XPER - Xperi Grows Moderately But Shows Some Promise

2023-12-07 16:41:18 ET

Summary

• Xperi Inc. beat revenue and earnings estimates in its Q3 2023 financial results.
• Xperi's Media Platform segment is growing quickly, but overall the company is only experiencing moderate growth and significant operating losses.
• Xperi's Perceive spin-out has potential in the AI space, and its DTS AutoStage system appears to be gaining traction.
• My near-term outlook for Xperi shares is Neutral [Hold], but the stock is worth putting on a watch list for future consideration.

A Quick Take On Xperi

Xperi Inc. ( XPER ) reported its Q3 2023 financial results on November 13, 2023, beating revenue and consensus earnings estimates.

The firm provides a variety of connected media and entertainment interfaces and related technologies.

While its smallest segment, Media Platform (TiVo OS) is growing quickly, overall the company is still growing only moderately and is generating significant operating losses.

A tantalizing potential is the firm’s Perceive spin-out, which appears to be readying to commercially launch an inference processor for devices in the ultra-hot AI space.

For now, I’m Neutral [Hold] on Xperi Inc. due to moderate revenue growth and continued heavy operating losses, but the stock is worth putting on a watch list.

Xperi Overview And Market

San Jose, California-based Xperi develops user interfaces and other technologies and has created a portfolio of entertainment technology brands.

The firm is headed by President and CEO Jon Kirchner, who held various senior roles at the company's former parent firm, Adeia, including CEO.

The company’s primary offerings include the following:

• TiVo

• DTS

• IMAX Enhanced

• HD Radio

• Media platform

• Connected car

• Pay TV

• Consumer Electronics.

XPER generates revenue from the media platforms it controls and from licensing imaging and semiconductor technologies to device manufacturers.

According to a market research report by eMarketer, the U.S. market for connected TV advertising was estimated at $17.3 billion in 2021 and is forecast to reach nearly $41 billion by 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 15.4% from 2021 to 2027.

The main drivers for this expected growth are a shift by traditional advertisers to connected TV advertising and away from linear TV advertising due to numerous reasons:

• Consumers shifting to streaming platforms from linear TV

• Higher engagement and interactivity opportunities

• Enhancing targeting capabilities

• Real-time reporting

• Greater cost-effectiveness.

Also, the chart below shows the expected growth or decline of US TV and connected TV ad spending from 2021 to 2027:

The firm is also active in other markets and generates its revenue from four primary segments, as the table shows below:

Note that the firm’s smallest segment, Media Platform (TiVo OS), is producing the fastest growth rate year-over-year, at 52%. However, the company faces strong competition from Roku, which also sells its Roku OS.

Xperi is also the majority owner of Perceive, a company that was incubated within Xperi and designs AI-inference processors for devices.

Xperi’s Recent Financial Trends

Total revenue by quarter (blue columns) has grown slowly; Operating income by quarter (red line) has remained heavily negative:

Gross profit margin by quarter (green line) has turned higher recently; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended higher in some quarters:

Earnings per share (Diluted) have been volatile and have remained heavily negative, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, XPER’s stock price has been highly volatile, losing 3.39% net:

For balance sheet results, the firm ended the quarter with $131.5 million in cash and equivalents and $50.0 million in total debt, all of which was long-term.

Over the trailing twelve months, free cash used was ($50.8 million), during which capital expenditures were $13.1 million. The company paid a hefty $67.2 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Xperi

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

XPER’s most recent unadjusted Rule of 40 calculation was negative (18.1%) as of Q3 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Xperi

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted growth in its Media Platform and Connected Car segments.

Across all of its segments, management expects incremental revenue opportunities of $250 million exiting 2025 compared to its 2022 results.

The firm achieved a notable customer rollout with BMW deploying its DTS AutoStage video service in their new five series.

This has prompted other car manufacturers to evaluate its solution, with the result of a "second design win for DTS AutoStage video service with another major European car OEM."

I prepared a chart showing the frequency of terms and keywords used by management and analysts on the most recent conference call:

The chart shows relatively few negative mentions during the call.

Analysts questioned the leadership about segment variability and on its Perceive majority interest.

Management replied that it experiences variability within its various segments, such as Pay TV, Consumer Electronics and per-unit shipments for its technologies in Connected Car.

Regarding Perceive’s inference IP, management wouldn't say much more than "there’ll be revenue generation over the next few years." An initial customer is using Perceive’s product in testing, but the product "will be forthcoming."

For the quarter’s results, total revenue for Q3 2023 rose by 7.2% year-over-year, while gross profit margin improved by 5.6% due to growing revenue from its IPTV segment and smart TV middleware, both high incremental margin businesses.

Selling and G&A expenses as a percentage of revenue fell by 0.9% YoY and operating losses were reduced by 31.0% but remained highly negative at $31.1 million.

The company's financial position is reasonably strong, with minimal debt, although it has used a high amount of free cash in the trailing twelve-month period.

XPER’s Rule of 40 performance has been negative, dragged down by operating losses.

Looking ahead, consensus 2023 revenue growth suggests a 4.5% rate versus 2022’s growth of 3.2%.

In the past twelve months, the firm's EV/Sales valuation multiple has been volatile but hasn’t changed much net-net, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include continued high growth from its Media Platform (TiVo OS) segment and perhaps a product launch from the Perceive AI-inference product.

Until then, the company is basically a moderately-growing, money-losing firm at present, so my near-term outlook on Xperi Inc. stock is Neutral [Hold] for now.

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