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spk03: Good day, ladies and gentlemen. Thank you for standing by and welcome to the Xperia fourth quarter fiscal year 2020 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. This call is recorded today, Tuesday, February 23rd, 2021. I would now like to turn the call over to Jerry Weinfeld, Vice President of Investor Relations for Xperia. Jerry, please go ahead.
spk00: Good afternoon, everyone. With me on the call today are John Kirchner, CEO, and Robert Anderson, CFO. Also on the call is Samir Armali, President of IP Licensing, who will be available along with John and Robert to answer questions during the Q&A portion of this 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 factor section in our SEC filings, including our most recent form 10Q, for more information on the risks and uncertainties that cause our actual results to differ materially from what we discussed today, including but not limited to risks associated with the TiVo transaction, the development and launch of new products, and any potential impact of the coronavirus. 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, realized and unrealized gains or losses on marketable equity securities and associated tax effects. We have provided reconciliations of these non-GAAP measures to the most directly comparable gap measures in the earnings release and on the investor relations section of our website. The recording of this conference call will be available on our investor relations website at www.expery.com. I'll now turn the call over to John Kirchner.
spk02: John Kirchner Thanks, Sherry, and thanks, everyone, for joining us. It would be difficult to begin a discussion around last year's performance without reference to the COVID-19 pandemic. It was a year like no other, and our employees came together seamlessly to deliver on our mission to provide extraordinary experiences in the home, on the go, and in the car. And while we're impacted by the pandemic in some areas of our business, we exited the year with strong results and key accomplishments. 2020 was a transformative year. We closed our merger with TiVo, made significant progress on integration, and were able to achieve 90% of the $50 million in run rate synergies from the combination. Importantly, by the time we finished the first quarter, we will have reached the $50 million run rate synergy target we set for the transaction, nine months ahead of schedule. We closed one of the largest IP licensing deals in the history of both companies, took steps to increase product business profitability, and announced several new product offerings. Altogether, We made incredible progress last year, and we will continue our transformation of the business in 2021 with improved profitability and opportunities for growth as we look ahead over the next few years. Now on to the results. For today's call, all 2020 and year-over-year performance comparisons will be discussed as if Experi and TiVo were combined for all periods. This approach will give 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. Despite operating in a global pandemic, we are thrilled with our full year 2020 performance and execution. Combined 2020 revenue of $1.15 billion far exceeded our expectations as we came into the merger. We generated $416 million in operating cash flow, and had $453 million in adjusted free cash flow. On the capital allocation front, we paid down $176 million of debt issued in connection with the merger, bringing our net debt balance to $617 million. Since the merger, we bought back $70 million of stock at an average price of $14.25, and we paid out $10.7 million in dividends. In our IP licensing business, we successfully closed transformational deals that underscore the foundational nature of our innovations and their long-term value in multiple licensing markets. Thus, this high-margin business is in the enviable position of having tremendous scale, stable revenue and cash flow, long-term visibility, and meaningful growth opportunities. On the media side of our IP business, we successfully entered into a long-term agreement with Comcast that extends into 2031, illustrating the continued relevance and value of our media IP portfolio well into the future. On the sending side of our IP business, we entered into an important patent licensing and technology transfer agreement with SK Hynix, reinforcing our leading IP position in hybrid bonding as that market continues to develop. In our product business, despite COVID-related headwinds, we executed against our plan to deliver a range of new products before the end of 2020. This should help improve the growth trajectory in the product business over the next few years. The products launched include the TiVo Stream 4K, DTS AutoStage, our connected radio solution, and DTS AutoSense, our in-cabin monitoring solution. In addition, we saw strong industry interest in our new perceived ergo chip for edge-based AI applications. Importantly, we have restructured the product business to include focus, strategic positioning, profitability, and longer-term growth prospects. We are also working to adjust our product portfolio, drive greater cost efficiencies, and realize revenue synergies resulting from having a broader base of technology. In support of these objectives, we've also increased certain investments in areas of the business that we believe will enhance our growth prospects and improve leverage and efficiency over the next three to five years. On the integration front, we've made substantial progress against a list of more than 1,000 tasks, many of which are now fully complete, positioning the product and IP businesses to be ready to operate independently during 2021. and a critical step as we prepare for ultimate separation. Over the last few months, we've evaluated uncertainties with respect