Xperi Inc. Q2 FY2025 Earnings Call

Good day, everyone. Thank you for being here. Welcome to the Xperi Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Sam Levenson from Arbor Advisory Group. Sam, please proceed.

Good afternoon, and thank you for joining us as Xperi reports its second quarter 2025 financial results. With me on today's call are Jon Kirchner, Chief Executive Officer; and Robert Andersen, Chief Financial Officer. In addition to today's earnings release, there is an earnings presentation on our Investor Relations website at investor.xperi.com. We encourage you to download the presentation and follow along with today's commentary. Before we begin, I would like to provide a few reminders. First, I would like to note that, unless otherwise stated, all comparisons are to the same period in the prior year. Second, today's discussion contains forward-looking statements about our anticipated business and financial performance 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 discuss today, please refer to the Risk Factors and MD&A sections in our SEC filings, including our most recent Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended June 30, 2025, to be filed with the SEC. 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 are detailed in the earnings release and accompanied by reconciliations to their most directly comparable GAAP measures, which can be found in the Investor Relations section of our website. Last, a replay of this conference call will be available on our website shortly after the conclusion of this call. I will now turn the call over to Xperi's CEO, Jon Kirchner.

Thank you, Sam, and thank you, everyone, for joining us on our second quarter 2025 earnings call. Over this past quarter, we've been operating in an increasingly difficult environment, which has had an impact on our business. Nevertheless, we are excited about the significant progress we continue to make on our strategic initiatives that are critical to meeting our longer-term growth plans as exemplified by growth in our TiVo One monthly active users, Connected Car AutoStage footprint and IPTV subscriber households. I'll cover all of this in a little bit more detail in a moment. Let me first address the financial outlook update we made early last week. The combination of macro uncertainty, tariffs and a weakening consumer environment began to meaningfully impact our customers' decisions, production outlook and purchasing patterns in the latter part of the second quarter. The impact of these conditions is being felt broadly across our business as we look ahead to the remainder of 2025, and touches areas like slower-than-expected IPTV subscriber growth, softer second half automotive production volumes, weaker consumer electronics production and end market demand and a more challenging advertising market. Robert will provide additional color later on this call. I'll now provide a summary of our results for the quarter. For the quarter, we posted revenue of $106 million. Despite lower year-over-year revenue, our adjusted EBITDA rose 4% to $15 million or 14% of revenue due primarily to continued business transformation efforts and cost management. We continue to work on lowering our cost profile in support of long-term margin expansion. Our non-GAAP earnings per share was $0.11. We posted $10 million of operating cash flow in the quarter and recorded $5 million of positive free cash flow. Now as we turn to the bigger picture, we continue to make significant progress on our strategic growth initiatives. As a reminder, we generally discuss our business in terms of growth solutions where we see strong potential for new revenue growth and core solutions, which encompass our more mature, long-standing product lines. Our growth solutions encompass three main areas: first, connected TV and streaming devices that support the TiVo One ad platform, where we monetize ad-supported viewing, viewership data and home page engagement across smart TVs powered by TiVo and TiVo video-over-broadband devices; second, in-cabin entertainment, where DTS AutoStage combines radio, rich metadata and video streaming services to enhance the automotive experience. We expect this solution to enable long-term revenue through a mix of license fees, upselling features, advertising and listener data. And third, IPTV, where we offer video over broadband on our industry-leading content-first streaming platform for our customers' IPTV linear video households as well as broadband-only households, where revenue is primarily generated by monthly subscriptions. Our progress in each of these growth areas is best measured against specific goals that we've set out for the year, and we believe we're on track to meet or exceed these goals in 2025. Let me first provide more detail on our growth initiatives. First is the TiVo One ad platform, which we believe has the most significant potential to drive our overall long-term revenue growth trajectory. Over the past few years, we've built the TiVo One ad platform, a cross-screen advertising platform that connects smart TVs and IPTV set-top boxes powered by TiVo into a cross-screen ad platform for maximizing engagement and monetization on streaming devices. The TiVo One ad platform connects our unique audience of monthly active users through industry-leading supply-side platforms directly to ad buyers and demand-side platforms. Our TiVo One ad platform strategy leverages the large and growing market for streaming content and advertising. To support this media platform monetization strategy, we launched TiVo OS for smart TVs in December of 2023. And today, we've signed nine partners shipping over 80 television brands across 40 countries and through more than 30 major retailers. Consumer reviews of the TVs have been very strong, and we continue to take market share and build the scale necessary in key markets to attract more advertisers, add volume and ultimately drive more aggressive monetization growth. We are increasingly winning in this competitive market by differentiating in a number of different ways: first, by delivering a best-in-class TV operating system in a set-top box user interface and discovery experience; second, we are an independent OS