Xperi Holding Corporation

Please stand by, we're about to begin. Good day, everyone. Thank you for standing by. Welcome to the Xperia fourth quarter full year 2021 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, we'll call the audience for questions. To ask a question at that time, please use the oppressive star on your telephone keypad. If you're using a speakerphone, you'll need to make sure you're having a new person in the chat to allow your signal to reach your equipment. Good afternoon, everyone. Thanks for joining us as we record our fourth quarter and full year 2021 financial results. With me on the call today are John Kirchner, CEO, and Robert Erickson, CFO.

In addition to today's earnings release, there is also an earnings presentation which you can access along with the webcast or on our website. 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 filing, 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 exclude 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, expense debt refinancing costs, and related tax effects. We've provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings relief and on the investor relations section of our 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 Expery CEO, John Kirchner.

Thanks, Sherry, and thanks, everyone, for joining us. To start, I'd like to thank the entire Xperi team for continuing to successfully deliver against the key strategic objectives we set following our merger with TiVo nearly two years ago. We've accomplished a lot since we closed the merger amidst what turned out to be just the early innings of a global pandemic. I'm proud of how our team has been navigating the shifting pandemic challenges to position the company for success. Importantly, this has included creating two-scale businesses poised to stand alone and deliver strong returns for our shareholders. For the IP licensing business, we've strengthened the core cash flow engine and have begun to build a much larger and more diversified IP platform, one with enhanced visibility and sustainability around its revenue streams. This past year, we continued to bolster the foundation of that business, successfully completing license agreements with leading entertainment companies throughout the world, resulting in our announcement today of another step up in our average annual baseline revenue to $375 million. Additionally, we continue to make progress towards reestablishing our semi-IP business as the industry moves to adopt hybrid bonding, as is evidenced by the Micron announcement today. We also announced today that Samir Armali, who has been running the IP business, will depart Xperia on March 1st. We came to this decision mutually with Samir as we evaluated our collective needs for a CEO candidate that can lead the IP business as a publicly traded company over the long term. We'd like to thank Samir for his contributions, as he has made and seen terrific progress under his leadership. He and his team have strengthened the foundation for the future of the IP business, which is sure to thrive as a standalone company. We've begun the search for an IP CEO and we're confident we'll find a leader who can build on the momentum generated over the last 18 months. In the meantime, under my oversight, the strong IP executive team will continue to drive the business forward during this transition. On the product side, while the pandemic and the associated supply chain disruptions continue to present some unique challenges, we are excited to see major steps taken in our business transformation and a return to growth on the horizon. We have diligently pursued restructuring the business aligned with our strategic roadmap and to position the business for profitable growth as it emerges as an independent company. Another core tenant in our merger was bringing together a tremendous base of technology to help accelerate our innovation engine and broaden our IP licensing opportunities. In the IP business, we've taken important steps to expand the media R&D function to support the long-term needs of the business. On the product side, We are pleased with several exciting new innovations in the consumer electronics, connected car, and pay TV space. Here are a few examples. We're on track to deliver a unique streaming service offering with our TiVo Stream OS on TVs within the next two years, which will accelerate user engagement-based monetization revenue. At CES, we demonstrated our mood-based recommendation concept on a single operating platform. which uses a motion detection to drive music and other media recommendations in vehicles, creating more immersive and personalized next-generation entertainment features, leveraging our in-cabin imaging and entertainment technologies. In addition, we launched our single-camera driver and occupancy monitoring solution, which keeps drivers, passengers, children, and pets safe with lower bomb costs for car manufacturers. We are one of the first companies to demonstrate this technology. All this progress brings us closer to standing up two separate businesses, better positioned and with significant scale. Based on our separation progress and current business outlook, our intent is to separate the IP and product businesses this fall. As we approach the separation, we'll share more specifics about the respective businesses, including key management, strategic and capital allocation priorities, financial profiles, and transaction structure. Additionally, we continue to view the forthcoming separation as a transformational event for both businesses, reducing complexity for investors and enabling two pure play platforms better positioned to grow and compete over the long term. One final but important update before we get into the business results. Earlier this month, we launched our first ESG annual report. ESG