Xperi Inc.

Good day, everyone. Thank you for standing by. Welcome to the Xperia fourth quarter and full year 2022 earnings conference call. During today's presentation, all participants 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 Iberg, Xperia Head of Investor Relations. Mike, please go ahead.

Good afternoon and thank you for joining us as Xperia reports its fourth quarter and full year 2022 financial results. With me on today's call are John Kirchner, Chief Executive Officer, and Robert Anderson, 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.xperia.com. Before we begin, I'd like to provide a few reminders. First, I would like to note that our full year 2022 financial results include results presented on a carve-out basis for the periods prior to Xperia separation from Xperia Holding Corporation on October 1st, 2022. Xperia Holding Corporation is now known as Audia. 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 discussed today, please refer to the risk factors and MD&A sections of our SEC filings including our registration statement on Form 10. 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 their most directly comparable GAAP measures, which can be found in the investor relations section of 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 Xperia CEO John Kirchner.

Thank you, Mike, and thank you, everyone, for joining us on our fourth quarter and full year 2022 earnings call. We're excited to announce strong financial results for our first quarter as an independent company. Revenue in the quarter was $136 million. an increase of 9% from the prior year. For the full year of 2022, total revenue was $502 million, representing a 3% increase from the prior year. Robert will provide a more detailed review of our financial performance in just a moment. We are making material progress in our key growth areas, with incremental traction in media platform, IPTV, and connected car. Recent announcements, such as AM Logic integrating our TV OS and related technologies into their smart TV chipsets, and our latest design win for DTS AutoStage, which has been expanded to include TiVo's video platform in the connected car infotainment experience, are prime examples of our increased 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 to improve 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 other solutions are in markets that are more mature and relatively stable over the longer-term horizon. We refer to these areas as growth and core, respectively. Our strategy is focused on driving revenue growth in four key areas, connected TV advertising, IPTV, in-vehicle infotainment, and in-cabin monitoring. With decades of experience, we have brought to market independent media platforms that are differentiated, unbiased, and tailored to provide a personalized consumer experience. We believe these attributes will allow us to capture share and drive revenue growth through a combination of license fees and monetization. The connected TV advertising market is expected to more than double over the next five years as advertisers shift their marketing investments toward the growing trend in video streaming. The IPTV market is also expected to more than double over the next five years as broadband into the home continues to increase. More than 80% of household broadband consumption is for video, a trend that is expected to continue. With over 70% of new vehicles projected to be capable of broadband connectivity by 2025, the in-vehicle infotainment market is expected to rapidly expand as more vehicles connect to the internet and a wider variety of content is consumed. Lastly, the in-vehicle driver and occupant monitoring markets are expanding quickly as the industry and regulators aim to make the vehicle a safer place. Diving a little deeper into each of these markets, our strategy in connected TV advertising is to work with smart TV OEMs to bring TVs to market incorporating our TiVo OS. With our platform as the conduit for consuming content, we'll be able to capture a portion of the ad revenue generated by consumers as they view ad-supported content over the life of the TV. As you may have heard, We impressed at CES with live demos of the first Festel TVs powered by TiVo. It was exciting to see these smart TVs, which are expected to begin shipping later this year, running the TiVo platform in a production environment at full scale. The TV OS has several key advantages for TV OEMs. We offer a truly independent media platform. with unbiased search and discovery that is not influenced by a particular content provider or advertiser. Our unique business model enables smart TV OEMs to brand the experience, retain customer ownership, and participate in usage-based economics over the life of the product. These aren't TiVo TVs. They are OEM-branded TVs powered by TiVo. As smart TVs with TV OS begin to shift, The path to monetization is relatively straightforward, and by sharing a portion of the ad revenue with the TV manufacturers, we believe we can build stronger OEM relationships to drive higher volumes over time. We expect to have a footprint of at least 7 million TVs powered by TiVo within three years, which would yield an annualized revenue run rate of approximately $140 million, while delivering meaningful margin expansion over time. Our IPTV offering sits within our pay TV business and has seen rapid success. We offer a best-in-class cloud-based entertainment platform for