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spk01: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperia first 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 open for questions. In order to ask a question, please press star 1 on your touchtone telephone. This call is being recorded today, Tuesday, May 5th, 2021. I'd 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. Thanks for joining us as we report our first quarter of fiscal year 2021 financial results. 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 the call. Before we begin, I'd 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 discussed 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 include one-time or ongoing non-cash acquired intangible 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 provide reconciliations of these non-GAAP measures, the most directly comparable GAAP measures, in the 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 Xperia and TiVo were 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 webcast 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.
spk03: Thanks, Sherry, and thanks, everyone, for joining us. Q1 revenue was in line with our expectations at $221.6 million, and our non-GAAP EPS was 59 cents, representing a strong start to the year. We generated $26.7 million in operating cash flow, up 124% versus Q1 last year on a fully combined basis, and $29.7 million in adjusted free cash flow, up 84% versus last year. We also bought back $25 million of stock during the quarter. Importantly, our board recently authorized an increase of $100 million to our existing stock repurchase plan, underscoring the confidence we have in our cash flow outlook for the year and the long-term prospects for both our IP and product businesses. These results and the strategic progress we made in Q1 put us on track to meet the annual outlook we provided last quarter. As it relates to the global semiconductor supply chain issues, our outlook reflects the most current information from customers and industry analysts. However, we'll continue to monitor this as we move forward. At a high level, we've made solid progress on the following initiatives. Building on the baseline revenue for our IP business and advancing opportunities in the various IP growth areas we've identified. Increasing the footprint and available content for the TiVo stream. expanding IMAX-enhanced ecosystems, advancing discussions with key OEM partners for our AutoStage and AutoSense products, progressing the adoption of our IPTV self-install solution, and further developing the platform toolset for customers of Perseve. The purpose of these initiatives is to facilitate long-term growth. While growth will not be linear, as we look out over the next four years through 2025, We expect these efforts to help drive figures in the mid-single digits to low teens for the product business, excluding any growth from perceived, and in the mid to high single digits for the IP business. Let us begin with a discussion of our IP licensing business. IP licensing revenue in Q1 was $98 million. Media IP revenue was up more than 30% year over year, This increase is reflective of the previously discussed step-up in our baseline IP revenue from the Comcast license, along with the significant momentum in renewals in the early part of the year. These renewals include agreements with leading companies such as Cox, Sony, and TCL. We've also recently renewed an agreement with Frontier, one of the top 10 traditional pay TV providers in the United States. This growth was offset by expected declines in our semi-IP business as we worked to reposition that business for future growth. The decline of approximately $60 million in semi-IP revenue resulted in our overall IP revenue being down 28% year over year. The momentum we are seeing within our media IP business reinforces our confidence in the $350 million average annual baseline. Additionally, we believe we have opportunities to potentially exceed that average annual baseline this year. We're also extremely pleased with the progress we've made integrating our legacy IP businesses since the merger last year, which has resulted in an even stronger combined IP business today. We remain focused on the various strategic IP growth opportunities we previously laid out in OTT, Canada, and SEMI, that collectively represent an opportunity in the lower hundreds of millions of dollars in incremental annual revenue above our $350 million average baseline. We will provide relevant updates on these efforts throughout the years they occur. With respect to the opportunity in Canada, we continue to expect some decisions from this initial round of litigation in the Q2-Q3 timeframe, although the timing of ultimate resolution and whether additional litigation will be necessary remains uncertain. That being said, we remain confident in our ultimate success in Canada and are pleased that the pending litigation has not slowed down progress with other licensing engagements in that market. Against this backdrop of significant progress and success, upon separation we will be squarely positioned to be the largest standalone public IP licensing company and believe our leading IP platform will create further opportunities for meaningful growth and value creation for our shareholders. Moving to the product business. Total product revenue for the quarter was $123.6 million, down 13% versus last year, primarily driven by minimum guarantees taken in Q1 of last year in the consumer experience category, declines in the pay TV category due to subscriber churn consistent with industry trends, and a shift in