Xperi Holding Corporation
Q1 2023 Earnings Call Transcript

Published: 9 May 2023

[Operator:]

Good day, everyone. Thank you for standing by. Welcome to Xperi First 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 open for questions. I would now like to turn the call over to Mike Iburg, Xperi's Head of Investor Relations. Mike, please go ahead.

[Mike Iburg:]

Good afternoon. And thank you for joining us as Xperi reports its first 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 is an earnings presentation, which can be accessed along with this webcast on our Investor Relations website at investor.xperi.com. Before we begin, I would like to provide a few reminders. First, I would like to note that unless otherwise stated, all comparisons are to the same quarter in the prior year. In addition, the first quarter of 2022 was calculated on a carve-out basis prior to experience separation from Xperi Holding Corporation on October 1, 2022. Xperi Holding Corporation is now known as Adeia Inc. Second, today's discussion contains forward-looking statements that are predictions, projections and 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-K. 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 the most directly comparable GAAP measures, which can be found in the Investor Relations section on 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 first quarter 2023 earnings call. We are pleased to deliver another quarter of significant business progress and solid financial results for Q1 of 2023. With these accomplishments, we remain on track to achieve our full year outlook and long-term strategic objectives. Revenue in the quarter was $127 million, an increase of 7% from the prior year. We expanded our gross margin, sequentially reduced our operating expenses and significantly increased our adjusted EBITDA from the year ago period. I'll let Robert walk you through the details in just a moment. In addition to a strong quarter for consumer electronics, we continue to achieve major milestones in each of our key growth areas, with significant progress in media platform, connected car and IPTV. The announcement of a second top 10 smart TV OEM integrating our TiVo operating system and the additional design win for our in-vehicle infotainment platform, validate our independent media platform approach and are prime examples of our continued momentum. As discussed at last fall's Investor Day, we offer a wide range of solutions designed to create extraordinary entertainment experiences for end users, as well as improved safety, comfort and convenience in the car. Four of our solutions are in markets that are expected to expand rapidly over the next several years, while the other solutions are in markets that are more mature and relatively stable over a longer-term horizon. We refer to these areas as growth and core, respectively. As I mentioned last quarter, our strategy is focused on driving revenue growth in the following key areas

[Robert Andersen:]

Thanks, Jon. Let's get straight into the numbers. As Mike noted earlier, unless otherwise noted, all comparisons are against the same quarter in the prior year. Total revenue for the first quarter was $127 million, an increase of 7%. This increase was primarily driven by consumer electronics and media platform partially offset by a decline in Pay-TV. Pay-TV, our largest revenue category, was down 6% as strong growth in IPTV was more than offset by declines in our core Pay-TV product lines such as classic guides and consumer hardware subs. Consumer electronics was up 31%, and driven by growth in home audio and video solutions from renewals signed in the quarter, some of which were minimum guarantee arrangements in which the revenue was taken upfront. Additionally, we had strong reported shipments of game consoles. Connected Car was up 4% due primarily to growth in our AutoSense and AutoStage products as well as modest growth in HD Radio. Media Platform was up 34%, driven by growth in monetization and contribution from the viewed acquisition. Our non-GAAP gross margin for the quarter was $100 million or 79%, an improvement of over 110 basis points, driven primarily by a revenue mix shift towards consumer electronics which is our highest gross margin category. Non-GAAP adjusted operating expense for the quarter was $99 million, up 4% from the prior year carve-out financials but down 5% sequentially. Our adjusted EBITDA was $7 million, an increase of approximately 70% from the prior year, yielding a 5% adjusted EBITDA margin. After accounting for tax and interest expense, our non-GAAP earnings per share was $0.04. Moving to the balance sheet. The company ended the quarter with $111 million of cash and cash equivalents. Our cash flow from operations in the quarter was a usage of $43 million due to the timing of bonus payments and certain collections. Specifically, the employee bonus payout, which occurs annually in Q1 was approximately $32 million similar to last year's amount. We also saw an increase in accounts receivable and other assets of about $12 million, most of which has now been collected. Overall, we expect operating cash flow to be positive for the balance of the year and to be approximately breakeven for the fiscal year. Turning to our financial outlook for 2023, we are reaffirming the previous guidance ranges and providing the following commentary. As provided on the last earnings call, we continue to expect full year revenue to be in the range of $510 million to $540 million. Full year adjusted EBITDA margin is expected to be in the range of 6% to 10%. Also unchanged, we expect cash taxes and non-GAAP tax for the year to be in the range of $20 million to $25 million. Although the Q1 non-GAAP tax expense was relatively modest at $0.5 million, we expect a higher non-GAAP tax expense for the remaining quarters of the year. Basic share count is still expected to average 43 million for the year and fully diluted share count is expected to average approximately 49 million for the year. That concludes our prepared remarks. Let's now open the call for questions.

