Thank you everybody for coming. My name is Nick Zangler. I cover AdTech and media at Stephens. Happy to have Xperi with us. Jon Kirchner, CEO. Robert Andersen, CFO. Guys, thank you very much for being here. You know, I actually think that, you know, in covering Xperi, I should get credit for covering, like, five different names, given all the various segments and how they're so different. But unfortunately, I still only get credit for one, despite all the time it takes to understand the business. But given that context, I'm hoping just to walk through the various segments of the business on a one-for-one basis, kind of as if, you know, I guess they were individual companies themselves. But obviously you are a company of many talents, and we'll find that out as we go through these segments.
Starting with media platform, right? This is 11% of the revenue base right now, but it's exhibiting the highest growth rates. The way I'm thinking about segmenting this is walking through the growth channels first and then getting to the segments that more support that growth with stability. Just for perspective here, when we talk about media platform, we're modeling $59 million in revenues here in 2023. I think you guys are targeting $190 million on a run rate basis, annualized by FY25. And what is really powering that is the new TiVo OS and relationships that you're forming on the TV OEM side.
Just to, you know, maybe starting with a status update on that, I think Vestel was the first relationship that you launched out of the gate. Just a quick status update on where we're at, where we're at with Vestel TVs launching with the TiVo OS embedded. Are they starting to hit the market right now?
Yes. So, as we said a few days ago, TVs are now shipping into Europe. We can see them starting to be activated, and, you know, I think one further update is, we now have confirmation there's orders from five other European countries, and there's five or six other brands within the Vestel portfolio that'll be shipping TVs as well. So in short, we're starting the process-
Mm-hmm
... of beginning to build footprint. And, you know, as we get through 2024 with more partners shipping TVs and ultimately more activations, you'll begin to see that, you know, turn into the monetization side, which is really the long-term opportunity and where, you know, significant growth, we believe, will come from.
Got it. And I'm just gonna allow these questions up, so you guys feel free to, to take them as you please. And if anyone has questions from the audience, feel free to raise your hand, interrupt. I'll ask every question if I have to, but happy to take them from you guys as well. But maybe you could just talk about the... take a step back, the overall operating system strategy. How have you guys gone to market that's different from some of the traditional players out there, the Rokus of the world, the Vizios of the world? I'd argue maybe you're the most TV OEM-friendly. So can you just describe the approach that you guys have taken in getting that TiVo OS into various TV OEM partnerships?
Sure. I think if you take a step back, one of the common investor questions of us is: Why do you believe, as Xperi, you can carve out a, you know, a meaningful portion of the CTV business in the face of a lot of competition and names and brands people are familiar with? And I think what's lost in that, in many cases, is the history and the size of the video services business that we have. We serve 30 million households today with video services in our pay TV space. So we have been doing this and, in fact, you know, invented some of the core UX design issues in legacy TiVo many, many years ago.
So, the jump to CTV is more about getting software onto TVs, and plugging in the existing infrastructure we have into the CTV business. So the leap for us is very different, as if we were truly a new entrant and weren't in this business. The second thing I think that's important that people don't necessarily fully appreciate is we already do business with all 15 of the top 15 TV makers in the world. We license them technology regularly for audio and other experience optimization. And so, part of the strategy was bring those two things together, the pay TV side, and experience with UX design, move it onto TVs.
What we're doing that's different, I think, is has a lot to do with really delivering an independent media platform model, which is we are not going to compete with our customers. We're not gonna make TVs, which is what you're seeing out of a lot of the competitors. We are licensing software and building partnerships where the actual TV OEM can own the brand, they can own their customer. We will share data, and they obviously will have prominent billing in ways that are important to their businesses, not only to sell TVs, but other goods around their brand inside the home, which is very, you know, one of the core tenets around the importance of why TV is so big. And then we share long-tail economics with them as well.
So that combination of truly being independent, supporting our customers, and giving them that control and participation, I think is what really sets us apart. And then lastly, from a technical design, we are not promoting a sea of apps, where the consumer has to go through and know where content is available. We actually do the opposite. We have what they call a content-centric approach, where you look for your content, and we'll tell you where it's available. So your time to content in the search and discovery process is not only far faster but far more gratifying, and we know from consumer studies that that actually drives more engagement on the platform. More engagement translates to more monetization opportunities. So, and this is something we've, you know, honed over many, many years, in the business.
