Q2 2023 Xperi Inc Earnings Call

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Good day, everyone. Thank you for standing by welcome to <unk> second quarter 'twenty Strange Free earnings conference call. During today's presentation, all parties will be in listen only mode. Following the presentation. The call will be opened for questions I would now like to turn the call over to Mike I'd work extra.

Gary <unk> head of Investor Relations Mike. Please go ahead.

Thank you.

Good afternoon, and thank you for joining us as Xperia report its second quarter 2023 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 was an earnings presentation, which you can access along with this webcast on our Investor Relations website at Investor Dot expiry Dot com.

Before we begin I'd like to provide a few reminders.

First I would like to note that unless otherwise noted all comparisons are to the same quarter of the prior year.

In addition.

The second quarter of 2022 was calculated on a carve out basis.

Or two experienced separation from Experian holding corporation on October one 2022.

Very holding corporation is now known as audio.

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 they are 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 section in our SEC filings, including our most recent Form 10-Q.

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.

Which can be found in the Investor Relations section of our website.

Lastly, a replay of this conference call will be available on our website. Shortly after the conclusion of this call.

I would now like to turn the call over to experienced CEO Jon Kirchner.

Thank you Mike and thank you everyone for joining us on our second quarter 2023 earnings call.

We're pleased to deliver another quarter of significant strategic progress and solid financial results I'll, let Robert walk you through the details in just a moment, but let me touch on revenue and growth rates.

Revenue in the quarter was $127 million up 1% from the prior year, but as some of you may recall last year's Q2 included a significant onetime benefit from a mobile imaging customer impacting consumer electronics revenue.

When excluding this benefit year over year growth would have been in excess of 10% due to strong growth in media platform and connected car.

Our first half revenue was consistent with the growth rate projections, we discussed at our Investor Day last September with media platform in connected car growing rapidly consumer electronics, showing modest growth in pay TV down mid single digits. The net result of our first half performance coupled with initiatives underway.

Is that we remain on track and expect to achieve our full year outlook.

Lastly, we're pleased to see strategic momentum continue in key growth areas of our business, particularly in media platform in connected car.

Our efforts are focused on four key growth areas and we're making significant progress in each of these are connected television advertising, where we offer our tivo operating system to power Smart Tvs and monetize AD supported viewing.

In cabin entertainment, where our Dts auto stage combines broadcast radio Internet matter data and video to enhance the automotive experience.

In cabin monitoring or Dts auto sense combines our imaging technology and machine learning to improve automotive safety comfort and convenience.

And and IP, TV, where we offer our industry, leading content first video over broadband platforms.

Each of these markets is expected to expand rapidly over the next several years as internet connectivity streaming and consumer expectations cause entertainment to be more ubiquitous and advertising dollar shift to new delivery methods I'd like to walk you through some of our significant accomplishments since our last earnings call. We.

And then media platform earlier today, we announced the sharp is the second TV OEM to launch Tvs powered by Tivo, we're excited to be partnering with sharp on our multi year multimillion unit relationship that is expected to ship Tvs starting in Europe next year in.

In addition, we signed a third smart TV Oems to integrate Tivo OS.

We now have three TV Oems with plans to ship product in 2024, and importantly, we expect to have distribution in both Europe and the U S. Our pipeline remains robust and we anticipate having other Oems under contract by the end of this year. This.

This is a tremendous accomplishment and strong validation of our strategy.

As outlined on last quarters call, we expect vest fell to have Tvs powered by Tivo in the European market for the upcoming holiday season. These.

These initial shipments are an important first step however, the monetization of these Tvs will build as our footprint grows and users engage with content.

In addition, Sony a longtime partner of experience will deploy our web browser technology within their smart TV lineup, enabling content search and discovery and creating an additional pathway to AD supported content monetization over time.

Overall, we're very pleased with the progress of our independent media platform strategy and its long term growth prospects.

Our connected car business also saw continued momentum in the quarter as you've likely seen the automotive industry is making extensive investments in making cars more connected as internet connectivity is dramatically altering the in cabin entertainment experience as part of this transformation, our Dts auto stage in cabin.