video and broadband service providers. Our content agnostic approach, where we bring all entertainment together to find, watch, and enjoy, provides consumers with a personalized engagement experience that is superior to alternative offerings. We continue to expand our IPTV subscriber base through new service providers, across the Americas and ended the year with 1.2 million subscriber households. IPTV growth was strong in the fourth quarter, offsetting modest declines in the larger, more mature pay TV markets, resulting in total pay TV revenue being modestly higher year over year. Over the next three years, we expect IPTV revenue to grow from approximately $40 million to over $100 million. Within our connected car business, we have two significant growth opportunities, namely in-vehicle infotainment and in-cabin monitoring. We address these opportunities with our DTS AutoStage infotainment and DTS AutoSense solutions. The automotive industry is making extensive investments in connected car as internet connectivity is turning the cabin into a personal entertainment space. We have longstanding relationships with automotive manufacturers who have adopted our HD radio solution, deployed in over 95 million vehicles, and now we are leveraging our media platform solutions, incorporating metadata, our legendary search and discovery, and TiVo's video capabilities to provide a vastly improved in-cabin entertainment experience. As anyone familiar with automotive, excuse me, as anyone familiar with the automotive market understands, These contracts take a long time to win and are long term in nature. As we look at our committed business and connected car at year end, we have over $300 million of revenue to be recognized over the next several years. And to put that in perspective, that's more than $300 million on a business that posted $84 million in revenue last year. Importantly, our pipeline of new automotive opportunities continues to grow. During the quarter, we were awarded our first design win incorporating video into our AutoStage in-car infotainment platform. This offering, which goes into production later this year, will bring TiVo's video platform into the center console. Also in connected car, we continue to be awarded design wins for AutoSense, our in-car driver and occupant monitoring systems, most recently winning a major program with a large Asian automotive OEM. Together, these wins continue to set the stage for meaningful long-term connected car revenue growth. We expect these four key growth areas to represent over 40% of our total revenue in three years, a significant increase from approximately 20% today. Our existing monetization business, which includes licensing our viewership data, advertising on our program guides, and licensing the recently acquired View Technologies generates about $40 million of revenue annually. By launching smart TVs powered by TiVo and participating in the monetization of ad-supported content, we expect this business to more than quadruple to over $190 million annually in a three-year timeframe. Next, having exceeded 1.2 million paid subscriber households, Our TiVo IPTV platform is currently generating approximately $40 million of revenue annually, primarily from recurring subscriber fees. Over the next three years, we expect annual revenue to more than double to over $100 million due to subscriber growth and increased revenue per household. Our AutoStage and AutoSense platforms continue to win new contracts for future model years. and we expect accelerating revenue growth as these contracts go into production. In addition, we plan to incorporate ad monetization into the AutoStage platform, which will create another opportunity for revenue growth downstream. As previously discussed, this is a long-term play where we expect revenue to grow from $4 million to approximately $40 million annually in three years, with more substantial revenue coming in the five- to seven-year range. Altogether, we expect our key growth areas of connected car, monetization, and IPTV to grow from approximately $84 million to over $330 million in three years, contributing $246 million of high margin net new revenue. Lastly, turning to perceive, we expect first revenue to occur in 2023, though due to some uncertainty around timing and amount, there is no perceived revenue included in our annual guidance. We continue to believe perceived represents a significant option for value creation as machine learning use cases move to the edge. For example, there's increasing awareness in the industry of the power of large machine learning models, such as large language models, that are delivering impressive results. We continue to provide tools and software applications for prospective customers as they evaluate and scope features based on the implementation of large networks on their edge devices. Notably, at CES we demonstrated a large language model running on our platform, sparking significant customer interest. We believe that our approach is distinctive and represents a clear value proposition of running large data center class networks at the edge at lower power than anyone in the industry. Thus, we intend to continue to invest prudently as we evaluate how best to generate the highest return on our investment and navigate what we believe will be a significant move to the edge over the longer run. With that, I'll turn the call over to Robert to discuss our financials. Robert?

