Xperi Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 1,800 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, which has streamlined our business and further enhanced 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: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue 100 % 100 % 100 % 100 % Operating expenses: Cost of revenue, excluding depreciation and amortization of intangible assets 24 25 25 23 Research and development 38 44 40 43 Selling, general and administrative 44 44 46 45 Depreciation expense 3 3 3 3 Amortization expense 9 12 9 12 Impairment of long-lived assets — — — 1 Total operating expenses 118 128 123 127 Operating loss (18 ) (28 ) (23 ) (27 ) Interest and other income, net 1 1 1 1 Interest expense - debt (1 ) — (1 ) (1 ) Gain on divestiture — — 10 — Loss before taxes (18 ) (27 ) (13 ) (27 ) Provision for income taxes 8 4 6 2 Net loss (26 )% (31 )% (19 )% (29 )% 30 Comparison of the Three and Six Months Ended June 30, 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). Three Months Ended June 30, 2024 2023 $ Change % Change (dollars in thousands) Revenue $ 119,591 $ 126,872 $ (7,281 ) (6 )% Revenue decreased by $7.3 million, or 6%, for the three months ended June 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to a decline of $14.6 million in Consumer Electronics revenue as a result of a decline in minimum guarantee (“MG”) revenue driven by the timing and duration of MG contracts that were renewed as well as the Divestiture, and a decrease of $3.4 million in Media Platform revenue driven principally by a decline in advertising revenue from a unique initial ad buy that occurred in 2023. These decreases were partially offset by an increase of $8.0 million in Connected Car revenue due to an increase in MG revenue in audio solutions, which was partially offset by the Divestiture, and an increase of $2.7 million in Pay-TV revenue, driven largely by continued increase in IPTV Solutions revenue and by higher core guide product revenue due to the timing and duration of MG contracts that were renewed, offset by declines in consumer hardware and subscription revenue in the second quarter of 2024. Six Months Ended June 30, 2024 2023 $ Change % Change (dollars in thousands) Revenue $ 238,435 $ 253,711 $ (15,276 ) (6 )% Revenue decreased by $15.3 million, or 6%, for the six months ended June 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to a decline of $25.2 million in Consumer Electronics revenue due to the Divestiture as well as a decline in MG revenue contracts due to the timing and duration of MG contracts up for renewal and executed, and a decrease of $1.1 million in Media Platform revenue driven principally by lower advertising revenue, which was partially offset by growth in our smart TV application software and middleware platform. These decreases were partially offset by an increase of $11.8 million in Connected Car revenue as the result of MG revenue coupled with settlements executed which was partially offset by the Divestiture, during the first six months of 2024. Operating Expenses Three Months Ended June 30, 2024 2023 $ Change % Change (dollars in thousands) Cost of revenue, excluding depreciation and amortization of intangible assets $ 28,953 $ 30,856 $ (1,903 ) (6 )% Research and development 45,123 55,701 (10,578 ) (19 )% Selling, general and administrative 53,102 56,497 (3,395 ) (6 )% Depreciation expense 3,278 4,202 (924 ) (22 )% Amortization expense 11,042 14,798 (3,756 ) (25 )% Total operating expenses $ 141,498 $ 162,054 $ (20,556 ) (13 )% 31 Six Months Ended June 30, 2024 2023 $ Change % Change (dollars in thousands) Cost of revenue, excluding depreciation and amortization of intangible assets $ 58,709 $ 58,648 $ 61 0 % Research and development 95,562 110,557 (14,995 ) (14 )% Selling, general and administrative 109,455 114,273 (4,818 ) (4 )% Depreciation expense 6,862 8,295 (1,433 ) (17 )% Amortization expense 22,081 29,625 (7,544 ) (25 )% Impairment of long-lived assets — 1,096 (1,096 ) (100 )% Total operating expenses $ 292,669 $ 322,494 $ (29,825 ) (9 )% 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 June 30, 2024 was $29.0 million, as compared to $30.9 million in the same period of the prior year, a decrease of $1.9 million, or 6%. The decrease was primarily attributable to lower costs incurred in connection with advertising revenue in the second quarter of 2024. Cost of revenue, excluding depreciation and amortization of intangible assets, for the six months ended June 30, 2024 was $58.7 million, as compared to $58.6 million in the same period of the prior year, an increase of $0.1 million, or 0%. The increase was primarily attributable to higher delivery costs related to an increase in NRE revenue, mostly offset by lower costs incurred in connection with advertising revenue in the first six months 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 June 30, 2024 was $45.1 million, as compared to $55.7 million in the same period of the prior year, a decrease of $10.6 million, or 19%. 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, decreases in bonuses and contractor expenses, and an increase in capitalized costs for internal-use software in the second quarter of 2024. Research and development expense for the six months ended June 30, 2024 was $95.6 million, as compared to $110.6 million in the same period of the prior year, a decrease of $15.0 million, or 14%. 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, decreases in bonuses and contractor expenses, and an increase in capitalized costs for internal-use software in the first six months 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 June 30, 2024 were $53.1 million, as compared to $56.5 million in the same period of the prior year, a decrease of $3.4 million, or 6%. The decrease was primarily attributable to 32 reduced employee headcount as well as decreases in stock-based compensation and bonus expenses, partially offset by an increase in certain one-time transaction costs in the second quarter of 2024. Selling, general and administrative expenses for the six months ended June 30, 2024 were $109.5 million, as compared to $114.3 million in the same period of the prior year, a decrease of $4.8 million, or 4%. The decrease was primarily attributable to reduced employee headcount as well as decreases in stock-based compensation and bonus expenses, partially offset by an increase in certain one-time transaction costs in the first six months of 2024. Stock-based Compensation The following table sets forth our stock-based compensation expense for the three and six months ended June 30, 2024 and 2023 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Cost of revenue, excluding depreciation and amortization of intangible assets $ 858 $ 927 $ 1,602 $ 1,719 Research and development 5,831 6,405 10,164 11,956 Selling, general and administrative 8,614 10,759 18,294 20,384 Total stock-based compensation expense $ 15,303 $ 18,091 $ 30,060 $ 34,059 We recognized stock-based compensation expense from restricted stock units and purchases made under our employee stock purchase plan. Stock-based compensation expense decreased by $2.8 million and $4.0 million, or 15% and 12%, for the three and six months ended June 30, 2024 compared to the same periods of the prior year, respectively. The decreases were primarily driven by a lower PSU expense, and reduced employee headcount during the first six months 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 June 30, 2024 was $3.3 million, as compared to $4.2 million in the same period of the prior year, a decrease of $0.9 million, or 22%. The decrease was primarily due to certain fixed assets becoming fully depreciated over the past 12 months. Depreciation expense for the six months ended June 30, 2024 was $6.9 million, as compared to $8.3 million in the same period of the prior year, a decrease of $1.4 million, or 17%. The decrease was primarily due to certain fixed assets becoming fully depreciated over the past 12 months. 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 June 30, 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 25%. The decrease was primarily due to certain intangible assets becoming fully amortized over the past 12 months. Amortization expense for the six months ended June 30, 2024 was $22.1 million, as compared to $29.6 million in the same period of the prior year, a decrease of $7.5 million, or 25%. 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 related leasehold improvements, during the six months ended June 30, 2023. We determined that we may not be able to fully 33 recover the carrying amount of the leased offices due to how the offices were being used, a significant decrease in the expected market price of the ROU assets, and expected delays in subleasing the office facilities based on the condition of the commercial real estate leasing market. We did not record any asset impairment charge for the six months ended June 30, 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 in the six months ended June 30, 2024. Refer to Note 6— Divestiture of the Notes to Condensed Consolidated Financial Statements (Unaudited) for additional information. Provision for Income Taxes For the three and six months ended June 30, 2024, we recorded an income tax expense of $9.3 million and $13.6 million on a pretax loss of $21.4 million and $30.5 million, respectively; which resulted in an effective tax rate of (43.4)% and (44.4)%, respectively. The income tax expense for the three and six months ended June 30, 2024 was primarily related to foreign withholding taxes, foreign income taxes, U.S. federal income taxes, and state income taxes. For the three and six months ended June 30, 2023, we recorded an income tax expense of $5.1 million and $4.8 million on a pretax loss of $34.3 million and $67.5 million, respectively; which resulted in an effective tax rate of (14.9)% and (7.1)%, respectively. The income tax benefit three and six months ended June 30, 2023 was primarily related to foreign withholding taxes, foreign income taxes, 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: As of June 30, 2024 December 31, 2023 (dollars in thousands) Cash and cash equivalents $ 92,481 $ 142,085 (1) Current ratio (2) 2.0 1.9 (1) Excludes $12.3 million of cash and cash equivalents classified as held for sale at December 31, 2023. (2) The current ratio is a liquidity ratio that measures our ability to pay short-term obligations or those due within one year. The ratio is calculated by dividing current assets by current liabilities. Six Months Ended June 30, 2024 2023 (in thousands) Net cash used in operating activities $ (51,921 ) $ (44,629 ) Net cash used in investing activities $ (8,443 ) $ (6,199 ) Net cash (used in) provided by financing activities $ (1,601 ) $ 2,723 34 Our primary liquidity and capital resources are our cash and cash equivalents on hand. Cash and cash equivalents were $92.5 million at June 30, 2024, a decrease of $61.9 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 $51.9 million, $5.9 million in payments of withholding taxes on net share settlement of equity awards and $8.1 million of capital expenditures and capitalized internal-use software costs, offset by $4.3 million in proceeds from the issuance of common stock under our employee stock purchase plan (“ESPP”). 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 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 $51.9 million for the six months ended June 30, 2024, primarily due to our net loss of $44.0 million being further adjusted by $42.2 million of changes in operating assets and liabilities, including payment 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 $30.1 million, amortization of intangible assets of $22.1 million, and depreciation expense of $6.9 million. Net cash used in operating activities was $44.6 million for the six months ended June 30, 2023, primarily due to our net loss of $72.3 million being further adjusted by $44.6 million of changes in operating assets and liabilities, partially offset by non-cash items such as depreciation expense of $8.3 million, amortization of intangible assets of $29.6 million, stock-based compensation expense of $34.1 million, an asset impairment charge of $1.1 million, and change in deferred income taxes of $0.7 million. Cash Flows from Investing Activities Net cash used in investing activities was $8.4 million and $6.2 million for six months ended June 30, 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 $1.6 million for the six months ended June 30, 2024, due to $5.9 million in payment of withholding taxes related to net share settlement of equity awards, partially offset by $4.3 million in proceeds from the issuance of common stock under our ESPP. Net cash provided by financing activities was $2.7 million for the six months ended June 30, 2023, primarily due to $5.9 million in proceeds from the issuance of common stock under our ESPP, partially offset by the payment of $3.2 million in withholding taxes related to net share settlement of equity awards. 35 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 June 30, 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 We believe our current cash and cash equivalents will be sufficient to meet our needs for at least the next 12 months from the issuance date of these financial statements. As the Promissory Note (see “Long-Term Debt”) matures on July 1, 2025, we may access the capital markets for additional funding. As we assess 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 capital markets in light of those 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 six months ended June 30, 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. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk For a discussion of our market risk, see Part II, Item 7A—Quantitative and Qualitative Disclosures About Market Risk in our Form 10-K.