revenue under a customer contract to the IP business due to updated reporting from the customer. In the consumer experience category, revenue was $51.3 million, down 19% year over year. The decline was primarily due to the upfront revenue recognition on a two-year minimum guarantee contract signed in Q1 of last year. Excluding minimum guarantees, our per-unit business would have been down slightly year over year. On the TiVo Stream front, our team has never been more engaged and excited as we continue to make progress on a fully embedded OS for smart TVs. Additionally, we continue to explore other opportunities to expand our footprint and increase monetization through the TiVo Stream platform. During the quarter, the number of activated TiVo Stream 4Ks grew quarter over quarter, increasing our stream footprint. On the content front, we saw significant expansion of the TiVo Plus service with the Q1 launch of IMDb TV, Amazon's free ad-supported service. We also added services such as Paramount+, as well as TV Everywhere, which includes offerings from ABC, CBS, Fox, and NBC. For the IMAX-enhanced ecosystem, we signed a multi-year agreement with Xiaomi, which includes a commitment for IMAX-enhanced Xiaomi TVs. Key to growing this ecosystem is content, During the quarter, we released an update to our encoding tools, which will enable easier and more cost-effective enhancement of film and episodic libraries for IMAX Enhanced. Importantly, during the quarter, we signed a significant agreement with a major streaming content service, which will support IMAX Enhanced delivery. We'll provide details on this later this year in connection with the launch. Moving to the connected car category, Revenue was $20 million, up 16% year-over-year, as we continued to see a return to strength in automotive sales. Fourteen new models launched with HD radio technology in North America. In addition, following the FCC's approval of all digital AM broadcasting, we've licensed nine new AM all-digital stations. For GTS Auto Stage, we continue to build out our broadcast and content infrastructure while engaging with car manufacturers. We developed five new broadcast apps for 36 stations in Europe. We put in place important aggregation agreements in Asia and Europe. We also licensed TiVo Metadata to a top five global streaming music service, which will facilitate the use of advanced features in the BTS Autostage product. The BTS Autostage platform is now live and in vehicles in 30 countries. and we are in discussions with major auto companies in Asia, the U.S., and Europe regarding global and regional launches. As auto companies have differing interests and features, we are engaging each company in roadmap discussions and expect further launches to be confirmed later this year. For DTS AutoSense, our in-cabin monitoring platform, we are on target for a global launch of our occupancy monitoring system this summer. and our driver monitoring solution continues to deploy on trucks and commercial vehicles in Asia. Lastly, reaching an important milestone in our development of car safety systems, we achieved ISO 9001 certification for the design, development, and deployment of software computer vision technologies, an important quality mark for the sell-in of DTS AutoSense solutions. Moving to our pay TV business, revenue was $52.3 million, down 16% sequentially due to subscriber churn consistent with industry trends and a shift in revenue allocated under a customer contract in favor of the IP business. We currently expect this to be the lowest pay TV revenue quarter of the year. As the pay TV industry declines, we expect subscriber declines in our legacy guides business to be partially offset by increasing RFU as this business shifts to IPTV. where we offer broader capabilities and services at higher value to our customers. Demand for the TiVo IPTV video service continued to grow during the first quarter, with deployments increasing close to 100% quarter over quarter on a small but rapidly growing base. Customer adoption of the TiVo self-install process also continued to increase in the quarter, as most operator partners that have chosen our Android TV-based IPTV solution have plans to increasingly offer the self-install option as part of their installation strategy over time. Additionally, during the quarter, Vodafone and Sharp Corporation extended agreements to license certain TiVo products. The Vodafone agreement provides them with access to a range of TiVo products, including content discovery, conversational voice, and insight data analytics. The Sharp renewal provides one of the industry's most advanced interactive program guides to viewers throughout Japan. Lastly, our perceived team signed an additional customer contract and is working through product integration and production grant plans. We've made solid progress with our development tools and are on track to enter beta with select customers over the next few months. We continue to see keen interest in our products and solutions and are excited to work with customers on their designs, integrating our solutions into their products, and broadening the addressable market for perceived. With that, I'll turn the call over to Robert to discuss our financials. Robert. Thanks, John. As previously noted, in order to provide more meaningful comparisons, in discussing both non-GAAP and cash flow-based numbers, prior periods are presented on a fully combined basis for the merged companies. Let me begin with financial results for the quarter. Xperia's first quarter revenue is $221.6 million, which is on track with our internal plan for the quarter and a