Q3 2024 Xperi Inc Earnings Call

Speaker Change: Thank you for standing by and welcome to the Xperia 3rd Quarter 2020 4 earnings conference call. I'll line to have him placed on me to prevent any background noise.

After the speakers are marked, there will be a question and answer session.

If you'd like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. I now like to turn the call over to Mike Iburg, head of Investor Relations. You may begin.

Mike Iburg: Thank you, operator. Good day everyone. Thank you for standing by and welcome to a serious third quarter, 2020 for Ernens Conference Call. During church today's presentation, all parties will be in a listen only mode.

Following the presentation, there will be an open Q&A session.

Speaker Change: I will now like the turn.

Speaker Change: Charlie.

Charlie: Good afternoon and thank you for joining us today as Xperia reports its third quarter 2024 financial results.

Charlie: With me on today's call are Jon Kirchner, Chief Executive Officer, Robert Andersen, Chief Financial Officer.

Before we begin, I'd like to provide a few reminders. First, I'd like to note that unless otherwise stated, all comparisons are the same.

Charlie: carried in the prior year.

Second, today's discussion contains four looking statements about our business, anticipated business and financial performance that are predictions, projections and other statements about future events which are based on management's expectations and beliefs and therefore subject to risk and uncertainties.

Charlie: and changes in circumstances. For more information on the risks and uncertainties that could cause our financial results to differ materially from what we discussed today,

Charlie: Please refer to our Risk Factors and MD&A section of our SSE filings, including our most recent Form 10-K and 10-Q.

Charlie: Please note that the company does not intend to update or alter these forward-looking statements to reflect the events or circumstances arising after this call.

Charlie: Third, we refer to certain non-GAAP financial measures which are detailed in the earnings release and accompanied by reconciliations to the most directly comparable GAAP measure.

Charlie: 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 our CEO, Jon Kirchner.

Jon Kirchner: Thank you, Mike, and thank you everyone for joining us on our third quarter 2024 earnings call.

Jon Kirchner: Our successful efforts in streamlining the business through our multi-year cost transformation efforts are increasingly showing results.

Charlie: While quarterly results will naturally fluctuate, we believe our performance this quarter provides an important indication of our ability to increase the margin profile for the business.

Charlie: and others, over the next several years as we work to continue to drive strategic growth and optimize costs.

Charlie: I'll let Robert walk you through the financial details in just a moment, but let me first provide a brief overview of the quarter.

Charlie: The macro environment in which we operate has been and may continue to be mixed.

Charlie: Inflation, reduced discretionary spending, CE and global automotive challenges have impacted our business and we've seen some partner delays with respect to the timing of certain rollouts of our Teva OS smart TVs.

Charlie: That said, we continue to see demand for our differentiated solutions and are making strategic progress in the areas of the business that we expect to drive significant long-term growth.

Charlie: Importantly, we continue to focus our business and media platforms and licensing as we believe these have the greatest long-term growth and profit potential.

Charlie: While each divestiture results in a reduction in run rate revenue, they also contribute a meaningful step forward in profitability and strategic focus.

Charlie: The positive effects of the AutoSense sale and our continued business transformation efforts can be seen in the profitability numbers posted today.

Charlie: Turning to the quarter just reported strong performance in pay TV in connected car, where the highlights in the quarter. This strength was primarily driven by a large multi year classic guide minimum guarantee deal and pay TV <unk>, partially offset by declines in consumer electronics media platform.

Charlie: Turning to the quarter just recorded, strong performance in pay TV and connected car were the highlights in the quarter. The strength was primarily driven by a large multi-year Classic Guide minimum guarantee deal in pay TV, partially offset by declines in consumer electronics and media platforms.

Charlie: The net result was Q3 revenue of approximately $133 million up 11% sequentially up 2% from the year ago quarter and up 6% when adjusting for the auto sensor divestiture.

Charlie: The net result was Q3 revenue of approximately $133 million, up 11% sequentially, up 2% from the year-ago quarter, and up 6% when adjusting for the AutoSense divestiture.

