Q3 2023 Xperi Inc Earnings Call
Participants
Jon E. Kirchner; President, CEO & Director; Xperi Inc.
Michael R. Iburg; VP of IR; Xperi Inc.
Robert J. Andersen; CFO; Xperi Inc.
Hamed Khorsand; Principal & Research Analyst; BWS Financial Inc.
Jason Michael Kreyer; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Matthew Evan Galinko; SVP & Senior Research Analyst; Maxim Group LLC, Research Division
Nicholas Todd Zangler; Analyst; Stephens Inc., Research Division
Steven Bruce Frankel; Director of Research & Senior Research Analyst; Rosenblatt Securities Inc., Research Division
Presentation
Operator
Good day, everyone. Thank you for standing by. Welcome to the Xperi Third Quarter 2023 Earnings Conference Call. (Operator Instructions)
I would now like to turn the call over to Mike Iburg, Xperi Head of Investor Relations. Mike, please go ahead.
Michael R. Iburg
Thanks, operator. Good afternoon, and thank you for joining us as Xperi reports its third quarter 2023 financial results. With me on today's call are Jon Kirchner, Chief Executive Officer; and Robert Andersen, Chief Financial Officer. In addition to today's earnings release, there is an earnings presentation, which you can access along with a webcast of this call on our Investor Relations website at investor.xperi.com.
Before we begin, I'd like to provide a few reminders. First, I'd like to note that, unless otherwise stated, all comparisons are to the same quarter in the prior year. In addition, the third quarter of 2022 was calculated on a carve-out basis prior to Xperi seperation from Xperi Holding Corporation on October 1, 2022. Xperi Holding Corporation is now known as Adeia.
Second, 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. For more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please refer to the Risk Factors and MD&A section in our SEC filings, including our most recent Form 10-Q.
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 Xperi's CEO, Jon Kirchner.
Jon E. Kirchner
Thank you, Mike, and thank you, everyone, for joining us on our third quarter 2023 earnings call. We continued our momentum on strategic priorities, during the quarter, while delivering solid financial results. I'll let Robert walk you through the details in just a moment, but let me touch on a few highlights.
Revenue in the quarter was $130 million, up 7% from the prior year, driven primarily by strong growth in Media Platform and Connected Car. At the same time, we saw a significant increase in adjusted EBITDA, improving from breakeven in the year ago quarter, to a 7% adjusted EBITDA margin. We also generated $24 million of cash flow from operations during the quarter.
As many of you may recall, we separated from Adeia a year ago. And with today's results, we have now delivered 4 consecutive quarters of year-over-year revenue growth. Overall, given the demands, associated with the business separation, and economic and geopolitical macro uncertainty, we are encouraged by delivering mid-single-digit revenue growth on a trailing 12-month basis.
Overall, we remain focused on 4 key growth opportunities. Connected TV advertising, where we offer our TiVo Operating System to power smart TVs and monetize ad-supported viewing, in-cabin entertainment, where DTS AutoStage combines broadcast radio, Internet metadata and video to enhance the automotive experience and drive long-term monetization. In-cabin monitoring, where DTS AutoSense combines imaging technology and machine learning to improve automotive safety, comfort and convenience. And IPTV, where we offer an industry-leading, content-first video over broadband platform.
Each of these markets is growing rapidly and expected to roughly double over the next 5 years. With each quarter that passes, we are increasingly well positioned to participate in this growth, as our business momentum continues to build and we deliver on the specific operational milestones necessary to be successful.
Our 3-year growth targets for these growth initiatives, outlined originally at our Investor Day last fall, and updated earlier this year, are to have a footprint of at least 7 million active TVs running our TiVo OS, 2.8 million IPTV subscribers and 10 million cars with DTS AutoStage and AutoSense.
As we achieve these milestones, we expect nearly $250 million of incrementalized annual revenue exiting -- excuse me, 2025 compared to our 2022 baseline. Based on our strong strategic execution this year, we are increasingly confident that we'll meet or exceed these targets within our original time line. We plan to provide an update on our progress toward these targets, after we complete the current year.