So I think that, that puts us in a really good position to accelerate this. And the, the last piece of this is maybe, you know, the, the empirical evidence of this is: a year ago, we said we'd be, you know, trying to, to land 1-2 partners in this space. We've now announced that we have 4, and more to come. And so I think people increasingly are seeing the, the benefit and the wisdom of this, and I think it gives us a lot of confidence as we look ahead over the next couple of years.
... Yeah, definitely seeing execution there. So you, Vestel, like you said, was the first win. Following that, you guys announced Sharp would also embrace the TiVo OS, and then thus far, there's two unnamed OEMs that I'm sure we'll find out pretty soon. But that gets you to four. At one point, you talked about, you know, targeting four to five TV OEMs. Can you talk about your goals from active user count that gets you to that hundred ninety million that we talked about? And then what also, like, the ARPU that's attached to that. I think, again, the ARPU dynamics are a little bit different for you guys because, relative to the players out there, because you're gonna share in the economics, unlike those.
So, if you could just kind of frame out your more granular targets as part of that $190.
Sure, I can help on that a little bit. So when we said on our Investor Day, sort of late last year, is that we expected to be in 7 million TVs within 3 years. So that puts us, you know, kinda exiting 2025 at 7 million TVs was our goal, and I think we indicated that would be probably, you know, 4-5 OEMs. So we're sort of already there on the OEMs. Technically, we could just get there with Vestel. They ship that many TVs. But I think we ultimately felt it was gonna be a handful of partners in how we get there. The other thing on the ARPU is that we outlined a $20-$30 ARPU. And you know, since we're going into Europe, which has different economics than the U.S., that's a reasonable number.
But I think we're also looking. This is an industry that already exists, so it's a reasonable target, I think, for 20-30 for us. And that you don't get that right out of the gate. It takes a little while for a TV to monetize, and you know, it's gonna depend on the mix for where we are geographically. We do expect to be in the US, as we described, next year, and that's really gonna be the highest ARPU market. So I think it'll. And it's gonna depend on our mix, but that's- I think those goals, as we laid them out, are looking, from this vantage point, very reasonable. And our confidence in kind of getting there has increased a lot as we've made this progress within the business.
Got it. Any further details on your footprint across Europe now and where you see it going forward?
I would say we've said that there are units going into the Czech Republic. I mentioned orders in five, you know, five or so more countries that are pending. Countries like Germany, Switzerland, Hungary, Austria, among them.
Got it. And then you kind of alluded to it earlier, just hoping to expand on it a little bit more, but, like, the TiVo OS.
Mm-hmm.
You know, how does it stack up as an operating system relative to the leaders in the space, like the Roku OS, Amazon, Google? You kinda talked about the content first strategy, but, I mean, if you were to compare what you guys offer relative to the leaders in the market, is there anything that you would say that you have a more enhanced ability or, or anything that you're missing that some of the larger players do offer?
Missing, no. Obviously, there are different, slightly different bundles of content across the platforms. I think the content first piece and search and discovery, if you were to use them side by side, you would find our search and recommendation engine likely better, more accurate. You know, if you do the same search query on two different TVs from, you know, two different competitors, you may end up with very different results. We feel pretty good about that. So I think that's, that is a core difference. We are providing, you know, similarly, what TV makers need to drive, you know, to control their TVs, find content, and ultimately to monetize it. And you know, as you can appreciate, we've done a ton of benchmarking, you know, around that, and feel very good.
So, you know, in short, I think we have what we need, and we'll continue to build out the content footprint, which was ever-changing. I mean, we've got, you know, major services, and of course, you optimize them by territory, but we also have, you know, 160 channels of curated content out of roughly 800 channels available to us. We've got all kinds of content that we're curating in different ways, and the goal there, of course, is to give consumers what they want, so you can ultimately drive the greatest monetization.
Nick, Nick, I'd add, like, when you, when you ask yourself: What are you good at? When I think about that for Xperi, we are really good at search and discovery, and we are really good at partnering, and we've been doing both of those for a really long time.
Mm-hmm. Just quickly on the monetization front, will that primarily be led by direct sales or leveraging the programmatic bids or bid stream?
I would say the vast majority are programmatic. There certainly will be direct managed campaigns, you know, as you'd expect in other businesses.
Got it. Okay, so just a wrap on the media platform. 59 million are now growing to 90 million run rate by 2025. That's through that active account growth, the ARPU that we talked about. The gross margins on this business are 30% now. Where do you see that going to over that 3, 4, 5-year period?
Yeah, we've within the media platform space, we indicated that we expect that to be in the seventies.
