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Xperi Corporation (XPER): Evermore Global Opens New Position

Evermore Global Advisors sees a value in Xperi Corporation (NASDAQ:XPER), a California-based technology firm in which the fund started a new position during the third quarter. In its Q3 investor letter, (you can download a copy here), Evermore discussed its investment thesis on Xperi, expecting that the company will soon favorably resolve two of its main issues: Samsung’s relicensing matter and its ongoing patent infringement litigation with Broadcom.

Here is everything Evermore said about Xperi in the letter:

Xperi Corporation is a San Jose, California-based research and development incubator, engaged in developing and licensing technologies within semiconductor manufacturing, as well as delivering audio and imaging solutions across home, mobile, and automotive markets. At quarter end, the company had a market capitalization of $1.25 billion and an enterprise value of $1.73 billion. Shares have sold off more than 40% since Xperi’s Q4’16 earnings were released due to a wider-than-expected range for 2017 revenue guidance. We believe the market has grown overly concerned about two separate, but ultimately related, issues: Samsung, a 25% customer in 2016, has so far failed to relicense certain DRAM-related intellectual property, which was the primary genesis of the wide revenue range; and ongoing patent infringement litigation with Broadcom with an uncertain outcome.

To build a solid cushion into our thesis, we excluded any revenue from Broadcom (which would represent completely newfound business), along with the at-issue Samsung revenues (historically around $50mm). Shares recently traded at approximately 8.0x operating cash flow (“OCF”). Notwithstanding the volatility expected should neither the Broadcom nor Samsung situations go in the company’s favor, we believe this level of underlying cash flow generation provides a reasonable valuation floor.

However, we expect Samsung will ultimately relicense, and that the Broadcom matter will be resolved in the company’s favor in due course. In this scenario, shares are trading at 6.0x our estimate of OCF. Further, and what’s truly asymmetric about the investment is that a favorable Broadcom outcome should also have a cascading effect on Xperi’s business, as management believes this patent family is being widely infringed-upon throughout the semiconductor industry.

In terms of specific catalysts, litigation has recently begun in the Samsung matter, though there is always potential for a pre-trial resolution. With regard to Broadcom, the International Trade Commission (ITC), which is the primary venue in the matter, is set to complete its investigation by early December (note that findings from the ITC’s Initial Determination issued in June point toward a favorable resolution). Lastly, the company is a significant generator of cash, and has recently indicated it would embark on a significant share repurchase program of up to $160 million (approximately 13% of the market capitalization). Cheap, with clearly defined catalysts, and with reasonable downside protection at these levels, we believe investors are confusing uncertainty of outcome with risk of meaningful capital impairment.

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Xperi Corporation (NASDAQ:XPER) provides innovative technology solutions in areas including premium audio, broadcast, automotive, computational imaging, computer vision, mobile computing and communications, memory, data storage, and 3D semiconductor interconnect and packaging.

Shares of Xperi’s stock are down over 56% this year. The company isn’t profitable yet and does not pay any dividend. It has a market cap of around $940 million.

For the third quarter ended September 30, the company reported net income of $15.9 million, or $0.30 earnings per share, down from $28.6 million, or $0.57 per share, in the same period last year. Revenue came in at $88.5 million, versus $62.4 million in the last year’s third quarter. For the fourth quarter, the company anticipates revenues to be in a range of $83 million to $138 million.

At the end of October, Xperi’s board of directors approved a quarterly dividend of $0.20 per share, payable on December 13. The company paid $9.9 million in dividends to stockholders in September.

In the quarterly earnings report, Jon Kirchner, the CEO of Xperi Corporation (NASDAQ:XPER), said that the company will return to an anticipated growth path as it moves into 2018 and beyond. “Our focus on innovating in audio, imaging and semiconductor technology, coupled with building advanced, integrated hardware, software and embedded solutions, will provide important differentiation and deliver compelling and intelligent experiences to consumers. This strategy builds on a solid, diversified and attractive business, and will further enhance our ability to deliver strong profitability, cash flow, and long-term growth over time,” Kirchner said.

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