Let me walk you through some of our recent achievements that reflect our progress. Within Media Platform, we're pleased to share that Vestel has begun shipping smart TVs powered by TiVo onto the JVC brand to retailers initially in the Czech Republic. Production is now underway for additional brands with expected shipments to multiple European countries in the coming weeks, consistent with the rollout we've been expecting.
This further validates our technology and program progress. As we're seeing these TVs activate, we now have improved line of sight to a broader footprint in 2024. Continuing our momentum, we recently signed our fourth TV OEM to integrate TiVo OS into their 2024 Smart TV lineup and expect additional contract wins by our year-end earnings call in February.
At IFA, the largest consumer electronics trade show in Europe, we were extremely proud to win 3 awards for TiVo OS, additionally and perhaps more satisfying was the number of industry participants who had heard about our unique value proposition and wanted to learn how they could partner with us going forward.
Given recent conversations with our committed TiVo OS partners and our understanding of the rollout plans in Europe and the U.S., we've increased confidence that we will achieve or exceed our original estimate of 7 million active users, as we exit 2025. Overall, it was a great quarter of execution around our independent Media Platform strategy and driving its long-term growth prospects.
Our Connected Car business also saw continued momentum in the quarter. The highlight of the quarter was BMW's rapid deployment of our DTS AutoStage Video Service, powered by TiVo, across their new generation 5 series lineup. These cars are now in showrooms in the United States, Germany, United Kingdom, France, Italy, Spain and South Korea.
Equally exciting is BMW's decision to expand the AutoStage Video Service rollout in these regions to a broad range of additional models, across various vehicle segments. On the heels of the BMW rollout, other car manufacturers are evaluating our solution, and we're pleased to announce a second design win for DTS AutoStage Video Service with another major European car OEM. This new program will include multiple models and began initially in Asia for the '25 model year.
In addition, we won a new HD Radio and DTS AutoStage program with Ford Motor Company, for its new radio platform, which was unveiled at the North American Auto Show earlier this fall. This program launches now and incorporates HD Radio and AutoStage into certain North American vehicles, beginning with the 2024 Lincoln Nautilus.
Lastly, we achieved a significant milestone within Connected Car, reaching 100 million cars incorporating HD Radio, the North American standard for digital radio, demonstrating the relevance and longevity of our technology platform and related ecosystem.
Within the Pay TV business, IPTV continues to make steady progress with double-digit subscriber growth for the 17th consecutive quarter, helping to offset the secular decline from our core Pay TV solutions. We now have more than 100 service providers that have selected TiVo's IPTV solutions for their customers.
Our Q3 results were positive with strong growth in IPTV, creating a modest year-over-year increase in the Pay TV category, which is now down 2% through the first 9 months, an improvement from the mid-single-digit decline, seen in the first half of '23. Service providers are deploying our IPTV solutions over their broadband networks to offer a wider range of video content and streaming applications to their customers. Enhancing their service offerings and competitiveness in the digital entertainment market.
IPTV deployments also enable these companies to offer interactive and on-demand content, improving the overall user experience, generating additional revenue streams and increasing customer loyalty to their connected services. In addition to the monthly subscriber fees associated with IPTV, we also offer TiVo+, where we monetize the viewing of ad-supported content, offering nearly 160 channels of curated content from a total of over 800 available free ad-supported television channels.
We signed 5 additional service providers in the quarter and now have 30 video service providers offering TiVo+ in the U.S. market.
Turning to Consumer Electronics. We signed several multiyear renewals with major Consumer Electronics manufacturers, including Sony, Vestel and Skyworth. These license agreements allow manufacturers to integrate DTS audio or Play-Fi wireless technologies into their products, for the next several years, validating the market appeal and longevity of these innovative technologies.
In addition, we signed a top 3 PC OEM to deploy our DTS:X audio solution, across a wide range of consumer PCs and laptops.
Lastly, we won 3 Best of Show Awards for DTS Play-Fi at the IFA trade show earlier this fall.