Thanks, John. As John mentioned earlier, our fourth quarter earnings represent our first quarter as a fully independent company. And before I walk through the financials, I'd like to mention that all comparisons are against the same quarter in the prior year. Total revenue for the fourth quarter was $136 million, an increase of 9%. This increase was primarily driven by our media platform and consumer electronics businesses. Media platform, although only 14% of total revenue, was up 57%, driven primarily by monetization and the viewed acquisition, which occurred last summer. Consumer electronics, at 20% of total revenue, was up 11%, driven by growth in mobile, as we extend our audio and video enhancement technologies into more mobile and PC devices, as well as from incremental license fees from a large mobile customer. Similar to prior quarters, Pay TV represented approximately half of our total revenue and was essentially flat as strong growth in IPTV offset modest declines in our core Pay TV product lines, such as classic guides and consumer DVR hardware. Connected Car represented 17% of total revenue and was up 4% due primarily to progress we've made in AutoStage and AutoSense in addition to automotive head unit production that includes our audio solutions. For the full year of 2022, consumer electronics increased 29%, primarily driven by incremental licensees from a large mobile customer and by stronger mobile and PC penetration. Media platform increased 13% due to the viewed acquisition and growth in monetization. ATV declined 5% as declines in the more mature classic guides business were mostly offset by strong growth in IPTV. Connected car declined 5%, primarily due to lower automobile production volumes that impacted HD radio revenue. Our non-GAAP gross margin for the quarter was $99 million, or 73%. Non-GAAP operating expense for the quarter was $104 million, and adjusted EBITDA was $3.6 million. Non-GAAP earnings per share was $0.08, favorably impacted by a strong expense management and by a year-end tax trip that created an income tax benefit in the quarter. Moving to the balance sheet, the company ended the quarter with $160 million of cash and cash equivalents. As part of our year-end review of goodwill and fixed assets, we booked a non-cash charge of $251 million for goodwill impairment and an additional $8 million related to closing a redundant office building as we seek to optimize our facility's footprint. Looking forward, we expect to incur additional real estate-related charges as part of our business optimization goals. Our cash flow from operations in the quarter was a negative $17 million due to $5 million of one-time expenses associated with the business separation and changes in working capital mostly driven by an increase in unbilled receivables of approximately $11 million. In terms of our 2023 financial outlook, we are providing the following ranges in commentary. We expect full-year revenue to be in the range of $510,540 million, in line with the gross estimate we provided at our investor day in September. We expect this growth to come primarily from our media platform and connected car businesses. In terms of quarterly cadence, we expect fiscal 23 revenue to follow a similar seasonal pattern to fiscal 22, with each quarter showing a comparable percentage increase from the prior year quarter. Full-year adjusted EBITDA margin is expected to be in the range of 6% to 10%. This range accounts for incremental investments in AutoStage, AutoSense, and TVOS due to accelerated business momentum and recent design wins, set in the midpoint slightly lower than the estimate we provided in September. We estimate cash taxes and non-GAAP tax for the year to be in the range of $20 to $25 million. Note that our tax expense is affected by two recently implemented U.S. tax law changes. First, we are required to capitalize certain R&D costs over five or more years, which has the impact of increasing our U.S. taxable income. It is unclear whether this requirement will be repealed during the course of 2023. Second, we can no longer deduct withholding taxes incurred in various countries with which the U.S. does not have a tax treaty. At the middle of our revenue and adjusted EBITDA guidance ranges, we expect operating cash flow to be approximately break-even for the year. Basic share count is 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 to your questions. Operator.

At this time, I would like to remind everyone in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Nick Zangler with Stevens. Your line is open.

Yeah. Hey, guys. Congrats on All the great news this quarter. I guess I'll start with this connected car win. Just, you know, can you frame up, I guess, what the TiVo OS looks like on a connected car? Does it look similar to the TiVo OS that's on a TV, just kind of reformatted to the car, or are there significant differences there? And then just as well, maybe like, you know, just does the OEM get to keep the branding like you do on the TV side as well? if you'll share the economics, software economics there, just like you do with the TVs, and then maybe just any early thoughts on the ARPU potential that you see there.