[Operator:]

At this time, we will begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of Hamed Khorsand from BWS Financial. Your line is open.

[Hamed Khorsand:]

Hi. Could you just talk about the upfront revenues that you generate from the renewals? And how are you expecting to fall into place as far as the guidance is concerns just given that it seems like Q1 is going to be very high consumer electronics revenue quarter.

[Robert Andersen:]

Hi Hamed, this is Robert. I can take that one. So, the upfront revenue that we experienced in Q1 is part of our planned for the year. So, it was known in advance how these would play out. So, they're part of our guidance range for the year. And I think the way we think about it is they really are a an affirmation of our DTS licensing business. So, we'll be getting revenue -- actually, we'll be getting payments for these contracts over many years. So, a really nice way to start the year and effectively part of our plan for the year.

[Hamed Khorsand:]

Okay. And any update as far as what you're seeing on the Autosense side, especially within the US market, if there's been any adoption of your technology?

[Jon Kirchner:]

I would say that the interest in Cabin Safety Solutions continues to grow. We are meaningfully engaged with a sizable pipeline of automakers. From a standards perspective, there isn't necessarily any major event that has occurred of late. But I do think the industry globally is clearly moving in that direction and I think we continue to have unique technology and a ton of domain expertise that is going to help us continue to win business in that space.

[Hamed Khorsand:]

And my final question was this TV OEM that you've won, was this because of Westell that you wanted or was this because of Roku making their own TV?

[Jon Kirchner:]

No, I think it really speaks to and validates our approach of there's a real desire for an independent media platform where the TV OEM can own their own brands, own the customer and participate in long-term economics. And I think that business model and that approach, coupled with a world-class UX, UI search, reckon discovery capability that we offer, I think, is driving a lot of resonance with TV makers. And I think it's just -- it's the next step in what we believe to be a robust pipeline. And I think more than anything, just says that we're on to something important tier -- that I think is going to have a meaningful impact to our business and growth over the next couple of years.

[Hamed Khorsand:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Jason Kreyer from Craig-Hallum. Your line is open.

[Jason Kreyer:]

Hi. Good afternoon, guys. Thank you. Curious, as you approach the launch of the TiVo OS being built into these TVs with Vestel first later this year. Just curious the strategy on consumer interaction or maybe it's consumer awareness, just as these are the first devices that TiVo built in, I'm wondering if there's like a broader marketing campaign that goes along with that.

[Jon Kirchner:]

Yes, we're working in partnership with our with our TV partners to highlight some of the advantages of the interface as well as the fact that there's new innovative technology on the TV platform. So in short, I think it will be coupled with clear marketing. But I think more than anything, what we want is as people turn on the TV that they have a great content-first user experience, because that's the very thing -- that's the very reason people are buying TVs, right, as they want to get to the content they want to watch. In the simplest and easiest ways and understand where it's available. And I think we've designed our product in a way that facilitates that. And I think the -- as a result, the learning curve will be relatively short. And I think the satisfaction that comes with the experience will drive even more interest in the platform over time.

[Jason Kreyer:]

And then last week at the new fronts, you guys kind of foreshadowed a move into the domestic market with TiVo OS. I'm just curious at what the process is that you go through there, if you're identifying OEMs and having engagement or how that process will look over the course of this year?

[Jon Kirchner:]

I expect that we'll continue to make progress on our pipeline. Naturally, we're talking to people globally. So I would say stay tuned. But I think as -- as we indicated when we first announced Vestel, which is great to have their partnership, but we thought there would be more. And I think today, we've shared some additional news that clearly revalidate that view, and I think it will continue.

[Jason Kreyer:]

Okay. I'm going to squeeze in just one more on connected car. We've just seen more auto manufacturers, kind of move away from things like CarPlay and Android Auto Curious if you think that creates a bigger opportunity for Auto Stage as you go forward?