Got it. Great. Okay, I was gonna move over to Connected Cars now. This represents 18% of revenues currently. So just again, for perspective here, we're modeling $93 million this year, and we're targeting $120 million exiting 2025. So within Connected Car, there are areas of stability and maturity, I guess you might say, and then there's areas of growth. But can you first talk about, on the stability side, the monopolistic position that you guys have established in HD Radio, how many auto OEMs you've penetrated, and what the revenue looks like within the context of that, I guess, you know, $93 million that we're thinking about for this year.
Sure. So, you know, in general, the lawyers don't like the term monopoly. But we happen to have the sole digital terrestrial radio standard in the United States and Mexico. So, HD Radio is that standard. We do, as a result, and over two decades of effort, we do business with all 42 brands sold in the United States, and we penetrate roughly 50%, slightly more than 50% of your annual car volume in any given year. So it's a well-established, very durable franchise, and interestingly, you know, radio, and even as we're enhancing radio, we'll talk about in a second, is still, you know, one of the most common platforms of entertainment in the car. Something like 90%+ of the U.S. population touches radio weekly, you know, for example.
You know, it is stable, doing well, and, you know, today represents a big bulk of our automotive business. We're building on top of that with some new products, which I know you'll get into.
Yeah. So basically, now we get to the growth side here that really gets us to that $120 million. These are comprised of AutoStage, AutoStage plus TiVo-
Mm-hmm.
which is, you got some recent very exciting announcements there, and then AutoSense. So I'm just hoping to take them one by one, starting with AutoStage. Maybe you could just obviously just describe what it is, the adoption you've seen thus far and the ARPU that you have commanded attached to it.
Sure. So AutoStage is next-gen radio, and what it does is it brings it brings more rich elements into that radio experience, so think visuals on your your video screen inside your car. So whether it's more advanced cover art, you can even bring ad, you know, related activity, you know, other sorts of information in addition to radio. And the way we do that is by pairing an IP-based data radio signal with the radio signal that otherwise exists. So you actually have, if you will, two channels into the car, so you have more room for more data, and you can do more interactive things. Traditionally, radio has been a one-to-many delivery system. You push it out of a radio tower, and you touch a bunch of cars, but the cars don't talk back to the radio tower.
With AutoStage, you actually have two-way communication because you have a different channel, and therefore, you can deliver far more richer media experiences. And the other interesting thing about AutoStage that's different than HD Radio is that AutoStage can be put on top of any underlying radio system in the world. So it's not limited to North America, as HD Radio is entirely North America-centric. So you can put it on top of FM, you know, in a foreign country. You can put it on top of DAB in Europe. You can put it on top of anything. So it's a piece of middleware that automakers can deploy globally, which increases our TAM meaningfully beyond just U.S. North American automotive volume.
The economics around that, we tend to think in terms of, of lower dollars per car with a much more expanded TAM.
Mm-hmm.
And I think what's interesting is the follow-on to that, and this was envisioned in the original TiVo-Xperi merger back in, you know, back in 2020, was that video would find its way out of the living room into cars. Cars, you know, today are, you know, kind of a new living room of sorts. You know, the most. It used to be the most technology in your life existed in your living room, if you think about advanced tech. Today, that is very much your car. And so as you think about EVs and charging, semi-autonomous driving, et cetera, video is coming into the car, and so we have now begun to layer video into that AutoStage platform powered by TiVo.
And again, it's leveraging the back end that we have that's headed towards consumer devices in the living room.
You got some really exciting wins here. You wanna talk about those?
Sure. So, BMW is the first partner to launch our AutoStage video service powered by TiVo. They are pushing it out in the new 5 Series that is actually finding its way into showrooms today.
Mm.
in the US, as well as in various markets around the world. And they have further indicated that they will be looking to expand the models that they're pushing this to, in the nearer term. So, you know, it's a very exciting example of this progress and interest in the industry. We've also announced that we have a second European automaker that is going to be adopting video in their Asian vehicles beginning in the 2025 model year. So, you know, you can see this video trend. Every meeting, you know, as recently as a few months ago at a major trade show, talking with major car company executives, every meeting pretty much started with the video topic. So we're... And that is broadly greenfield, right? You have screens in cars.
People are interested in putting content to them, but there is also, I think the opportunity in our view, in the longer run, there's monetization opportunities there, the same they would be in your living room. So there is, I think, significant, you know, downstream opportunity in automotive around the entertainment arc-
Mm.
in general, and I think we're very, very well-positioned by virtue of decades in the business, trusted partner, independent platform. So you can see the same themes, you know, kind of hitting the car that we-
Mm
... kinda have in the living room.