to the shape of the COVID pandemic recovery, its impact on our product business, and our internal progress on the complex systems work needed to successfully separate our businesses. As a result of these factors, we now expect that our original timeline to separate the business in mid-2021 will be pushed out to the first half of 2022. We believe that this timeline will enable us to best position both the product and IP businesses for success as independent public companies and thereby create the most value for shareholders. Moving to more specifics in the IP and product segments. IP licensing revenue, including the impact of purchase accounting, was $300.4 million in Q4, up 132% year over year. This increase was mainly driven by the catch-up payments under our new Comcast agreement, somewhat offset by one-time revenue in Q4 2019 in our semi-IP business. For the full year, revenue was $635.6 million, up 58% year-over-year. We entered 2021 with a significant step-up in our historical annual run rate for our IP business. After Comcast, our average revenue baseline is now approximately $350 million, which supports our position as one of the largest IP licensing companies in the world. As we enter the year, we are pleased with the exciting and continued momentum we see in our IP business. Already in 2021, we've announced a number of key renewals with leading companies around the world, further solidifying our $350 million IP revenue baseline. These include multi-year agreements with Cox, Sony, and TCL. Additionally, as we've highlighted previously, there are a number of key growth areas for the IP business that would be incremental to that $350 million baseline. In the aggregate, we believe these growth areas represent an opportunity in the low hundreds of millions per year when fully realized. The first opportunity is greater penetration in OTT video markets. With our recent agreements, we have successfully licensed 100% of the top 10 traditional pay TV providers in the United States, which accounts for approximately 70 million subscribers. The OTT market is currently experiencing explosive growth. For example, the largest providers of subscription video on demand in the United States now have approximately 200 million subscribers in the aggregate, driven in part by the recent launch of a number of new services. While these services have a significantly lower ARPU when compared to traditional PTV, the scale of the overall OTT video market continues to grow and presents an increasingly important licensing opportunity for our IP business. While we are at a comparatively earlier stage in licensing the key providers in this market, we are confident that the fundamental innovations from our patent portfolios will be similarly relevant to these new and widely adopted OTT video services. This will be an area of increased focus for us and one that we are very excited about. The second opportunity for us is continuing to license the traditional pay TV market in Canada. We've already successfully licensed a number of leading Canadian pay TV providers, including Shaw and Rogers. As you know, we are currently in litigation with several Canadian pay TV providers and expect some decisions from this initial round of litigation in the Q2-Q3 timeframes. though the timing of resolution and whether additional litigation will be necessary remains uncertain. Third, on the semiconductor front, and consistent with our prior messaging, our $350 million baseline revenue is exclusive of any semiconductor revenue. This revenue has historically been more episodic and therefore more difficult to forecast than our media IP revenue. We believe that near-term revenue opportunities may be comparatively smaller than in years past as our semi-IP business goes through a period of transition as the market for our more advanced technologies further develops. We remain confident that the opportunity for our semiconductor technologies, and in particular hybrid bonding, is significant and will play out over the next few years as the industry increasingly adopts our foundational IP. Now onto the product business. Total product revenue for the quarter, including the impact of purchase accounting, was $133.5 million. down 2% year-over-year. Growth in the connected car and consumer experience categories was offset by declines in the pay TV category. Product revenue for the year was $511.9 million, down 6% year-over-year. Consumer experience revenue in Q4 was $56 million, up 11% year-over-year. Revenue for the year in this category was $209.9 million, up 3% year-over-year. Growth in Q4 was driven by increases in monetization, game consoles, and mobile. Game console was driven by the launch of two new consoles that resulted in a strong Q4, and our mobile business continues to show strength in gaming headsets, which grew 44% year-over-year. Our TiVo hardware business grew significantly versus 2019 due to continued momentum for the TiVo Stream 4K. We improved monetization in our consumer hardware business, driven by higher user engagement on our content-first platform and an increased user base. TiVo Plus, our AVOD streaming platform, grew from 26 to 145 linear channels in 2020 and added tens of thousands of AVOD viewing hours. Importantly, we've seen a 393% quarter-over-quarter growth in terms of total viewership for our premium AVOD catalog, and partner feedback indicates we're delivering significantly higher than average hours per user per month compared to other Android distribution platforms. We continue to expand our connected TV advertising footprint across operators and across our Stream 4K product, This footprint expansion coupled with the launch of new data and ad products and a strengthening market for connected TV and entertainment advertising contributed to growth and monetization this quarter. We also added to our IMAX-enhanced