provider that does not compete with our TV partners by making our own TVs; third, we share advertising revenue and data with our partners; fourth, we focus on our partners' branding throughout the experience, allowing our partners to retain brand visibility by shipping a co-branded experience that is powered by TiVo; and fifth, our technology enables a lower-cost hardware solution, which we believe, in many cases, is meaningfully lower than key competitors while still being highly performant and able to scale on a global basis. Our goal for the TiVo One ad platform in 2025 has been to build an initial connected TV and video-over-broadband device footprint of 5 million monthly active users. As Q2 came to a close, we saw substantial progress toward building scale for the TiVo One ad platform. We now have 3.7 million monthly active users, putting us well on the way to achieving our 2025 goal. We also announced a total of nine TiVo OS partners to date with just one more needed to hit our 2025 goal of 10 partners, which we expect will yield significant increases in footprint over time. As our monthly active user footprint grows, we're beginning to recognize advertising revenue from our TiVo One ad platform with our year-end exit goal of reaching $10 of annual revenue per user still within our sights. We have recently expanded the selling of home page ad units to leading streaming services in Europe, and interest from potential advertising partners in our footprint and viewership data is growing. To further advertiser interest in our platform, we've recently signed key partnerships with Wurl, Kargo and FreeWheel that we expect will bring additional scale and benefits to advertisers and brands interested in targeting our growing and largely unexposed installed base. Within the connected car category, we made significant progress expanding penetration of our DTS AutoStage solution by signing two new OEM programs and by launching in several new car models, including the BMW 5 Series, Kia EV9 and the Hyundai IONIQ 5 and IONIQ 9. We broadened the ecosystem for AutoStage by expanding the number of global broadcasters that support the platform and are now aggregating content from broadcasters in over 60 countries. Broadcasters are key partners in the longer-term AutoStage platform monetization strategy as they provide both metadata to enrich the user experience and ad placement slots that we expect will drive auto-based digital ad monetization over the long term. On HD Radio, we signed a multiyear agreement with an integrated chip provider, and our footprint continued to grow with several new vehicle models launched with partners, including BMW, Honda, Hyundai and Volkswagen. Turning to Pay TV. The operator market continues to evolve, and as such, we offer our customers several solutions as follows: first, our IPTV solutions. These solutions provide a full content lineup for operators whose customers are paying subscriptions for live linear content. With our content-forward user interface, this solution showcases bringing all video entertainment content together, including not only live linear but subscription video-on-demand, transactional video-on-demand and free ad-supported television from leading streaming partners. Second, broadband TV. Broadband TV is a subscription-based product like IPTV with the fundamental difference of being lower cost and offering a more limited lineup of channels. Lastly, TiVo Broadband. TiVo Broadband is effectively the same solution as broadband TV, except there are no subscription channels or fees. We believe all of these household solutions enable a device footprint that has advertising and monetization opportunities for our monthly active users. Against this backdrop, our IPTV solutions in North America and Latin America continued strong growth of over 30% on a year-over-year basis, reaching an installed base of over 3 million subscriber households. Approximately half the installed base is in North America and the other half in Latin America. When accounting for both geographic and ASP mix within the markets and solutions, IPTV revenue growth was 24%. Additionally, we extended our relationships with key customers by signing significant multiyear renewals with Liberty Latin America and Cable One. And lastly, we executed international metadata agreements with Korea Telecom and Proximus in Europe. In the consumer electronics market, we advanced our DTS sound-based technology solutions by signing key minimum guarantee contract renewal agreements during the quarter with TPV Philips, TCL and Sony. We also entered into a separate renewal agreement with Sony for the inclusion of IMAX Enhanced technology in Sony's TVs, sound bars, receivers and projectors, which continues to bring best-in-class entertainment to consumers in the home. We signed our first customer TV contract for our Clear Dialogue enhancement technology with a major TV OEM. Our Clear Dialogue solution leverages AI to give users control over improving the intelligibility of dialogue across all sources, a key pain point for consumers around the world who struggle to make out what people are saying when watching TV. Clear Dialogue has won multiple industry awards, and we spent the last 18 months porting the solution onto integrated chips, where we expect market availability in the first half of 2026. Let me now summarize where we stand with respect to our 2025 exit goals. In Media Platform, we made substantial progress growing monthly active users utilizing the TiVo One ad platform to 3.7 million, and we've signed an additional smart TV partner, bringing the total to nine. In Pay TV, we've now exceeded our annual footprint goal of 3 million IPTV subscriber households while also beginning to deploy the TiVo One ad platform to certain operators in North America. In Connected Car, we've increased the number of vehicles with our DTS AutoStage solution to over 12 million. Overall, we're encouraged by our progress toward meeting or exceeding these strategic goals by year-end 2025. We expect this strategic progress will, in turn, position us to generate more revenue and profitability growth over the long term. With that, I'll turn the call over to Robert to discuss our financials.