<unk> platform is expanding rapidly auto stage is now deployed in more than 4 million cars across five automotive brands globally, and we expect the momentum to continue.

Bmw's decision to deploy Dts auto stage video service powered by Tivo and their five series later this year is a good example of our progress.

In addition to the initial success of auto stage, we expect this combined footprint to grow rapidly driven by model and geographic expansion, creating the long term opportunity for advertising monetization and feature Upselling.

To further improve the user experience, we recently signed agreements with broadcast groups representing over 4000 radio stations across North America, Europe , Australia, and New Zealand. This extensive network of broadcasters will enhance the in cabin experience by sending additional meta data that auto stage will combined with Internet com.

10 to enrich the user experience enhancements include additional content such as Albemarle lyrics personalized recommendations and a real time guide showing what is currently playing on other stations.

Turning to Dts auto sense, our in cabin driver an occupant monitoring system continued its momentum during the quarter.

We signed a new contract with a top three automotive OEM with plans to go into initial production in late 'twenty four for the 2025 model year.

We now have design wins from six automotive brands encompassing over 80 different models.

In addition to these next gen platforms, we continue to make progress in our well established HD radio business. This quarter. Our HD radio solution has been launched on more than 10 additional models for the North American market, increasing our share of new car production.

The in cabin entertainment and monitoring markets are expected to double over the next five years and the success. We're seeing today sets the stage for meaningful long term connected car revenue growth.

Within the pay TV business IP TV continues to make steady progress helping to mitigate the secular decline in linear pay TV subscribers.

Our IP television solutions had another consecutive quarter of healthy double digit subscriber growth, adding more than 150000 net new subscribers in Q2.

The continued momentum in IP TV is being driven by new broadband service providers offering our IP TV services and at the same time customers, increasing the velocity of IP TV adoption as they package our solution together with their broadband services to create a more attractive bundle.

In addition.

Collecting a monthly subscriber fee for IP TV, we also monetize the viewing of AD supported content through Tivo, plus where we offer nearly 160 channels a free AD supported TV content.

As the market is shifting towards more SaaS content being consumed our video service provider customers are increasingly offering tivo plus to expand the entertainment options to their subscribers, whether broadband only or video.

And lastly, our momentum continues with the expansion of Tivo plus availability across 25 additional video service providers during the quarter.

<unk> more scale to this element of our monetization footprint.

And our discovery product line, we licensed search and recommendation technology to our customers enhancing their ability to drive consumer engagement.

During the quarter, we significantly expanded our relationship with a top five U S video service provider, increasing our footprint by millions of additional households, and demonstrating the value of our deep heritage of applying AI to personalized content discovery.

Turning to consumer electronics, we signed several renewals with major consumer electronics manufacturers. These license agreements allow consumer electronics manufacturers to continue integrating Dts audio and play Fi wireless technologies into their products for the next several years validating the market appeal and longevity.

Of these innovative technologies.

In addition, we celebrated the 30th anniversary of Dts, our immersive audio technology first deployed in the $19 93 Classic film Jurassic Park, now pervasive across consumer electronics and mobile devices.

Turning to perceive we're continuing down the path, we set out last quarter and expect first revenue this year against the backdrop of tremendous interest in large scale AI.

We continue to make progress on our development efforts to scale our compression technology.

And are engaged with customers and partners on its applications deploying large language models or <unk>.

Recognizing the magnitude of this opportunity we are exploring options for strategic partnering to help accelerate our path to market we expect.

To report additional progress over the coming quarters.

In summary, it was a successful quarter from many perspectives, we continue to hit specific milestones that both validate our solutions and reaffirm our strategy.

We remain on track to achieve our strategic objectives and long term financial targets with that I will turn the call over to Robert to discuss our financials Robert.

Thanks, John as Mike mentioned earlier, unless otherwise noted all comparisons are against the same quarter in the prior year.

Total revenue for the second quarter was $127 million up 1% from the prior year.

Last year's Q2 included a significant revenue benefit from our mobile imaging customer.