Charlie: non-GAAP adjusted operating expenses declined 18% or $18 million from the prior year due mainly to our ongoing cost optimization efforts, which included a meaningful reduction in head count in Q3 as well as from the auto divestiture earlier this year adjust.

Charlie: Non-GAAP adjusted operating expenses declined 18% or 18 million dollars from the prior year, due mainly to our ongoing cost optimization efforts which included a meaningful reduction in headcount in Q3.

Charlie: as well as from the Auto Sense divestiture earlier this year. Adjusted EBITDA was $31.4 million, or 24% of revenue, more than tripling from the prior year quarter.

Charlie: Adjusted EBITDA was $31 4 million or 24% of revenue more than tripling from the prior year quarter.

Charlie: We remain focused on three key growth opportunities, where we see strong potential and differentiation.

Charlie: We remain focused on three key growth opportunities where we see strong potential and differentiation.

Charlie: These are connected television advertising, where we offered our tivo media platform to power Smart Tvs and other broadband devices and monetize their usage.

Charlie: These are Connected TV Advertising, where we offer our TiVo Media Platform to power smart TVs and other broadband devices and monetize their usage.

Charlie: In cabin Entertainment, where Dcs auto stage combined broadcast radio Internet meta data and video to enhance the automotive experience and drive long term monetization.

Charlie: And Tivo video over broadband, where we provide subscribers access to our industry, leading content first streaming platform for broadband only and IP TV linear households.

Charlie: Each of these markets is expected to roughly double over the next five to seven years.

Charlie: We continue to strengthen our position in each market and believe we are increasingly well positioned to grow our revenue as these markets expand.

Charlie: Consistent with past communications. Our goal is to have 20 million monetize <unk> endpoints by the end of 2025, consisting of approximately $10 million in home and $10 million in cars breaking.

Charlie: Breaking this down and homes, we expect an active footprint of $7 million devices comprised of connected Tvs and other broadband devices, including our video of a broadband solutions.

Charlie: <unk> comes from the viewing of AD supported content and usage of our Tivo media platform.

Charlie: Additionally, we expect approximately 3 million IP TV households, utilizing our video of a broadband solution, where we primarily earn subscription revenue on a per household basis.

Charlie: Lastly, we expect to have the Etfs auto stage, and 10 million cars, which we will monetize through license fees Upselling features and advertising.

Charlie: We believe that achieving our goal of 20 million monetize of endpoints should generate nearly $200 million of incremental revenue in 2026 relative to 2023.

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

Charlie: Within media platform in Q3, we saw some partner delays shifts certain smart TV volume into Q4 of this year into early 2025.

Charlie: These shifts at least in part reflect the mixed industry environment mentioned earlier.

Charlie: As a consequence these delays have reduced our monetization expectations for 2024.

Charlie: Importantly, our activated device print device footprint is approaching 1 million units and we're tracking toward our target of 2 million units by year end.

Charlie: This reflects some recent Q4 acceleration in our device footprint and growing commitments to our platform overall, we're confident that our partner pipeline remains on track to achieve our 7 million units footprint goal by the end of 2025.

Charlie: And position us to grow monetization revenue through 2025 and beyond as our footprint continues to expand.

Charlie: Today's smart Tvs powered by Tivo are generally available across Europe.

Charlie: <unk> is the largest markets under numerous different brands.

Charlie: At this stage of the rollout our primary focus is to ensure maximum customer satisfaction and user engagement with smart Tvs powered by Tivo.

Charlie: We continue to receive data from activated units and we're encouraged by viewing engagement as we look to maximize platform value over time.

Charlie: Within connected car, we saw some growth in positive strategic momentum. However, there were also some clear signs of emerging weakness in the market, which may impact our per unit HD radio business. We were awarded two new Dcs auto stage design wins, one with video with a Japanese automotive automotive OEM, which we.

Charlie: Expect will go into production next year.

Charlie: Autosave is now deployed in more than 8 million vehicles across 146 countries with 5 million vehicles in North America, having both HD radio and auto stage.

