Xperi Inc. (XPER) Earnings Call Transcript & Summary

Welcome, everyone, to Tobii's webcast today, where we will be sharing new information about our exciting announcement this morning that we have reached an agreement to acquire Xperi AutoSense. Joining me today are Magdalena Andersson, the CFO for Tobii; and as well as Carolina Stromlid, who is the Head of IR for Tobii. We are going to be taking questions after this presentation. So, if you have questions right now, please feel free to put them in the chat already now. Okay. So, let's get started. As I mentioned earlier, we announced this morning that we've made a transformative acquisition for Tobii. And this acquisition is in the automotive interior sensing market. What I want to do in the presentation today is provide a little bit more context as to the strategy that Tobii has been executing under, how this acquisition fits into the strategy, what our group will look like after this acquisition is completed. And then we will have Magdalena share some additional details around the transaction itself, the financial structure of the transaction and provide some guidance for the automotive business going forward, as well as the transaction. So, let's start first and talk about Tobii overall. Tobii's mission is to improve the world with technology that understands human attention and intent, a technology that we call attention computing. Today, we address this market in 2 main ways; with our Products & Solutions segment, which is a vertical set of offerings, primarily targeted towards universities that do research, pushing the boundaries of science, selling products into companies that are trying to understand customer behavior. We also deliver solutions into end gamers who are looking for more immersive experiences. This segment over the last couple of years has seen 8% revenue CAGR at a gross margin of about 70%. We expect that the dynamics for this business is that it will demonstrate stable growth and present low overall business risk given the large number of customers in the space and Tobii's leadership position in the verticals we play in. The second segment that we have is the Integration segment. And this segment sells into customers that incorporate our technologies into their own offerings. Typical customers for this space are people that manufacture VR headsets, PC manufacturers, medical device companies, et cetera. This segment over the last several years has had 15% revenue CAGR and has a gross margin of about [ 90% ] as we have shifted from a hardware-oriented set of products in the segment toward more software. The Integration business is expected to deliver high growth, but is also exposed to higher risk because success for Tobii in this segment depends very much on the success of our customers who incorporate our technologies. Now a clear part of our Integration segment has been the focus around the automotive sector, specifically to enable companies that are deploying driver monitoring systems into their portfolio. And this has been a focus for us for the last several years and something that we have been very vocal about our ambition to become a leader in. So, let me talk about what the market is that we intend to go and address. The automotive interior sensing market is made up of 2 major components. One is Driver Monitoring Systems. And Driver Monitoring Systems or DMS, these are technologies that are primarily focused on making the cars safer. They focus on ensuring the drivers are paying attention to the active driving and adoption of DMS technology has been driven by legislation, starting in 2019 in the European Union, but is now getting picked up in regions across the world. Automotive interior sensing is a combination of this driver monitoring solution set as well as a companion set of technologies called Occupancy Monitoring Systems or OMS. OMS systems have typically been targeted towards comfort and convenience features typically towards premium car manufacturers. But we expect that as the DMS products penetrate the market more broadly, there's an opportunity for OMS to pick up as well because in many cases, OMS can share the same hardware that is used to deploy DMS. And so it's relatively cost effective to deploy that technology into the marketplace. There are also elements of OMS that are related to safety in specific cases, for example, understanding whether children have been accidentally left behind in the car. And in the United States, there's already legislation looking to target and minimize the effect of that kind of incident happening. Now, if we look at the size of this market, one way to look at potential opportunities here. So, look at metrics for the Driver Monitoring System market alone. The chart on the left shows the overall market projection for DMS systems. This is the combination of all elements inside the DMS portfolio. And the market estimations are that this market will grow to about $5.3 billion by 2023, which is about north of SEK 50 billion. We expect that the software contribution, which is where Tobii would play is about 10% of this market. So, we think that's about a SEK 5 billion per year annual market for us to play in. And that is just DMS alone. We expect, of course, with the addition of OMS that there's potentially an even larger market for us to plan. It is this market opportunity that makes it such an important target for Tobii's attention computing portfolio. The automotive interior sensing market is a large market. And actually, in contrast to some of the other places where Tobii plays, it's a very predictable market. The market is very predictable in the annual volumes that it drives. And given the legislation driving the adoption of DMS, we think that it's very predictable that penetration rates of DMS will rapidly increase and approach 100%. This represents a large growth opportunity and a predictable growth opportunity for the deployment of attention computing. Now, from a Tobii perspective, we have invested in this segment starting in 2019, and we have started with a focus on Driver Monitoring Systems, where our technology capabilities and confidence from the eye tracking field have the most direct parallel and similarity. Over the last couple of years, we have built our solutions and delivered products into this space. We are engaged in multiple RFQs in Driver Monitoring Systems. And earlier this year, we announced our first design win. Now, when we look at how -- and what it takes for us to build a leadership position in this space, we believe 2 sets of things. One, of course, that the overall market is strategically important to Tobii. We've talked about the large market that this represents, the predictable growth that this market will represent for Tobii. But we also believe, of course, in order to build that leadership position, a comprehensive product portfolio is becoming critical to win. This starts, of course, with Driver Monitoring Systems, which are legislatively mandated. Driver Monitoring Systems are required in almost all the RFQs we see and we see already that attach rates for DMS systems are quite high. And we expect that as these safety systems get picked up, attach rates will move towards 100%. Today, OMS is marketed primarily as a premium, convenience and comfort set of features. Typically, the RFQs that we are participating in now, they have lower attach rates. But there are signs that there will be legislative mandates at least for some parts of the OMS portfolio. In the RFQs that Tobii has started to see over the course of this year, we do see the dynamic that the majority of the RFQs do expect