That's actually... I mean, this is where you guys have such a potentially unique advantage because unlike the other CTV OS players, you guys have an existing and lasting relationship with all of the auto OEMs. So, like, considering that, do you feel that you have probably the leading opportunity to bring TiVo into the cars versus the competitors that are out there, maybe trying to do so as well?
I think we're very well positioned. I think the other, you know, not so subtle element of this is we're independent. We're not putting our car maker partner, you know, UX experiences at risk. We're not asking to take over the cabin, that you might hear from some of your Big Tech partners. We're not asking to disintermediate them from their customers. We're basically saying: Let us partner with you, so you can deliver your own experience. The experience in a Mercedes is very different than in a BMW, very different than a Lincoln.
Mm-hmm.
They all want their own special sauce 'cause it's key to driving their own brands and their experiences, and we can partner with that very effectively. So I think we are very well positioned, you know, to be that partner over time.
Right. I think I'm stealing a line of yours, but, you know, a reason why they might not want to partner with Big T ech is because the OEMs themselves do not want to be considered at the end of the day just to be metal and rubber.
That's right.
Right?
That's right.
They want to own the experience.
Metal, metal, glass, and rubber.
Yeah.
You know, when the business gets reduced to that, you know, things change. You know, when you think about the typical purchase experience for a car, you know, people think, you know, brand, size, and then when they hit the dealership, they're primarily tinkering around in the cabin. Very few people ever open the hood and take a look anymore. I mean, it's rare. You'd have to see a seventies car commercial where somebody opens the hood and stares at the, you know, the exhaust manifold or whatever the case may be. So it is a very different game, and entertainment is central to that thesis, and it is also central to the profitability they drive in and around these cars.
Are you willing to talk about the ARPU difference between AutoStage and then the enhanced product, AutoStage plus TiVo, or just, the monetization?
I think there is the video business is nascent, obviously, but it will first exist on a SaaS basis, so we will get a subscriber fee per vehicle per year. You know, think in, you know, in the lower dollars. But I think the more interesting thing is that it is really the longer term monetization opportunity that I think is really interesting, that will evolve as there's more scale and opportunity, and advertisers, you know, begin to appreciate the cross-platform advertising opportunities that may, you know, exist in the vehicle. It'll also depend on driver habits, when and where are people watching these things?
For example, is it only sitting at chargers, charging stations where there's, you know, less, or where there's no driving risk versus, you know, semi-autonomous mode, and how all that plays out? So there's a lot to be learned, but what we know instinctively is the advertising model is tried and true and well-established vis-a-vis video-related user engagement, and there's no reason we don't believe that could show up longer term in a car. So I think it's, you know, we're clearly seeding the market with a business model that we think works in the near to mid-term, but I think the interesting question we'll all be evaluating is where does it go from there?
Right. Right. Jack.
Can you talk about the new AutoStage program with Ford and everything like that?
Sure.
In terms of number of OEMs?
Sure. So we do business with all the U.S. majors as well, although we just announced that Ford had selected HD Radio and AutoStage for one of their new car platforms, which will expand the use of our technology in Ford vehicles. Which is great. I think they're you know, they're very you know, I think technology-focused and they're doing you know, a lot of work around how do they make the in-cabin experience ever richer. So you know, I think the economics and the components of what we offer them are very similar to what we're doing with others. Obviously, the video element there is...
or there is no video element there in that initial, you know, stage, but as you can reasonably expect, you know, all these conversations are ongoing, and the good news is that adding video to the platform is, you know, not a major deal. It's more a function of licensing and just making sure you got the chipsets where you need them to be, and the code, you know, ready to go.
The final aspect within the growth engine of the connected car business is AutoSense.
Mm-hmm.
Can you describe what you guys have built there, the adoption you've seen across OEMs, and if you're willing to comment on the ARPU dynamics of that product?
Sure. So, AutoSense is actually a safety product that we have a lot of imaging expertise, and increasingly, people are looking to put cameras in cabins to do what they call driver monitoring or occupant monitoring, where you're keeping track of what's going on inside the cabin, so that in turn, the car can either take certain action or prompt the driver to take certain action, i.e., you're not paying attention, you know, have a vibration reaction or a ping reaction, or even in the most extreme case, with more advanced vehicles, literally pull you off the road, you know, if you're not attentive. Those decisions are not for us. We're just providing input into a system. The automakers get to decide what they wanna do with the feedback.
