XPER - Xperi: A Look At Whether Its Growth Trajectory Is Sustainable

Summary

• Management has been guiding big - we'll look at whether or not it's realistic in the time frame projected.
• A big thing to consider is how much its Pay TV decline will offset growth from its four major areas.
• One concern is management, in the last earnings report, didn't refer to the potential impact of a challenging economy and the impact of rising interest rates.
• The company expects to incur further charges from its real estate in the future.

Xperi Inc. ( XPER ) continues to be a mixed bag, as the company showed signs of potential sustainable growth in its media platform and connected car businesses, while its Pay TV segment, which accounts for 50 percent of total revenue, was flat on the quarter.

I see its Pay TV unit continuing to decline going forward and will be a headwind for the company. The degree of the impact will be determined by how quickly Pay TV revenue erodes as measured against the growth in its other segments.

In its latest earnings report it looked like a big beat on a non-GAAP basis, but when taking into account GAAP, it was far from a good quarter.

Guidance from the company remains very optimistic, with connected car and IPTV projected to grow from $84.00 million to over $330.00 million in the next three years, which would represent high-margin revenue if they're able to execute on their strategy.

In this article we'll look at its recent numbers, optimistic guidance, and why there are more potential headwinds to consider in the near term.

Some of the numbers

Revenue in the fourth quarter of 2022 was $135.5 million, compared to revenue of $124.7 million in the fourth quarter of 2021. Revenue for full year 2022 came in at $502.00 million, compared to revenue of $486.00 million for full year 2021.

Net loss in the reporting period was -$(298.05) million, or -$(7.06) per diluted share, compared to a net loss of -$(51.8) million, or -$(1.23) per diluted share in the fourth quarter of 2021.

Net loss for full year 2022 was -$(761.2) million, or -$(18.02) per diluted share, compared to a net loss of -$(175.6) million, or -$(4.18) per diluted share for full year 2021.

A significant portion of the net loss came from a non-cash goodwill impairment charge of $251.00 million, along with an additional $8.00 million associated with the closing of an office building. Management stated it expects further impairment charges related to real estate in the future.

Cash flow from operations in the fourth quarter was -$(17.00) million. That was attributed to $11.00 million in unbilled receivables and $5.00 million in separation fees related to the business separation.

At the end of the fourth quarter of 2022 the company had cash and cash equivalents of $160.1 million, compared to cash and cash equivalents of $120.7 million at the end of calendar 2021.

The company held long-term debt of $50.00 million at the end of the reporting period.

Guidance

Concerning 2023 guidance, revenue is projected to be in a range of $510.00 million to $540.00 million, led by expected growth from its connected car and media platform businesses.

Adjusted EBITDA margin for full year 2023 is expected to be in a range of six percent to nine percent.

Operating capital is guided to be about breakeven for 2023.

Further out, as mentioned above, the company believes it'll be able to boost revenue from IPTV and connected car from its current $84.00 million to over $330.00 million in 2025. Approximately $246.00 of revenue from those segments includes wider margin.

There are a couple of concerns I have with those numbers. First, I'm always very skeptical of guidance that is projected that far out. There's no way, in my opinion, a company can accurately guide over a three-year period.

Second, it doesn't appear there was any caveat mentioned concerning the challenging economic year 2023 will probably end up being. Both Walmart ( WMT ) and The Home Depot ( HD ) recently guided with caution for 2023, and assuming they're correct in regard to slowing sales, that suggests the overall economy is showing signs of slowing down, and that would have an impact on the guidance of XPER for 2023, and the next couple of years as well.

Even under normal conditions I wouldn't rely on forward guidance for a period of three years, but when including the current uncertainties as to how the economy will do over the next year or so, it definitely can't be relied upon in my opinion.

Add to that the strong probability that its Pay TV business is going to continue to shrink, and projected impairment charges from its real estate holding going forward, I see there being a lot less visibility than management's concerning the performance of XPER over the next three years.

Finally, in regard to its key revenue drivers, the company sees connected TV advertising, IPTV, in-vehicle infotainment, and in-cabin monitoring to represent 40 percent of total revenue in three years, up from the 20 percent it represents today.

Over the longer term I see that as highly achievable, but not within the time frame the company guides for.

Conclusion

XPER is transitioning to several growing markets that, if it's able to execute on its strategy, should drive decent growth over the long haul. But I see the weak economy having more of an impact in 2023 than the company seems to think, and see it as being detrimental to its performance, and a risk in regard to the three-year time frame the company guides for.

Along with economic conditions and the accompanying policies of the Federal Reserve, is the effect of real estate impairment charges and probable slowdown in its Pay TV business. Including those negative catalysts as a whole, I think the company is being overly optimistic concerning its performance over the next one to three years.

With the company bouncing off its 52-week low of $8.15 on December 23, 2022, and it is trading at $11.27 as I write, there's a lot less risk/reward in the company than there was a couple of months ago.

For investors who believe in XPER stock, I think it would now be best to wait for a pullback to take a position, as there is a lot less upside at this time. I also see disciplined position-sizing and dollar-cost averaging being a good strategy for a stock like XPER, which in my opinion could go either way, and if it drops, it could linger there for a prolonged period of time, especially if XPER management doesn't deliver on its guidance in 2023.

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