Thanks, Jon. As in past quarters, I'll be covering two main areas during this call. I'll first go through the financial results and provide commentary for the quarter. And second, I'll discuss our financial outlook. Let me begin with the quarter's revenue results. Total revenue for the second quarter was $106 million, a decrease of 11% from last year's $120 million and lower by 10% when adjusting for the Perceive divestiture. This year-over-year revenue decrease was primarily attributable to certain minimum guarantee arrangements recorded in the prior year period within Pay TV and Connected Car. As a reminder, in any given year, approximately 20% to 25% of our revenue across the business is categorized as point in time, most of which consists of minimum guarantee arrangements with our customers. While the revenue from these agreements is recognized during the period in which it is signed, many of these agreements regularly renew in a multiyear cycle and provide the benefit of long-term predictability, certainty and commitment to our technologies. When unit volumes under these agreements are exceeded, we recognize the overage revenue on a per unit basis in reported periods. Within the pay TV category, we recognized revenue of $50 million, a decrease of 18% from last year. This decrease was largely due to certain minimum guarantee revenue recognized last year relating to our Classic Guide product line and was partially mitigated by 24% revenue growth in our IPTV solutions as we saw continued subscriber year-over-year growth. Consumer Electronics revenue was $19 million, an increase of 23% when excluding the divestiture of Perceive. While this growth was attributable to the signing of minimum guarantee renewals for our codec and audio solutions with certain large CE customers, other agreements expected to be concluded were not signed due to market uncertainty. Connected Car revenue decreased by $6 million due to a lower amount of minimum guarantee agreements recorded in the quarter compared to last year. Media Platform revenue was $12 million, 18% higher than last year due primarily to advertising revenue from a linear ad placement that was delayed from last quarter. Looking at our income statement for the quarter, our year-over-year cost of revenue increased by almost $5 million, driven both by revenue mix and from higher costs related to certain advertising revenue. Non-GAAP adjusted operating expense decreased by $19 million or 23%, primarily due to ongoing business transformation and cost management efforts that Jon mentioned earlier. From a profitability perspective, our adjusted EBITDA was $15.2 million, up 4% from last year's $14.6 million or 2.2 basis points of margin as our revenue decrease was more than offset by the year-over-year expense reduction. Our non-GAAP earnings per share was $0.11 compared to $0.12 we posted in the second quarter of last year. From a balance sheet perspective, we finished the quarter with $95 million in cash, up $7 million from last quarter. This increase was principally due to the $10 million of operating cash flow generated in the quarter, which was a $12 million improvement from the $2 million usage of operating cash flow that occurred last year. With regard to our outlook, we expect a revenue range of $440 million to $460 million. Despite the limited direct impact from tariffs that we experienced in the first quarter, as the second quarter progressed, we noted significantly more uncertainty related to the macroeconomic environment. Customer concerns around visibility drove a reluctance to enter into certain agreements, and a weakening consumer environment was reflected in lower near-term forecasts. We expect these conditions to persist for the balance of the year. As such, we are forecasting slower-than-expected IPTV subscriber growth, softer second half production volumes in automotive, weaker consumer electronics production and end market demand in certain product categories, and a more challenging advertising market. While our revenue outlook for the year has been reduced, we are encouraged by the progress of our business transformation efforts as we continue to focus on cost management, profitability and cash flow generation. We expect an adjusted EBITDA margin range of 15% to 17%. Operating cash flow is now expected to be neutral, plus or minus $10 million. Non-GAAP tax expense is still expected to be approximately $20 million, capital expenditures at approximately $20 million, and basic and fully diluted shares are still expected to be approximately $46 million. That concludes our prepared remarks. Let's now open the call for questions.