But that is a growing area that is also getting some regulatory support, where, you know, some of the proposed standards over the next few years are going to require, in order to get the highest safety ratings, that these systems live on board. We happen to have particular expertise, and we have won a fair amount of business. People like BMW are already shipping a driver monitoring system product that we have in their cars today. And we have announced that we have other Asian OEMs that'll be coming to market. So, in short, it's a... it's not necessarily directly aligned with entertainment-
Right
... but it is a place where we have a lot of expertise, and we have, you know, been building a business. Dollars, you know, think lower- to mid-single-digit dollars in that space, depending on the bundle. There's a lot of different features one could have that would determine ultimately the pricing. But I think this area for us, you know, remains something we're looking to build. You know, clearly, there's a lot of investments being made by the industry and therefore being required of us to, you know, to pursue this, but over the long arc, you're gonna see these kinds of systems end up, you know, in cars pretty uniformly.
... Quick near-term question. The recent auto strikes that occurred, I mean, it seems like they've effectively been resolved now, but is that expected to weigh at all on production next year and, you know, have any impact on your connected car growth as we look into 2024?
Yeah, we've definitely seen some impact. For us, we're pretty heavily weighted into the Asian manufacturers for HD Radio, so that's been mitigated to some extent. But we've certainly felt a little bit of it, and I think it sort of remains to be seen at the moment how long that strike activity is gonna go since there's some uncertainty at the moment.
Right.
Yeah. I mean, it's just for the benefit of those that don't follow it, there have been agreements, but they're—those agreements are being ratified right now. And there's, you know, one or two examples domestically where people are, you know, it's not clear that the votes, you know, are gonna fully pass. But I think we're presuming going into 2024, they sort it out. It's in everybody's best interest to fully sort it out. And I would say the broader industry research is the automotive business is kind of up 4% year-on-year next year.
Mm.
So, you know, we'll have more to say about how that directly impacts our business with our mix as we get into February. But, you know, in short, I think hopefully, you know, we'll move through this period with minimal, you know, impact and keep the—you know, keep the progress going around growth.
Cool. All right. So to wrap connected cars, again, modeling $93 million this year, you're targeting run rate $120 million by FY2025. The growth is coming from AutoStage, AutoStage plus TiVo, AutoSense. Gross margins in this business, 80% right now. As you continue to see increased adoption of these new products, does that change at all as we go into 2025, or does that remain relatively stable?
I would, I would hold it relatively stable. I don't think it changes too much.
All right, next segment of the several that you guys offer, pay TV, 46% of revenues. Now we're getting more into, like, the stable businesses, right?
Right.
But there is still growth elements within them. So again, pay TV, 46% of revenues, you know, getting to that growth aspect, the IPTV segment, right? So I think you had 1 million active accounts here, last year. This year, just over a million right now. But effectively, the concept here is you're taking the TiVo OS that we've already talked about, and it's gonna sit on pay TV subscriptions and provide users with a modern-day CTV experience for partners that otherwise, you know, wouldn't be able to provide that to their pay TV customers. If I have that correct. Correct me at any time or if you have any, adjustments there. But effectively, you know, within this business, like I said, a little bit over a million subscribers here through all the relationships that you've, that you've driven.
I think you're seeing double-digit growth rate and effectively targeting nearly 3 million IPTV subscribers in 2025. So that actually takes this business, I think, from $40 million to $100 million over that, that time period. But there... you, you guys segment a few things within pay TV-
Sure.
-right? So effectively, this whole segment maybe is a slow growth or flat grower. But can you just talk about the dynamics that are going on within this segment? Maybe define IPTV a little better for me if you need to. And then talk about the pieces of this business segment that are actually maybe in a secular decline and weighing on that overall growth outlook.
You wanna start with IPTV, and then I can kind of talk about the overall segment?
Yeah, sure. So, I guess the first place to start is that IPTV, in many ways, is kind of the successor product to your traditional cable set-top box, which is what they call is based on a QAM system. Biggest difference between, you know, your newer IPTV and the old system you may be familiar with is that they're not only a lot more flexible, but you can build things like streaming capability into it and integrate the traditional cable delivery with streaming and whatnot. So, our customers are increasingly interested in modernizing their experiences at a time when people are cord-cutting. So there's, you know, three reasons that people, you know, may wanna migrate their installation bases to IPTV. One is, you know, better, richer experience.
