Q2 2021 Xperi Holding Corp Earnings Call
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Good day, ladies and gentlemen, thank you for standing by welcome to the ex Crees second quarter fiscal year 2021 earnings conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The call will be opened for questions.
In order to ask a question. Please press star 1 on your telephone touch.
Net.
This call is being recorded today Tuesday August 2021.
I would now like to turn the call over to Jay <unk>, Vice President of Investor relation tracks Free Geri. Please go ahead.
Good afternoon, everyone. Thanks for joining us we reported our second quarter fiscal year 2021 financial results with me on the call today are Jon Kirchner, CEO and Robert Andersen CFO also on the call is from your arm of Lee President of IP licensing will be available along with John.
Robert to answer questions during the Q&A portion of the call.
Before we begin I would like to provide 2 reminders first today's discussion contains forward looking statements that are predictions projections or other statements about future events, which are based on management's current expectations and beliefs, and therefore subject to risks uncertainties and changes in circumstances.
Please refer to the risk factors section in our SEC filings, including our annual report on form 10-K for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today.
Please note that the company does not intend to update our alternative forward looking statements to reflect events or circumstances arising after this call.
Second we refer to certain non-GAAP financial measures, which exclude onetime or ongoing non cash acquired intangibles amortization charges costs related to actual our planned business combination, including transaction fees and integration costs severance facility closures and retention bonuses.
Separation costs stock based compensation.
Loss on debt extinguishment expense debt refinancing costs.
Realized and unrealized gains or losses on marketable equity securities and associated tax effects. We have provided reconciliations of these non-GAAP measures to the most directly will be directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website.
They all 2021 and year over year performance comparisons will be discussed as if experience T. Though were combined for all periods. This approach will get the best view of progress on the overall business and these numbers can be found in the interactive analyst Center on our Investor Relations website.
Courting of this conference call, we will be available on our Investor Relations website at Www Dot expiry Dot com I'll now turn the call over to chocolate share.
Thanks, Jerry and thanks, everyone for joining us.
We delivered a strong Q2 with revenue and earnings coming in above our expectations with stronger than expected revenue was mostly driven by successfully signing certain deals earlier in the year than planned.
Creasing, our visibility to achieve our full year outlook.
And despite a modest impact on our product business from semiconductor supply constraints, we remain on track to achieve our outlook for the year.
Revenue was $222.3 million down 4.7% year over year, mainly due to expected declines from semi IP and our pay TV product business, partially offset by growth in media IP connected car and consumer experience markets.
During the quarter, we generated $56.3 million in operating cash flow and $56.7 million and adjusted free cash flow.
We also paid down about $51 million of our debt bought back $10 million of stock and are on track with our capital allocation strategy of returning approximately 50% of our free cash flow to investors.
At a high level, we made solid progress on the following initiatives during the quarter.
Building on the baseline revenue for IP business, particularly through expanded and renewed licenses in the OTT area.
Increasing the footprint of the available content for Tivo stream and continued work on an integrated connected television implementation.
Engaging with key OEM partners on our auto stage and auto products, while preparing for the launch of <unk> with our first partner BMW later, this summer and expanding our IP TV platform with the Mobi TV acquisition.
Let me begin with a discussion of our IP licensing business.
IP licensing revenue in Q2 was $101.8 million.
Importantly, media IP revenue was up more than 40% year over year.
This increase was driven by the step up from the Comcast license and the momentum we've had with renewals and expanded licenses in the first half of the year.
As is typical some of these deals include catch up license fees recognized during the quarter.
This increase was offset by expected declines in our semi IP business, because we worked to reposition that business for future growth.
The decline of approximately $50 million in semi in IP revenue resulted in our overall IP revenue being down 15% year over year.
On the OTT front, we continued to establish the relevance and value of our patent portfolio.
First during the quarter, we signed a long term renewal of our patent license with Google.
Which provides continued broad coverage under our patent portfolios for their expanding businesses.
Second we also signed a multiyear renewal with Fox Corporation, which provides continued and expanded coverage under our patent portfolios.
