Xperi Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis is intended to promote understanding of our results of operations and financial condition and should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2023 found in our Form 10-K filed by Xperi Inc. on March 1, 2024 (our “Form 10-K”).

Business Overview

We are a leading consumer and entertainment technology company. We believe we create extraordinary experiences at home and on the go for millions of consumers around the world, enabling audiences to connect with content in a way that is more intelligent, immersive, and personal. Powering smart devices, connected cars, entertainment experiences and more, we bring together ecosystems designed to reach highly-engaged consumers, allowing us and our ecosystem partners to uncover significant new business opportunities, now and in the future. Our technologies are integrated into consumer devices and a variety of media platforms worldwide, driving increased value for our partners, customers, and consumers. We operate in one reportable business segment and group our business into four categories: Pay-TV, Consumer Electronics, Connected Car and Media Platform. Headquartered in Silicon Valley with operations around the world, we have approximately 1,850 employees and more than 35 years of operating experience.

Divestiture

In December 2023, we entered into a definitive agreement with Tobii AB, an eye tracking and attention computing company, pursuant to which we agreed to sell our AutoSense in-cabin safety business and related imaging solutions (the “Divestiture”). The Divestiture was completed in January 2024 and streamlined our business, further enhancing our focus on entertainment markets.

Results of Operations

The following table presents our historical operating results for the periods indicated as a percentage of revenue:

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Comparison of the Three Months Ended March 31, 2024 and 2023

Revenue

We derive the majority of our revenue from licensing our technologies and solutions to customers. For our revenue recognition policy including descriptions of revenue-generating activities, refer to Note 2—Revenue of the Notes to the Condensed Consolidated Financial Statements (Unaudited).

(dollars in thousands)

The $8.0 million, or 6%, decrease in revenue for the three months ended March 31, 2024, compared to the same period in the prior year, was primarily attributable to a decline of $10.6 million in Consumer Electronics revenue due to the Divestiture as well as a decline in minimum guarantee revenue contracts, and a decrease of $3.5 million in Pay-TV revenue, driven largely by declines in core guide products, consumer hardware, and subscription revenue which were partially offset by increases in IPTV Solutions. These decreases were partially offset by an increase of $3.8 million in Connected Car revenue as the result of growth coupled with settlements executed in HD Radio, and an increase of $2.3 million in Media Platform revenue driven principally by growth in our smart TV application software and middleware platform in the first quarter of 2024.

Operating Expenses

(dollars in thousands)

Cost of Revenue, Excluding Depreciation and Amortization of Intangible Assets

Cost of revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, hardware product-related costs, maintenance costs and an allocation of facilities costs, as well as service center and other expenses related to providing our offerings and non-recurring engineering (“NRE”) services.

Cost of revenue, excluding depreciation and amortization of intangible assets, for the three months ended March 31, 2024 was $29.8 million, as compared to $27.8 million in the same period of the prior year, an increase of $2.0 million, or 7%. The increase was primarily due to higher delivery costs related to an increase in NRE revenue in the first quarter of 2024.

Research and Development

Research and development expenses consist primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as other costs related to patent applications and examinations, materials, supplies, and an allocation of facilities costs. Other than certain software development costs that are capitalized, all research and development costs are expensed as incurred.

Research and development expense for the three months ended March 31, 2024 was $50.4 million, as compared to $54.9 million in the same period of the prior year, a decrease of $4.5 million, or 8%. The decrease was primarily driven by lower research and development spend in the AutoSense in-cabin safety business and related imaging solutions following the Divestiture, a reduction in expenses in the Perceive subsidiary, and an increase in capitalized costs for internal-use software in the first quarter of 2024.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs (including stock-based compensation expense) for sales and marketing personnel engaged in sales and licensee support, marketing programs, public relations, promotional materials, travel, and trade show expenses. General and administrative expenses consist primarily of compensation and related costs (including stock-based compensation expense) for management, information technology, finance and legal personnel, legal fees and related expenses, facilities costs, and professional services. Our general and administrative expenses, other than facilities-related expenses and fringe benefits, are not allocated to other expense line items.

Selling, general and administrative expenses for the three months ended March 31, 2024 were $56.4 million, as compared to $57.8 million in the same period of the prior year, a decrease of $1.4 million, or 2%. The decrease was primarily attributable to the reduced employee headcount following the Divestiture as well as savings in contractor expenses, partially offset by an increase in one-time transaction costs related to the Divestiture in the first quarter of 2024.

Stock-based Compensation

The following table sets forth our stock-based compensation expense for the three months ended March 31, 2024 and 2023 (in thousands):

We recognized stock-based compensation expense from restricted stock units and purchases made under our employee stock purchase plan. The $1.2 million, or 8%, decrease in stock-based compensation expense for the three months ended March 31, 2024, when compared to the same period of the prior year, was primarily driven by reduced employee headcount as a result of the Divestiture, and secondarily a decrease in equity awards granted in the first quarter of 2024.

