Xperi Holding Corporation
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Second Quarter Fiscal Year 2021 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. . This call is being recorded today, Tuesday, August 3, 2021. I would now like to turn the call over to Geri Weinfeld, Vice President of Investor Relations for Xperi. Geri, please go ahead.

[Geri Weinfeld:]

Good afternoon, everyone. Thanks for joining us as we report our second quarter fiscal year 2021 financial results. With me on the call today are Jon Kirchner, CEO; and Robert Andersen, CFO. Also on the call is Samir Armaly, President of IP Licensing, who will be available along with Jon and Robert to answer questions during the Q&A portion of the call. Before we begin, I would like to provide two reminders. First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs, and therefore subject to risks, uncertainties, and changes in circumstances. Please refer to the Risk Factors section in our SEC filings, including our annual report on Form 10-K for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call. Second, we refer to certain non-GAAP financial measures, which exclude one time or ongoing non-cash acquired intangibles amortization charges, costs related to actual or planned business combinations, including transaction fees, integration costs, severance, facility closures and retention bonuses, separation costs, stock-based compensation, loss on debt extinguishment, expensed debt refinancing costs, realized and unrealized gains or losses on marketable equity securities and associated tax effects. We provide a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in earnings release and on the Investor Relations section of our website. Lastly, all 2021 and year-over-year performance comparisons will be discussed as if Xperi and TiVo for combined for all periods. This approach will get the best view of progress on the overall business and these numbers can be found in the interactive analyst center on our Investor Relations website. The recording of this conference call will be available on our Investor Relations website at www.xperi.com. I'll now turn the call over to Jon Kirchner.

[Jon Kirchner:]

Thanks, Geri, and thanks everyone for joining us. We delivered a strong Q2 with revenue and earnings coming in above our expectations. The stronger than expected revenue was mostly driven by successfully signing certain deals earlier in the year than planned, increasing our visibility to achieve our full year outlook. And despite a modest impact on our product business from semiconductor supply constraints, we remain on track to achieve our outlook for the year. Revenue was $222.3 million down 4.7% year-over-year, mainly due to expected declines in semi IP and our Pay-TV product business, partially offset by growth in media IP, Connected Car and Consumer Experience markets. During the quarter, we generated $56.3 million in operating cash flow and $56.7 million in adjusted free cash flow. We also paid down about $51 million of our debt, bought back $10 million of stock and are on track with our capital allocation strategy of returning approximately 50% of our free cash flow to investors. At a high level, we made solid progress on the following initiatives during the quarter

[Robert Andersen:]

Thanks, Jon. As noted over the past four quarters, in order to provide more meaningful comparisons, and discussing both non-GAAP and cash flow based numbers, prior periods are presented on fully combined basis for the merged companies. Thankfully, this is the last quarterly comparison to which we need to make this statement. Let me began with the financial results for the second quarter. Xperi's second quarter revenue was $222.3 million, which was ahead of our internal plans for the quarter due to certain deals closing earlier than anticipated. On a non-GAAP basis, our operating expense excluding COGS was $108.4 million, down $17.3 million or 13.8% year-over-year due to synergy savings, lower personnel expense, lower outside spend and reduced litigation. Non-GAAP cost of goods sold of $26.2 million was about $1 million lower than in 2020. Cash taxes paid in the quarter were $9 million. Using this $9 million cash tax number, non-GAAP earnings per share for the second quarter was $0.61. We ended the quarter with 104.9 million basic shares outstanding and 113.7 million non-GAAP fully diluted shares outstanding. Moving to the balance sheet. We finished the quarter with $199 million in cash and investments. During the quarter, we repriced our outstanding debt to lower borrowing costs, extend the maturity and improved other terms that provide flexibility in the credit agreement. As part of the debt repricing, we paid down $50.6 million of debt, bringing the outstanding balance down to $810 million and net debt of $611 million. Operating cash flow for the quarter was $56.3 million, up from $44 million a year ago on a fully combined basis due to reduced spending, interest in cash taxes, offset by lower revenue and changes in working capital. Our adjusted free cash flow for the quarter was $56.7 million. Adjusted free cash flow reflects operating cash flow adjusted for $3.1 million of property, plant and equipment spend, and $2.6 million of merger and separation-related costs. During the quarter Xperi paid a quarterly cash dividend or $0.05 per common share of stock. We also bought back 0.4 million shares of common stock for a total of $10 million. Let me lastly comment on our outlook for the year. Given the closing of certain deals into the first half in our pipeline of activity for the remainder of the year, we're reaffirming our revenue outlook at $860 million to $900 million. This revenue range reflects the most current information we have from customers and industry analysts regarding constraints in the global semiconductor supply and its impact on our business. So as a reminder, given the inherent uncertainty in the timing of resolution, the annual outlook does not include revenue associated with any resolution of litigation against Canadian operators or execution of large semi IP licenses. On the expense side, we expect our annual expenses to be consistent with our prior guidance. We had lower spending in the second quarter due to the deferral of certain expenses to later in the year. In the second half, we will have additional expenses as a result of the MobiTV acquisition, and we expect sequentially higher R&D and SG&A expenses. Also, while litigation expense can be difficult to forecast, due to case, timing and activity, we expect litigation expense to increase and to be in the range of $15 million to $20 million for the second half. Given the repricing of our debt this past quarter, we are lowering the outlook for interest expense by $4 million down to $39 million for the year. Other than this one change, we are reaffirming our annual expense outlook communicated in February. Our cash flow outlook also remains on track for the year. That concludes our prepared remarks. Let me now open the call to your questions.