We are very pleased with the progress we're making in the OTT area, which is the largest of the strategic growth opportunities. We've identified for the media IP business.
<unk> like the ones, we announced this last quarter illustrates that the fundamental innovations from our patent portfolios are relevant across all forms of video consumption from linear to on demand and from traditional TV platforms to online and mobile.
While OTT services generally have a lower <unk> when compared to traditional pay TV. The scale of the overall OTT video market is significantly larger from a subscriber standpoint, and most consumers subscribed to multiple OTT services.
As a result, OTT presents an increasingly important licensing opportunity for media IP business.
On the Canadian front, we successfully renewed and extended our patent license agreement with 1 of the leading Canadian pay TV operators during the quarter.
And continue to pursue the remaining unlicensed pay TV providers.
We expect a decision from our initial round of litigation with those providers sometime later this year.
Notably we filed a second round of litigation against Videotron and more recently, a second round of litigation against Bell Canada.
We remain very confident in the relevance of our IP portfolio and our ability to ultimately achieve a market based resolution in Canada, although predicting timing is always difficult.
Since the merger closed last year will continue to improve the strong foundation of our IP business as well as make important progress in the various strategic growth areas, we have identified.
Our progress this quarter gives us confidence that we will exceed our $350 million average annual baseline this year.
Moreover, we continue to demonstrate the relevance and value of our IP across all aspects of the evolving video landscape.
As evidence of this broad relevance as we sit here today.
Than $100 million of our annual IP revenue comes from outside of traditional U S pay TV.
We are confident that our IP licensing business is better positioned than ever supported by long term agreements that generate significant recurring cash flow as well into the future.
Moving onto our product business.
Total product revenue was $124 million.
Up 6% year over year on a combined company basis, driven by growth in connected car and consumer experience, partially offset by declines in pay TV.
In the consumer experience category revenue was $46.9 million.
Up 12% year over year on a combined company basis the.
The increase from Q2 was mostly driven by Tivo stream <unk> device sales and related monetization and a significant renewal on the audio side for Tvs sound bars and receivers.
The number of activated Tivo stream <unk> grew significantly quarter over quarter, driven by our growing retail distribution presence and creative marketing.
This year, we've made great progress in achieving our retail distribution goals by expanding from Amazon and Walmart and adding best buy target and QVC.
Additionally, Youtube TV ran a campaign to select subscribers offering tivo stream <unk> devices.
On the content front during the quarter, we signed agreements to integrate several new services, including signing an agreement to integrate Amc's Ascot properties Acorn TV, all black Sundance now and shudder on Tivo stream <unk> and the Tivo Mvpds platform.
In addition to the 1 hundreds of entertainment apps on the Google play store today, we have over 20, plus streaming services fully integrated into the Tivo stream <unk> discovery experience, including Netflix Disney plus Prime HBO, Max Peacock, Paramount plus and Hulu.
Moving to the connected car category.
Revenue was $19.5 million up 53% year over year on a combined company basis as we continue to see a return to strength in automotive sales. Despite the impacts of semiconductor chip shortages.
During the quarter 15, new models launched with HD radio technology in North America.
Additionally, with celebrated 15 years of HD radio in BMW cars, and notably HD Radio now come standard in all BMW models in the U S.
Dts auto stage or connected car media platform is now live in 42 countries we.
We are engaged with 20 Oems exploring launches in 'twenty 2 through 'twenty 5 and interest is strong among car companies and tier ones across Asia, Europe and the U S.
For Dts auto sensor in cabin monitoring platform. We are on target for the initial global launch of our occupancy monitoring system. Later this summer with BMW and we continue to deploy our Dms solution in Asia and food, So you susu and INO trucks.
Currently we are engaged with 14 Oems regarding launches in 2023 through 2026.
Moving to our pay TV business revenue was $54 million down 9% year over year, due primarily to subscriber churn broadly consistent with industry trends.