Turning to Perceive, we're pleased to share that we signed a license agreement with a big tech customer. And as expected, recognized first revenue in the quarter. We expect this relationship to expand over time and are very excited about the future potential of this deal and the other opportunities we are cultivating. This progress clearly validates the industry interest in our approach to low-power AI at the edge.
Recognizing the magnitude of the opportunity with large language models, we continue to explore options for strategic partnering to help accelerate our path to a larger market opportunity. We expect to report additional progress over the coming quarters.
A lot has been accomplished over the past year, since we became a stand-alone product company. We're focused on driving key growth initiatives and core product execution, while working to transform our organization through greater efficiency and a lower cost structure. Taken together, this progress has put us on a path toward improved profitability and meaningful growth, consistent with the vision we outlined a year ago on the eve of our separation.
Importantly, our vision of using smarter technology to create extraordinary experiences is resonating with our customers and partners across the various markets in which we compete. The recent operational milestones, we achieved with Vestel and BMW, demonstrate not only our speed and agility, but the value of our differentiated independent Media Platform and strength of our long-standing partnerships.
With smart TVs powered by TiVo and Connected Cars with video now in the market, as well as continued double-digit growth in IPTV, we are making great strides toward unlocking an exciting future with greater growth and profitability.
With that, I'll turn the call over to Robert to discuss our financials. Robert?
Robert J. Andersen
Thanks, Jon. As Mike mentioned earlier, unless otherwise noted, all comparisons in my comments are to the same quarter in the prior period. Total revenue for the third quarter was $130 million, up 7%. Pay TV, our largest revenue category, was up 3%, a significant improvement from the modest declines, seen in the first half of the year. During the quarter, we saw strong growth in our IPTV solutions, which was partially offset by declines in our core Pay TV business.
Consumer Electronics was down 4%, mostly due to onetime revenue in the prior year period, so the decline was partially offset by new agreements signed in the quarter, strong game console shipments and a modest amount of revenue from Perceive, which we categorized within Consumer Electronics.
Connected Car was up 16%, due to higher HD Radio volumes from strong automotive shipments, increased penetration of DTS audio solutions and increased revenue from AutoStage.
Media Platform was up 52%, due primarily to an increase in revenue from our smart TV middleware solutions and partly due to quarterly timing of certain revenue. In addition, we saw growth in direct sold and programmatic connected TV advertising. Somewhat offset by declines in media and entertainment advertising within our Pay TV solutions from the writers and actor strike.
Our non-GAAP gross margin for the quarter was $105 million or 80%, an increase of approximately 530 basis points from last year. This improvement is due to revenue growth in our IPTV solutions, which leverage our existing infrastructure to enable scaling within the business, and due to growth in high-margin revenue from our Smart TV middleware solutions.
Non-GAAP adjusted operating expense for the quarter was $100 million, up 2% sequentially and up 3% from the prior year's carve-out financials.
Our adjusted EBITDA was $9 million, resulting in an adjusted EBITDA margin of 7%. After accounting for tax and interest expense, our non-GAAP loss per share was $0.08.
Moving to the balance sheet. The company ended the quarter with $132 million of cash and cash equivalents, an increase of $20 million from Q2. As Jon mentioned, our cash flow from operations in the quarter was $24 million, the result of strong working capital management. We still expect the full year operating cash flow to be a usage of cash.
Turning to our financial outlook for 2023. We are narrowing our previous guidance ranges and providing the following commentary. We now expect full year revenue to be in the range of $518 million to $532 million, maintaining a midpoint of $525 million. We now expect non-GAAP adjusted EBITDA margin to be in the range of 6% to 8%. The midpoint here is slightly lower than our prior range, as accelerated progress on TV OS and DTS AutoStage wins have driven incremental investments in these areas to facilitate faster penetration for the products.