touches many aspects of our business. from the relationships we build to the vitality of our workforce and to the way we respond to challenges. You can find this report on our website. Environmental and social issues are not simple to solve, and through thoughtful, candid conversations with senior leaders and employees across our global workforce, we explored views on diversity, inclusion, equity, and our environmental footprint and completed a robust analysis to identify and prioritize the ESG issues material to our company. Exciting times are ahead as we continue our ESG journey. With that, let us now cover the progress of the IP business and its goals for 2022. For those not following the webcast, we are on slide four of the investor deck. IP revenue in Q4 was $89.7 million. As a reminder, in Q4 of 2020, we entered into a long-term license with Comcast and received a large payment for prior periods, which creates some challenging year-over-year comparisons. With the Comcast payments for prior periods excluded, IP revenue was up almost 20% year-over-year. For the full year, IP revenue came in at $391.2 million, significantly ahead of our previously announced $350 million average annual baseline. As is typical, our full-year revenue reflects the execution of some agreements in 2021 that included catch-up or upfront license freeze that will not carry over in 2022. As we begin 2022, we're very excited about the position of our IP business, which has now generated more than $9 billion over the past two decades, illustrating the significant scale and longevity of that business. More than $1 billion of that revenue has been generated in just the last two years, highlighting that we are as relevant today as ever. Our strong execution in 2021 has enabled another step up in our average annual baseline revenue for 2022, moving up from $350 million to $375 million, driven by new and improved agreements with leading entertainment companies around the world. As is typical with IP businesses, each year we will have a few key agreements that are up for renewal, and the timing of those renewals may have some impact on our quarterly revenue trends. However, we're confident that we're well positioned to successfully complete those renewals within 22, and therefore they are included in the go-forward average annual baseline. Excluded from this baseline are any significant agreements that we expect to conclude with new customers, as well as any revenue from agreements that reflect catch-up or upfront fees or other revenue that isn't expected to recur under accounting rules, such as the upfront revenue recognized from the recent agreement with Micron. Turning now to some of our previously identified growth areas on slide five. In semi-IP, the multi-year Micron license announced today is another significant milestone. This most recent agreement is further validation of the relevance and value of our foundational portfolio and expertise in hybrid bonding. Together with our previously announced agreements with other leading memory providers, we now have approximately 90% of the DRAM market and 55% of the NAND flash market under license. While the specific terms of the agreement are confidential, it is similar to the most recent deals we've concluded in this space, adjusting for relevant market share differences. With Micron now under license, we look forward to the opportunity to license the remaining memory players, as well as new opportunities in logic, where we're starting to see an increase in the announcements around the adoption and incorporation of hybrid bonding. Turning to Canada, we continue to wait for a decision in our initial round of litigation. This decision has taken longer than we expected, although we do not believe there's anything that can or should be read into that longer timeframe. We remain very confident in the relevance of our IP portfolio and our ability to ultimately achieve a market-based resolution in Canada, although predicting timing is always difficult. As a reminder, we also filed second rounds of litigation against Videotron and Bell Canada last year. Finally, in OTT, we continue to engage with a pipeline of opportunities that represents our largest long-term growth driver. Last year, we announced a number of key agreements in this category – we expect continued progress during 2022. moving to slide six lastly we continue to actively prepare for separation today in another important step in that process i'm pleased to announce our new brand for the ip licensing business adia ideas are at the heart of an ip business and this notion is embedded in our new name which also means to license in greek As such, we believe Adia is the right brand for our IP business moving forward. We will be doing higher-profile marketing around the brand as we get closer to separation, but in the interim, you can learn more about Adia and our IP business at our new website, www.adeia.com. Moving to the product business on slide 7. Beginning this quarter, we've chosen to recast our product revenue categories to better align with how we are now managing the business internally and to provide investors with greater visibility into what is driving our business as we approach separation. You can find the previous and revised category revenue history on our website under the Interactive Analyst Center. This slide shows the major shifts. Total product revenue in Q4 was $124.7 million. down 7% from $133.8 million a year ago. Revenue was impacted by continued supply chain disruption across our business, as well as some end-market specific dynamics, which I'll cover in more detail shortly. Turning to slide eight in our first product category, Pay TV. Pay TV now includes discovery, video metadata, TiVo consumer linear TV subscribers, and hardware. Using this new breakdown, Q4 revenue