Q3 2023 Xperi Inc Earnings Call

Good day, everyone. Thank you for standing by welcome to the Experian third quarter 2023 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 I would now like to turn the call over to Mike I Berg experience head of Investor Relations. Mike. Please go ahead.

Thanks, operator, good afternoon, and thank you for joining us as Xperia reports its third 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 a webcast of this call on our Investor Relations website at Investor Dot experience Dot com.

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

First I'd like to note that unless otherwise stated all comparisons are to the same quarter of the prior year.

In addition, the third quarter of 2022 was calculated on a carve out basis prior to experienced separation from its very holding corporation on October one 2022.

<unk> 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 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 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 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 will now turn the call over to experienced CEO Jon Kirchner.

Thank you Mike and thank you everyone for joining us on our third quarter 2023 earnings calls.

We continued our momentum on strategic priorities during the quarter, while delivering solid financial results I'll, let Robert walk you through the details in just a moment, but let me touch on a few highlights.

Revenue in the quarter was $130 million up 7% from the prior year driven primarily by strong growth in media platform in connected car at the same time, we saw a significant increase in adjusted EBITDA improving from breakeven in the year ago quarter to a 7% adjusted EBITDA margin.

We also generated $24 million of cash flow from operations during the quarter.

As many of you may recall, we separated from Audi a year ago and with today's results. We have now delivered four consecutive quarters of year over year revenue growth.

Overall, given the demands associated with the business separation and economic and geopolitical macro uncertainty. We are encouraged by delivering mid single digit revenue growth on a trailing 12 month basis.

Overall, we remain focused on four key growth opportunities.

Connected television advertising, where we offer our tivo operating system to power Smart Tvs and monetize AD supported viewing.

In cabin entertainment or Dts auto stage combines broadcast radio Internet meta data and video to enhance the automotive experience and drive long term monetization.

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

T V, where we offer an industry leading content first video over broadband platform.

Each of these markets is growing rapidly and expected to roughly double over the next five years with.

With each quarter that passes we are increasingly well positioned to participate in this growth as our business momentum continues to build and we deliver on the specific operational milestones necessary to be successful.

Our three year growth targets for these growth initiatives outlined originally at our Investor Day last fall and updated earlier. This year are to have a footprint of at least 7 million active Tvs running our Tivo OS $2 8 million IP TV subscribers and 10 million cars with Dts auto stage in auto sense.

As we achieved these milestones we expect nearly $250 million of incremental lives to annual revenue exiting 2000, 2020, excuse me 2025 compared to our 2020 to baseline.

Based on our strong strategic execution. This year, we are increasingly confident that we'll meet or exceed these targets within our original timeline.

We plan to provide an update on our progress toward these targets. After we complete the current year.

Let me walk you through some of our recent achievements that reflect our progress.

Within media platform, we're pleased to share that <unk> has begun shipping smart Tvs powered by Tivo under the JBC brand to retailers initially in the Czech Republic.

Production is now underway for additional brands with expected shipments to multiple European countries in the coming weeks consistent with the rollout we've been expecting.

This further validates our technology and program progress as we're seeing these Tvs activate we now have improved line of sight to a broader footprint in 2024.

Continuing our momentum we recently signed our fourth TV OEM to integrate Tivo OS into their 2020 for smart TV lineup.

And expect additional contract wins by our year end earnings call in February.

<unk> the largest consumer electronics trade show in Europe, we were extremely proud to win three awards for Tivo OS. Additionally, and perhaps more satisfying was the number of industry participants who had heard about our unique value proposition and wanted to learn how they can partner with us going forward.

Given recent conversations with our committed Tivo OS partners and our understanding of their rollout plans in Europe and the U S. We have increased confidence that we will achieve or exceed our original estimate of 7 million active users as we exit 2025.

Overall, it was a great quarter of execution around our independent media platform strategy and driving its long term growth prospects.

Our connected car business also saw continued momentum in the quarter. The highlight of the quarter was bmw's rapid deployment of our Dts auto stage video service powered by Tivo across their new generation five series lineup.

These cars are now in showrooms in the United States, Germany, United Kingdom, France, Italy, Spain, and South Korea.

Equally exciting is bmw's decision to expand the auto stage video service rollout in these regions to a broad range of additional models across various vehicle segments.

On the heels of the BMW rollout other car manufacturers are evaluating our solution and we're pleased to announce a second design win for Dts Auto stage video service with another major European car OEM.

This new program will include multiple models and began initially in Asia for the 25 model year.