The second is the cost of maintaining, you know, some of the newer IPTV systems is a lot less than trying to maintain some of the older, you know, big iron hardware that was required. And so it's in their interest from a cost perspective to try to migrate people. And the third reason is that you can evolve IPTV, so internet protocol-based television, those systems in a way that's much easier than you can do it on the older systems because you can flash software updates and do all kinds of things, 'cause they're basically much more modern boxes that are less expensive to produce on the front end and more flexible on the back end.
And so, we have basically two types of IPTV business within that segment, and the industry, you know, as they're looking to hold on to customers and as they're looking to offer broadband services, one of the interesting things we know is that people who have broadband subscriptions, who also have video subscriptions, are far stickier customers than if they only have broadband only. So there's a real interest in getting, getting the customer base into, video-based, solutions. And the two varieties we offer is we offer an IPTV solution where we offer part of the system, and it's integrated with other third parties. And for that, we tend to, to generate, you know, think, you know, lower dollars, in monthly subscriber fees for that because we're offering part of a system.
We now also offer a managed IPTV service, which is a little less flexible, but we offer the whole thing. This is coming out of a transaction we did with MobiTV a while back. And there, we're talking $6-$8 per subscriber per month. You know, so it's more financially attractive. Long story short, we're trying to take that, you know, 1 million-ish subscriber base up to nearly 3 million, and that growth, you know, in and of itself, because it's coming at more gross dollars to a large extent, serves to offset the secular decline that is happening in your traditional legacy cable TV.
So where people are cord-cutting and moving off those systems, where we're also getting royalties based on our classic guide, you know, type products, but they're rolling off at smaller dollars than some of the IPTV. So there's this interesting mixed question of what's the rate of decline relative to the rate of growth? Big picture, we're simply trying to, you know, neutralize that decline, position the business in a forward-looking way, consistent with where our operators wanna be. And at the end of the day, you know, whether it's at a slight decline, flat, or, you know, over a longer arc, you know, slightly better than that, that's our objective in building it out.
Yeah. So and I think if you think about the pay TV business that we kind of report in aggregate, there's several pieces in there that what John was describing. So we have the classic guides business, which has been subject to cord-cutting. We also have our hardware, right? Our historic hardware and subs business, and so that's in there. That's also kind of in secular decline. We have discovery business, where we sell search and discovery capabilities. That's sort of level. And then we have this high-growing IPTV business. So you've got a lot of dynamics going on within the group. As we've seen in the past, it's generally been declining at about 5% per year on average, you know, when you put all those pieces together.
In this last quarter Q3, we actually saw growth in this business, which I think surprised people a little bit. We had a very strong quarter in IPTV, and we also were doing audits of customers in the classic guides business, and occasionally we'll get some recoveries there. So that dynamic sort of mitigated the year a little bit. We'll have more to say about what we think the outlook on this business is when we do the Q4 numbers. I still think it's a decliner in the near term, but that may mitigate a little bit over time. So we'll describe that a little bit better as we go forward.
Yeah.
Question from the audience.
Could you talk a little bit about what you got from Mobi, what you paid for Mobi, and what you've gotten from it since then, and how it fits into this one-
Sure, sure.
...
So the question is, what do we get in the Mobi transaction? I wanna say we paid roughly $15 million out of a bankruptcy proceeding after I think they had raised hundreds of millions of dollars of capital. So, you know, from our standpoint, you got a lot of leverage in that, and I think very well orchestrated by our team. We got a backend platform that interestingly had been technically very well established and very stable in supporting customers. But I think part of what they were trying to do business model-wise and execution, they were not solving for some of the things that we brought inherently in the transaction.
So we could take that platform, which was very stable and technically very robust, and in turn, also work with customers to reprice some of the services in a way that, you know, was more reflective, we think, of the value proposition and whatnot. And coming out of that transaction, I wanna say, I don't think we lost any of our customers that they had originally had and built on that, and-
Who else do they have going?
There are other smaller players that are making, you know, you know, managed solutions. But I think the value prop in totality, for us has been very good. So today we have, you know, every customer they had, you know, plus more. And we are increasingly seeing from broadband people the desire to do managed services. Why? Because it's the most cost-effective from where the partner sits to do it. It comes with... You know, you don't have unlimited flexibility. People that wanna do the partial IPTV solutions kind of wanna build their own, and there's all kinds of customization that go on between us and other partners.
But we like it because it's cost-effective and scalable across a bunch of customers with slightly different skinning, and the performance around the, you know, the acquisition and the asset has been very, very good.
Yeah, the scalability of the business is really for, especially for the hosted kind of MobiTV backend, is a great business.
In your educated opinions, why did they go bankrupt?
