XPER.NYSEXperi INC

DEFC14A: Rubric Capital Seeks Board Overhaul at Xperi Inc., Citing Underperformance and Misaligned Capital Allocation

Sentiment:

Definitive Proxy Statement

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Rubric Capital, a significant Xperi Inc. stockholder, is soliciting proxies to elect two nominees to the board, aiming to address what it sees as material underperformance and poor capital allocation.

Delay expectedThe timeline for a potential separation of its IP and product businesses had slipped into the first half of 2022.
Worse than expectedXperi's shares have declined by approximately 28% since the spin-off, while the S&P Software Index increased by approximately 74% and the Russell 3000 returned approximately 42%.Xperi's LTM Adjusted EBITDA margins are approximately 1,700 basis points below its ISS peer group.In 2023, Xperi granted approximately 4.2 million shares of common stock, resulting in approximately 9% dilution.

Summary

  • Rubric Capital, owning approximately 9.0% of Xperi Inc.'s common stock, is seeking to elect two director nominees, Deborah S. Conrad and Thomas A. Lacey, at the 2024 Annual Meeting of Stockholders.
  • Rubric Capital believes that the current Board of Directors has overseen material underperformance since the spin-off of Xperi from Adeia, with shares declining by approximately 28% while the S&P Software Index increased by approximately 74% and the Russell 3000 returned approximately 42%.
  • Rubric Capital criticizes Xperi's margin performance, stating that its LTM Adjusted EBITDA margins are approximately 1,700 basis points below its ISS peer group.
  • Rubric Capital also raises concerns about Xperi's compensation program, noting that the company granted approximately 4.2 million shares of common stock in 2023, resulting in approximately 9% dilution, while revenue only grew by 4%.
  • Rubric Capital expresses concerns about capital allocation decisions, including the sale of the AutoSense division for $42.7 million with zero upfront consideration.
  • Rubric Capital is also recommending stockholders vote for the ratification of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for its fiscal year ending December 31, 2024, and for the approval of the proposals to amend Article V and Article XII of the Charter to eliminate supermajority voting requirements for stockholders to amend the Bylaws and certain provisions of the Charter.
  • The Annual Meeting is scheduled for May 24, 2024, and Rubric Capital urges stockholders to vote using the enclosed WHITE universal proxy card.

Sentiment

Score: 3

Explanation: The document expresses strong dissatisfaction with Xperi's performance and governance, indicating a negative sentiment. The call for board change and criticism of capital allocation and compensation practices further reinforce this negative outlook.

Positives

  • Rubric Capital supports the proposals to amend Article V and Article XII of the Charter to eliminate supermajority voting requirements for stockholders to amend the Bylaws and certain provisions of the Charter.
  • Rubric Capital believes that the election of its nominees will bring necessary experience and improved oversight to the boardroom.

Negatives

  • Xperi's shares have underperformed significantly since the spin-off.
  • The company's margin performance is substantially below its peers.
  • Stock-based compensation is considered excessive, leading to significant dilution.
  • Capital allocation decisions, such as the AutoSense sale, are questioned.
  • Rubric Capital believes that the members of the Board should be held accountable for adopting stockholder-unfriendly provisions in the first place.

Risks

  • The Rubric Capital Nominees will constitute a minority of the Board and there can be no guarantee that the Rubric Capital Nominees will be able to implement the actions that they believe are necessary to unlock stockholder value.
  • There is no assurance that any of the Companys nominees will serve as directors if all or some of the Rubric Capital Nominees are elected.

Future Outlook

Rubric Capital believes that achieving peer margins, valued using a median 2024 peer group multiple of 11.0x EBITDA, Xperi would be worth approximately $29 per share, representing an increase of approximately 170% over its current price.

Management Comments

  • Rubric Capital expressed its disappointment with both the Companys subpar margin performance and continued high level of stock-based compensation being offered at the Company.
  • Rubric Capital expressed their concerns regarding the sale of the Companys AutoSense division and the lack of upfront consideration received in the sale.