both DMS and some OMS capabilities. And OEMs in the space are looking at partnering with vendors who actually have that full portfolio and can help them define the kind of experiences they would like to bring into the automobiles of the future. Now, Tobii's intention is that we will be a leader in the automotive interior sensing space. And in order to deliver that, we believe that a comprehensive product portfolio is critical to win. So with that strategy in mind, let's talk about how Xperi AutoSense fits into the direction we're driving towards. Xperi has been investing in the automotive interior sensing space since 2017, a couple of years ahead of Tobii. They actually received their first design wins and production cars for DMS on the road as early as 2019. And since then, they've also been augmenting their Driver Monitoring System capabilities with Occupancy Monitoring System in the marketplace as well. Their first OMS systems were deployed into the market with a premium German automaker in 2021. And they actually see the potential for single camera systems that include both OMS and DMS entering the market already in 2025. They have a large talented group of people focused on computer vision and machine learning, about 250 employees. The primary locations that these employees are in are in Romania and Ireland. And today, of course, with their technology, they have built a very credible set of design wins. They have 6 OEMs that they count as customers, over 80 models and their solutions have already been deployed into scale on cars on the road. Their solutions have already been on the road for more than 3 billion kilometers. Like Tobii, they're a technology company that has also invested in a robust patent portfolio to protect their innovations. And with this deal, we are getting a patent portfolio of north of 175 items. We consider Xperi a pioneer in the OMS space, a leader in that from a road map perspective. And they, of course, have differentiated DMS solutions that they have been shipping in the marketplace since 2019. We think the combination of their credibility with design wins in hand, products that are shipping on the road and a really strong road map makes them a great asset for us to bring into the Tobii family. Now, let me give you a view of what DMS and OMS actually looks like. What is the future of interior sensing look like? This is sort of the vision of what these kinds of systems could be. The intention, of course, is that the combination of OMS and DMS and automotive interior sensing in totality, will provide the car with information to make both the car safer to ensure that the driver is actually paying attention to the task of driving. But by understanding the behavior and the state of all of the passengers in the car, whether it's the dog, whether it's the child in the back seat, there is an opportunity for the car to also tailor the experience inside the car to the mood and the needs of the passengers across that are sitting in the automobile. This is the end vision of what automotive interior sensing intends to deliver, a way to make cars safer and a way to make a car more comfortable and more convenient for all of the passengers by better understanding their behavior and their stake. So that is Xperi AutoSense. Now, let's switch and talk about what this means for the combined group. So, if we look at the combination of AutoSense and Tobii, we see that AutoSense brings with it a strong portfolio of significant design wins. Today, the combined group after closing will have design wins with a premium German automaker, a large Korean automaker as well as a large Japanese automaker. The combined group will have a design win total of 7 OEMs and those 7 OEMs represent more than 15% of the global automobile manufacturing. So, it's a really substantial portion of the market that we can call as customers of our technology set. These customers, of course, many of them being in production are paired with a technology offering that we think is one of the most complete in the marketplace with a leading Occupancy Monitoring System that is coming in from Xperi AutoSense paired with a really innovative set of technologies around Driver Monitoring Systems that we intend to build in the combination of Tobii and Xperi. We believe that assisting us in delivering to the space is the skill set of resources that we will get that are focused on AI and machine learning with experience in bringing technologies into production in the automotive space, which again will augment what we have here in Tobii. We believe the combination of the 2 groups will see scalability and synergy, both on the revenue side, where we see the technologies that are coming with the acquisition that can be exploited in other Tobii verticals, whether that's in the virtual reality space or in the personal computing space. But we also see the opportunity where we will have cost synergies by combining the great assets we have on both sides and more efficiently delivering to our road maps in automotive as well as our other verticals. We believe the combined entity will also have a very broad sales footprint with locations in every single major geography. Going forward, we intend to address the market opportunity now with 3 segments, given how substantial and transformative this acquisition is. As we have said so far, Tobii addresses the market with 2 reporting segments; the Products & Solutions segment and the Integration segment. Going forward, we will now have 3; Products & Solutions, Integration and AutoSense. The Products & Solutions business is largely unchanged as a result of this acquisition. It will basically have the same set of products and the same set of target customers as we have had prior to the acquisition. On the Integration side, the focus once again is to target customers who will incorporate our solutions into their offerings. But now the automotive focus of the Integration segment will be removed. That part will show up inside what we call the new AutoSense segment. And the AutoSense segment will be highly focused on targeting both automotive OEMs as well as automotive Tier 1s that are trying to deploy Driver Monitoring and Occupancy Monitoring solutions and to really cover broadly the automotive interior sensing market. Now, if you take a look at the dynamics of these 3 segments, we think that Tobii emerges from this as a much more balanced company. We see once again that the ambition level for Products & Solutions is to deliver stable growth and to demonstrate low overall business risk. We continue to expect that the Integration segment will have high growth but may also be subject to high risk given the fact that we are dependent on customer success in markets that are still not yet mature. Now, if you look at the Automotive segment in the AutoSense business, it's a different dynamic, I believe, than the Integration segment. We do expect that this will deliver large growth as we actually win business here as our design wins start to scale over time. But we expect that this market actually has medium risk, given the dynamics of the market that we plan. This is a stable market where penetration of our technologies in many cases are mandated by legislation. We think Tobii emerges at the end of this acquisition with a much more balanced portfolio across these 3 legs, but also the potential to be much stronger in the longer term as we have accelerated our path to leadership in the automotive business with this acquisition. With that, I'm now going to switch over and hand it over to Magdalena to share some financial details about the transaction.

