Xperi Holding: Smart TV Play, Smart Investment Play? (NASDAQ:XPER)

Xperi Holding (NASDAQ:XPER) is a name which I have not covered before, but a quick glimpse reveals that this business, which just made an interesting acquisition, is hugely profitable, a sufficient reason to have a look at the prospects for this business after there have been more corporate developments at hand.

Two Businesses Under One Roof

Xperi is both a product and IP licensing business under a single roof. The product business includes entertainment products used in consumer entertainment products, automotive in-cabin entertainment, and related applications.

The IP licensing business contains over 10,000 patents and applications covering fundamental aspects of video experiences across platforms as well as a semiconductor packaging and processing technology business. In terms of revenue share, the product business generates roughly 60% of sales, with the profitable IPO licensing business responsible for the remainder of revenues.

The company at large posted revenues of $878 million in 2021, down slightly year-over-year. The company generated just $13 million in GAAP operating earnings as interest expenses and taxes translated into a full year loss of $55 million. This however was after incorporating a $203 million amortization expense. This makes that a GAAP loss of $0.53 per share compares to an adjusted profit of $2.03 per share, as I am happy to adjust for all the items except for half a dollar per share in stock-based compensation expenses, revealing a realistic profit number around $1.50 per share.

Net debt stood at $565 million by year-end, very manageable with EBITDA easily trending around a quarter of a billion on a realistic basis, even excluding stock-based compensation expenses. With 104 million shares outstanding, the company supported a $1.6 billion equity valuation at $15 per share at the start of the year, or near $2.2 billion enterprise valuation if we include net debt. Based on earnings power of $1.50 per share, valuations are non-demanding at 10 times realistic earnings.

For 2022, the company guided for sales to rise to $910-$950 million, while no explicit earnings guidance has been provided, as a combination of a 10 times earnings multiple and modest growth looks quite compelling.

Some Perspective

Xperi has been a listed business since 2003, as in fact its shares traded around the same level at the time. After a boom towards the $50 mark in 2007, shares fell back to $10 during the financial crisis. Shares rallied towards the $50 mark again in 2015 and 2016, but ever since then it has been downhill, with shares down to $15 here, trading near their lows.

On the corporate side, Xperi has seen a big move in 2020 as it completed its merger with TiVo. This deal valued TiVo at $1.2 billion when it was announced late in 2019, with the combination valued at $3.0 billion at the time. The rationale was to combine product revenues and IP revenues, creating diversified income streams, a move which it now seeks to get undone with the company announcing a split of the business.

At the same time, the company has seen a big first quarter, as the company hit a big IP deal with Micron Technology (MU). Revenues rose 16% to $257 million, with non-GAAP earnings posted at $0.92 per share. If we back out stock-based compensation expenses, earnings came in at $0.55 per share, a very comfortable result, trending at more than $2 per share.

In May, Xperi announced that it has found a new executive for its IP licensing business, with a split seen later this year. The spin-off is highly interesting as well and could be hugely accretive of course, depending on the details for the spin-off which was announced in February 2022. That is very soon time frame after the merger with TiVo, which has essentially been made undone with this anticipated spin-off.

In June, Xperi announced a $10 million hike in the full year revenue guidance, now seeing sales at a midpoint of $940 million, with an equal hike made in the cash flow guidance.

Amidst all this good news, Xperi announced the purchase of Vewd Software early in July. Founded in 2002, the company is an independent OTT software provider for smart TV markers, connected cars and other applications, mostly in Europe. The deal is valued at $109 million, equal to about 5% of the valuation of Xperi, as the deal is set to add some $10 million in the second half of this year, revealing about a $20 million run rate. The resulting 5 times sales multiple looks a bit steeper, as no specific margin guidance has been given, nor growth rates have been reported.

Concluding Remark

It seems as if the company has been seeing solid momentum ahead of the spin-off, all while the valuations are non-demanding. Of course, it will be a challenge to see how the businesses will be spun-off and how corporate cost allocation will look like, but valuations do not strike me as very demanding here. This is certainly the case as the company has been seeing some real momentum on the corporate front in recent times.