strong start for the year. On an on-gap basis, our operating expense, excluding COGS, was $113 million, down 25.1 million, or 18%, year over year, due to lower personnel expense, reduced litigation costs, and lower outside spend. Non-GAAP cost of goods sold of $27.2 million was about $1 million lower than in 2020, as higher costs for hardware products, such as the Stream 4K, were more than offset by a change in TiVo's IT expense allocation methodology in connection with the merger and reduced personnel expense. Cash taxes paid in the quarter were $5.9 million. Using the total cash tax number for the first quarter, non-GAAP earnings per share was 59 cents. We ended the quarter with 104.9 million basic shares outstanding. As John mentioned, during the quarter, we bought back 1.1 million shares of common stock for a total of $25 million. Since closing the merger, we have spent $95 million to repurchase 6 million of our shares, yielding an average repurchase price of $15.87. We plan to continue repurchasing shares consistent with our balanced capital allocation strategy. Moving to the balance sheet, we finished the quarter with $237 million in cash and investments. They also paid down $13 million of debt during the quarter. Operating cash flow for the quarter was $26.7 million, up from $11.9 million a year ago on a fully combined basis. Due to $68 million from reduced spending, changes in working capital, cash tax, and interest expense, that more than offsets $53 million in lower collections, primarily from semiconductor IP. Our adjusted free cash flow for the quarter was $29.7 million. Adjusted free cash flow reflects operating cash flow adjusted for $1.8 million of property plant and equipment spend and $4.8 million of merger and separation-related costs. It's worth noting that our cash flow is not linear throughout the year, with the first quarter typically being the lowest quarter of the year. During the quarter, Xperia paid a quarterly cash dividend of five cents per common stock. Let me lastly comment on our outlook for the year. Given the strong first quarter and our pipeline of activity, we still see revenue for the year being in the range of $860 to $900 million, with Q4 being our strongest quarter. As John mentioned, this revenue range reflects the most current information we have from customers and industry analysts regarding the global semiconductor supply chain constraints. However, we will continue to monitor this as we move forward. Also, as a reminder, Given inherent uncertainty in the timing of resolution, the annual outlook does not include revenue associated with the resolution of Canadian litigation 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 first quarter due to the deferral of certain expenses to later in the year. Also, while litigation expense can be difficult to forecast, we currently expect it to be approximately $25 million for the year, significantly lower than last year. The bulk of the litigation expense is expected to occur in the second half. Additionally, certain R&D investments ramp up over the next few quarters. As a result, we expect operating expense to step up each quarter throughout the remainder of the year. Thus, given the strong start to the year, we are reaffirming our full year 2021 outlook communicated on our last earnings call. That concludes our prepared remarks. Let's now open the call to your questions. Operator?
spk01: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to not reach our equipment. Again, press star 1 to ask a question, and we'll pause for a moment to allow everyone an opportunity to signal for questions. And we'll take our first question today from Richard Shannon with Craig Holland.
spk03: Hi, guys. Thanks for taking my questions here. A few things I could ask about. I guess, John, I think you mentioned this on the last call, but maybe I'd love to get a little bit more thoughts here, either qualitatively or even quantitatively, if you're willing to. You talked about your IP baseline at $350 million a year with some potential upside that could be in the low hundreds of millions of dollars annually. You called out the OTT, Canadian pay TV, and semi-IP, if I've got that right. Can you give us a sense of both timing of when these could happen? And I know that the pay TV part is litigation-dependent. And then also maybe split up to the degree to which you have visibility and which ones could be bigger contributors to that ultimate upside in the low hundreds of millions that you mentioned. Sure. So, you know, big picture, as you know, the timing of getting certain things resolved in the IT space is always uncertain. You know, but we feel very good about the pipeline. And I'm going to ask Samir to specifically address some of your questions because I think he's living it every day. So, Samir? Certainly. I think we feel good, as John said, about the pipeline really in all three areas. We think each one individually will contribute meaningfully to that growth that we identified. We haven't really sized any of the opportunities individually beyond what we have said with respect to the Canadian litigation. As we've said, while Canada is a smaller number of subscribers than what we had in our recent Comcast resolution, In the aggregate, because we have a different pricing mechanism with some of the smaller operators, we do believe if we resolve all of the Canadian opportunities that in the aggregate it will be as large as the annual contribution that we've received from the recent Comcast resolution.
spk01: So Canada is large, but we're equally confident and excited about the other opportunities as well.