We continue to expect a full year non-GAAP tax estimate of $20 million. Our tax expenses are not linear throughout the year, primarily due to the timing of foreign withholding and certain federal and state taxes. So with non-GAAP tax expense of approximately $12 million, through the first 3 quarters, we expect Q4 non-GAAP tax expense to be approximately $8 million.
Basic share count is still expected to average 43 million for the year. And fully diluted share count is expected to average approximately 50 million for the year.
That concludes our prepared remarks. Let us now open the call for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Jason Kreyer from Craig-Hallum.
Jason Michael Kreyer
Great to hear that you've got the new TiVo-powered hardware shipping. Just curious if you can talk through what you expect for the revenue progression in that segment? And then maybe if you can just touch on kind of the revenue recognition, as far as like rev shares with providers and then how we should expect that to impact the P&L?
Jon E. Kirchner
Sure. So I think as you can well appreciate, Jason, the ability to monetize TV footprint is, first and foremost, a function of building that footprint. So we -- as we expect more units to be shipped into the field in the course of '24 and ultimately, then activated. In due course, you'll begin to see monetization. You'll see that monetization ramp over time. And I think the exact timing of revenue recognition, following a typical model, where there's a bit of a waterfall from when an ad is shown, and it goes through the programmatic back end and ultimately, is billed and collected, they'll be a typical time lag between when the ad is shown and that ultimate monetization.
But I think we'll have more to say around the model and that specifically as we get into '24 because I realize that over time, what is clearly of interest to folks is just how is that footprint changing, as well as how our users engaging with the platform and ultimately viewing.
And then ultimately how is the -- are the ads being placed and at what kind of CPMs to begin to help you better understand how to model what ARPU will ultimately will look like over time. We do expect it, though, to ramp starting smaller and building, and it will also depend on the geographic mix. Of where that footprint is, whether it's Europe or U.S., because the ad markets and the ultimate ARPUs are going to be different based on the geographic mix.
Jason Michael Kreyer
Perfect. We'll wait for more details there into the new year. Kind of a similar question on Perceive. Just wondering there, as we get into '24 and obviously, great that you're getting revenue generation on that side. But can you give us any expectations on how we should expect the kind of the cost to -- kind of how the costs fade in, as we go forward from here, now that that's generating revenue?
Jon E. Kirchner
I think we'll clearly have more to say in February around what the net impact is of revenue and the cost of carry. I think as the Perceive product and how we're potentially looking to exploit the technology via licenses, a lot of the cost is just ongoing engineering, as opposed to hard silicon. Hard silicon cost is one thing particularly about applications such as moving towards large language models and whatnot. That's more software-based than -- and it's more software and therefore, labor-based than any hard component. But again, more to say on that as we get into '24.
Operator
Your next question comes from the line of Steven Frankel from Rosenblatt Securities.
Steven Bruce Frankel
Jon, to follow up on Perceive. Could you give us any insight into how this initial customer is using the product and kind of what's the time line before it gets actually deployed into an end product?
Jon E. Kirchner
Steve, what I can share is, I think, there'll be revenue generation over the next few years. I really can't get into the specifics around it because let's -- let's just say it's both confidential and sensitive. So commenting about it at all given the nature of what it is, it would not be advisable at this point. But obviously, I know there's both interest, and we'll see what can be said over time.
But I think it's -- it's fair to say that the product is not yet in market and will be forthcoming. And that the core technology is a part of what they're trying to achieve.
Steven Bruce Frankel
And does it take a material incremental investment on either your part or this strategic investor that you may be looking for to get to where this customer wants to go? Or is that incremental investment about running faster and maybe catching something else?
Jon E. Kirchner
I think let me -- I can speak to our role in that, which is the core work that was necessary to I think, yet to get this particular design win, has been largely completed on our part. There's work we needed to support the implementation with this customer. And obviously, this is a component to more that this customer is working to build. So -- but as far as where we sit, I would say the vast majority of the work is behind us rather than ahead of us.
Operator
Your next question comes from the line of Nick Zangler from Stephens.