Sure. I think it's early stages. So, Nick, I think what I'm going to be able to respond to here is to kind of give you a bigger picture. So we do expect the business opportunity to create opportunities nearer term license fees, if you will, on a subscribership basis as well as monetization over the longer run. Secondly, I think from a design perspective, obviously the automaker has a great deal of input on how they would like the video services to appear in the vehicle. So I would say that it will not be identical to what you see in the living room. However, at the core, what's behind it, you know, TiVo's legendary search and recommendation, metadata usage, et cetera, et cetera, and all the things that really create a unique and personalized engagement experience, all those elements are all there. And I think uniquely deployed, given that the car is not the living room, despite the fact I think you're going to see this increasing amount of content consumed in vehicles, particularly as people look at electric vehicles, where you have some slightly different use cases as you think about longer stays while cars are being charged. you know, you have front seat entertainment all of a sudden becoming more relevant in that context and you also, you know, have the longer run, you know, kind of semi-autonomous or autonomous vehicle, you know, driving that will lead to an increase in entertainment consumption. So, you know, in short, early days, super excited about the win. I think it shows the power of the platform, you know, as we think about what we're doing, you know, in not only the living room but ultimately in car and on mobile platforms bringing together that entertainment experience that we've been working towards for a number of years. And I think we'll have a lot more to say about the economics of this long-term as we begin to do more business in the space where we can put a little more shape around it in a way that doesn't strategically compromise ongoing discussions with a number of folks.

Right. I know. That's fair. Not sure if you're aware, but also on the Roku call the other day, Tebow got a shout-out And so I got to ask, just, you know, given all the dynamics that are happening within the TV OEM industry, you know, Roku now is building out their own branded TV. It effectively will compete with their TV OEM partners as it currently stands. I'm curious what impact, you know, maybe this has had on your engagement with potential TV OEM partners and their interest in utilizing TiVo. You're powered by TiVo option, which seems to be a little bit more TV OEM friendly.

First and foremost, I think that announcement underscores the need for an independent media platform. I think we've had quite robust engagement prior to that announcement, but I would say that announcement further has created some interest. you know, as people look to engage, you know, around independent platforms. I think, you know, our model, our business model, sharing revenue with TV partners long-term, as well as our best-in-class interface and search and rec and whatnot really helps drive where, you know, where there's interest in what we're doing. I think the other question that was brought up, I think I know in context or in and around that, was a question around scale. And I think the fascinating thing on the scale question is that You know, we already power more than 30 million households, you know, today with video based services. So we are uniquely positioned, you know, as being a company that already has a very large video service business, you know, doing business all over the world, you know, over decades to be able to serve up an independent media platform. And I think that, you know, therein lies part of the key is that we're seen as a credible partner. by TV OEMs, and I think people are recognizing the independence of the model and a way for us all to win where, you know, they get to own the brand, they get to own the customer. You know, we obviously share, you know, share data, and they get to participate in the long tail of the economics.

Right. Okay. And then just final one for me on the fundamentals here in the quarter. You know, It was a broad-based beat on the expense side just relative to the expectations that you guys kind of laid out on the last call, and it drove significant adjusted EBITDA upside relative to your prior expectations. So just curious, it looks like it's broad-based, but relative to what you guys had alluded to at first, what type of expense mitigation efforts took place in the quarter, and is there any push-out into – Next year, potentially, just thoughts on the spread, I guess, and where we expected expenses to roll in and where they actually did. Thanks.

I would say, generally speaking, our expense management in the quarter, even as I noted on the call, was very good. And we are making good progress toward optimizing the cost structure of the company. And I would expect that to continue into 2023. But I think we made good progress even during the quarter. So I think our numbers supported that, which is actually a positive adjusted EBITDA. And we expect expense management and optimization efforts to continue as we go forward.

Appreciate it, guys. Thanks and good luck. Thanks, Nick.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from Hamed Korsand with BWS Financial. Your line is open.

Hi. Could you just expand on the mobile customer that you generate revenue from? Is this related to the imaging revenue that you talked about a couple quarters ago? Is this recurring in nature at all? What's the possibility of adding more mobile customers?

The mobile customer that we referred to on the call is, and this occurred early during 2022, is settling a dispute with that customer and also entering into a longer-term arrangement with that customer. So it was, let's say, sort of the best of both worlds. And we still see from our products a considerable opportunity for us in mobile through our CE products. So a good growth outlook there in the future.

Okay. And then about the ad monetization, how are you building the inventory available and what kind of response are you getting from advertisers for your platform?

I think people are very interested in, you know, the insights we have into, you know, the audiences we currently have across our various TV products that are in household and they're certainly interested in what we're going to be able to bring to table in conjunction with that as it relates to connected TV. You know, and so, you know, we already, you know, one of the other questions we sometimes get is you know, as you're building towards a monetization model, what about the monetization platform and engine that has to plug into these TVs, even if you got the tvOS, you know, embedded? And the answer is we already have that monetization platform. We have teams working on it today that work with advertisers directly. And we have infrastructure plugged into, you know, all your major demand side and supply side platforms. So, you know, in short, we're ready to continue to to scale that as we get more footprint. And CTV has, of course, been our primary focus because it's the place where we can have the biggest impact on the size and scope of the footprint to really turn on the monetization model over time.