Your first question comes from the line of Jason Kreyer with Craig-Hallum.

I am seeking some additional clarity on the volatility or perhaps the shortfall between Q2 and Q3. You provided some insights regarding the consumer electronics side. I'm curious if those deals that were pending did get signed. Were they signed for a shorter duration or do you still anticipate these deals being finalized? Additionally, I would like to know more about the situation outside of consumer electronics, particularly regarding the ad market, and I'm interested in what trends you are observing there.

Sure. In Q2, we observed some uncertainty in our customers' near-term outlook, which made them less inclined to pursue long-term deals or finalize the agreements we presented to them. Whether these deals will eventually be signed is still uncertain, but it seems more like a delay at this point. In the advertising market, we have noticed a similar level of uncertainty. We factored this into our updated projections. Does that help?

Yes, that helps. A follow-up, just sticking on the ad market. The long-term monetization plan, you've got a direct sales element right now. You also announced on the call, you've got some new partnerships. Just curious the balance between direct sales and these partners that you announced.

Jason, it's Jon. I think it will be a mix of both approaches. We have dedicated significant time to enhancing our connectivity to programmatic infrastructure. However, I believe there will always be a portion of campaigns sold directly, depending on various factors and the specific requirements of different ad units, like home page ads compared to other programmatic options. Our goal, especially in light of your previous question, is to recognize that during times when advertisers are scaling back or seeking more cost-effective solutions in a challenging market, there is a trend toward larger ecosystems. We are still in the process of building our scale, so we aim to collaborate closely with partners to ensure that as we establish our presence and our audiences can be targeted, we leverage partnerships in the near term to address or alleviate some of these market conditions. Over time, we will either choose to extend these agreements on a larger scale or adapt as market conditions stabilize.

And your next question comes from the line of Hamed Khorsand with BWS Financial.

So first off, could you just talk about the dynamics of your ad platform and how you're expecting to grow that this year given that you're expecting unit volumes to decline? So wouldn't that actually have a negative impact on what you get on the platform?

There may be some confusion with the data, Hamed. We anticipate growth in our monthly active user count. As mentioned, we believe we are on track to reach over 5 million monthly active users, an increase from the current 3.7 million. This growth will lead to more viewers and active users, which will enhance our advertising opportunities. A contributing factor to this is that our user base is expanding across a broader geography. We are also focusing on building more scale in key markets, as this scale makes our platform more appealing to advertisers. Furthermore, we will collaborate with partners to increase the availability of our inventory, which should lead to revenue growth. In general, there is a natural progression when optimizing a monetization platform, especially when enhancing the viewing experience and showcasing fast content for users. This process involves significant effort over an extended period. However, without growth in our user base as a starting point, it's challenging to achieve substantial revenue growth. Our user base is on a robust upward trajectory, and more partners are increasing their TV presence in Europe and beyond. As our reach expands and we can better demonstrate what our unique audience offers to advertisers, we will improve our sales efforts and increase our monetization potential.

Okay. My other question is regarding stock buybacks. At what point would you consider implementing that strategy?

Well, we have authorization to do stock buybacks from our Board, and that's naturally a discussion we are having with the Board, particularly given where the stock is at present. So I think you can see us taking a very close look at that as part of our capital allocation strategy.

We have reached the end of our call today. I'd like now to turn the call over to CEO, Jon Kirchner.

Thank you, operator. I think it's fair to say that, no doubt, we are operating in an environment with a certain degree of uncertainty, which affects our industry and our customers and our competitors as well as ourselves. That said, I think we have a very clear strategy for growth, and we continue to make excellent progress toward achieving our 2025 goals, some of which we've already surpassed six months ahead of schedule. And in addition, as the results of our second quarter, I think, demonstrate, we've successfully mitigated revenue pressure, I think, with significant reductions in our cost base and strong cost management. So our view of the opportunity ahead of us is really unchanged. And over the back half of 2025, we remain confident in our ability to further build the strategic foundation for rising revenue and profitability as we get into 2026. And I'd like to thank clearly our entire Xperi team for their focus and strong execution on our strategic objectives as we collectively strive to create shareholder value. Thank you for joining us today, and we look forward to keeping you apprised of our progress.

That concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.