Charlie: The market for in cabin Entertainment continues to grow and our near term approach to this market is to take the steps necessary to expand our footprint and enhance end user customer satisfaction and engagement. We believe this footprint will strategically position us to build upon baseline licensing revenue with additional monetization revenue opportune.

Charlie: <unk> longer term.

Charlie: Lastly, even as the overall market may be softening, we continue to make progress in the North American market is automotive Oems are adding HD radio to new models enhancing potential penetration over time.

Charlie: Within pay TV video over broadband or IP TV solution continues to make impressive progress, surpassing $2 4 million subscriber households in the quarter and reaching our year end target.

Charlie: We also expanded tivo broadband with the signing of two new operators, bringing the total number of operators to 12.

Charlie: With eight incremental this year.

Charlie: <unk>, we executed an agreement with <unk> for a new broadband TV solution, providing a low cost over the top content bundle for operators.

Charlie: Our rapidly growing video over broadband footprint combined with this new low cost offering expands our opportunity for U S based monetization through our Tivo platform along with Smart Tvs.

Charlie: Lastly, within our legacy pay TV products, we signed a significant multi year classic guide renewal with Panasonic. These multiyear transactions contribute to the long term economic value of our legacy solutions.

Charlie: Turning to consumer electronics, we launched Dts clear dialogue.

Charlie: On device solution that leverages the latest advancements in AI based audio processing to improved dialogue intelligibility for Tvs.

Charlie: Our recent experience survey of 200 U S. Adults.

Charlie: <unk> at 84% of consumers have experienced trouble understanding dialogue during TV shows and movies.

Charlie: In response.

Charlie: Over three quarters of survey respondents said they used captions or subtitles with one in three reporting they're always on are often turned off.

Charlie: The eco Berlin.

Charlie: Our clear dialogue solution won two best of awards.

Charlie: Lastly, we signed multiple Dcs codec renewals with existing customers Vestal honor and NASA.

Charlie: With respect to perceive we said we would complete our strategic review by the end of summer and we announced the sale of perceive assets to Amazon on August 19th.

Charlie: For gross proceeds of $80 million in cash.

Charlie: The transaction closed on October <unk> and.

Charlie: And following additional tax planning that reduced our initial tax estimate by approximately $8 million. We now expect to net approximately $60 million from the transaction.

Charlie: Against an ambitious set of year end objectives. After three quarters, we've delivered against many of our core goals for 2024.

Charlie: With a number of important activities expected to happen between now and year end.

Charlie: Overall, despite certain challenges, we continue to make significant strategic and financial progress toward our long term objectives with that I'll turn the call over to Robert to discuss the financials Robert.

Robert Andersen: Thanks Darren.

Robert Andersen: With that backdrop, let me now discuss the quarter's financial results.

Charlie: Total revenue for the third quarter was approximately $133 million up 2% from last year's reported revenue in us.

Charlie: 6% when adjusting for the auto and.

Charlie: And related imaging solutions divestiture that occurred earlier this year.

Charlie: With that in mind and in order to compare apples to apples, let me compare this quarter's revenue by market against last year's results.

Charlie: Excluding the divestiture.

Charlie: ATV, our largest revenue category was up 35% compared to last year, bringing year to date pay TV revenue grew up 12% compared to the first nine months of last year.

Charlie: The Q3 increase was primarily driven by a large multi year classic guide minimum guarantee deal and core pay TV.

Charlie: The structure of the deal required us to recognize most of the revenue upfront, even though the cash will be collected over time with.

Charlie: This deal also reduces the expected rate of pay TV decline for the year.

Charlie: Pay TV also benefited from the IP TV growth, which continued its trend of double digit year over year revenue growth.

Charlie: Consumer electronics was down 38%.

Charlie: In part due to prior year minimum guarantee agreements along with lower royalty revenue in Q3 from market softness in certain end products such as gaming consoles.

Charlie: Connected car was up 11% year over year.

Charlie: Due primarily to higher revenue from the auto stage.