Oh, a bunch of, I would say, as usual, a bunch of decisions that perhaps in light of where the market was going, you know, just turned out to be, you know, not, not wise. You know, and, you know, we're living in a world where scale matters. That's the other thing. It's hard to be a totally a bit part player in some of these things, and so you take on a lot of pressure, and you end up doing deals that maybe are, you know, are not long-term sustainable. And when you come, you know, to the table with a much bigger footprint, you know, and much more scale, knowledge, capability, you can right some of those things. But it would be a much longer conversation as to, you know, those issues.
But I think it's also fair to say that we tracked what they were doing for years before, you know, we ultimately decided to do it and felt it to both be timely, you know, cost-effective, and where we could leverage what they had built without losing a lot of it. Sometimes when you buy broken assets, right, you end up seeing further deterioration after you buy them. In this case, the team was unbelievably successful at basically building on top of where they were and taking it forward with the industry.
... All right, so just wrapping up this piece of the business, $245 million in 2023. We talked about the dynamics. There's areas of growth, IPTV growing from 40 to 100 over time, but then other areas in secular decline. So basically, a flat-ish type business, and I think the gross margins here are at 70%. Correct?
Yeah, that's about right.
Okay, great. And then moving to not quite the final piece of the business, 'cause you've got another one now that's starting to generate revenue, but we'll talk consumer electronics. Well, I guess Perceive fits within that, but we'll get to that in a second. 25% of revenues here are sourced from the consumer electronics side of the business. This includes DTS Play-Fi, which I describe that as a duopolistic maybe type product there, IMAX Enhanced. But maybe you could just talk about the various products offerings you have there, and then how you've saturated the market with including, like the DTS audio codec in virtually all or most consumer electronic devices. Just so your presence there, and maybe just describing the offerings more in general.
Sure. So our history in the CE business goes, you know, way, way back into the 1990s. First and foremost, around the audio brand DTS, which, you know, was launched as a startup in 1993 in the theatrical space, then launched a consumer licensing business, and ultimately became part of the mandatory Blu-ray standard with Dolby. So DTS lives in effectively a duopoly between Dolby and ourselves. As a result, we are both penetrated widely across all kinds of audio products, you know, in AV receivers, speakers, sound bars, TVs, you know, et cetera.
It is a very good, stable, durable, highly profitable business because you're really, in many cases, and, you know, you're investing on the margin for further innovation, but a lot of the core has been there for a while. On top of that, we have other newer initiatives. One is what we call DTS Play-Fi, Play-Fi Wireless, think Sonos, but where you can have wireless connectivity across devices inside your whole home audio system that are not made by the same brand. So it's middleware that connects, you know, speakers from X, Y, and Z partners and makes them function as if they were one, similar to, you know, what Sonos offers. But in Sonos's case, you have to stay only within their brand. You can only buy their speaker types, you know, et cetera.
That has been, that has been, you know, slowly growing in different ways. There's a lot of dynamics in the back end of the ecosystem between some other Big Tech folks that kind of dabble in that industry. But that is something we see continuing to grow, and that involves both licensing fees on TVs as well as actual hardware modules that go in devices. And then you have IMAX Enhanced, which is a partnership we have with the company IMAX, to bring a consumer version to televisions, of what they do in IMAX theaters.
It is a, you know, kind of layered on licensing opportunity, where we have certain visual specs, and IMAX content when played in the IMAX Enhanced format on your home television, you know, with the appropriate equipment, gives you, we believe, the very best possible consumer experience you can get. And that is a program that, you know, continues to expand as well with, you know, partners like Sony, Sony TVs, or IMAX Enhanced, TCL, et cetera, et cetera. So those are some of the things that are on the margin driving growth within CE, even as part of the rest of the legacy, let's call it audio business, kind of ebbs and flows with market volumes-
Right
... and because we're highly, highly penetrated.
Right. But the margins here are 90%.
Yeah.
Correct?
Yeah. It's a fabulous business.
Great. Okay, and then finally just getting to Perceive, which actually will fit in the consumer electronics segment. Some really cool, exciting news here, on the Perceive front. So Perceive is a semiconductor startup incubated within Xperi, really focusing on inferencing at the edge. I'll let you guys kind of describe, you know, more of so what that means. But the new revelation here is that you've landed a Big Tech customer who's going to license the technology here. Can you talk about the dynamics of that deal? Where do you expect, you know, revenue contribution to proceed going forward with Perceive? And then just overall, like, what exactly is Perceive offering? What is inferencing at the edge? What does this chip provide that, you know, maybe some other players might not?