Thank you. Here we are. The transaction, yes. So, we acquired the AutoSense business from Xperi Inc., which is a company. It's a tech company listed at the New York Stock Exchange. We will pay a minimum amount of USD 45 million for the business on a cash-free debt-free basis. And the structure for the payment is the following. First, we have approximately USD 30 million as a promissory note that will be paid in 3 installments in '27, '28 and '29, including an interest of 8%. And then we have USD 15 million as a minimum earn-out paid in 4 installments, '28, '29, '30 and '31. So, when we take those together, USD 30 million and USD 15 million, you get the USD 45 million as a minimum. And then finally, there is also a possibility for additional earn-out to be paid in 2031, depending on certain volume and deployment targets for the AutoSense business. And all in all, as you can see, there is no cash paid upfront. And then to finance the operational expenses for the AutoSense segment in '24 and '25, we intend to do a capital raise of around SEK 300 million in Q1, 2024. And this capital raise will ensure that the Tobii group in total will be fully financed to reach long-term profitability. And what do we expect to get out of this transaction. Well, we expect to see a revenue impact already in 2024 of around SEK 180 million to SEK 220 million. This revenue stems mainly from what is called the imaging part of the acquired business and this revenue level is not expected to continue but rather to decline after 2024. The EBIT impact from the transaction in 2024 is expected to be positive. And then the AutoSense segment's revenue is expected to be SEK 30 million to SEK 50 million in 2024, and then it's expected to grow over the years to around SEK 500 million in 2028, and the segment is expected to be cash flow positive in 2026. And then we foresee a high gross margin in this segment over and above 90% since it's primarily a software-related segment. And so as you might know, one of our external targets are expiring here after Q4 this year, namely being EBIT positive in Q4, 2023. And with that, plus this new acquisition, it's evident that we would like to present to you new targets for the group shortly, and we are now planning to do that in Q1, 2024. And with that, over to you, Carolina, for some Q&As.