spk03: Okay, great. That's helpful. The question on on on pay TV here. Obviously understand the industry dynamics here, which you're exposed to here, but you're also talking about some improvements in your IPTV IPTV business. So we had some great activations from a small base in the first quarter. What's your what's your visibility and outlook going forward this year? And ultimately, when does that make that pay TV business kind of flatten out or even start to start to improve? I think it really depends on the pace of adoption, Richard. I think a lot of our customers put on hold certain IPTV deployment efforts when COVID hit, in part because truck rolls were not possible. And I think we're coming out of that now in a very positive way. I think the good news is we have quite a bit of business already booked and inked. that we're going to be looking to service. So I think we have broader visibility that this is going to be an attractive market for us and we should be able to generate meaningful growth. I think the question we're still grappling with is just what is going to be the exact timing of adoption, you know, not only among specific customers but across our broader customer base. But I think exactly as you point out, the IPTV element will, you know, meaningfully reduce some of the decline you're seeing and provide an important offset. And I think secondly, a key point of differentiation is that the monetization prospects for IPTV are significantly greater than what we've perhaps seen traditionally in our IPTV business. And I think that both will also as an offset and a potential growth driver looking forward. Okay, that's helpful. Maybe I'll ask one question and jump back in the queue here. Last quarter, I think you described AutoSense as having 20 designs. I didn't hear an update today. I wonder if there's any way you can quantify that in any way. And then as we think big picture about AutoSense within the context of your connected car segment here, when does this become a material number for you? We've talked about the potential ramp of more advanced safety systems accelerating as you get into the 23-24 timeframe. I think the level of activity amongst our automotive partners, both Tier 1s and OEMs, in and around this area, I think, continues. And I think we are on schedule to see the first release from a customer leveraging our solution here in the back half of this year. So I think as we maybe get more information about the exact timing of when we may see more models and more customers come to market, I think we'll be in a better position to give you visibility. But I think without a doubt, This trend will accelerate over the next five to seven years. We're in the very early innings now, and it's going to continue to grow, just because there's safety standards that are impacting how people are thinking about this. There's natural, I think, broader desires within the auto industry to make the driving experience safer. And I think people have realized that this technology is really ready for prime time in many cases to materially advance the in-cabin experience. Just to follow up on that, John, you seem to be implying that these 20 designs or whatever the number is today are mostly kind of ramping in a 23-24 timeframe rather than sounds like one or maybe slightly more than one ramping in the second half of the year. Is that a fair guess? understanding of the timeframe for deployment? I wouldn't necessarily paint it in that exact fashion. I think you'll start to see multiple models in the course of this year. And then I think the interesting question is, how does that acceleration begin to hit 22? But certainly as you get out into 23 and beyond, you'll see more and greater diversity amongst those offering our systems. Okay. That's helpful perspective. I'll jump out of line. Thanks, John.
spk01: Our next question will come from Hamed Khorasan with BWS Financial.
spk03: Hi. Thank you for taking the question. This is actually for Hamed. Just one quick question. You know, the big news, the big topic everyone is talking about is supply constraints on chips. And I wondered if you could provide a color on how that is impacting you, but more importantly, how it's impacting your customers, especially when you're talking about connected auto. Thank you. Sure. So, you know, I would say feedback from our customer base, which keep in mind, we're doing business with, you know, all automotive brands sold in the United States and extensively around the world. is that it is a mixed bag. I think, you know, without a doubt, you know, it will impact what perhaps would have been the size of the global automotive recovery. But I think, you know, so far we think while it will trim, you know, the overall growth number by a few percentage points, we have yet to see, at least from people we are dealing more business with as opposed to less, an indication that it's going to materially impact our business beyond what we've already factored in and thought about in our respective guidance range. But I think, you know, this is an evolving thing, and we all need to, you know, to stay close to it.
spk01: Okay. Thank you. And as a reminder, press star 1 if you have a question. We'll hear from Matthew Galinko with Sonoti.
spk02: Hey, good afternoon. In my first question, I think you mentioned integration of IMAX enhancement to a streaming service. Is there any additional detail or color you could provide around that today? Maybe region or reach of the streaming service? Just, you know, are we waiting until the back half to hear something?
spk03: I think I can share that initially its initial relevance will be in North America, but not much more I can share as it relates to it just because of customer confidentiality issues. But I do believe, as we've said, that it's a significant development in the further development advancement of the IMAX enhanced ecosystem. So stay tuned and we'll certainly have more to say about it as it gets launched.
spk02: All right, thanks. And then I guess similar question, you referenced the customer win, second customer win, I think, in Perceive. Given where you are building out tool sets, maybe how long, you know, at least from the work that you need to do, do you think it'll take to get a product to the shelf? You know, obviously there's, I guess, stuff beyond your control, but, you know, what's the time to market there? And, you know, I guess what's the, you know, I guess what's the motivation for a customer moving today on something versus, you know, waiting a few months or until maybe the next iteration of their product? Thanks.