ecosystem. Sony announced its Bravia Core service, launching soon with the largest IMAX-enhanced movie collections. The IMAX Enhanced program has seen growing success with local studios in China, including the IMAX Enhanced release of The 800, the highest-grossing film worldwide in 2020. Tencent and iQIYI are now both streaming in China, supporting this growing pipeline of IMAX Enhanced titles. Lastly, iQIYI and Hisense launched IMAX Enhanced on certain TV models, iQiyi is the sixth streaming service worldwide to launch IMAX Enhanced and the second streaming service in China. Importantly, we expect to see significant expansion on the content side of the IMAX Enhanced ecosystem as we progress through 2021, which should in turn drive greater device growth and revenue. Connected Car delivered Q4 revenue of $22 million, up 12% year-over-year, as we're seeing a return to strength in North American auto sales. For the full year, revenue was $70.5 million, down 14% year over year, due to the impact of the pandemic on car sales in late Q1 and Q2 of 2020. In Q4, eight new car models with various brands launched with HD radio. In addition, the FCC officially approved commercial AM all-digital broadcasting. creating additional incentives for car OEMs to adopt HD radio technology. In total, more than 8 million cars shipped with HD radio last year. And overall, when taking into account our audio and radio solutions, Xperia technology has now been shipped in over 100 million vehicles on the road. With the merger of Xperia and TiVo, we've greatly expanded our next-generation infotainment offering, branding the platform as DTS AutoStage. This system launched with Mercedes in Q4. We are adding additional features such as lyrics to the platform and integrating metadata and personalization capabilities going forward. Future generations of the DTS AutoStage product will represent a full suite of features, and we continue to expand our global broadcast footprint to enable the DTS AutoStage experience in cars. We've branded our in-cabin monitoring solutions as DTS AutoSense, which are available across four OEM providers, including three light truck and bus suppliers in Asia and one major European passenger vehicle manufacturer coming to market later this year. To date, we've had 20 different design wins for the product. The solution now has over 600 million kilometers of actual road drive time behind it. Moving on to PayTV. Pay TV revenue was $55.7 million, up slightly sequentially and down 16% year over year, primarily due to a one-time payment received in Q4 2019. For the full year, revenue was $232.7 million, down 10% year over year. As expected, we continue to see churn in our legacy pay TV business. Over time, we expect this churn to be partially offset by growth in new TiVo IPTV deployments. Our contracted customer IPTV deployments in 2020 were heavily disrupted by the COVID-19 pandemic. We've been actively working with our operator partners to enable new consumer self-install, no contact deployment options. As a result of these efforts, we're starting to see a positive trend in new household deployments in the US and Latin America. In addition, we added two new operator TiVo IPTV design wins in the period. Lastly, with our perceived subsidiary, we continue to make progress with early partners to bring a smart security camera product to market later this year. As evidence of the innovation around our Ergo platform, our chip has received a number of industry awards validating its unique capabilities. These include the CES Innovation Awards 2021 Honoree in the Embedded Technologies category and the Best of Sensors Awards 2020 Startup of the Year. As we continue to see the opportunities for ERGO evolve, we are accelerating certain investments during 2021 to position the platform for greater scalability in 2022 and beyond. These investments primarily relate to expanding our field applications engineering capability, and the productization of tools that will allow our customers to quickly and easily develop their solutions on our platform. Entering 2021, we have a clear set of priorities that are aimed to position the product and IP businesses for growth while we complete integration and prepare our businesses for independent success. On the IP licensing side, these include increasing penetration into OTP and new media markets, licensing the remaining pay TV operators in Canada on market-based terms consistent with our existing licensing program, and expanding our hybrid bonding technology footprint. On the product side, these include driving our TiVo Stream and IMAX enhanced programs and connected TVs, accelerating our DTS Auto Stage and DTS AutoSense progress with Tier 1 suppliers and OEMs, expanding TiVo IPTV deployments, and launching Perceived's ergo chip in our first partner products and completing the productization of our platform tools. With that, I'll turn the call over to Robert to discuss our financials.
spk01: Robert Nussbaum- Thanks, John. Let me begin with financial results for the 2020 fourth quarter and full year. As John noted earlier, in order to provide more meaningful comparisons I'll be describing revenue and cash flow-based numbers on a fully combined basis, as if Xperia and TiVo were combined for all periods. Combined numbers can be found in the Interactive Analyst Center on our investor relations website. Total revenue for the fourth quarter was $433.9 million, up from $265.7 million in the fourth quarter of 2019. The increase was mainly driven by the Comcast settlement and growth in the consumer experience and connected car categories, offset by lower revenue from semiconductor IP. As John mentioned, the full year revenue on a combined basis for 2020 was $1.15 billion, up 21% from $948.2 million in 2019. Fourth quarter GAAP operating expense
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