was $66.1 million, down 6% year over year. Our long-term focus in this market is driving adoption of our higher-value IPTV solutions, which are positioned to offset declines in our traditional guides business. While the consumer hardware and subscription business is in decline, we believe growth in IPTV should mostly offset declines within the pay TV category. We expect this category to be flat to slightly down in 2022, driven by declines in consumer subs and hardware discovery in our traditional guides business, mostly offset by growth in IPTV. During the quarter, we completed the integration of MobiTV, now referred to as TiVo's managed IPTV service. Notably, we're pleased with the progress we've made around IPTV as we continue to add new operators with our expanded product offerings. Our total IPTV subscribers grew organically more than five times year over year and double digits every quarter in 2021. We also won several new IPTV customers, including BreezeLine, formerly Atlantic Broadband, and helped customers such as Cincinnati Bell launch and begin scaling IPTV. Turning to slide nine. Our second category is consumer electronics, which includes DTS audio and imaging solutions in home and mobile and our perceived business. Using this new breakdown, Q4 revenue was $24.5 million, down 13% year over year, driven by declines in our mobile business, which we expect to return to growth this year. Additionally, in Q4 2020, we signed about $3 million of multi-year minimum guarantee contracts that positively impacted that quarter due to revenue recognition rules. During the quarter, we launched IMAX Enhanced on LG Soundbars and Best LTVs. We also launched a streaming partnership with Disney Plus with 13 Marvel blockbusters, and Sony Pictures expanded their offerings to more than 160 unique IMAX Enhanced titles and a total of 798 SKUs across multiple languages. In addition, PlayFi was named a CES 2022 Innovation Awards honoree for two products, DTS PlayFi home theater in the smart home category, and DTS PlayFi apps for Android, Android TV, and iOS in the software and mobile app category. Our perceived subsidiary continued to make good progress on multiple fronts. Our set of software tools is in customer beta, and we are supporting multiple design and prototyping efforts with customers to bring perceived-enabled products to market. Looking forward, we expect the consumer electronics category to grow this year through supply chain normalization and game consoles and growth in our PlayFi wireless and mobile business. Longer term, we expect additional growth to come from expansion of our IMAX-enhanced ecosystem and perceive as we see the first products utilizing our technology come to market. Moving to slide 10. Our third category is connected car, which now includes music metadata in addition to HD radio, auto stage, and auto sense. Using this new breakdown, Q4 revenue was $22.4 million, down 10% year over year. Declines were driven by supply chain constraints, which we continue to monitor closely and are in line with IHS forecasts. We are working with our partners to try to mitigate shortages that could impact key components with our technology. We anticipate an improving situation in the back half of 2022 as the supply chain stabilizes. Given the complexity around forecasting this category with supply chain uncertainties, at this point we expect the category to be roughly flat in 2022. A few important highlights from the quarter. Toyota will now be offering HD radio across its entire next generation infotainment system. And going forward, nearly all new Toyota cars in the U.S. will have an HD radio as a standard feature. In addition, 16 car companies have been testing AutoStage in Europe, North America, and Asia. Today, multiple partners, including two major OEMs, are in advanced stages of testing our solution. With respect to our AutoSense driver monitoring solution, our team has reached an important industry milestone by achieving A-SPICE certification. Also, BMW has recently incorporated AutoSense occupancy monitoring in an additional car model, and we continue to see progress in our customer pipeline for the technology. Moving to slide 11. On our fourth and final new category in the product business is media platform, which captures the TiVo Stream OS, the TiVo Stream 4K, monetization, and TV viewership data. Revenue in Q4 was $11.7 million, up 15% versus last year, driven by sales of the TiVo Stream 4K and increases in advertising revenue. In 2022, we expect double-digit growth in this category, mostly driven by expansion in our advertising-based monetization revenue. This is our fastest-growing category, and we are focused on partnerships with TV OEMs, chipset partners, and content providers to bring the first TVs powered by TiVo Stream OS in 2023 or 2024 We expanded our partnerships to include YouTube TV and YouTube support for the TiVo Stream OS, integrating YouTube TV into the TiVo Stream 4K guide. We continue to integrate content onto the platform and added Discovery+, PBS, and Send to Life to TiVo Stream 4K and TiVo+. TiVo Stream 4K now covers all major streaming services. On the monetization front, we're focused on expanding our capabilities within our ad technology stack And during the quarter, we released our video price-based auction solution for our CTV ad inventory, resulting in increasing fill rates and CPMs. Lastly, TiVo's TV viewership data is captured in this category and was adopted by additional customers in the TV and digital advertising industry. The Trade Desk, a digital media buying platform built for the open Internet, is licensing TiVo's data to build audiences across the widest range of media channels to optimize the impact of advertising campaigns for its clients. With that, I'll turn the call over to Robert to discuss our financials. Robert?