In addition, we want a new HD radio in Dts Auto stage program with Ford Motor Company for its new radio platform, which was unveiled at the North American Auto show earlier this fall.

This program launches now and incorporates HD radio and auto stage into certain North American vehicles, beginning with the 2020 for Lincoln Nautilus.

Lastly, we achieved a significant milestone within connected car, reaching 100 million cars, incorporating HD radio the North American standard for digital radio demonstrating the relevance and longevity of our technology platform and related ecosystem.

Within the pay TV business IP TV continues to make steady progress with double digit subscriber growth for the 17th consecutive quarter, helping to offset the secular decline from our core pay TV solutions.

We now have more than 100 service providers that are selected Tivo IP television solutions for their customers.

Our Q3 results were positive with strong growth in IP television, creating a modest year over year increase in the pay TV category, which is now down 2% through the first nine months an improvement from the mid single digit decline seen in the first half of 'twenty three.

Service providers are deploying our IP television solutions over their broadband networks to offer a wider range of video content and streaming applications to their customers.

<unk> their service offerings and competitiveness in the digital entertainment market.

TV deployments also enable these companies to offer interactive and on demand content, improving the overall user experience generating additional revenue streams and increasing customer loyalty to their connected services.

In addition to the monthly subscriber fees associated with IP TV. We also offer tivo, plus where we monetize the viewing of AD supported content offering nearly a 160 channels of curated content from a total of over 800 available free AD supported TV channels we.

We signed five additional service providers in the quarter and now have 30 video service providers offering Tivo plus in the U S market.

Turning to consumer electronics, we signed several multi year renewals with major consumer electronics manufacturers, including Sony <unk> and Sky worth these license agreements allow manufacturers to integrate Dts audio or play Fi wireless technologies into their products for the next several years validating the market appeal and.

<unk> of these innovative technologies.

In addition, we signed a top three PC Oems to deploy our Dts X audio solution across a wide range of consumer Pcs and laptops.

Lastly, we won three best of show Awards for Dts play Fi at the <unk> trade show earlier this fall.

Turning to perceive we're pleased to share that we signed a license agreement with a big Tech customer and is expected recognized first revenue in the quarter.

We expect this relationship to expand over time and are very excited about the future potential of this deal and the other opportunities we are cultivating.

This progress clearly validates the industry interest in our approach to low power AI at the edge.

Recognizing the magnitude of the opportunity with large language models, we continue to explore options for strategic partnering to help accelerate our path to a larger market opportunity.

We expect to report additional progress over the coming quarters.

A lot has been accomplished over the past year since we became a standalone product company.

We're focused on driving key growth initiatives and core product execution, while working to transform our organization through greater efficiency and a lower cost structure.

Taken together this progress has put us on a path toward improved profitability and meaningful growth consistent with the vision, we outlined a year ago on the eve of our separation.

Importantly, our vision of using smarter technology to create extraordinary experiences is resonating with our customers and partners across the various markets in which we compete.

The recent operational milestones, we achieved with Vesta and BMW demonstrate not only our speed and agility, but the value of our differentiated independent media platform and strength of our long standing partnerships with smart Tvs powered by Tivo and connected cars with video now in the market as well as continued double digit growth in <unk>.

<unk>.

We are making great strides toward unlocking an exciting future with greater growth and profitability.

With that I'll turn the call over to Robert to discuss our financials Robert.

Thanks, John.

As Mike mentioned earlier, unless otherwise noted all comparisons in my comments are to the same quarter in the prior period.

Total revenue for the third quarter was $130 million up 7%.

Pay TV <unk>, our largest revenue category was up 3% a significant improvement from the modest declines seen in the first half of the year.

During the quarter, we saw strong growth in our IP television solutions, which was partially offset by declines in our core pay TV business.

Consumer electronics was down 4%, mostly due to one time revenue in the prior year period. The decline was partially offset by new agreements signed in the quarter.

<unk> game console shipments.

And a modest amount of revenue from perceive which you'd categorize within consumer electronics.

Connected car was up 16% due to higher HD radio volumes from strong automotive shipments increase.

Increased penetration of Dts audio solutions.

And increased revenue from auto stage.

Media platform was up 52%.

Due primarily to an increase in revenue from our smart TV middleware solutions.

Partly due to quarterly timing of certain revenue.

In addition, we saw growth in direct sold in programmatic and connected TV advertising.

Somewhat offset by declines in media and entertainment advertising within our pay television solutions from the writers and actors strike.