Excluding this onetime benefit our Q2 year over year revenue growth would have been greater than 10%.

Pay TV, our largest revenue category was down 4% an improvement compared to the 6% decline we saw in Q1 <unk>.

Strong growth in IP TV during the quarter helped to mitigate declines in our core pay TV product lines.

Consumer electronics was down 20%, primarily due to the onetime revenue event last year. Nonetheless, we saw solid traction in audio renewals during the quarter for both Etfs and play Fi that helped to bolster the overall performance within consumer electronics.

Connected car was up 13%, primarily due to high HD unit volume.

<unk> radio unit volume as car manufacturers increased production following several years of supply chain issues.

As our customer programs advance we also saw a doubling of the combined revenue for our auto.

And auto stage solutions.

Media platform was up 149% with more than half of this increase due to growth in monetization.

And the rest due to incremental revenue from the viewed acquisition.

I've included a slide on the first half and revenue results.

Although I won't go through this in detail our first half performance by business unit is broadly consistent with the expected growth rates, we articulated at our Investor day last year and.

And has us well within the range of our full year revenue outlook.

Our non-GAAP gross margin for the quarter was $97 million or <unk>, 76% a decrease.

There are approximately 300 basis points from last year, driven primarily by a shift in margin contribution from consumer electronics to media platform due to the one time high margin mobile imaging customer revenue that occurred last year.

non-GAAP adjusted operating expense for the quarter was $98 million.

Up 5% from the prior year's carve out financials, but down 1% sequentially.

Our adjusted EBITDA was $5 million, resulting in an adjusted EBITDA margin of 4%.

After accounting for tax and interest expense, our non-GAAP loss per share was <unk> <unk>.

Moving to the balance sheet. The company ended the quarter with $112 million in cash and cash equivalents, a slight increase from Q1.

Our cash flow from operations in the quarter was a usage of $2 million due to modest changes in working capital.

We expect operating cash flow in the second half of the year to be positive while the full year is currently expected to be a usage of cash primarily due to an uptick in dsos and an increase in unbilled receivables from strong execution in multiyear deals.

Overall, we remain comfortable that we have sufficient cash to run the business.

Turning to our financial outlook for 2023, we are reaffirming our previous guidance ranges and providing the following commentary.

We continue to expect full year revenue to be in the range of $510 million to $540 million.

And adjusted EBITDA margin to be in the range of 6% to 10%.

We are lowering our full year non-GAAP tax estimate from $20 million to $25 million to approximately $20 million.

Our tax expense is not linear throughout the year due primarily to the timing of foreign withholding and certain federal and state taxes.

So while the non-GAAP tax was approximately $5 million in the first half we expect the second half to be approximately $15 million distributed equally between the two remaining quarters.

Basic share count is still expected to average $43 million for the year and fully diluted share count is expected to average approximately $50 million for the year.

That concludes our prepared remarks, let's now open the call for questions.

Operator.

At this time I would like to remind everyone in order to ask a question breast Star then the number one for your telephone keypad, we will pause for just a moment to compile the Q&A roster.

Your first question comes from Steven Frankel for Hosing Black Securities. Steven. Please go ahead.

Good afternoon.

John can we just get a little more detail.

Years mobile imaging transaction was data upfront payment was that a catch up kind of how do you characterize how should I think about that.

That anomaly.

It was the resolution of a.

<unk>.

Contractual matter that dated back a few years prior coupled with the execution of a go forward license.

Okay.

And then.

To focus on.

The more important things going forward. It sounds like you made some good progress with <unk>.

Tivo as an.

And you talked about entering the North American market could you tell us whether that's for all.

The new Oems or one or two that you had going into the quarter that now tells you would go into North America.

I think we're going to end up with multiple players in North America next year, Steve and I think Thats, all I really can say for competitive and strategic reasons.

Okay.

What are you learning.

Monetization front.

From the pay TV business.

That.

May be helped here the way you're thinking about <unk> as it rolls out or is it and monetizing at this early stage, where you think it should be.