Nicholas Todd Zangler
Congrats on all the great progress this quarter. When you look at that -- the revenue guide, a $14 million spread just between the high and low end of the guide for the year, which is obviously just the fourth quarter now. Curious if you could just talk about the variability there, maybe which segments in particular are driving or maybe more volatile or driving that variability, and that the degree of that spread then?
Robert J. Andersen
Yes, sure, Nick. It's a fair question. I'd say when you look at our fourth quarter, we have a fair degree of -- it's really one of our busiest quarters in terms of closing out key agreements, particularly within Pay TV and Consumer Electronics. So we're mindful that we will have variability there depending on whether or not we can reach terms that are acceptable to us. And if not, then we would shift the timing out.
We also have variability in our per unit shipments for both CE and Connected Car, also subscriber growth within IPTV, and I guess you could also say advertising within the Media Platform. So given the variability within all of those pieces, we want to make sure that we are putting within our range an appropriate number to account for these various factors.
Nicholas Todd Zangler
Understood. No, that's helpful. And then on the Connected Car side, again, another great one here. It sounds like BMW is significantly expanding the incorporation of the AutoStage plus TiVo offering. So obviously, congrats there. But just can you talk about how this update, in particular contributes to any sort of potential ramp in Connected Car revenues as we look forward?
Jon E. Kirchner
Yes. I think they're all components of continuing to build that Connected Car story, over the next few years. Certainly, the expansion of models is welcome news because in automotive, typical production time lines, this has been a fairly fast project, and I think speaks to the great work that BMW has done as a partner, but also I think the interest in video, as a platform in car and also our ability to respond to their needs, I think, in a very effective way.
So we're not yet naturally guiding on '24. We'll have more to say about automotive, as we get into February, along with other things. But I think the fact that you have a major widely recognized partner, who is known for being highly selective about technology and building great experiences, not only engaging with the platform, but deciding to go more broadly fairly early. I think it will help us certainly in getting others into the mix.
And I think prove that this can be done in relatively short order, which over the next couple of years, I think, speaks positively towards the overall ramp in Connected Car related revenue, as second folks that just have already signed up.
Operator
Our next question comes from the line of Hamed Khorsand from BWS Financial.
Hamed Khorsand
First question I had was something you have not brought up at all on this call -- was there any progress on AutoSense at all? You left that out.
Jon E. Kirchner
There has been. We continue to work on supporting business that we have, as well as advancing discussions with pipeline customers. So I would say business as usual, but you don't always have customer wins in any given quarter to speak to. So lots of intense work on advancing the program and obviously, more news to follow.
Hamed Khorsand
Okay. And then you now have 4 TV OEMs, but you've only named 2. Why haven't the other 2 been named yet? And will they expand geographically beyond just the Europe?
Jon E. Kirchner
I think here again, Hamed, we'll have more to say in February on just kind of what the shape of rollout will look like. You got to keep in mind that not every TV partner has the same strategy about how they're managing everything from marketing to announcements, to the retail channels, et cetera. So we are not at liberty to front run what our customer needs are, but rather really respond to their strategies.
So what I can say is that in due course, obviously, you'll know who they are. And certainly, as we get closer to -- they'll roll out of those TVs. And as our partners permit us and we both engage on helping promote, what they're doing. And I think as we said in the past, we expect there to be distribution in the U.S. next year amongst the 4 we've signed and from more than one of the customers we've signed.
So I think again, more shape to follow. And I think the pipeline remains very, very active and robust. So as we said in the script, we expect to have more news just on broader progress in TV OS, as we get into February.
Hamed Khorsand
Okay. And one last question, if I may. Robert, given the guidance for Q4, it depicts a lot of operating leverage. Is that kind of operating leverage good enough? Or will it be better in '24? Can we use that kind of operating leverage, as a highlight for the business?
Robert J. Andersen
As you asked the question about operating leverage, are you indicating that we -- can you grow top line and kind of hold expense? I just want to make sure I'm answering your question properly.