Charlie: <unk> was up 25% year to date due to the significant multi year program with an Asia based tier one automotive supplier for our TTS and Cabot Kodiak that.

Charlie: That occurred in the second quarter.

Charlie: This growth we are seeing signs of weakness in the automotive market as we enter Q4.

Charlie: Give me a platform is down 39% in the quarter due primary to minimum guaranteed deals that occurred last year for our core middleware products.

Charlie: 18% year to date, while the trends within media platform are currently driven by the middle middleware and legacy pay TV ad products.

Charlie: We remain confident in the future growth of our media platform business as our Tivo OTA and video of our broadband footprint expand over the coming quarters.

Charlie: non-GAAP adjusted operating expense for the quarter was $82 million down, 18% or $18 million from the prior year.

Charlie: This year over year improvement was largely due to the reduction of approximately 100 personnel most of whom are based in the U S. Along with other cost savings actions.

Charlie: The improvement was also due to the divestiture of auto related imaging solutions earlier this year.

Charlie: As well as lower run rate spending on a perceived subsidiary of which the sale completed at the beginning of October.

Charlie: non-GAAP tax in the quarter was $6 million.

Charlie: Our adjusted EBITDA was $31 million, resulting in an adjusted EBITDA margin of 24%.

Charlie: After accounting for tax and interest expense, our non-GAAP earnings per share attributable to the company was 51.

Charlie: Moving to the balance sheet. The company ended the quarter was $73 million of cash and cash equivalents the.

Charlie: The balance sheet also shows total unbilled receivables of $126 million, an increase of $44 million since the beginning of this year due to the higher amount of minimum guarantee deals completed.

Charlie: Approximately two thirds of the Unbilled overall unbilled overall unbilled receivables amounts are expected to be billed in the next four quarters and convert it to cash.

Charlie: With regard to the $50 million of debt Thats on our balance sheet, which matures in July of 2025, we are planning to refinance most if not all of the debt early next year.

Charlie: We are already underway on the refinancing process.

Charlie: Operating cash flow was a $4 million use of cash primarily driven by changes in working capital and onetime items.

Charlie: With regard to capital allocation during the third quarter, we repurchased $10 million worth of stock or $1 1 million shares.

Charlie: On an average price of $8 92.

Charlie: Given our belief that our share price does not fully reflect the value of the business, we expect to make additional share repurchases in the coming quarters.

Charlie: Our capital allocation strategy is to continue to rate their earn excess capital to shareholders, while maintaining an adequate amount of cash for investment in key growth drivers and working to deleverage and reduce borrowing costs over time.

Charlie: Moving to our outlook for the remainder of 2024, we are making the following changes to the guidance ranges previously provided.

Charlie: We are updating our revenue range to $490 million to $505 million to reflect softness in our core license in markets such as CE in automotive.

Charlie: Relative to our expectations earlier in the year.

Charlie: Further monetization revenue expected in the fourth quarter is largely shifted into 2025, it apart and delays with respect to TV footprint in certain markets.

Charlie: Despite the lower revenue range, we are increasing our adjusted EBITDA margin range to 14% to 16% due to progress.

Charlie: <unk> with respect to our business transformation efforts.

Charlie: Full year operating cash flow is now expected to be at 50% to $60 million usage of cash.

Charlie: The change in forecast is due to three main factors first we have a larger amount of minimum guarantee deals in the second half which were not contemplated in the original forecast.

Charlie: And for which the cash will be collected in future periods.

Charlie: Second we incurred about $30 million of one time costs for the divestitures and related business transformation.

Charlie: Including transaction costs severance costs cash taxes, and other onetime costs that were not anticipated earlier in the year.

Charlie: Third as just noted our forecast for revenue was also lower which impacts operating cash.

Charlie: Importantly, with the perceived transaction closing two days after the end of Q3, we expect to end the year with well over $100 million of cash on the balance sheet.

Charlie: non-GAAP tax expense is now expected to be approximately $25 million, which was $5 million higher than the prior estimate primarily due to tax incurred as part of the proceeds sale transaction.