Consistent with our strategy to grow our higher value IP TV service to offset declines in our traditional service during the quarter, we closed the acquisition of movie television.
This acquisition will help accelerate IP television conversions and profitable revenue growth.
The <unk> TV assets expand our addressable market within segments, such as broadband and fiber in homes with a high value IP TV managed service offering from a proven and scalable platform.
Post close we have successfully entered into new more favorable agreements with nearly all mobile TV customers.
These customers will benefit from continued investment in the platform and experience commitment to supporting operators with a broad portfolio of IP television solutions.
Additionally, Hotwire communications, 1 of the nation's leading fiber optics telecommunications provider specializing in multifamily communities signed a license agreement for the Tivo IP TV platform.
Overall, we continue to see strong subscriber growth for IP, TV service, which once again grew close to 100% quarter over quarter.
Lastly, our perceive team continued to make progress in enabling customers to use our technology.
Consistent with our plans we have now provided early access to our development tools to select customers.
We are also monitoring the semiconductor supply situation changes in the marketplace and potential impact on our customers go to market plans, we continue to see keen interest from our customers and our products and solutions for applications in diverse areas such as security cameras video conferencing laptops tablets and Wearables.
With that I'll turn the call over to Robert to discuss our financials Robert.
Thanks, John.
As noted over the past 4 quarters in order to provide more meaningful comparisons discussing both non-GAAP and <unk>.
Cash flow based numbers per <unk>.
Curious I presented on fully combined basis from the merged companies.
Thankfully this at the last quarterly comparisons from which you need to make that statement.
Let me begin with the financial results for the second quarter.
Second quarter revenue was $222.3 million, which was ahead of our internal plans for the quarter due to certain deals closing earlier than anticipated.
On a non-GAAP basis, our operating expense, excluding Cogs was $108.4 million.
Down $17.3 million or 13, 8% year over year.
Due to synergy savings lower personnel expense lower outside spend and reduced litigation.
Non-GAAP cost of goods sold of $26.2 million.
About $1 million lower than in 2020.
Cash taxes paid in the quarter or $9 million using Thats 9 million cash tax number non-GAAP earnings per share for the second quarter was 61.
We ended the quarter with $104.9 million basic shares outstanding.
Third $13.7 million non-GAAP fully diluted shares outstanding.
Moving to the balance sheet.
We finished the quarter with 199 million from cash and investments.
During the quarter, we repriced, our outstanding debt to lower borrowing costs.
And the maturity and improve other terms that provides flexibility and the credit agreement.
As part of the debt repricing, we paid down $56 million of debt, bringing the outstanding balance down to $810 million.
Net debt of $611 million.
Operating cash flow for the quarter was $56.3 million up.
Up from $44 million, a year ago on a fully combined basis due to reduced spending interest and cash taxes offset by lower revenue and changes in working capital.
Our adjusted free cash flow for the quarter.
With $56.7 million adjust.
Adjusted free cash flow reflects operating cash flow adjusted for $3.1 million per property plant and equipment spend.
And $3.6 million of merger and separation related costs.
During the quarter, it's very paying a quarterly cash dividend of 5 cents per common share of stock.
We also bought back 4 million shares of common stock for a total of $10 million.
Let me lastly comment on our outlook for the year.
Given the closing of certain deals into the first half and a pipeline of activity for the remainder of the year, we are reaffirming our revenue outlook of $860 to $900 million.
This revenue range reflects the most current information we have some customers and into the street analysts regarding constraints from a global semiconductor supply.
Net impact on our business.
So as a reminder, given the inherent uncertainty in the timing of resolution of the annual outlook does not include revenue associated with any resolution of litigation against Canadian operators.
Our execution of large than the IP licenses.
On the expense side, we expect our annual expenses to be consistent with our prior guidance.
Lower spending in the second quarter due to the deferral of certain expenses to later in the year.
In the second half we will have additional expenses as a result of the <unk> acquisition, and we expect sequentially higher R&D and SG&A expenses.
Also while litigation expense can be difficult to forecast.
Due to case timing activity.