And the last question I had was related to connected car. You've been talking about a lot more models lately for autostage. Where would you stand as far as generating revenue from nearly all of those models that you talked about in your press release, those 100 models? Is this a 23 event or a 24 event?

I think you're going to see certainly some vehicles come online in 23, more in 24, and even more again in 25. These deals commonly involve engineering that has front-end time, but but then they begin to roll usually on some models and then get expanded into a larger base of models under a particular broader manufacturer umbrella. It's building, and that's one of the things. We've highlighted and we've recognized we are doing fantastically well at winning business. One of the things the world can't fully see yet is how that business will ramp over the next three, five, seven years. But I think one of the steps we took today was to try to provide more insight into that, indicating that our committed business pipeline over the next couple of years is in excess of 300-plus million. And I think that begins to give you a feel that we're very confident and have won quite a bit of business in connection with these programs as we move through the next couple of years.

What percentage of those models is displacement of HD radio, and what percentage is brand new as far as you're concerned as an opportunity?

Well, you know, we do brands, we do business with all the automotive brands sold in the United States, you know, 40 plus brands. So we're not really displacing with auto stage those opportunities. Rather, it is a layer on top of, you know, HD radio in the United States, or it is a new tranche of business for those manufacturers who are shipping units into other geographies where they're not licensing HD radio because HD radio is not the standard, let's say, in Europe, for example. So in those cases, the autostage revenue and the deployment of autostage is brand new in those markets. So it's a combination of being an adder in the U.S. and an extender, if you will, of additional business and net new revenue as you look outside the United States.

and more broadly in North America.

Okay, thank you.

Your next question is from the line of Matthew Galenko with the Maxon Group. Your line is open.

Hey, thanks for taking my question, and congrats on the strong 22. So I perceive it sounds like there's still a little volatility on know how much and exactly when it starts in 2023 so i'm curious if that's just the result of work that has to happen internally or is that your customers um you know own internal work and you know go to market that that leads to that um that question on when and how much

I think it's fair to characterize it, Matt, as a little bit of both. I think one of the things that this interest in larger models has done is in some cases it's caused people to assess where they are and in some cases expand their ambitions, which invariably starts the cycle. I think it also bears noting that the you know, the nature of kind of the, you know, challenges in the broader CE space, you know, and the competition at retail, you know, has driven a real concern over cost at the lower end of functionality. And I think it's causing people to reassess, you know, part of what, you know, they're thinking about building and where it fits. And that leads to, you know, some uncertainty around timing and deployment. And there's also been asks of us to, to enable either more functionality or assist people with different sorts of implementations. So I think we're working through all that. We remain highly convicted around the technical differentiation of the platform, and the interest remains very strong. I think getting that perfect market fit and taking it forward and exactly when and what that's going to look like is going to depend on how few things fall here as we look over the course of the coming quarters.

Thanks.

And I guess just to follow up to that is with some of the, I think, increased engagement that you talked about, does the pipeline of opportunities sort of fall into the general you know, kind of consumer electronics, you know, market that you've previously been brushing up against, or is there a different, you know, exploration or use case that, you know, has the potential to emerge, you know, as the first or second or, you know, stronger thrust of perceived adoption?

Yes, is the general answer. You know, certainly CE is where a lot of this stuff shows up, but, you know, as we think about industrial automotive and other use cases, I think, you know, having various discussions that, you know, I think are going to lead to productive outcomes, I think the big question, as always, is just, you know, timing, you know, and road to what that looks like.

Great. Thank you. Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. There are no further questions at this time.

I will turn the call back over to the company for closing remarks.

Thanks, Operator, and thanks, everyone, for joining today's call. We're excited about our growth prospects and the continuing momentum we see in our business. I'd like to thank our employees, customers, and partners for helping us achieve these strong results. We look forward to reviewing our Q1 results with you in early May, and I'm sure we'll see a few of you in between now and then. Thanks so much. Have a good day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.