[Jon Kirchner:]

In short, I think automakers are increasingly looking to differentiate their cabins and certainly to offer next-gen experiences around the core media platforms or the media delivery sources that are in the car. And I think certainly, Auto Stage and as we move into video, which we expect to see in this next generation of cars here as part of our broader platform. I think that -- the fact that we are an independent platform for the automakers to help further customize and create the experience they want in the cabin, leveraging our technology base and having easy access to next-gen radio among other things. I think that bodes well. And certainly, I think, as you mentioned, some of the other competing technologies in the car as people look to own their own experiences, we're a great partner to do that. Q - Perfect. Thank you

[Operator:]

Your next question comes from the line of Nick Zangler from Stephens. Your line is open.

[Nick Zangler:]

Congrats on the second smart TV in -- that's awesome. Just a high level, I'm wondering if there's just any further details you could provide on that win? Maybe when specifically you might see the launch within 2024, first half catalyst or back half. Does it look and feel similar to the arrangement with Vestel -- and maybe you could size it up, I guess, relative to the initial win at Vestel that could be helpful?

[Jon Kirchner:]

Yeah. Nick, they're a top 10 provider, as we said. I think we'll be able to maybe share a bit more information as we get into fall, which is when I expect this will likely become public, as to who the brand is. Business model here is consistent across our TV manufacturers. And as for exact timing and sizing, I think that's under discussion as we continue to work with this partner. So I would say stay tuned.

[Nick Zangler:]

Got it. And then how about just like how quickly this was able to come to fruition just to level set how fast these can come about. Bottom mind, how long would you say you've been talking with this specific OEM and to kind of gauge from initial contact to actually committing to launch, how long that process can take, especially in this environment where you've got the Rokus of the world building their own TVs and maybe some are accelerating their plans to look for partners like what you can provide in TiVo?

[Jon Kirchner:]

I would say the sales cycle oftentimes it's inside a year. But it varies. It varies based on the state of readiness, the technical complexity of what the TV maker is specifically trying to do the chipsets that they're currently running in their TVs, et cetera. So and a lot of that pre-validation work precedes the ultimate agreement -- the business agreement. So I think I probably have more to say on this as we get further along in our pipeline and maybe I can give you a better indication of kind of what both sides of the goalposts look like. But I would say this has been a very -- this outcome is a result of steady engagement, and we're thrilled to have them on board and look forward to going to market with them.

[Nick Zangler:]

Awesome. And then I might have missed it, but I'm not sure if you touched on it. Any update on the Vestel TV launch, specifically when those TVs will hit retail. Just curious if we should start to expect some revenue contribution in 2Q, or is it back half 2023 contribution?

[Jon Kirchner:]

Late 2023, Nick, is what we'd expect. And I think what we saw is based on some retail planning, even though our software stack is ready to go, that the timing of TVs in Europe for Vestel hitting retailers is likely coming in before the holiday buying season. So it's going to be second half.

[Nick Zangler:]

Got it. And then, all right, last one. Media Platform revenues, up 33% in the quarter. I mean, obviously, a very strong result. I think maybe just a little short of where we were modeling. I'm wondering if -- did that number come in line with your expectations for the quarter? And I'm curious if at this stage, you guys would see or experience any advertising pressure in the market, would you be able to call that out, or are you guys in just such a ramp mode that you don't really feel it. But just general commentary on that revenue number where it came in?

[Jon Kirchner:]

Yeah. So let me just address from a broader market perspective, definitely, we're seeing there is some softness but we have a number of things going in that category. So that helps blunt the impact of that. Robert, more you'd like to add?

[Robert Andersen:]

Sure. I would say that in terms of what we were expecting, Nick, we were more or less in line. Within that category, we're not yet experiencing the value we ultimately expect to receive within monetization until we really get a foothold into the TBOS market. So the upside for us this quarter is contribution from viewed and growth in monetization, which was reasonable, I think. But that category, I think, is really emerging for us as an interesting growth category going forward.

[Nick Zangler:]

Awesome, great. Thanks so much guys. Appreciate it.

[Robert Andersen:]

Thank you, Nick.

[Operator:]

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to the presenters.

[Jon Kirchner:]

Thanks, operator, and thanks, everyone, for joining today's call. We're excited about our continued success and financial performance. I'd like to thank our employees, customers and partners for helping us achieve these strong results. We look forward to reviewing our Q2 results with you in early August. This concludes today's call.

[Operator:]

This concludes today's conference call. You may now disconnect.