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Xperi Is a Good Value

- By Soid Ahmad

Xperi Corp. (XPER), formerly known as Tessera Holding Corp., is a technology holding company involved in the provision of product licensing and semiconductor intellectual property. The company offers digital audio and radio technology solutions and imaging solutions through its product licensing business. On the semiconductor IP side, the company develops and licenses packaging solutions, including 3-D semiconductor packaging and interconnect solutions. The company addresses the mobile, home, datacenter and automotive segments of the market.


Xperi has a portfolio of operating subsidiaries and brands, including DTS Technologies, Tessera Technologies, FotoNation and Invensas. Through DTS and FotoNation, the company offers audio and imaging product licensing solutions. Tessera, on the other hand, specializes in semiconductor solutions, including advanced packaging and 3-D interconnects.

Revenue classification

The company generated $229.1 million, or 88% of its revenue, from the semiconductor and IP segment in 2016. The remainder of its revenue came from the product licensing segment that included imaging solution results from FotoNation. The revenue share, however, will shift more toward product IP as the company includes DTS' results going forward. The revenue from product licensing is expected to rise to around 42% as compared to just 18% of the total revenue before the acquisition of DTS, as shown in the chart below:



Source: SEC Filings DTS and Teserra

In regard to its customers, the company generated most of its revenue from Samsung (005930.KS) followed by Micron Technology (MU).

Overall, the company is exposed to semiconductor integrated circuits (IC) and consumer electronics through audio, imaging, advance packaging and interconnect technology.

Stock is trading at a very low multiple

Analysts are expecting EPS of $3 for Xperi for fiscal 2018, translating into a forward price-earnings (P/E) multiple of around 10; the stock is trading 15 times 2017 earnings. Given the current S&P 500's P/E multiple, in excess of 20, this seems quite cheap. The primary concern for such a low P/E might be the litigation concerns. According to the company:


"Although we are engaged with and have licensed our technologies to many semiconductor companies, some of the companies that use our patented technologies have nonetheless chosen not to enter a license agreement with us. Consequently, we have necessarily developed significant abilities to plan, to execute and sustain litigation activities. We view litigation as a tool to be used only when necessary and only when other business approaches have failed."



The company has ongoing legal proceedings against big semiconductor players like Toshiba Corp. (TSE:6502) and Broadcom Ltd. (AVGO), which is reflected in the price-earnings multiple. There are also concerns about the ongoing relationship with Amkor Technology Inc. (AMKR). According to the company's SEC filing:


"In January 2015, we entered into an agreement with Amkor Technology Inc. ("Amkor") to settle all pending litigation and arbitration proceedings between Amkor and Tessera Inc. Under the terms of the agreement, Amkor agreed to pay us a total of $155 million comprised of 16 equal quarterly recurring payments, which commenced in the first quarter of 2015 and will continue through the fourth quarter of 2018. In 2016 and 2015, Amkor accounted for 15% and 14%, respectively, of total revenue."



Amkor agreed to pay, but the problem is that Amkor might not renew after 2018, leading to a revenue reduction to the tune of 15%. Therefore, the stock might be trading at low multiples. As mentioned, revenue share is shifting from semiconductor IP toward product portfolio; prospects are not as bad as reflected by the current multiple. First, all the litigation is against companies not contributing materially to the revenue of Xperi's subsidiaries. Amkor's setback will be offset by increased exposure to DTS going forward. Look at the revenue forecast below to gauge the company's prospects.

Revenue (in millions)

2016

2017

2018

2019

2020

Semiconductor & IP

$229.10

$242.85

$257.42

$272.86

$289.23

Revenue Lost

$45.82

$45.82

Revenue Gained

$138.20

$145.11

$152.37

$159.98

$167.98

Product Licensing

$30.40

$31.92

$33.52

$35.19

$36.95

Total Adjusted Revenue

$397.70

$419.88

$443.30

$422.22

$448.35

Net Income

$87.49

$92.37

$97.53

$92.89

$98.64

Outstanding Shares

51.00

51.00

51.00

51.00

51.00

EPS

$1.72

$1.81

$1.91

$1.82

$1.93



Focus Equity Estimates

The forecast sheet depicts revenue is not materially affected even after adjusting for revenue loss expected from Amkor and others going forward. Assumptions for the forecast include 6% growth in semiconductor and IP, followed by a 5% growth in product licensing during 2017 to 2020. Net income is expected to be around 22% of the revenue.

DTS' acquisition is a plus amid audio technology market penetration

Note that DTS' audio technologies have significant market penetration. Key partners of the company include Amlogic, Analog Devices, Cadence, Intel (INTC), Marvell, Mediatek, Mstar, NXP Semiconductors (NXPI), Qualcomm (QCOM), Realtek, Sigma Designs, Texas Instruments (TXN) and others. Further, the company recently entered into partnerships with Amazon (AMZN) for Alexa and Huawei for Nova products and HD radio technologies.



Estimates for unit numbers from NPD, Parks Associates, IDC, JEITA, IHS IMS, CEA, Quixel, IHS Screen Digest, DTS's estimates

Moreover, FotoNation's prospects include cameras for advanced driver assistance systems in cars. An increased number of cameras per car will directly boost FotoNation's revenue. FotoNation also entered a deal with OnePlus, which is one of the top handset manufactures among emerging market consumers.

Company will benefit from acquisition-related synergies

Due to an aggressive merging strategy, the company will be able to cut operating costs through eliminating duplication and reducing personnel and related real estate. This will certainly boost margins in the long run. Note that Tessera acquired DTS and then changed its name to Xperi.

Valuation and final thoughts

The valuation assessment is based on the discounted economic value added computation. The calculation assumes a constant p.a. growth rate of 5% in earnings during 2017 to 2019 and a 6% growth rate in 2020 and 2021. Note that 5% growth is plausible as the advanced packaging industry is set to grow at an average compound rate of 6% over the next few years. The capital asset pricing model is used for calculating the discount rate. No dilution is assumed in outstanding shares and the S&P 500 is used as a proxy in the CAPM model.

Projections

Notes

2017

2018

2019

2020

2021

Perpetuity

Amount in millions

Net Income

$92.31

$97.41

$102.28

$108.42

$114.92

$121.82

Cost of capital

r*capital invested

$38.0

$38.0

$38.0

$38.03

$38.03

$38.0250

$54.29

$59.39

$64.26

$70.39

$76.90

$83.79

Adjusted Net Income

$54.29

$59.39

$64.26

$70.39

$76.90

$83.79

Discount factor

1.00

0.93

0.87

0.80

0.75

11.52

Economic Value Added

$54.29

$55.24

$55.60

$56.66

$57.58

$965.29

Period

0

1

2

3

4

5

Market value added

$1,245

Invested Capital

$507

Value of the equity

$1752

Price Target

$34.3



Focus Equity Estimates

The valuation sheet reveals the stock is slightly undervalued. Note this valuation is based on conservative estimates. Analysts are expecting consensus earnings of $2 for 2017, followed by $3 for fiscal 2018. This valuation sheet should be used as a baseline valuation for Xperi.

Overall, given the unreasonable litigation fears, a low P/E and healthy prospects for product IP enabled by DTS, Xperi seems to be a good value at the current price.

Disclosure: I have no position in any stocks mentioned and no plans to initiate any positions in the next 72 hours.

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This article first appeared on GuruFocus.