Well I think Theres a couple of aspects as you think about long term monetization and TV OS that are important one is.

You need.

Meaning full video service infrastructure that we have in Spain, serving up tens of millions of households through our pay TV business and IP TV. We also have quite a bit of history and experience.

Looking at.

Data, that's coming off these Tvs through IP TV in our various software layers that headset.

On various boxes in the field and I think that will enable us to.

To prepare for various state of segments that are of interest and we know from direct experience too to our advertising partners. So I think the the.

The backend infrastructure that is essential to turning on.

The monetization engine and then obviously scaling it.

<unk> accelerated over time is really I think something we have been working on for some time and is really a reflection of the business we have.

And the key issue for us is getting footprint out there, which I think as you see multiple players in the market in 'twenty for that build will begin to ramp and certainly as we exit 'twenty four and get into 25, we expect.

That monetization to be coming online at faster rates.

And I think it positions us well to to have a.

To have a slice of this market that is both attractive and generates.

Good long term growth as well as very attractive margins overtime.

Okay, great I'll jump back in queue. Thank you.

Your next question comes from the line of Matt <unk> with AWS Financial Ahmed. Please go ahead.

Hi.

Question I had was from a competitive landscape in auto what are you seeing in the form of auto science and.

Are you, losing any share competitively to anyone.

And how do you feel about winning more share.

The timing of when all of this becomes into rapid turns into revenue for you.

Well I think.

Responding in reverse order I think it will build over time as our existing design wins find their way into.

Various models across the customers we have as we said we have.

Early 80 models that are now contracted to support.

Our in cabin monitoring technology, and I think we have we have some very unique technology and solutions and as a result.

I think we are routinely winning shoot outs.

For broader Oems or in cabin monitoring occupancy monitoring there is theres a bunch of different terms that the industry uses around it.

And so I think the effort.

The long term prognosis for the businesses.

Good.

And so I don't see us out there.

Really losing business as a competitive matter certainly there are others in the space.

There certainly are also some some tier ones and tier twos that are working on potentially building solutions, but one of the unique things that we bring to the game as we bring decades of detail.

Imaging expertise through all the work that we've done around facial recognition and body posture that partially comes out of our.

Substantial mobile imaging work for many many years and so we have a bedrock of both data as well as expertise in that space and I think we've been working for a couple of years how to apply to the car and I think it is showing showing very well as we're in the competitive pitching process.

Okay, and then looking out into the second half.

The revenue breakdown looks.

Similar to what the first half look like are you expecting some sort of pickup in one of the four segments.

Well I think when we look this is Robert when we look at the revenue breakdown for the remainder of the year.

We expect that the profile or rather the timing of the revenue.

In the year is actually pretty similar to last year. So if one was going to kind of.

Forecast out the revenue for Q3 and Q4 in aggregate.

It gets follows the pattern from Q3 and Q4.

As a percentage basis I think if you are raising last year by about five or 6% share to get there and in terms of that mix I think that's what you were getting at.

We've seen.

Kind of continued progress along what we expected with strength in the automotive connected car business as.

As well as media platform.

And I think even for the remainder of the year probably contribution from consumer electronics.

Okay.

Then one clarifying question regarding sharp is that purely for Europe or will that broaden out to other regions.

It starts initially in Europe , and I think we'll have more to say about broadening that relationship over time.

Okay. Thank you.

Your next question comes from Matthew billing co when the vaccine group Matthew. Please go ahead.

Okay.

Hi, Thanks for taking my questions.

Hey, Ken.

I think the.

Idea of a.

North American entry for Tivo as it.

Maybe.

A little unexpected relative to maybe what you've signaled in the past so I guess im curious whats changed in either the market or your positioning that.

But the U S.

It has become.

Core North America has become more addressable then.

One of the regions.

Hey, Matt I don't know that it necessarily has been any recent event we've been in pipeline discussions for some time kind of globally with different.

Different partners I think there is however, a wide and growing recognition that.

For the brands, who don't have the resources, perhaps to build their own and we believe it's a substantial amount of Tvs that exist.

North American and European markets.

