best in Show honors for the respective categories at IFA and IBC, the global media conference and trade event in Amsterdam. TiVo was called one of the best interactive TV technologies at the CSI awards, one of the most prestigious and competitive technology awards in the industry. Lastly, turning to Perceive, we believe machine learning at the edge continues to represent a large disruptive opportunity for Xperi, and we expect the first proceed-based Urgo products to enter the market in 2023. With that, I'll turn the call over to Robert to discuss our financials. Robert?

Thanks, Jon. Before I begin, I'd like to first recognize Xperi staff. Particularly those in accounting, finance, tax, legal, and corporate development for their incredible work in completing the business separation. It would be hard to overstate the amount of work involved, and I'm very proud of the team's dedication and professionalism in getting a long list of tasks completed prior to the separation, which is a huge achievement. As previously noted on the call, our third quarter earnings results are being reported on a carve-out basis to reflect Xperi Inc's financial results for the quarter prior to our separation on October 1st from Xperi Holding Corporation, which is now known as Adeia, Inc. Going forward, our results will be those of a standalone company. Total revenue for the third quarter was $121.6 million, an increase of 3% from $117.7 million in the third quarter of last year. This increase is driven by our consumer electronics business, which had a strong third quarter with revenue of $34 million, a 58% increase from a year ago, primarily attributable to certain multi-year agreements being recognized in the quarter. Consumer electronics accounted for 28% of total third quarter revenue, while we continue to expect solid double-digit growth in consumer electronics this year. We expect this business to moderate towards single-digit growth going forward. The IPTV business, which is our largest at 48% of total Q3 revenue, generated $58 million, down $7.5 million compared to the year-ago period, as healthy growth in our IPTV solutions was more than offset by churn in our classic guides business, as well as continued declines in consumer hardware and associated subscriptions. Our connected car business, which accounted for 17% of third quarter revenue, was $20 million during the quarter, relatively flat with the prior year. We expect DTS AutoStage and DTS AutoSense to grow compared to 2021. This growth will be more than offset by declines in HD radio and audio solutions due to continued supply chain issues. Therefore, we expect our connected car business to be down roughly mid-single digits in 2022 compared to last year. Our final business, the Media Platform, which accounted for 8% of total revenue, was $9.5 million for the third quarter, a decrease of $9.7 million or 7% from the year-ago period due to lower advertising revenue substantially related to one-time revenue recognized in the third quarter of 2021. Note that we expect this business to substantially grow in Q4. Overall, we continue to see significant upside in the media platform over the next few years, principally from our SmartTV footprint growth and related monetization. Our non-GAAP gross margin, calculated as revenue plus cost of revenue excluding depreciation and intangible amortization, was $91 million or 75%. Non-GAAP adjusted operating expense for the quarter was $97 million, and adjusted EBITDA was a slight loss of $0.7 million. Moving to the balance sheet, the company ended the quarter with $180 million of cash and cash equivalents, which we view as sufficient capital to run the business going forward. Accounting for the $50 million of long-term debt related to the Vewd acquisition, the company's net cash position at quarter-end was $130 million. As part of a review of goodwill in the quarter, in connection with the separation of the company, we booked a non-cash charge for goodwill impairment of $354 million in the quarter. Looking at the consolidated statement of cash flows, our cash flow from operations in the quarter was a positive $10.9 million. In terms of our 2022 financial outlook, we are reiterating the guidance provided at our Investor Day in September: revenue in the range of $490 million to $510 million; cost of revenue, excluding depreciation and amortization of intangible assets in the range of $115 million to $125 million; and non-GAAP adjusted operating expense in the range of $395 million to $405 million. Adjusted EBITDA for the year is expected to be approximately breakeven. That concludes our prepared remarks. Let's now open the call for questions. Operator?

Your first question today comes from Nick Zangler with Stephens.

First off, congrats on the solid quarter and the second OEM win and the POS. And I just want to clarify that. So that is indeed your second TV, TiVo OS win and just curious when you might expect those TVs to come to market and in what regions?

Nick, I think it's important to clarify, KTC is an OEM manufacturer for other brands. So what I think is important about it is that they're going to be building effectively turnkey reference designs that are ready to go for other brands that are interested. So it begins to lay the, if you will, the production groundwork to move more quickly as we look ahead to '23 and '24. So the KTC win is not a branded express product, if you will, but I think it lays part of the important infrastructure necessary to continue to accelerate what we're doing. And I would just leave you with the fact that we continue to be engaged very constructively with a number of others and expect that we will have more brands on board here as we look over the next quarter or two.

But the end goal is for the brands that KTC represents to incorporate the TiVo powered OS as was the case with the Vestel relationship, is that correct?

Yes, they believe that there is demand for our solution and our OS platform and thus are making it available to their clients. I think it's up to us, obviously, to connect the dots, as they would be doing turnkey manufacturing.