[Operator:]

We can now take the first question from Hamed Khorsand from BWS Financial.

[Hamed Khorsand:]

Hi. So first off just on the OTT front, could you just talk about what your efforts are as far as renewing, new licenses. And if you're able to talk about if there's any more licenses coming up for renewal this year?

[Samir Armaly:]

Certainly, Hamed. This is Samir. As we said on the call we're pleased with the progress we're making in OTT so far. It's obviously one of the areas that we've identified as a strategic growth area for the IP business. We have a pipeline of opportunities in terms of renewals and new licensing that the team continues to work through. Obviously, as those deals get done, like they did in the most recent quarter, where it's possible we'll make up announcements. But we're pleased with the progress to date and we're happy with the pipeline we've got. And we'll be updating you as we make more progress in the future.

[Hamed Khorsand:]

So you can't comment on if there's anything coming up in the second half of this year?

[Samir Armaly:]

There's certainly always a long pipeline. As we've said, the timing of getting any deals done is not something we can predict with any sensitivity. But the team is certainly actively working on the normal pipeline, you'd imagine they're in an important and growing segments of business.

[Hamed Khorsand:]

Okay. My other question was on IPTV. Could you just talk about MobiTV’s customer diversification? How much of it is within the U.S.? How much of it is within international? And how are you going to pursue that as far as adding more customers in those regions using MobiTV?

[Jon Kirchner:]

Yes. Sure. Hamed, it's largely U.S. centric. And I think, the difference between kind of the MobiTV offering and what historically been on in an IPTV context is, MobiTV has a managed service offering. And the client base kind of that was using their service is in the neighborhood of approaching, let's call it, a 100 different customers. So a lot of smaller operators and whatnot. But we believe that the quality of the platform and its scalability potential when coupled with our existing legacy TiVo IPTV customer base, really puts us in a position to be a key provider of services to this space. And I think, offering both the ability to scale very efficiently to make the economic model much more viable in the context of being a bigger provider to the broader industry, as well as allowing us to invest in ways that will improve the platform for our customers. So very, very pleased to have completed not only that acquisition through the bankruptcy court, but secondarily, at the speed at which we have kind of picked up the ball, engaged with customers, gotten the respective key talent, engaged with our teams and how we're kind of refining and laying plans for a much more aggressive IPTV growth as we look ahead.

[Hamed Khorsand:]

Okay. Lastly, your hardware COGS dropped quite a bit. Is that going to be a new level going forward or was this a one-time anomaly?

[Robert Andersen:]

I can take that one, Hamed. COGS did have fairly low quarter. As I may have mentioned in some of the remarks, I do expect that to tick up in between the second half. Part of that is just timing of when expenses occur and the mix of our shipments. The other is the increase we would attribute due to the MobiTV acquisition. So both of those will drive the numbers up in the second half. I do you expect, as I mentioned earlier, that the -- we gave a range for COGS previously, and I would expect we would be within that range.

[Operator:]

. It appears there are no further questions at this time. I'd like to now turn the call back over to Jon Kirchner for any additional or closing remarks.

[Jon Kirchner:]

Thanks, operator. And thanks everyone for joining us on today's call. We delivered another strong quarter, and I'm particularly pleased with the progress we've made on growth in the OTT area of our IP business, IPTV adoption and expansion of our solutions and TiVo Stream 4K footprint. I want to thank our employees for their dedication and commitment towards executing on our strategy and plans during what is otherwise very challenging time. I look forward to discussing our progress with shareholders over the coming months. Thank you. This concludes today's call.

[Operator:]

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