And independent media platform becomes really important and one that Ken.

Provide the benefits that <unk> offers and that is the brand's ability to own their customer to share the data to have a.

Content neutral platform that really is all about driving the best user experience and therefore monetization and then ultimately participating in the backend economics of the long tail of the TV and I think that value proposition is something that has a lot of residents that I think some had been sitting on the sidelines kind of watching us further develop but I think it's very clear now that we're coming to <unk>.

<unk>.

With multiple players and as as we have more success I think that MBS more ever more confidence and I think the quality of the solution that we're showing I think is also.

Been instrumental in getting people comfortable debt.

We've got a solution that will make it easy to find watch and enjoy what consumers want and the higher the engagement with.

With content the higher the potential.

Revenue monetization and sharing in partnership with these television brands. So in short I think it's what we expected I think in some ways.

Maybe it's moving even more quickly than we expected, but we still have a lot of work to do but we are very very excited about the trajectory and where it will end up here in the next couple of years completely consistent.

With what we more or less outlined last September at our Investor day, and likely ends up better sooner.

Got it thank you and then.

Can you.

Maybe.

Touch on or expand on what our strategic partner.

Might do.

For you and perceive in terms of.

Accelerating towards the.

Yes.

Opportunity or.

Yes can you cover that in a little bit more detail.

Sure so.

As you look to the to the LLM market and the wide scale deployment.

These are larger.

AI solutions I think it's very clear.

Just given the size and scale of that opportunity that there's going to be a need for additional resources capabilities.

Perhaps distribution scale financial resources, and whatnot, if you're really going to tap in to maximizing the value of the technology and I think it's.

That recognition.

I think.

Has made the conversation interesting with strategic partners.

We are engaged in various conversations I think there's a tremendous amount of interest in the fundamental challenge, which is if you want to bring the goodness.

Consumers and mass how do you deal with the inherent scalability challenges of these massively large models and I think.

Perceive us very much.

Focused on.

Advanced compression technology that can address that challenge and ultimately bring ever higher performance and much greater power efficiency.

To bear and I think that is going to be essential to.

To folks as one looks to scale. This so in short I think it's a recognition that the market opportunity is vast.

And we as a technology player with part of the solution.

Likely.

We'll be the best office, we work with a strategic partner or partners to bring that technology to market.

Okay. Thank you.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your next question comes from.

Nick <unk> with Stephens.

Nick Please go ahead.

Yes, Hey, guys.

Is there any way to well congrats on the new relationships here is there any way to size up I guess, the three TV relationships that you have now.

Just in totality or maybe relative to each other.

Or maybe said another way.

Did these relationships that you've.

Cemented thus far it gets you to that 7 million active account number that you have targeted for 2025 or do you still feel that you might need a few more wins.

No I think.

With what we have I think what we laid out is certainly achievable.

And I think.

I think we will have more to say on this topic, Nick because we get.

A couple of quarters down the way.

Got you and then I did want to ask about the <unk>.

Sorry, if you already discussed it but.

The.

Commentary within media platform that Sony is going to deploy.

<unk> browser if were talking Sony Tvs EMI understanding was that the Google TV OS is exclusively utilized on Sony. So I'm just curious if you could flesh out what exactly is happening here.

She has another pathway to monetization. So just if you don't mind elaborating on that new relationship as well.

Sure so viewed.

As Youll recall, we acquired them last year.

It has a web content browser that has been deployed on.

Various systems, including Android Tvs, So it's the.

It's the use of that in connection with with their Tvs and I think it just is one more example of.

Let's call it some of the value that.

We were able to gain through the acquisition.

Understood. Thanks, very much guys.

Thanks, Nick.

This concludes the Q&A session I will now turn the call back over to the company for closing remarks.

Thanks, operator, and thank you everyone for joining today's call. We're excited about our continued strategic momentum and our solid operating performance I'd like to thank our employees customers and partners for helping us continue to achieve our objectives and we look forward to reviewing our Q3 results with you in early November This concludes today's call.

Ladies and gentlemen, thank you all for joining you may now disconnect.

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