And I just want to ask on the adjusted EBITDA, obviously, it came in flat for the quarter. I think if my numbers are right, in the first and second quarter, I think it would imply maybe like a negative $13 million, $14 million adjusted EBITDA number in the fourth quarter, just looking for validation there, and if so, maybe you can just talk about the sequential downtick?

Yes, sure. You have to keep in mind that the adjusted EBITDA for the first three quarters is really on a carve-out basis. So it might not reflect all of the street's true standalone costs. So as we look into Q4, we do expect an uptick in operating expense just because it's not carved out in this instance, but really stand-alone costs. It's just an accounting convention. So you're correct, I think, kind of year-to-date, we have a positive number on your adjusted EBITDA, I think over $14 million. And, I think as we're talking about a break even, I think we may do a little bit better than that. But I just wanted to kind of give a rough approximation to where we would finish.

And does the, I think at the Analyst Day, you guys laid out expectations for 2023. They were mid-single-digit revenue growth, and adjusted EBITDA margin of 10%. Does that still hold or any change there?

Well, we're currently working on our 2023 operating plan. And, that work is in progress. I think we're continuing to head toward those numbers; we'll obviously give more detail when we do our annual call and lay out the year. So those are certainly our goals for the year.

I would add, I think certainly from a top-line perspective, there's a lot going on in our pipeline that we're pretty excited about. I think a key determination that we'll provide an update on is just what's the ultimate mix. Because some of the things we're doing have different kinds of margin profiles. And that will, depending on the mix, as we see it kind of coming in and our final planning and based on holiday feedback, that'll probably allow us to further update where we are in relation to that target, or we're clearly headed in that direction. And we believe that even after '23, we'll continue to see gains well beyond 10% is our EBITDA, excuse me, as our revenue scales.

Last one for me. Congrats on all of these connected car wins. So it sounds like we've got a bunch of new brands launching AutoStage. We've got some new brands launching AutoStage. Just thinking about when those products actually come to market and when you might start recognizing those revenues? I know a product win might not necessarily represent a launch for a few years down the road. So just kind of coinciding the announcement of these wins versus when we start to see the other revenues recognized.

Yes, I think you'll start to see some revenue recognized in that '24, '25 period, but I think it becomes more meaningful as you get into '25 and '26 and beyond. I think the key thing about automotive is that these programs are very complex, they're hard to win, but they tend to have great durability and very long time horizons. And we're super excited about the number of people that are kind of joining onto our next generation infotainment platform and safety as it relates to how we think about the next 10 years and current connected car. But I think you'll see it start to accelerate and become more meaningful in '25, '26 and beyond; there's quite a bit of acceleration expected.

Your next question comes from the line of Hamed Khorsand, BWS.

This is Hamed. I have a couple of questions. Regarding AutoSense in Europe, could you provide more details about any successes or discussions you're currently having?

Well, I think we said on the call that we have, you know, gotten another win in terms of broader penetration across an entire OEM's model line for our AutoSense product; we continue to be very, very deep in a number of other evaluations that I would say look very promising. So I would expect there to be more business won here over the next year, for sure. And then I think from an infotainment perspective, AutoStage, you heard, we announced three brands; there are more wins, we believe, in the pipeline coming. And so our dual-pronged approach to both thinking about the connected car in the cabin, along the lines of infotainment and safety, as well as the breadth and flexibility of our solutions is getting a lot of resonance, and the team is doing an outstanding job of executing around those pipelines. So the future in connected car looks very, very good from our perspective.

And then the final question, are you seeing a bigger shift in customer conversations related to consumer electronics compared to the second quarter?

I'm sorry, would you repeat the question? I want to make sure I'm responsive to the difference in conversations in what context.

As in the feedback, whether you're getting now versus the second quarter in terms of feedback, in terms of how it's progressing timeline-wise, any details you can provide on the difference between now and Q2 conversations?

I would say we're certainly seeing some mixed feedback; some things are different. Now, I would say some things are easing up from a supply chain standpoint, so certain things kind of look better going into 2023, seeing improvements around things like game consoles and whatnot. You're seeing some other macro uncertainty that is maybe driven by inflation and other factors that is impacting what people may think about how their discretionary dollars will be spent here throughout the holiday period and into the next year. So I think things keep evolving, and I think that's one of the things we're going to be looking at very, very significantly over the next two to three months is, as we get ready to give guidance for '23, what is the net impact of all that. Our business touches the industry very, very broadly. We license, in excess of a billion products a year, so we're dealing with a lot of different pieces, and I think how that comes together on balance is what we will certainly guide to and talk about when we get into February.

Your next question comes from the line of Matthew Galinko with Maxim Group.