Thank you for the presentation, Magdalena and Anand. Yes, we will now open up for questions, and we will start with questions that are posted in the chat. We would also like to apologize because there has been some technical issues with the Teams link. So, we hope that everyone has been able to join now. So, let me start with the first question. Why is Xperi divesting AutoSense?

Great question. Again, we think that this transaction is a fantastic win-win for both Xperi and Tobii. And again, as we've talked about, the Xperi part of this business has created good momentum in the space. From an Xperi perspective, they have actually been quite focused to simplify their company as the core of their business is in the entertainment industry and focused on media sets of offerings. From their perspective, this computer vision set of assets, while building an interesting business is not core to where they want to drive the future of the business. That, of course, for us, is dramatically different. For us, we are very much a computer vision company. Our focus is on attention computing. The automotive market is central to what we believe is the success of the future of Tobii. And in this scenario, we are able to go and take an asset that in many cases, is undervalued under the Xperi umbrella because it's not aligned to their core, but bring it into Tobii where it's much more aligned to our core where we can fully extract the value of the momentum they have built, the customer design win momentum that they have already demonstrated as well as the capabilities that they're bringing in-house.

Thank you. And the next question is, can you please elaborate on AutoSense customer traction and existing design wins that will now be included into new business segment?

Sure. So so far, the AutoSense business comes in with 6 OEMs. Again, Tobii has 1. So, the total number of OEMs together is 7 OEMs. In the OEMs that we now have, there is a premium German automaker. There is a large Korean automaker as well as a large Japanese automaker. These design wins that AutoSense brings in, some of them, of course, have started a while back, but the large volume design wins are actually going to start in production in 2025 and 2026. I think the really interesting thing here is when we talk about the power of incumbency in the automotive space. The OEMs that we now have design wins, many of which have been signed recently in the last 18 months, they represent more than 15% of the overall automobile global manufacturing footprint. And I think that bodes very well for us to get future revenue growth, both within these customers, but of course, to demonstrate our credibility and win additional RFQs going forward.

Thank you. Analysts participating, please indicate in some way if you would like to ask a question verbally. I have a few questions from analysts in the chat. So, I will start with a question from Daniel Djurberg at Handelsbanken. How much of the SEK 500 million revenue in 2028 is already secured from current design wins?

So, I don't think that we're going to go into specific numbers at this point in time. But again, we see that production of the high-volume design wins that are in place are starting in '25 and '26. So, I think it's safe to assume that a significant portion of that is coming from design wins that are already part of what we have. But we are, of course, expecting that we will win additional designs starting next year and beyond. And we are, of course, participating in RFQs, and we expect the same is true for the AutoSense business.

And he has a second question. You expect revenues in computer vision and image processing to fall back in 2025? Any comment on magnitude and also will it be EBIT accretive?

So in 2025, the total EBIT will be accretive to Tobii with this large revenue from the imaging business. But then we see in '25, it will go down pretty much, not totally, but pretty much and then '26, very much no revenues.

I mean the way we should think about the dynamics of this business, as Magdalena mentioned, in 2024, we see substantial revenue in what is considered a more legacy part of the business. There will be some steady state business long term, but it will be at a much lower level than what we expect in 2024. And we see that decline already in '25 and further in 2026.

Then we'll move over to Erik Larsson from SEB. He has a question. Is this acquisition a result of Tobii lagging behind competition or rather good opportunities?