Our non-GAAP gross margin for the quarter was $105 million or 80% an increase of approximately 530 basis points from last year.

This improvement is due to revenue growth and our IP television solutions, which leverage our existing infrastructure to enable scaling within the business.

And due to growth in high margin revenue from our smart TV middleware solutions.

non-GAAP adjusted operating expense for the quarter was $100 million up 2% sequentially and up 3% from the prior years carve out financials.

Our adjusted EBITDA was $9 million, resulting in an adjusted EBITDA margin of 7%.

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

Okay.

Moving to the balance sheet. The company ended the quarter with $132 million of cash and cash equivalents, an increase of $20 million from Q2.

As John mentioned, our cash flow from operations in the quarter was $24 million. The result of strong working capital management.

We still expect the full year operating cash flow to be a usage of cash.

Turning to our financial outlook for 2023, we.

We are narrowing our previous guidance ranges and providing the following commentary.

We now expect full year revenue to be in the range of $518 million to $532 million, maintaining our midpoint of $525 million.

We now expect non-GAAP adjusted EBITDA margin to be in the range of 6% to 8%.

The mid point here is slightly lower than our prior range as accelerated progress on TV OS and Dts auto stage wins have driven incremental investments in these areas to facilitate faster penetration for the products.

We continue to expect a full year non-GAAP tax estimate of $20 million. Our tax expenses are not linear throughout the year, primarily due to the timing of foreign withholding and certain federal and state taxes.

So with non-GAAP tax expense of approximately $12 million through the first three quarters.

We expect Q4, non-GAAP tax expense to be approximately $8 million.

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 us now open the call for questions operator.

If you'd like to ask a question. Please press star one on your telephone keypad.

First question comes from the line of Jason Prior from Craig Hallum. Please go ahead.

Perfect. Thank you guys great to hear that you've got the new Tivo powered hardware shipping just curious if you can talk through.

And what you expect for the revenue progression in that segment and then maybe if you can just touch on kind of the revenue recognition as far as like like Rev shares with providers and then how we should.

Expect that to <unk>.

The P&L.

Sure so.

I think as you can well appreciate Jason.

The ability to monetize TV footprint is first and foremost a function of building that footprint. So we as we expect.

More units to be.

Shipped into the field in the course of 'twenty four and ultimately.

Then activated.

Due course, you'll begin to see monetization youll see that monetization ramp over time.

And I think the exact timing of revenue recognition. Following a typical model where there is a bit of a waterfall from when an AD is shown on it goes.

It goes through the programmatic backend and ultimately.

Is billed and collected there'll be a typical.

Time lag between when when the AD as shown in that ultimate monetization, but I think we'll have more to say.

Around the model and that specifically as we get into 'twenty four because I realize that over time, what is clearly of interest to folks is just how is that footprint changing.

As well as how are users engaging with the platform and ultimately viewing.

And then ultimately how is the.

Are the ads being in place and at what kind of CPM is to begin to help you better understand how to model what our pool ultimately will look like over time, we do expect it though to ramp.

Starting smaller and building and it will also depend on the geographic mix.

Where that footprint is whether its share for us because.

The AD markets in the ultimate <unk> youre going to different based on the geographic mix.

Perfect, we'll wait for more details there and in the new year.

A similar question on perceive.

Just wondering there as we get into 'twenty, four and obviously, great that youre getting revenue generation on that side, but.

Can you give us any expectations on how we should expect the kind of the cost.

You too.

Kind of how the cost fading as we go forward from here now that Thats generating revenue.

I think we'll clearly have more to say in February around what the net impact is of revenue and the cost of carry I think.

As is in.

The perceived product and how we're.

Potentially looking to exploit the technology via licenses.

A lot of a lot of the cost is just ongoing engineering.

As opposed to hard silicon hard silicon cost is one thing, particularly about applications such as moving towards large language models and whatnot, that's more software based and it's more software and therefore labor based and then any hard component, but again more to more to say on that as we get into 'twenty four.

Okay. Thank you guys appreciate it.

Your next question comes from the line of Steven Frankel from Rosenblatt Securities. Please go ahead.

Good afternoon, John to follow up on perceive that could you give us any insight into how this initial customer is using the product.

And what's the timeline before it gets actually.

Deployed into an end product.

Steve what I can share is I think the revenue generation over the next few years I really can't get into the specifics around it because.

Let's just say, it's both confidential and sensitive so commenting about it at all given the nature of what it is it would not be advisable at this point, but but obviously I know there's both interest and we'll we'll see what can be said over over time, but I think it's.

