Xperi Holding Corporation (NASDAQ:XPER) Q3 2023 Earnings Call Transcript November 13, 2023
Xperi Holding Corporation misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.06.
Operator: Good day, everyone. Thank you for standing by. Welcome to the Xperi Third Quarter 2023 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] I would now like to turn the call over to Mike Iburg, Xperi Head of Investor Relations. Mike, please go ahead.
Michael Iburg: Thanks, operator. Good afternoon, and thank you for joining us as Xperi reports its third quarter 2023 financial results. With me on today’s call are Jon Kirchner, Chief Executive Officer; and Robert Anderson, Chief Financial Officer. In addition to today’s earnings release, there is an earnings presentation, which you can access along with a webcast of this call on our Investor Relations website at investor.xperi.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 Xperi seperation from Xperi Holding Corporation on October 1, 2022.
Xperi Holding Corporation is now known as Adeia. 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 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 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 Xperi’s CEO, Jon Kirchner.
Jon Kirchner: Thank you, Mike, and thank you, everyone, for joining us on our Third Quarter 2023 Earnings Call. 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 and 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 Adeia 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 TV Advertising, where we offer our TiVo operating system to power smart TVs and monetize ad-supported viewing, in-cabin entertainment, where DTS AutoStage combines broadcast radio, Internet metadata and video to enhance the automotive experience and drive long-term monetization. In Cabin Monitoring, where DTS AutoSense combines imaging technology and machine learning to improve automotive safety, comfort and convenience.
And IPTV, 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 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 IPTV subscribers and 10 million cars with DTS AutoStage and AutoSense. As we achieve these milestones, we expect nearly $250 million of incrementalized annual revenue exiting — excuse me, 2025 compared to our 2022 baseline.
Based on our strong strategic execution this year, we are increasingly confident that we’ll meet or exceed these targets within our original time line. 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 Vestel has begun shipping smart TVs powered by TiVo onto the JVC 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.
We continuing our momentum. We recently signed our fourth TV OEM to integrate TiVo OS into their 2024 Smart TV lineup and expect additional contract wins by our year-end earnings call in February. At IFA, 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 could partner with us going forward. Given recent conversations with our committed TiVo OS partners and our understanding of the rollout plans in Europe and the U.S., we’ve 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 AutoStage 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 AutoStage 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 AutoStage video service with another major European car OEM.
This new program will include multiple models and began initially in Asia for the 2025 model year. In addition, we won a new HD Radio and DTS AutoStage 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 AutoStage into certain North American vehicles, beginning with the 2024 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, IPTV 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 have selected TiVo’s IPTV solutions for their customers. Our Q3 results were positive with strong growth in IPTV, 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 2023. Service providers are deploying our IPTV solutions over their broadband networks to offer a wider range of video content and streaming applications to their customers. Enhancing their service offerings and competitiveness in the digital entertainment market. IPTV 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 IPTV, we also offer TiVo+, where we monetize the viewing of ad-supported content, offering nearly 160 channels of curated content from a total of over 800 available free ad-supported television channels. We signed five additional service providers in the quarter and now have 30 video service providers offering TiVo+ in the U.S. market. Turning to Consumer Electronics. We signed several multiyear renewals with major Consumer Electronics manufacturers, including Sony, Vestel and Skyworth. 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 longevity of these innovative technologies.
In addition, we signed a top three PC OEM 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 IFA 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 as 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 stand-alone 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 Vestel 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 IPTV, 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?
Robert Andersen: 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%. ATV, our largest revenue category, was up 3% and a significant improvement from the modest declines, seen in the first half of the year. During the quarter, we saw strong growth in our IPTV solutions, which was partially offset by declines in our core Pay TV business. Consumer Electronics was down 4%, mostly due to onetime revenue in the prior year period, so the decline was partially offset by new agreements signed in the quarter, strong game console shipments and a modest amount of revenue from Perceive, which we categorized within Consumer Electronics.
Connected Car was up 16%, due to higher HD Radio volumes from strong automotive shipments, increased penetration of DTS Audio solutions and increased revenue from AutoStage. Media Platform was up 52%, due primarily to an increase in revenue from our smart TV middleware solutions and partly due to quarterly timing of certain revenue. In addition, we saw growth in direct sold and programmatic connected TV advertising. Somewhat offset by declines in media and entertainment advertising within our Pay TV solutions from the writers and actor 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 in our IPTV 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 year’s 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 $0.08. 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 Jon 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 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 a midpoint of $525 million. We now expect non-GAAP adjusted EBITDA margin to be in the range of 6% to 8%. The midpoint here is slightly lower than our prior range, as accelerated progress on TVOS and DTS AutoStage 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?
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Q&A Session
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Operator: [Operator Instructions] Your first question comes from the line of Jason Kreyer from Craig-Hallum. Please go ahead.
Jason Kreyer: Perfect. Thank you, guys. Great to hear that you’ve got the new TiVo-powered hardware shipping. Just curious if you can talk through 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 RevShares with providers and then how we should expect that to impact the P&L?
Jon Kirchner: 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 as we expect more units to be shipped into the field in the course of 2024 and ultimately then activate it, in due course you’ll begin to see monetization, you’ll 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 and it goes — it goes through the programmatic back end and ultimately is billed and collected, there’ll be a typical time lag between when the ad is shown in that ultimate monetization. But I think we’ll have more to say around the model in that specifically as we get into 2024, 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 placed and at what kind of CPMs to begin to help you better understand how to model what ARPU will 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 of where that footprint is, whether it’s Europe or U.S., because the ad markets and the ultimate ARPUs are going to be different based on the geographic mix.
Jason Kreyer: Perfect. We’ll wait for more details there into the New Year. Kind of a similar question on Perceive. Just wondering there as we get into 2024 and obviously great that you’re getting revenue generation on that side, but can you give us any expectations on how we should expect the kind of the cost to — kind of how the cost fade in as we go forward from here now that that’s generating revenue?
Jon Kirchner: I think we’ll clearly have more to say in February around what the net impact is of revenue and the cost to carry. I think as in the Perceive product and how we’re potentially looking to exploit the technology via licenses, a lot of the cost is just ongoing engineering as opposed to a hard silicon cost is one thinks 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 than any hard component. But again, more to say on that as we get into 2024.
Jason Kreyer: Okay. Thank you, guys. Appreciate it.
Operator: Your next question comes from the line of Steven Frankel from Rosenblatt Securities. Please go ahead.
Steven Frankel: Hi. Good afternoon. Jon, to follow-up on Perceive, could you give us any insight into how this initial customer is using the product and what the timeline before it gets actually deployed into an end product?
Jon Kirchner: Steve, what I can share is, I think, there’ll be 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, would not be advisable at this point, but obviously I know there is both interest and we’ll see what can be said over time. But I think it’s fair to say that the product is not yet in market and will be forthcoming. And then the core technology is a part of what they’re trying to achieve.