We expect litigation expense to increase and to be in the range of $15 million to $20 million for the second half.
Given the repricing of our debt this past quarter, we are lowering the outlook for interest expense by $4 million.
And a $39 million for the year.
Other than this 1 change we are reaffirming our annual expense outlook communicated in February our cash flow outlook also remains on track for the year.
That concludes our prepared remarks, let me now open the call to your questions.
We can now take.
First question from how much core Hamed <unk> from <unk> financial.
Hi, So first off just on the OTT front.
Could you just talk about what your.
Efforts are as far as the renewing the licenses.
If youre able to talk about if theres any more.
Licenses coming up for renewal this year.
Certainly have a severe.
As we said on the call. We're pleased with the progress we're making in OTT so far.
Obviously, 1 of the areas that we've identified as a strategic growth area for the IP business.
We have a pipeline of opportunities in terms of renewals and new licenses that the team continues to work through obviously as those deals get done like they did in the most recent quarter where were part where it's possible we'll make those announcements, but we're pleased with the progress to date and we're happy with the pipeline, we've got and we'll be updating you as we.
We make more progress in the future.
So you can't comment on if there's anything coming up in the second half of this year.
There is certainly always a long pipeline as we said the timing of getting any deals that is not something we can predict with any specificity, but the team certainly actively working on the normal pipeline get imagine there in an important and growing segment per visit.
Okay and then my other question was on IP TV.
Could you just talk about moving Tvs customer diversification, how much of it is within the U S. How much of it is within international line.
How are you going to pursue that as far as.
Adding more customers in those regions Susan Mcgee television.
Yes sure.
But it's largely U S.
Centric.
And I think the.
The difference between.
Kind of moving to the offering and what <unk> historically done it in IPD to context is will be TV has a managed service offering.
And the client base kind of that was using their service.
<unk>.
As in the neighborhood of approaching let's call it 100 different customers.
So a lot of smaller operators and whatnot.
But we believe that the quality of the platform and its scalability potential when coupled with our existing.
Legacy Tivo IP TV customer base.
Really puts us in a position to be a.
A key provider of.
Services to this space and I think offering both.
The ability to scale very efficiently to make the economic model.
Much more viable in the context from being a bigger provider to the broader industry.
As well as allowing us to invest in ways that will improve the <unk>.
Platform for our customers so.
Very very pleased to have completed.
Not only that that acquisition.
Through the bankruptcy court, but secondarily at the speed at which we have.
Kind of picked up the ball engaged with customers gotten their respective key talent engage with our teams and how were kind of refining.
Lang.
<unk> for for much more aggressive IP TB growth as we look ahead.
Okay, and lastly, your hardware Cogs dropped quite a bit is that going to be.
A new level going forward or was this a 1 time anomaly.
I can take that 1.
Net Cogs did have a fairly low quarter.
I may have mentioned in some of the remarks I do expect that to tick up meaningfully in the second half.
Part of that is just timing of when expenses occur.
The mix of our shipments.
Other is the increase we would attribute DTA of another TV acquisition. So both of those will.
Drive the numbers up in the second line.
I do expect as I mentioned earlier that debt the debt.
We gave a range for togs.
Previously and I would expect we would be within that range.
For the year. Thank you.
Once again, if you would like to ask a question. Please press star 1 net.
Not a star 1 pashka question.
It appears there are no.
Are there questions at this time I would like to now turn the call back over to Jon Kirchner for any additional or closing remarks.
Thanks, operator, and thanks, everyone for joining us on today's call.
We delivered another strong quarter and I'm, particularly pleased with the progress we've made on growth in the OTT area of our IP business IP TV adoption and expansion of our solutions and Tivo stream <unk> footprint I want to thank our employees for their dedication and commitment towards executing on our strategy and plans during what is otherwise very.
<unk> time.
I look forward to discussing our progress with shareholders over the coming months.
Thank you this concludes today's call.
This concludes today's call. Thank you for your participation you may now disconnect.
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Yes.
Okay.
Thanks.