It's fair to say that the product is not yet end market and will be forthcoming.

Yes.

The core technology is.

<unk>.

Part of what they're trying to achieve.

Okay.

And does it take a material incremental.

Investment on.

Either your part or this strategic investor that you may be looking for.

To get to.

This customer wants to go or.

Or is that incremental invest.

Investment about running faster and.

Maybe catching something else.

I think I can speak to our role in that which is.

The core the core work that was necessary to.

Thank you.

Yes at this particular design win.

It has been largely completed on our part Theres work, we needed to support the implementation.

With this customer.

And obviously this is a component.

More than <unk> customers.

Working too well.

Working to build so but as far as where we sit.

I would say the vast majority of the work is behind us rather than ahead of us.

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

Thanks, Steve.

Our next question comes from the line of Nick <unk> from Stephens. Please go ahead.

Hey, guys. Thanks, a lot and congrats on all the great progress this quarter.

When you look at that the revenue guide of $14 million spread just between the high and low end of the guide for the year, which is obviously just the fourth quarter now curious if you could just talk about the variability there maybe.

Maybe which segments in particular are driving are maybe more volatile or driving that variability.

And that did.

The degree of that spread then.

Yes, sure Netcom, it's a fair question I'd say when you when you look at our fourth quarter.

We have a fair degree.

It's really one of our busiest quarters in terms of closing out key agreements.

Particularly within pay TV consumer electronics.

So we're mindful of that we we will have variability there depending on whether or not we can reach terms that are acceptable to us and if not then we will shift the timing out.

We also have variability in our per unit shipments for both CE and connected car.

Also subscriber growth with an IV television.

And I guess, you could also say advertising within the media platform.

So given the variability within all of those pieces, we want to make sure that we are.

Putting within our range.

Appropriate number two.

To account for these various factors.

Understood that's helpful and then on.

The connected car side again, another great win here it sounds like BMW is significantly expanding.

The incorporation of the auto stage plus tivo offering.

So obviously congrats there, but just can you talk about how this update in particular contributes to any sort of potential ramp in connected car revenues as we look forward.

Yes, I think it is.

Theyre all components of continuing to build that connected car story over.

Over the next few years certainly the expansion.

Of models is welcome news because in an automotive typical production timelines.

This has been a fairly fast project and I think speaks to the great work that BMW was down as a partner, but also I think the interest in video.

As a platform and car and also our ability to respond to their needs I think in a very effective way so.

We're not yet naturally guiding on 24, we will have more to say about automotive as we get into February along with other things but.

I think the fact that you have a major.

Widely recognized.

<unk>.

Partner, who is known for being highly selective about about technology and building great experiences not only engaging with the platform, but deciding to go more broadly fairly early.

I think it is.

It will help us certainly in getting others.

Into the mix and I think and prove that this can be done in relatively short order, which over the next couple of years I think speaks positively towards the.

Overall ramp.

In connected car related revenue.

Second folks that just have already signed up.

Right Andrew.

Great Awesome. Thank you very much guys and congrats on all this great progress. Thank you Nick.

Your next question comes from the line of Matt <unk> from B Ws financial Please go ahead.

Hi, first question I had was.

You have not brought up at all on this call as well.

Was there any progress on <unk>.

No sense at all.

Left that out.

There has been we continue to work on.

Supporting business that we have as well as advancing.

Discussions with pipeline customers.

So I would say.

Business as usual, but you don't always have customer wins in any given quarter.

To speak to so lots of intense work.

On advancing the program.

And obviously more news to follow.

Okay, and then you know.

How have for PV Oems, but you've only mean to why haven't the other two been named yet and well they expand geographically beyond Europe.

Europe.

I think here again, Amit will have more to say in February on just kind of what the shape of rollout will look like you got to keep in mind that that not every television partner has the same strategy about how theyre managing everything from marketing to announcements to the retail channels et cetera. So.

We are.

We are not at Liberty to.

To front run what our customer needs are but rather really respond to their strategy. So what I can say is that in due course, obviously, you'll know who they are and certainly as we get closer to that.

The rollout of those Tvs and as is our partners permit us and we both engage on helping promote.

What theyre doing.

And I think as we said in the past we expect.

They are to be.

Distribution in the U S next year amongst the four we've signed and for more than one.

The.

Of the customers, we have signed so I think again more more shaped to follow and I think the pipeline remains very very active and robust. So as we said in the script we.

To have more news just on.

Broader progress in TV OS as we get into February.