Well, maybe I'll start with Big Tech. People keep asking, "What is Big Tech?
Yeah. Well...
Think of those six uncertain , big companies.
Yeah.
It's one of those.
Yeah, so, if I may, Nick, I want to expand your aperture, that this is not solely a chip play.
Right.
The reason being is, we built a chip and software solution originally targeted at consumer electronics applications, like advanced video applications, for example, but the software can be used independent of the chip. The core notion behind Perceive is, you know, in a world of AI, you know, there's a lot of desire. What does AI do? In many cases, it generates inferences. It takes information-
Right
... and then predicts, you know, what that data means or something that may happen in ways that can customize the human- machine interface in all kinds of interesting ways. One of our contentions as we looked at this years ago, was that, you know, the data center-only model for inference was not likely to be sustainable if AI was gonna be everywhere. And the reason being is you have a lot of data latency, time latency, and it costs a lot of money to shift bits up and down to the cloud, to constantly have the cloud brain do all the work. And that ultimately it would follow the PC evolution a lot like what you saw back in the mid-'80s with IBM PCs, where it used to be you'd go to your...
I think about this in my college days. You know, I'd book time on the VAX or Unix system, and I'd get a little bit of time with the brain, but then I was done. And then all of a sudden, the PC shows up, and you can do a whole bunch of stuff actually on your desktop. And that made computing explode in a lot of ways. This is the vision around AI at the edge is that core idea that you're gonna, of course, have sophisticated models in the cloud, generative AI, et cetera, but a lot of that ultimately can be done at the edge if you can figure out how.
The big how issue is: how do you make it small enough that it can cost effectively run on chips that are available on consumer devices? And Perceive's mission is dealing with that core issue. How do you compress big models, make them smaller without losing key accuracy, because nobody wants something that doesn't work, even if it runs at the edge. And how do you deliver that? We originally designed a chip for this purpose, and we have licensed, you know, some of the software in that core design to a Big Tech partner, who is going to take that forward, I think in some products that we're super excited about after, you know, a long period of evaluation.
Recognizing revenue this year, we certainly see some in 2024 and more in 2025, and as that product ships, there's a variable component to what we'll build on top of that. Meanwhile, though, the big prize here for Perceive is LLMs, large language models. This is, think, you know, ChatGPT and whatnot, where increasingly the industry is, "Hey, if we can throw more," what they call parameters, "at an AI issue, we can get to better, more interesting results to make that computer be ever more precise, human-like, et cetera." The problem is as the weights, the so-called weights or parameters go up, the bigger those models are. And so all of your big, you know, tech providers and people thinking about, you know, how do you deploy truly advanced AI in a massive way?
It can't all live in the cloud. You know, the amount of investment required and energy required to run all that, you have to figure out how you get good results on using a way to shrink it down. So we are doing core work very aggressively and engaged with a few folks around the core notion of how do you take large language models and make them smaller to make them more efficiently run, either directly at the edge or even in between. And that is something that, you know, will... It's our primary focus in the near term. And if we can crack that nut, I think it's fair to say that, you know, there's a lot of value creation to be had there.
But in the meantime, we've focused our Perceive efforts, if you will, mitigating the expense to the business as we're now generating revenue, because we wanna keep this in context of our other desire, which is to expand EBITDA margin, you know, over time.
I would've liked to spend the whole 45 minutes on that piece- ... but when you're, when you're five companies in one, it's-
Well, you do a good job covering all of our companies.
Yeah.
Great job.
You do a great job.
But okay, but just, just to finish it all together, I know we got another minute. We're modeling $525 million in revenue this year. If you add all these up, all- everything we've kinda talked about, I think you get to $680 million in 2025. Adjusted EBITDA is at 7% now. How do you think about the leverage you get as you grow to that potentially $680 number over time?
Yeah, we've given some numbers, kind of looking out, sort of the three years from last year into the 25%-30% range. I think what you'll see is that gradually working its way up. I expect we'll be in double digits next year, and we'll give some more description on that. But that's really under the... It's enabled by the growth in the business, which starts to hit sort of next year. We start to see some of these initiatives taking off as we focus the business on the returns and as we optimize the business, and that's something we've... All of those things we're focused on at the same time. So profitability is very high on our list.
Well, as much as following you makes my brain hurt, I really do enjoy it.
It can't be that bad.
You're doing exciting stuff.
Yeah.
Thank you, guys, very much. Appreciate it.
Thank you.
Thanks, Nick.