Charlie: Our estimate for capital expenditures stays the same at approximately $20 million.

Charlie: As a result of the share repurchases our estimated share count for basic share is reduced by 1 million to approximately $45 million.

Charlie: And fully diluted shares is reduced by 2 million to approximately $46 million.

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

Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue if you'd like to withdraw your question simply press Star one again.

Speaker Change: Your first question comes from the line of Jason <unk> from Craig Hallum Capital. Your line is open.

Speaker Change: Great. Thank you this is Kyle on for Jason here.

Speaker Change: So just kind of wanted to start with some of the puts and takes on what youre seeing with the Tivo OTA device shipments.

Speaker Change: I know you noted some things kind of getting pushed into 2025.

Speaker Change: But it sounds like broadly things are kind of accelerating here. So just wanted to get a sense of your confidence in reaching that 2 million unit goal by the year end and is there any way to quantify that kind of implies about 5 million units for next year to hit your goal.

Speaker Change: I mean is there any kind of upside scenarios there given the acceleration you've seen there.

Speaker Change: Well I.

Speaker Change: I think we're both comfortable that.

Speaker Change: Round about year end, we will hit the 2 million Mark and we have visibility.

Speaker Change: So there is there.

Speaker Change: Theres certainly been compared to what we expected to see some of these units tend to ship more in the summer timeframe and things that pushed later in the year.

Speaker Change: So while that isn't necessarily favorable given our attempt to to get at.

Speaker Change: Your ship beginning to be monetized.

Speaker Change: And Thats whats shifting into 'twenty five we still we still feel very good about both.

Speaker Change: Both the pipeline and the increased activity and as I as we said on the call we're seeing.

Speaker Change: Accelerating activity and as it relates to 'twenty five we have very good line of sight with ever more partners coming online.

Speaker Change: I think our ability to achieve that goal of 7 million units as we exit 'twenty five 'twenty six so overall.

Speaker Change: I think we feel very good about the strategic progress despite a little bit of short term delay as people have moved some things around and I think an important thing to understand is we don't control the timing.

Speaker Change: A lot of this as well so we're an ingredient provider, but other people are making decisions to say look it's off the market the industry and their own needs.

Speaker Change: Perfect and then I guess secondly from me can you kind of just give I know, it's kind of early still but just any update to some of the monetization youre seeing on <unk>.

Speaker Change: Maybe just kind of give us a sense of some of the monetization tailwind you would expect to see as you continue to achieve greater scale in some of these markets.

Speaker Change: Well I think at this point the monetization revenue was not material in part because of the footprint still remains relatively small one of the important things about.

Speaker Change: Ultimately monetizing footprint as you need certain scale within each market to begin to.

Speaker Change: Bundle audience segments.

Speaker Change: Are both relevant and interesting to advertisers so theres nothing out there that we see that would indicate that we wont be able to.

Speaker Change: To monetize the engagement and the viewership millions of hours are being consumed on these tvs that are more newly out there.

Speaker Change: So there will be an optimization equation.

Speaker Change: The audience is get bigger footprint.

Speaker Change: Footprint gets bigger as you move through 2005 and into 'twenty six that will allow you to get more drive more revenue.

Speaker Change: But in short all the pieces, we believe our in place and certainly the industry more broadly.

Speaker Change: This is increasingly as the path for.

Speaker Change: AD supported viewing where consumers are spending more and more time on.

Speaker Change: Energy and their entertainment choices.

Speaker Change: Great. Thank you very much.

Speaker Change: Thank you Kenny.

Speaker Change: Your next question comes from the line of Steve Frankel from Rosenblatt. Your line is open.

Steve Frankel: Hi, Good afternoon, John I want to follow up on this.

Steve Frankel: <unk>.

Steve Frankel: The delays you were talking about in <unk>.

Steve Frankel: Some units coming to market is that.

Steve Frankel: Include what you previously talked about in terms of the entry into the North American market for this holiday season.

Steve Frankel: We expect.

Steve Frankel: That a partner is adding into production here in late November for.