I guess if you touched on supply chain easing up maybe on the consumer product side, but on the automotive side, how are things looking into 2023 for getting HD Radio shipping at more normalized volumes?

Based on the data we have, Matt, we think '23 will start to climb out of some of the challenges we've seen in '22. In some ways, it feels a bit like the sum of what was expected in the second half, as far as a bit more of a recovery in '22 getting pushed out into '23. We think we'll see more of our solutions appearing in vehicles, and there'll be less supply chain impedance in being able to get out there in '23. So, generally speaking, we're looking more favorably at automotive in '23 versus where we've been.

And then in terms of any expectation of a sequential pickup in media platform in the fourth quarter. Can you just touch on that, what does that relate to? Is it in the context of the new OEM agreement you discussed previously? Are we starting to see initial revenues from that? What are we seeing in the fourth quarter that would trigger a sequential bump?

I can take that. Now, there's two primary drivers here. We expect to see an uptick in monetization during the fourth quarter, and we're also expecting contributions from the Vewd acquisition, which we categorize under media platform. So those two will be the primary drivers for the growth we're expecting in Q4.

Your next question comes from the line of Richard Shannon with Craig-Hallum.

I start with a kind of quick two part here, actually no, just one part on the guidance here. Robert, on the OpEx here, I think a previous question didn't apply to that; higher levels than the third quarter, how do we think about that in the context of looking towards next year? Is there seasonality effects here or other investments that would cause us to think about either higher or lower starting next year? And how do you think about this level that we have this year versus next? Is there any way to kind of give us context?

Yes, it's a good question, Richard. I would say due to the continued transformation efforts that we've been undergoing within the business, we expect the net average quarterly expenses next year to be lower than, say, this fourth quarter, which really gives you a proper profit starting point as a standalone business. As we noted, Q4 sequential expenses, we expect to be higher, just because we're a fully standalone organization, but lower on an annual quarterly, we'll say average quarterly basis next year. Question for John, following up on the topic of KTC. Would they have signed up this agreement with you without some view and interest from certain OEMs out there? Or are they kind of doing a 'build it and they will come' strategy?

No, it's the former. These things take engineering; they require an investment of time. I think it's fair to say that they have seen our progress in the marketplace and had enough interest that it is worth their time and energy to work with us to build these turnkey reference designs.

I think that was the case, but I guess I wanted to hear from you. So thanks for that, John. Let's hear you gave a number here for the first time at least, if I recall, on your IPTV subscribers over 1 million. John, maybe give us some characterization of what the ambitions are and what the opportunity is for subs over time. I mean, one, when we get to, you know, say, 2 million or 5 million, I don't even know what to think about there. But maybe you just kind of give a near to medium-term thought process for where you think subs can go over the next one or two years or whatever.

I think in that kind of mid two to three year timeframe, I think we would fully expect that number to more than double. The pipeline, and even the agreements we have around people looking to deploy product, are pretty significant and have been held up in part either due to COVID or due to supply chain challenges with set-top boxes. So there's a lot of pent-up deployments that have yet to occur. I think the value of the IPTV solution from an operator perspective, both in terms of offering a more advanced experience as well as lowering the cost of operating a system at a time when the market is super competitive, and subscribers that subscribe to video services tend to return at a lower rate with respect to broadband-based subscriptions. So you put all that together, the backdrop is well situated for us to continue to advance. I think the specific timing of the exact growth within that kind of midterm period is something I think maybe we'll talk to a little bit more as we get into February, at least with respect to '23. But I think it's fair to say we believe this business is meaningfully bigger than it is now; it's certainly in the millions of subscribers. And we've already laid a lot of the groundwork to get there at what rate that occurs.

Just want to get a sense or maybe an update on the engagement there. There were some comments on your input couple months ago regarding the effect of the macro and recession on engagement there or timeframes. And maybe you can just update us there on what's going on in the last couple of months, please?

I mean, I think it clearly, as people are thinking about launching new, groundbreaking products, the supply chain naturally becomes part of every conversation, both about timing. But what I can say about what's happening within Perceive is we have continued to advance and/or deepen engagements with a number of people that we've been engaged with for quite some time, in ways that I think are promising, both in the extent of potential applications as well as people's comfort with the platform. So the headline hasn't changed, which is we expect to see products in '23. And I would say the work that's ongoing is going well.

That concludes today's question-and-answer session. I now would like to turn the call back to Jon Kirchner.

Thanks, operator, and thanks everyone for joining today's call. We are excited about our growth prospects and importantly the continuing momentum we see in our business as demonstrated by our recent TiVo OS and Automotive wins. I'd like to thank our employees for their outstanding execution during what has been a challenging period. We look forward to seeing some of you at the upcoming Stephens Conference later this month. With that, that concludes today's call.

This concludes today's conference call. Thank you for joining. You may now disconnect.