Good day, everyone. Thank you for standing by. Welcome to the Xperi Third Quarter 2023 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] I would now like to turn the call over to Mike Iburg, Xperi Head of Investor Relations. Mike, please go ahead.

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 Anderson, 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 of 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.

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 four 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 four 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 five 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…

Thanks, John. 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%. ATV, our largest revenue category, was up 3% and 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…

[Operator Instructions] Your first question comes from the line of Jason Kreyer from Craig-Hallum. Please go ahead.

Perfect. Thank you, guys. 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 RevShares with providers and then how we should expect that to impact the P&L?

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 as we expect more units to be shipped into the field in the course of 2024 and ultimately then activate it, 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 is a bit of a waterfall from when an ad is shown and it goes -- it goes through the programmatic back end and ultimately is billed and collected, there'll be a typical time lag between when the ad is shown in that ultimate monetization. But I think we'll have more to say around the model in that specifically as we get into 2024, because I realize that over time, what is clearly of interest to folks is just how is that footprint changing as well as how are 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.

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 2024 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 cost fade in as we go forward from here now that that's generating revenue?

I think we'll clearly have more to say in February around what the net impact is of revenue and the cost to carry. I think as in 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 a hard silicon cost is one thinks particularly about applications such as moving towards large language models and whatnot. That's more software-based and it's more software and therefore labor-based than any hard component. But again, more to say on that as we get into 2024.

Okay. Thank you, guys. Appreciate it.

Your next question comes from the line of Steven Frankel from Rosenblatt Securities. Please go ahead.

Hi. Good afternoon. Jon, to follow-up on Perceive, could you give us any insight into how this initial customer is using the product and what the timeline before it gets actually deployed into an end product?

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 just say, it's both confidential and sensitive. So, commenting about it at all, given the nature of what it is, would not be advisable at this point, but obviously I know there is both interest and we'll see what can be said over time. But I think it's fair to say that the product is not yet in market and will be forthcoming. And then the core technology is a part of what they're trying to achieve.

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 investor -- investment about running faster and may be catching something else?

I think -- I mean, I can speak to our role in that, which is the core work that was necessary to, I think, get this particular design win, has been largely completed on our part. There's work we need to support the implementation with this customer. And obviously this is a component to more than 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.

Okay. Great. Thank you. I'll jump back in the queue.

Thanks, Steve.

Your next question comes from the line of Nick Zangler from Stephens. Please go ahead.

Hey, guys. Thanks a lot and 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?

Yeah. 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.

Understood. No, that's helpful. And then on the Connected Car side, again, another great win 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?

Yeah. 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 2024. 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...

Got it.

Second, folks that just have already signed up.

Right. No, 100% agree. Awesome. Thank you very much, guys, and congrats on all this great progress.

Thank you, Nick.

Our next question comes from the line of Hamed Khorsand from BWS Financial. Please go ahead.

Hi. 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.

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.

Okay. And then you now have four TV OEMs, but you've only named two. Why haven't the other two been named yet? And will they expand geographically beyond just Europe?

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, etc. 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 the 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 four 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.

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 2024? Can we use that kind of operating leverage as a highlight for the business?

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.

Yeah. 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 two in two together for 2024.

Yeah. I think the short answer for this is yes. We as a business are focusing on two 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.

All right. Thank you.

You're welcome.

[Operator Instructions] Your next question comes from the line of Matthew Galinko from Maxim Group. Please go ahead.

Hey. Thanks for taking my questions. 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.

Yeah. 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 on balance in 2023. As you look ahead into 2024, 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 2024 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 2024 and study some of the industry data coming out of Q4 and into next year.

Thanks. 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're kind of short term in nature, if there's -- if they're going to be kind of permanent in nature? Thanks.

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 1 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 to...

Yeah. I would say two 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 2024, we expect EBITDA expansion, and we'll have a lot more to say about that in 2024. 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 two 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 2023 plans. And I think that's a great thing as we look ahead into 2024 and 2025.

Got it. Thank you.

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.

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.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.