Steve Frankel: Some U S destined Tvs that should be here.

Steve Frankel: Around year end.

Steve Frankel: No.

Steve Frankel: What remains to be seen as to how much of a presence there.

Steve Frankel: We'll have at that point.

Steve Frankel: We have every bit of confidence there.

Steve Frankel: As you get into 'twenty five youll see at least two of our partners in the U S market.

Steve Frankel: And obviously, we're going to work aggressively to try to build even on that footprint further to the extent we can.

Steve Frankel: Hey.

Speaker Change: And so are you also saying youre seeing some delays.

Steve Frankel: In Europe with some of the existing partners as well as just volume relative to earlier expectations.

Speaker Change: Well it's true.

Speaker Change: That you thought were in launch.

Speaker Change: Yes totally correct Steve It is it has more to do with the volumes of when certain things are going to happen.

Speaker Change: Got.

Speaker Change: As expected certain volumes to hit.

Speaker Change: Bigger earlier in summer and we've had some people push around their own plan, some cases move a little slower and.

Steve Frankel: And based on that we have.

Steve Frankel: Seamless timeshare, but as I said as you got into Q4, we've been seeing folks kind of accelerate some of the things we expected a little bit earlier. So it made it maintains for us.

Steve Frankel: A high degree of confidence over.

Steve Frankel: Our platform is being.

Steve Frankel: I think embraced bye bye now seven partners.

Steve Frankel: They are committed to it they are working with us.

Steve Frankel: Plumbing is even though there may be smaller.

Steve Frankel: <unk> of units out there as we are.

Steve Frankel: <unk> 1 billion Mark.

Steve Frankel: We're seeing that they are in fact activated that they are connected and we're getting data off fees. These units, even though they are a little bit more let's call. It widely widely dispersed across various parts of Europe.

Steve Frankel: It's worth noting that these the.

Steve Frankel: The units that have shifts in their end market.

Steve Frankel: Good reviews.

Steve Frankel: Many customers.

Steve Frankel: And not being returned which is absolutely critical so it's a good product, which I think matters a lot.

Speaker Change: And John your confidence in hitting the seven.

Speaker Change: Does that depend on.

Steve Frankel: Winning any new partners or do you think with the seven you have today.

Steve Frankel: Drive enough volume to $8 7 million units.

Speaker Change: The ladder, we have all the partners, we need to be able to drive those numbers are better.

Speaker Change: Great and then you also talked about some softness in <unk>.

Speaker Change: U S market are we talking here about <unk> and are you talking about decision cycles may be getting extended so youre not getting designed in when you thought you would.

Speaker Change: I think we're seeing some softer demand in some cases.

Steve Frankel: <unk>.

Steve Frankel: Things like game consoles being being down relative to some of our expectations.

Steve Frankel: I would say.

Steve Frankel: There hasnt been any meaningful shifts in market share as weak.

Steve Frankel: Think about our more traditional CE businesses and.

Steve Frankel: In automotive.

Steve Frankel: While we continue to see good directional progress with what we're doing strategically with things like auto stage.

Steve Frankel: We are seeing a bit of a weakening as you think about broader broader volumes out there.

Steve Frankel: You don't have to go very far to look at the headlines on various automotive reports that all of us.

Steve Frankel: Paul is not going swimmingly.

Steve Frankel: And so I think we're trying to manage through that and again this is about relative expectations.

Steve Frankel: They have had at the beginning of the year relative to the fact that we were still seeing obviously positive progress.

Speaker Change: Okay, great. Thank you.

Speaker Change: Your next question comes from the line of Hamzah <unk> from B Ws financial your line is open.

Speaker Change: Hi, So first question I guess.

Speaker Change: Perhaps.

Speaker Change: Youre talking about on the auto and consumer electronics market.

Speaker Change: That's been a topic that's been going on since the <unk>.

Speaker Change: <unk> of the year, even last year. So why did it take so long before you actually start to see it.

Speaker Change: Well you got to remember Amit we've got.

Speaker Change: We've got our.