Depreciation Expense

We recognized depreciation expense for certain equipment, capitalized internal-use software, leasehold improvements, and buildings and improvements. Depreciation expense for the three months ended March 31, 2024 was $3.6 million, as compared to $4.1 million in the same period of the prior year, a decrease of $0.5 million, or 12%. The decrease was primarily due to certain fixed assets being fully depreciated during 2023.

Amortization Expense

We recognized amortization expense for certain intangible assets we acquired in business combinations that are recognized separately from goodwill. Amortization expense for the three months ended March 31, 2024 was $11.0 million, as compared to $14.8 million in the same period of the prior year, a decrease of $3.8 million, or 26%. The decrease was primarily due to certain intangible assets becoming fully amortized over the past 12 months.

As a result of intangible assets we acquired in previous mergers and acquisitions, we anticipate that amortization expenses will continue to be a significant expense over the next several years. See Note 7—Intangible Assets, Net of the Notes to Condensed Consolidated Financial Statements (Unaudited) for additional detail.

Impairment of Long-Lived Assets

As a result of optimizing our global real estate footprint and subleasing certain offices following the Spin-Off (as defined in Note 1—Description Of Business And Summary Of Significant Accounting Policies), we recorded non-cash impairment charges of $1.1 million to reduce the carrying amount of certain operating lease ROU assets and property and equipment, including leasehold improvements, during the three months ended March 31, 2023. We determined that we may not be able to fully recover the carrying amount of the leased offices due to how the offices are being used, a significant decrease in the expected market price of the leased asset, and expected delays in subleasing the space based on the current real estate leasing market.

We did not record any asset impairment charge for the three months ended March 31, 2024.

Gain on Divestiture

As previously disclosed, we completed the Divestiture on January 31, 2024 and streamlined our business, further enhancing our focus on entertainment markets. Upon the completion of the Divestiture, we recognized a gain of $22.9 million during the three months ended March 31, 2024. Refer to Note 6—Divestiture of the Notes to Condensed Consolidated Financial Statements (Unaudited) for additional information.

Provision for (Benefit from) Income Taxes

For the three months ended March 31, 2024, we recorded an income tax expense of $4.3 million on a pretax loss of $9.1 million, which resulted in an effective tax rate of (47.0)%. The income tax expense for the three months ended March 31, 2024 was primarily related to foreign withholding taxes, foreign income taxes, U.S. federal income taxes, and state income taxes.

For the three months ended March 31, 2023, we recorded an income tax benefit of $0.3 million on a pretax loss of $33.2 million, which resulted in an effective tax rate of 0.9%. The income tax benefit for the three months ended March 31, 2023 was primarily related to foreign withholding taxes, partially offset by U.S. federal income taxes and state income taxes.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was unlikely that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset reversing deferred tax liabilities. We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release depends on the level of profitability that we are able to achieve.

Liquidity and Capital Resources

The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the periods presented:

(in thousands, except for ratios)

(dollars in thousands)

(1) Excludes $12.3 million of cash and cash equivalents classified as held for sale at December 31, 2023.

(in thousands)

Our primary liquidity and capital resources are our cash and cash equivalents on hand. Cash and cash equivalents were $95.2 million at March 31, 2024, a decrease of $59.2 million from $154.4 million, including $12.3 million classified as held for sale in connection with the Divestiture, as of December 31, 2023. This decrease resulted primarily from cash used in operations of $49.8 million, $4.7 million in payments of withholding taxes on net share settlement of equity awards and $4.7 million of capital expenditures and capitalized internal-use software costs.

For information about our material cash requirements, see “Liquidity and Capital Resources” in Part II, Item 7 of our Form 10-K. Our cash requirements have not changed materially since December 31, 2023.

Stock Repurchase Program

In April 2024, our Board of Directors (the “Board”) authorized the repurchase of up to $100.0 million of our common stock (the “Program”). Under the Program, we may make repurchases, from time to time, through open market purchases, block trades, privately negotiated transactions, accelerated share repurchase transactions, or other means. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases under the Program. Since the inception of the Program, we have not repurchased any shares of our common stock. The volume, timing, and manner of any repurchases will be determined at our discretion, subject to general market conditions, as well as our management of capital, general business conditions, other investment opportunities, regulatory requirements, and other factors. We currently expect to fund the repurchase program from cash and cash equivalents, short-term investments and/or future cash flows. The repurchase program does not obligate us to repurchase any specific number of shares of common stock, has no time limit, and may be modified, suspended, or discontinued at any time without notice at the discretion of the Board. Any repurchases under the Program may not enhance the value of our common stock.