Industry Context

The document compares Xperi's performance against the S&P Software Index and the Russell 3000, highlighting significant underperformance relative to the broader market and its sector.

Comparison to Industry Standards

  • The document compares Xperi's margins to its ISS peer group, which includes companies like A10 Networks, Appian Corporation, BlackBerry Limited, and others.
  • It notes that Xperi's LTM Adjusted EBITDA margins are approximately 1,700 basis points below the average of this peer group.
  • The document also compares Xperi's stock-based compensation to that of its former parent company, Adeia, noting that Xperi's dilution was significantly higher.

Stakeholder Impact

  • The outcome of the proxy contest will directly impact shareholders through potential changes in board composition and strategic direction.
  • Employees may be affected by changes in company strategy and capital allocation.
  • Customers and suppliers could be impacted by shifts in product focus and business relationships.

Next Steps

  • Stockholders are urged to vote using the enclosed WHITE universal proxy card.
  • Rubric Capital intends to seek reimbursement from the Company for the expenses it incurs in connection with this solicitation, if successful.

Key Dates

DateDescription
Mid-2016Rubric Capital became interested in a potential investment in Tessera Holding Corporation.
February 22, 2017Tessera changed its name to Xperi Corporation.
May 3, 2017Thomas A. Lacey stepped down as CEO of Xperi Corporation.
December 19, 2019Xperi Corporation announced an all-stock merger with TiVo Corporation.
February 21, 2020Xperi Corporation received an unsolicited, non-binding all-cash proposal from Metis Ventures LLC to acquire 100% of the outstanding equity of Xperi Corporation for $23.30 per share.
March 31, 2020Xperi Corporation disclosed the existence of its wholly-owned subsidiary Perceive Corporation.
June 1, 2020The merger of Xperi Corporation and TiVo was completed, with the resulting combined company renamed Xperi Holding Corporation.
July 10, 2020Xperi Holding reported second quarter earnings and reaffirmed that it made progress towards a planned separation of its IP and product businesses in mid-2021.
February 23, 2021Xperi Holding reported fourth quarter earnings and Mr. Kirchner revealed that the timeline for a potential separation of its IP and product businesses had slipped into the first half of 2022.
February 23, 2022Xperi Holding announced plans to resume the process of separating its product business, Xperi Inc., and its IP licensing business, Adeia Inc., into two independent, publicly traded companies.
August 29, 2022The board of directors of Xperi Holding announced the separation of the product and IP licensing businesses had been approved.
September 20, 2022Xperi Holding held an Investor Day, in which the spin-off company, Xperi Inc., provided preliminary 2023 and long term financial guidance.
October 1, 2022The Company completed its spin-off from Adeia (formerly known as Xperi Holding).
August 9, 2023The Company reported second quarter earnings, missing consensus expectations, while highlighting conversations with strategic partners on Perceive as ongoing on its quarterly earnings call.
November 13, 2023The Company announced third quarter earnings, narrowing the range on revenue to $518 $532 million and reducing margin guidance to 6 8%, considerably below the ~10% guidance given at its 2022 Investor Day.
December 12, 2023The Company announced a definitive agreement to sell its AutoSense division to Tobii AB (Tobii) for $42.7 million.
January 22, 2024Representatives of Rubric Capital held a call with Xperi to inform them of Rubric Capitals intention to nominate Deborah S. Conrad and Mr. Lacey for election to the Board at the Annual Meeting.
January 22, 2024Rubric Master delivered a notice of nomination to the Company nominating the Rubric Capital Nominees for election to the Board at the Annual Meeting.
January 23, 2024Rubric Capital filed a Schedule 13D with the SEC disclosing the submission of the Nomination Notice.
February 1, 2024Rebecca K. Marquez, Chief Legal Officer and Corporate Secretary of the Company, emailed Rubric Capitals legal counsel copies of the Companys form of director and officer questionnaire to be completed by the Rubric Capital Nominees.
February 6, 2024Rubric Counsel emailed Ms. Marquez the Rubric Capital Nominees completed D&O Questionnaires and followed up regarding a potential meeting between Rubric Capital and the Company.