Okay and one last question if I may.

Robert.

Given the guidance for Q4.

It depicts a lot of operating leverage.

What kind of operating leverage.

Good enough or would it be better in 'twenty four can we use that kind of operating leverage.

Highlight for the business.

You asked the question about operating leverage are you, indicating that we can grow top line and kind of holds expense. So just want to make sure I'm answering your question properly.

Yes, given the guidance that you're providing.

It kind of shows.

Quite a bit of.

EBITDA growth sequentially and then.

Yes.

Your previous commentary by John I think it was that about.

Single digit a mid single digit growth as well so I'm just trying to put two and two together for 'twenty four yes, I think the short answer for this is yes, we as a business are focusing on on two primary things one growing that top line through these initiatives and the other is being very.

Thoughtful about our spend.

There is no question that the business itself has a.

It can leverage very well.

For operating margin.

Yes.

And by that measure expanding EBITDA as we get into next year.

Alright, thank you.

Youre welcome.

Hi, Dan if you would like to ask a question. Please press star one on your telephone keypad.

Your next question comes from the line of Matthew <unk> from Maxim Group. Please go ahead.

Hey, Thanks for taking my questions.

Can you.

Yes.

Any cause.

And on how.

Some of the dynamics in automotive industry are impacting your outlook for volumes in that business for you.

Between the strike.

Some pricing dynamics I'm, just curious how youre thinking about it.

Yes, Matt.

I would say that.

Certainly the strikes have had.

Limited impact on our business, thus far and part of that just has to do with the.

The volume mix, we have from different customers that is slightly.

Or is weighted more favorably towards foreign.

Customers rather than some of the U S. Although we do business.

Pretty well across the board.

The other thing I would say is that we've seen certainly supply chain improvements and whatnot I think the and so net net it hasnt had too much of an impact.

On us.

Thus far this year.

Nor do we expect it and on balance in 'twenty three as you look ahead into 'twenty four would improve supply chains and the strikes behind you I think we're watching closely.

And we will continue to.

You've got higher interest rates and consumer confidence may be.

Not.

Not in a not in a great place and how that ultimately impacts demand, but I think it's fair to say as we sit here based on the market data that I've seen.

Debt.

Wouldn't necessarily look into 'twenty, four with with with big concerns about major changes, but on the other hand, I think we'll be looking to.

To get a finer point of view on that as we get into providing guidance for 'twenty four and study some of the industry data coming out of Q4 and into next year.

Thanks, that's helpful and then as a follow up.

I think Robert mentioned.

Some narrowing of the EBITDA guidance.

Based on incremental investments.

Across a couple of business lines can.

Can you just.

Repeat what you mentioned, there and maybe go into a little bit more detail around what those investments are.

And if there.

Kind of short term in nature or if there is.

<unk>.

Kind of permanent in nature.

Sure Matt so the.

The numbers that I gave our 6% to 8% for adjusted EBITDA margin for the year.

That's that's has a mid 7% and previously we had 6% to 10% with the mid of 8%. So.

Roughly eight percentage points from.

<unk> from our prior guidance, it's not a huge amount of money when you get down to it but we have focused our efforts on TV OS.

And the auto stage wins and the driver here is really to make sure that we are balancing our investments.

To drive growth, while being mindful about profitability. So I think we wanted to make sure that we had properly funded the initiatives.

Any additional color you want to add I would say two things.

As far as permanent versus transitory I think some of it is transitory as you start up.

Customers more quickly and work with them to get into the marketplace as aggressively as possible. So I think.

Over and Youll see this was we get into 'twenty four we expect EBITDA expansion.

And we will have a lot more to say about that in 'twenty four.

And I think the other thing behind behind it is I don't think its as simple as thinking about adjusted in terms of of.

That slight difference because the investments obviously are more material in that slide.

That slight difference state and so as a result, we've obviously made other changes within the business too.

To help if you will fund and support those things so we're being far more active across the board.

The net result in this case was as Robert described it but I think as we look ahead, we're going to enjoy the benefit of <unk>.

Faster revenue growth and penetration in these two key areas as a result of some of the decisions. We've made in the business. We've won and some cases that is faster and more than we expected originally in our 23 plants and I think that's a great thing as we look ahead into 2025.

Got it thank you.

And we have no further questions in our queue. At this time I will now turn the call over to the expiry team for closing remarks.

Thanks, operator, and thanks, everyone for joining today's call. We're very excited about our continued strategic momentum and 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 Q4 and full year results with you in February This concludes today's call.

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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