So, I would say that it is definitely a forward-leaning move. Again, we absolutely expect to be a leader in this space. We have known coming in that our organic plan, starting with Driver Monitoring Systems was something that was going to take some time for us to be successful as we build credibility in the space. With this acquisition, I think we have been able to get an asset that I think is really fortunate for us to have seen on the market. They have substantial momentum, but they also have this leading capability on the Occupancy Monitoring Systems side. I would say that it's always been in our strategy to go and look at inorganic ways to accelerate our path to leadership here. But with this particular piece, I think we have had the good fortune to get something that is substantially better than what we expected we would find. And so from that perspective, it's very much part of our strategy to look at inorganic moves. And I think this particular transaction is really, really positive for us. That's something that I would candidly say in the beginning of the year, we would not have expected to have an option to bid on.

And what was your reasoning when balancing the opportunity with the financing needs?

I think that, again, if you look at the structure of the deal and the way that the deal is structured, it reflects sort of time to revenue in the automotive space, we're not taking that much risk upfront because there is no upfront cash outlay. Yes, we need to raise some amount of money to manage the operational expenses. But between the short-term benefit we get here, which is substantial revenue in 2024 as well as a positive EBIT contribution, which helps us along the path to profitability, I would say that the financing of the deal actually makes it even easier for us to go and get this kind of significant asset. Typically, in most other scenarios, I would expect that we would end up with a deal where there would be an upfront cash outlay and we would actually have to deal with the fact that the automotive business has a long time to revenue dynamic. I think this particular deal for Tobii and our shareholders is very positive because we've minimized that impact and actually both accelerated and strengthened our short term, while fundamentally strengthening our mid and long term.

Okay. Then Daniel Thorsson of ABG has some questions. And let's try to see if he can ask them verbally. Please, Daniel, go ahead and unmute yourself.

We can't hear you yet Daniel if you are speaking.

I have them written also, so...

Okay.

A couple of questions then. Should we see the rights issue as mainly linked to the acquisition or the OpEx investments near term and therefore rather linked to perhaps an underperformance in Products & Solutions or Integration versus your former 2025 targets?

You should see directly linked to this acquisition and the operational expenses we see in this AutoSense segment the coming 2 years.

So that's where we will see the losses that needs to be covered by the rights issue?

Yes. That way we will see the cash outflow.

Yes. I see. Okay. But still in 2024, just to get it correctly here, EBIT, is that going to be positive or negative in this new segment in 2024 as a whole? Well, I think that was very difficult to understand.

Yes, I think it's a little complicated. And I think this is why we want to come in with clear targets in Q1. Again, if we think about sort of the AutoSense segment, Daniel, again, we're pretty clear that the focus there is on companies that are driving -- that are going to deploy Driver Monitoring and Occupancy Monitoring Systems. If you think about the legacy business that's there from the transaction that we're getting, it will probably show up in the Integration side. So, I think the best way to look at this is the impact of the transaction, which is that it will deliver SEK 180 million to SEK 220 million in 2024 and be EBIT accretive to Tobii in 2024. Then as we sort of get into the formal closing and beyond, we're going to sort of be able to give you more visibility on exactly how the EBIT starts to move between the 3 different segments. But I think the right way to go and evaluate it now is to look at the transaction. And then, of course, it will land in our business in the appropriate way.

So, the rights issue now is basically to cover larger losses than before, but in '25 and '26?

Yes, but they are directly sort of targeted towards the AutoSense operational expenses.

I see. But the acquisition itself will have a positive EBIT contribution to the group in full year 2024 still, right?

Yes.

Yes.

And then secondly, just 3 to 4 years back, Tobii's standpoint in the automotive space was very clear that it was not interesting because the technology requirements were too simple and easy, while Tobii held too much advanced eye tracking technology and that the market will turn out into a commodity longer term. What has really changed to those statements today?