Hamed Khorsand
Yes. But given the guidance you're providing, it kind of shows quite a bit of EBITDA growth sequentially. And then your previous commentary by Jon, I think it was, said about single digit -- mid-single-digit growth as well. So I'm just trying to put 2 into 2 together for '24.
Robert J. Andersen
Yes. I think the short answer for this is yes. We as a business are focusing on 2 primary things: one, growing that top line through these initiatives. And the other is being very thoughtful about our spend. But there's no question that the business itself has a -- it can leverage very well for operating margin. And by that measure, expanding EBITDA as we get into next year.
Operator
(Operator Instructions) Your next question comes from the line of Matthew Galinko from Maxim Group.
Matthew Evan Galinko
Can you, I guess, offer any comments on how some of the dynamics in Automotive industry are impacting your outlook for volumes in that business for you between the strikes and some pricing dynamics? I'm just curious how you're thinking about it.
Jon E. Kirchner
Yes. Matt, I would say that certainly, the strikes have had limited impact on our business thus far. And part of that just has to do with the volume mix, we have from different customers that is slightly -- or is weighted more favorably towards foreign customers rather than some of the U.S., although we do business pretty well across the board.
The other thing I would say is that, we've seen certainly supply chain improvements and whatnot. I think the -- so net-net, it hasn't had too much of an impact on us thus far this year. Nor do we expect it and on balance in '23. As you look ahead into '24, with improved supply chains and the strikes behind you, I think we're watching closely and we'll continue to because you've got higher interest rates and consumer confidence, maybe not in a great place and how that ultimately impacts demand.
But I think it's fair to say, as we sit here based on the market data that I've seen that wouldn't necessarily look into '24 with big concerns about major changes. But on the other hand, I think we'll be looking to get a finer point of view on that, as we get into providing guidance for '24 and study some of the industry data coming out of Q4 and into next year.
Matthew Evan Galinko
That's helpful. And then as a follow-up, I think Robert mentioned some narrowing of the EBITDA guidance based on incremental investments across a couple of business lines. Can you just repeat what you mentioned there? And maybe go into a little bit more detail around what those investments are? And if they are kind of short term in nature if there's -- they're going to be kind of permanent in nature?
Robert J. Andersen
Sure, Matt. So the numbers that I gave are 6% to 8% for adjusted EBITDA margin for the year, that has a mid of 7%. And previously, we had 6% to 10% with the mid of 8%. So down roughly a percentage point from our prior guidance. It's not a huge amount of money when you get down to it. But we have focused our efforts on TV OS and the AutoStage wins. And the driver here is really to make sure that we are balancing our investments to drive growth while being mindful about profitability. So I think we wanted to make sure that we had properly funded the initiatives. Any additional color you want to add, Jon?
Jon E. Kirchner
Yes. I would say 2 things. As far as permanent versus transitory, I think some of it is transitory as you start up customers more quickly and work with them to get into the marketplace as aggressively as possible. So I think over -- and you'll see this as we get into '24, we expect EBITDA expansion, and we'll have a lot more to say about that in '24. And I think the other thing behind it is, I don't think it's as simple as thinking about it just in terms of that slight difference because the investments obviously are more material than that slight difference.
So as a result, we've obviously made other changes within the business to help, if you will, fund and support those things. So we're being far more active across the board. The net result in this case, was, as Robert described it.
But I think as we look ahead, we're going to enjoy the benefit of faster revenue growth and penetration in these 2 key areas, as a result of some of the decisions we've made in the business we've won in some cases, that is faster and more than we expected originally in our '23 plans. And I think that's a great thing as we look ahead into '24 and '25.
Operator
We have no further questions in our queue at this time. I will now turn the call over to the Xperi team for closing remarks.
Jon E. Kirchner
Thanks, operator, and thanks, everyone, for joining today's call. We're very excited about our continued strategic momentum and solid operating performance. I'd like to thank our employees, customers and partners for helping us continue to achieve our objectives. We look forward to reviewing our Q4 and full year results with you in February. This concludes today's call.
Operator
This concludes today's conference call. Thank you for your participation, and you may now disconnect.