Cash Flows from Operating Activities

Net cash used in operating activities was $49.8 million for the three months ended March 31, 2024, primarily due to our net loss of $13.4 million being further adjusted by $43.4 million of changes in operating assets and liabilities including payment during the quarter of employee annual bonuses for 2023 performance, and $22.9 million of a non-cash gain recognized from the Divestiture, partially offset by non-cash items such as stock-based compensation expense of $14.8 million, amortization of intangible assets of $11.0 million, and depreciation expense of $3.6 million.

Net cash used in operating activities was $43.1 million for the three months ended March 31, 2023, primarily due to our net loss of $32.9 million and $46.9 million in changes in operating assets and liabilities, partially offset by non-cash items of stock-based compensation expense of $16.0 million, amortization of intangible assets of $14.8 million, depreciation expense of $4.1 million, and an asset impairment charge of $1.1 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $4.7 million and $3.9 million for three months ended March 31, 2024 and 2023, respectively, which was primarily related to capital expenditures and capitalized internal-use software.

Capital Expenditures

Our capital expenditures for property and equipment consist primarily of purchases of computer hardware and software, capitalized internal-use software, information systems, and production and test equipment. We expect capital expenditures in 2024 to be approximately $20.0 million. These expenditures are expected to be paid with existing cash and cash equivalents. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities was $4.7 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively, which reflected the payment of withholding taxes related to net share settlement of equity awards.

Long-Term Debt

In connection with the acquisition of Vewd Software Holdings Limited (“Vewd”) on July 1, 2022, we issued a senior unsecured promissory note (the “Promissory Note”) to the sellers of Vewd in the principal amount of $50.0 million, of which $50.0 million was outstanding at March 31, 2024. Indebtedness outstanding under the Promissory Note bears an interest rate of 6.00% per annum, subject to potential adjustments as described in Note 8—Debt to the Condensed Consolidated Financial Statements included in this Quarterly Report. The Promissory Note matures on July 1, 2025. We may, at any time and on any one or more occasions, prepay all or any portion of the outstanding principal amount, plus accrued and unpaid interest, if any, under the Promissory Note without premium or penalty. In addition, the Promissory Note has mandatory prepayment provisions upon certain change of control or asset sale events.

Short-Term Liquidity/Financings

Our current cash and cash equivalents balance is expected to be sufficient to support our operations, capital expenditures and income tax payments, in addition to any investments and other capital allocation needs, for at least the next 12 months from the issuance date of these financial statements, and for the foreseeable future thereafter. As our debt becomes due, we may be required to access the capital markets for additional funding. As we assess inorganic growth strategies, we may need to supplement our cash and cash equivalents with outside sources. As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow as well as our ability to access the market in light of those earning levels.

Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. Equity or debt financing may not be available when needed or, if available, equity financing may not be on terms satisfactory to us.

We may supplement our short-term liquidity needs with access to capital markets, if necessary, and strategic cost savings initiatives. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business and market conditions, and our liquidity is subject to various risks including the risks identified in “Risk Factors” included in Item 1A of our Form 10-K.

Critical Accounting Estimates

During the three months ended March 31, 2024, there were no significant changes in our critical accounting estimates. For a discussion of our critical accounting estimates, see Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K.

Recent Accounting Pronouncements

See Note 1—Description of Business and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report for more information.

For a discussion of our market risk, see Part II, Item 7A—Quantitative and Qualitative Disclosures About Market Risk in our Form 10-K.

Evaluation of Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the last fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there were no material changes to the risk factors previously disclosed in Part 1, Item 1A. of our Form 10-K, which is incorporated by reference herein.

Our stock repurchase program may not be fully consummated, may not enhance long-term stockholder value, may increase the volatility of our stock prices and, as we implement it, will diminish our cash reserves.

Pursuant to the Program adopted in April 2024, we may repurchase of up to $100.0 million of our common stock, from time to time, through open market purchases, block trades, in privately negotiated transactions, accelerated share repurchase transactions, or by other means. Since the inception of the Program, we have not repurchased any shares of our common stock. The volume, timing, and manner of any repurchases will be determined at our discretion, subject to general market conditions, as well as our management of capital, general business conditions, other investment opportunities, regulatory requirements, and other factors. The Program does not have an expiration date and does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares, or to do so in any particular manner. Further, repurchases under the Program could affect our share trading prices or increase their volatility, and any repurchases will reduce our cash reserves. We are under no legal obligation to repurchase any shares, and if we do not do so or if we commence repurchases and then suspend or terminate them, the trading prices of our stock may decrease and their volatility increase. We may not in the future have cash and cash equivalents sufficient to fund all potential repurchases under the Program. Even if we complete the Program, we may not be successful in our goal of enhancing stockholder value. As we use our cash resources in the Program, we have less cash to fund our operations and pursue other opportunities that may provide value to stockholders.