spk03: I think From a customer's standpoint, like anything, one's looking to differentiate their products in a competitive marketplace. I think our tools availability has been a constraint. We've talked about that in terms of people's independent ability to easily incorporate our platform. into their products. So we're addressing that. And as those tools become available later this year, I think that will certainly open up pipeline opportunities for customers to develop and ship product in the course of 22 and certainly, you know, ever more so as you get into 23. From the folks we've already been working with, you know, quite extensively, you know, I would expect that you'll see product in the marketplace by early next year, if not before. We expect to see some shipments in the course of this year. But I think one of the other elements of this, as you point out, is we're now a smaller piece and a bigger puzzle given all the components people are looking to need to incorporate to build some of these products. So I think that is clearly going to be a factor that is within our control. We'll have to see where it goes. But in general, we feel great. about pipeline expansion. We feel very, very good about the technical development, pretty much on schedule with what we have laid out. And we think the market opportunity to proceed remains incredibly large.
spk02: Got it. Thank you. And the last one for me is on your slide deck, it looks like your DevoStream roadmap went from a three-step to a two-step. So I'm curious what – you know, kind of what got cut out from that process? What have you sort of learned along the way that, you know, changed your, you know, perception of strategy?
spk03: Sure. So originally, you know, as we approached the combination, we had done a lot of planning around kind of a three-phase approach, starting with the Stream 4K product, which is a dongle that attaches to TVs, moving into an embedded application where we would be, let's say, the preferred user interface choice on a broader platform built originally around the notion that it would live on top of Android TVs. And then thirdly, going all the way into a much deeper embedded solution, embedded OS, where we're a bigger provider, where we're really the sole and primary interface for the broader content search and discovery and engagement. What has changed is last fall, Google came out and said that they intend to go beyond their core OS-level offering and really get into the UX business. And in so doing, it eclipses one's ability to, I think, reasonably be an alternative that might otherwise live on their lower-level platform. And so we've really jumped from phase one, which is stream 4K, directly into working aggressively on getting our solutions embedded in TVs in a deeper level. So that's essentially what's happened. That work is ongoing and continues very well. Continue to have partner discussions that I think are quite engaged around it, and we think we have a pretty unique solution. that drives higher engagement and therefore greater monetization for everybody involved in the ecosystem. And so, you know, at the end of the day, I think we feel very good about the ongoing efforts that get us into phase three. Our efforts are really designed not only to accomplish that, but ideally to try to move that timeframe in as much as one can so that, you know, of devices and in turn drive, you know, engagement and monetization around that.
spk02: Great. Thank you.
spk01: Our final question will be a follow-up from Richard Shannon with .
spk03: Hi, guys. Thanks for taking my follow-up. John, on your last call, you talked about your product licensing business, expecting it to be roughly flat this year. You've maintained your guidance for the year. So are your expectations that can be the case? And then does that help you? And would it help us think about that product business having, you know, overall flattened out and maybe, you know, worse being flat next year and possibly growing? Is that a viewpoint that you'd support at this point? I think we expect growth in our product and our IP businesses if we look out beyond 21, certainly in 22. I think the question that is the one that we'll get a better handle on as we go in towards the end of the year is just how much growth will we be able to deliver in these businesses based on the various things we're working on and their state of play. In short, we are tracking our plans, you know, for this year, I think, very well. Execution, both, you know, in a direct economic way as well as in a strategic way, remains very, very strong. And I think, you know, I think we'll have a very good year. And as we look forward into 2022, I think it'll be an interesting discussion when that time comes, just, you know, just how much in our outlook has changed with respect to relative rates of growth as you go into 2022. You know, Richard, I think it's worth maybe noting some of the growth rates that John mentioned in his comments. As we look out, you know, over the next four years, we're expecting CAGRs in the mid-single to digits to low teens for the product business, excluding any growth from perceived, and in the mid to high single digits for the IP business. Okay, that is helpful. Last comment or last question for me. Just on the IP spin out last last call, you talked about this being a first at 22. As we get one quarter close to that, just want to confirm that still you're expected time frame. And what do you expect to hear more definitive plans about that? Is this something in the next quarter? Or is that more towards the end of the year? How should we? What should we expect there? Yes, to first half the next year, and you'll hear more as you get deeper into fall. Let's get close. Okay, great. That's all from me, guys. Thank you.
spk01: That will conclude today's question and answer session. I'm going to turn the conference over to John Kirshner for any additional closing remarks.
spk03: Thanks, Operator, and thanks, everyone, for joining today's call. I want to thank our employees for their dedication towards executing on our strategy and operating plans. I look forward to providing updates over the coming months and hope to see many of you at the upcoming technology and media conferences we're presenting at. including Needham, Baird, and J.P. Morgan. Operator, this concludes today's call. Thank you.
spk01: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
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