XPERI (Risks (Samsung Litigation. Trial in July did not go well. SAMSUNG…
Semiconductor industry at peak cycle (reportedly). See MU and WDC
Suspect acquisition price for DTS
2 large OSAT clients coming off the books in 2018
New Revenue recognition accounting: ASC606.... Purchase accounting rules have left XPER unable to recognize some of the revenues from DTS. In 2017, Valueline noted that some $50M in revenues from DTS were unable to be accounted for.
Rising operating, R&D, and SG&A expenses. Higher R&D costs in SemiCon segment because it is working directly with OEMs on R&D.
Samsung Litigation. Trial in July did not go well. SAMSUNG FORMERLY 25% OF TOP LINE... this is what started the share price decline from $45 to $12 today.
XPERI is now suing Samsung in the case and the case has not been resolved. In June XPERI received an unfavourable ruling
On going patent litigation
Product Licensing MOBILE SEGMENT
Licensing revenues from blue ray players, gaming consoles and PCs caused a 13% declined in MOBILE segment revenues [THIS SEGMENT IS SUPPOSED TO GROW 21-23%/YR TO 2022]
$113M remaining on authorized share repurchse program.
Bought back $15M in shares in Q2 2018
neutral buying and selling
New CEO in 2017... He was the CEO of DTS for 17 years
Management owns 1.4% of stock
XPERI owns 5,500 patents. The median selling price for US issued patents was $192,500 in 2016. That puts the total value of the patent portfolio at $1 billion versus a market cap of $600M and an EV of $1 billion
GAAP earnings are negative, so no PE or EBIT multiple
EV = $1 billion. EBITDA has ranged between $125M and $200M = 5-8x EV/EBITDA
FCF = $100-$150M/year looking backwards. Market Cap = $600M =
17% FCF Yield
Customer Concentration: Micron = 11% of Revenues, Amkor = 10%
Total Revenue expected to grow 5-8% to 2022 and Operating cash flow at 8-15%
[37% of cash EBIT, 50% of Revenue)
Customers: Fujitsu, Harman, LG, Microsoft, Panasonic, Samsung, Sony, Acura, Audi, BMW, Ford, GM, Honda, Tesla, Toyota, Nikon
DENSO released new safety monitring product using facial recognition technolgies in May
DTS Connected Radio product Launched.. accept all signals AM/FM, HD Radio, DAB, DAB plus
Grew 7% Y/Y in Q2
They had to "build a new broadcast system for HD radio"
Competition = Sirius/XM, Pandora
In Q1 2018, XPER added 15 new radio stations to its total licensees. It also completed its Connected Radio integration with RCS, which caters to a broad base of radio station clientele. Penetration of HD Radio into North American autos in Q1 increased 23% Y/Y
Mobile = Audio and Imaging. they are in 25% of phones today.
Down 13% Y/Y in Q2 due to PCs and other legacy products
Home = Audio and connected devices.
Segment expected to grow 12-14% through to 2022 (weighted towards back half)...Auto at 12-14%/year, Mobile at 21-23%/year, Home at 7-8%/year
Segment down 7% in Q2 2018 because of gaming, blue-ray and PCs.... they think it will be up for the full year
Geography: 60% of revenues from outside of North America
Looking backwards they've demonstrated the ability to generate $100 - $150M in FCF/year for the past 4 years (2014 to 2017). Which is great. This year, they are telling us that they will hit $120 - $140M in CFFO, or $110 - $130M in FCF, so within that range. Which is great. BUT, CFFO YTD is $39M and FCF YTD is $11M, neither appear to be on pace. When asked this question, MGMT reiterates their confidence in hitting numbers with bigger Q3 and Q4. XPERI "Good" segment was down Y/Y in the first half of 2018 driven by legacy technology in Mobile and Home segment causing declining revenue which more than offsett gains in Auto segment. YTD revenues are down 7% in the "good" segment.... they say this segment will be up for the full year. XPERI "Bad" segment down 5% Y/Y, in line with projections. YTD Cash EBIT was $0. Longer term, they guide revenue increases in "Good" segment. I don't know how to project "Bad" segment revenues given state of semiconductor industry. Reportedly at peak. We rely on management's expectations for all of this.
Conclusion: We can't estimate EPV right now. We therefore need a 33% discount from NAV... which = 10.57/share