Technology company Xperi operates in four main business segments: pay-TV, consumer electronics, connected car, and an independent media platform. Despite its potential, Xperi currently faces several challenges that hinder its growth and profitability. This article aims to critically analyze the company’s situation, focusing on its financial performance, strategic decisions, and corporate culture. Additionally, we will explore the activist investor Rubric Capital’s suggestions for change and evaluate their feasibility.
While Xperi shows mid to high single-digit growth and impressive gross profit margins, its earnings before interest, taxes, depreciation, and amortization (EBITDA) fall significantly short compared to peer companies. Xperi’s guidance suggests a 6% to 8% EBITDA margin, compared to 25% to 35% among similar companies. The first opportunity for value creation lies in cost cutting.
Currently, Xperi allocates 45% of its revenue to selling, general, and administrative (SG&A) expenses and 43% to research and development (R&D). These percentages exceed the company’s total gross profit, highlighting the need for greater spending discipline. By reducing R&D expenditure by 20% and SG&A by 5%, Xperi could increase its EBITDA from $35 million to over $95 million. Additionally, divesting or shutting down the Perceive artificial-intelligence chip business, which currently incurs an annual expense of $20 million without generating revenue, would provide an immediate EBITDA boost to $55 million.
Selling Perceive would not only increase Xperi’s credibility in the market but also enable the company to focus on its core competencies and long-term prospects. The recent divestiture of AutoSense, the cabin safety business, sparked doubts about management’s strategic decisions. By strategically refreshing its portfolio and maximizing resource allocation, Xperi can improve its financial performance.
However, Xperi’s cost structure and strategic decisions are merely symptoms of a fundamental problem: a corporate culture that lacks a focus on shareholder value. Reflecting this issue, Xperi’s executive compensation policies warrant scrutiny. The company has granted approximately 4.1 million restricted stock units (RSUs) to management in the past nine months, resulting in a 12% dilution to shareholders. Alarmingly, 75% of these grants are solely time-based, rather than performance-based.
This compensation structure exposes a misalignment between management incentives and shareholder interests. Xperi’s stock price decline of 24% amidst a 36% increase in the S&P 500 raises concerns about the effectiveness of the current compensation approach. To reinforce shareholder value as a priority, Xperi needs a corporate culture that rewards performance and holds management accountable.
Rubric Capital, a New York-based hedge fund founded by David Rosen, has nominated Deborah S. Conrad and Thomas A. Lacey for election as directors to Xperi’s board at the 2024 annual meeting. Conrad, a former senior vice president and chief marketing officer, and Lacey, the former CEO and director of Xperi’s predecessor company, bring valuable industry knowledge and experience.
Rubric Capital’s main objective is to introduce fresh blood to the board, change the corporate culture, and instill discipline and accountability within the management team. By expanding the board’s size from five to seven directors, Xperi can accommodate the addition of Conrad and Lacey without creating an overly burdensome board structure.
Rubric Capital emphasizes its willingness to work with Xperi’s management and seeks a settlement rather than a proxy fight. While Rubric Capital has never previously taken a proxy fight to a decision, it came close to doing so with UK-based Mereo BioPharma. If forced, Rubric Capital is prepared to see the issue through to a decision.
Given the risks associated with a proxy fight and the potential benefits of collaboration, Xperi should carefully consider Rubric Capital’s suggestions. Settling amicably and incorporating fresh perspectives onto the board would demonstrate a commitment to positive change and shareholder value.
The challenges faced by Xperi in maximizing its potential are evident, but the company possesses great products and operates in promising markets. By addressing its cost structure, making strategic divestments, and reshaping its corporate culture, Xperi can overcome its obstacles.
Rubric Capital’s proposal to add Conrad and Lacey to Xperi’s board provides an opportunity for fresh perspectives, industry expertise, and improved shareholder value. By embracing change and working collaboratively, Xperi can position itself for success in the evolving technology landscape.
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