And again, I think we have said as early as 2020-2021, that when we made this investment in 2019, what primarily changed first and foremost was the legislative mandate. When we saw the legislative mandate drive adoption of this technology inside the EU, we made the investment to go into the space. Now again, I think the dynamics of the space are something that will have to play out. One part of it, of course, is the fact that we think that it's a very predictable large market that you can drive into. The second part, as you allude to is, there are, of course, crowded set of competitors today. But I also think that it's actually a defensible market because new entrants would have to go through the process of getting automotive certification, building credibility with customers. So, if you're able to go and get a leadership position, you get the benefits of incumbency, you get the benefits of the experience of going through these automotive cycles. And I think between the need to certify to get into automotive as well as the long time to money in these kinds of spaces, if you are in the space and active, I think it can be a very good business. I think the longer-term questions around ASPs, I think there's a lot of questions on how that would play out. Again, there are opportunities, of course, to go and expand the offering into the OEMs with technologies like Occupancy Monitoring Systems. We see that car manufacturers, of course, are more and more focused on providing a great experience in the car beyond just maybe thinking about the technical specs of what drives the engine, for example. So, I think that as you get aligned to more of those kinds of experiences, I think there's an opportunity to look at ASPs that can be defensible. And so I would say that the first change for Tobii was the legislative mandate that made the market certain and with a clear time. I think the fact that you can be a leader and it's a defensible market also makes an attractive piece. And I think from an ASP perspective, while competition will put pressure on that ASP, I also think that there's a lot of innovation aligned with what OEMs are going to deliver to the market that can give you opportunities to be in a very good position.

Just to follow up on the predictability you say here, I think we can all agree that we will see an increased penetration of DMS and OMS in automotive over the next 10 years for sure. But related to the predictability of your sales generations, that's obviously a factor of volume times ASP. And as late as April this year, you said that you could not value the design win that you announced in automotive, because you didn't really know how volumes in ASP going to play out in 5 years or in 4 years' time. But now you say they're going to have a SEK 500 million in terms of revenues in 2028. Can you share with us what volume and ASP you are assuming for the 2028 sales target?

No, I don't think we would get to that level of detail at this point, Daniel. But the way I would consider it is slightly different. What we said was when we had the first design, we said that for individual designs, I think it's very difficult to go back and drive particular numbers because the volumes in a particular RFQ aren't typically guaranteed. And again, we are trying not to be super specific on each individual customer deal on what the specific dynamics are for the financials of that particular deal. I think as you start getting into larger numbers, of course, I think there's a way to value the market, which is as you get to higher penetration rates, we expect that there will be a certain amount of opportunity and we think that the ASPs will become more regular. One of the things that we talk about in predictability in the space, which I think is different to other markets is that when we get these design wins, they are actually for multiple years in the life cycle of production of a platform. And again, the total market opportunity as well as maybe the rough estimate you can make here are things that you can assess. I think that it will be easier for us to give more guidance as we get more design wins under our pipeline because then I think we have the opportunity to go in and take sort of a law of large numbers approach on how we can talk about the market opportunity. But again, what we see when we talk about the 2028 revenue is, there are design wins in hand. These design wins are for a longer period of time. That's one of the unique dynamic of automotive versus, let's say, consumer electronics. And again, we see the opportunity there to take advantage of incumbency to win more designs. And we believe that we are going to be able to win new designs with the portfolio that we are bringing to the market.

Final question from Magdalena here. What are the pros with the complex financial structure, I have to say it is of the acquisition? And was that preferred by you or the seller to have this structure?

For us, it's a big pro, the total structure in the sense that we were hesitant to say totally negative to come up with cash upfront for the deal. And therefore, since the seller agreed to putting up a promissory note for the larger part, that was positive for us.

I think that was the last question today. Please do not hesitate to reach out to me if you have any further questions or to Magdalena. And Anand, please give some final remarks perhaps.

Thank you, Carolina. So again, thank you for joining us today. Again, I'm really excited to share this transformative acquisition that we've announced this morning. I truly believe that this acquisition both strengthens Tobii in the short term with a substantial revenue contribution in 2024 with a positive EBIT contribution, helping us on our road to profitability as an overall group, but also, of course, in the mid to long term, where this absolutely accelerates our path to leadership in the automotive interior sensing market, a market that is very much central to our attention computing vision. So, I'm really happy to be taking this kind of positive step. And I'm looking forward to, of course, sharing more details in Q1 as we start the integration and we can answer some of the more detailed questions around what the opportunities are, both for revenue as well as cost synergies. Thank you very much.

Thank you.

Thank you.