February 9, 2024Representatives of Rubric Capital held a call with Mr. Kirchner and Christopher Seams, a director of the Company, to discuss the Rubric Capital Nominees generally and express a desire to reach a constructive resolution to avoid a proxy contest.
February 20, 2024Rubric Capital sent the Company a demand pursuant to Section 220 of the Delaware General Corporation Law to inspect certain stockholder list materials and related information in connection with the Annual Meeting.
February 26, 2024Messrs. Kirchner and Seams held a call with representatives of Rubric Capital to discuss the Companys potential resolution.
February 28, 2024The Company reported fourth quarter results, with full year revenue of $521 million and Adj. EBITDA margins of 6.7%, while guiding 2024 revenue below expectations and announcing the hiring of Centerview to explore strategic alternatives for Perceive.
March 1, 2024The Company filed its Annual Report on Form 10-K with the SEC, disclosing an increase in the number of outstanding shares of Common Stock, which reduced Rubric Capitals ownership percentage from 9.3% to 9.1% of the outstanding shares of Common Stock.
March 4, 2024Mr. Kirchner emailed representatives of Rubric Capital to inform them that the Company has an updated proposal for a potential cooperation agreement.
March 5, 2024The Company sent a letter to Mr. Lacey seeking confirmation with respect to one of his responses to the D&O Questionnaire he submitted to the Company on February 6, 2024.
March 6, 2024Rubric Counsel sent a letter to the Company on behalf of Mr. Lacey responding to the March 5th Letter.
March 6, 2024The Company provided notice to Rubric Capital pursuant to Rule 14a-19(d) of the Exchange Act of its intent to solicit proxies at the Annual Meeting for incumbent directors.
March 8, 2024Rubric Counsel informed Company Counsel that the updated settlement proposal was not acceptable to Rubric Capital.
March 8, 2024Rubric Capital filed its preliminary proxy statement with the SEC.
March 22, 2024The Company filed its preliminary proxy statement with the SEC on form PRE 14A.
March 25, 2024The Company re-filed its preliminary proxy statement with the SEC on form PREC 14A, in which it disclosed an increase in the number of outstanding shares of Common Stock, which reduced Rubric Capitals ownership percentage from 9.1% to 9.0% of the outstanding shares of Common Stock.
March 25, 2024Rubric Master delivered a supplement to the Nomination Notice to the Company in accordance with the Bylaws.
April 1, 2024Rubric Master delivered an additional supplement to the Nomination Notice to the Company in accordance with the Bylaws.
April 2, 2024The Audit Committee approved the engagement of Deloitte & Touche LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2024, effective immediately.
April 8, 2024The Company filed a Current Report on Form 8-K with the SEC disclosing that it changed its independent registered public accounting firm for the fiscal year ending December 31, 2024 from PricewaterhouseCoopers LLP (PwC) to Deloitte & Touche LLP.
April 17, 2024The Company filed its definitive proxy statement with the SEC.
April 17, 2024Rubric Capital filed this definitive proxy statement with the SEC.
May 22, 2024Deadline to register to attend the Annual Meeting.
May 24, 2024Date of the 2024 Annual Meeting of Stockholders.
December 18, 2024Deadline for stockholders to submit a proposal for inclusion in the Companys proxy materials for presentation at the 2025 Annual Meeting.
January 24, 2025Earliest date for stockholders to submit a proposal for presentation at the 2025 Annual Meeting that is not to be included in the Companys proxy materials.
February 23, 2025Latest date for stockholders to submit a proposal for presentation at the 2025 Annual Meeting that is not to be included in the Companys proxy materials.
March 25, 2025Deadline for stockholders who intend to solicit proxies in support of director nominees other than the Board's nominees to provide notice that sets forth the information required by Rule 14a-19(b) under the Exchange Act.
May 24, 2025Date of the 2025 Annual Meeting of Stockholders.

Keywords

proxy contest, board of directors, stockholder value, capital allocation, EBITDA margins, stock-based compensation, Xperi Inc., Rubric Capital

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