Xperi's Activist Rubric nominates two directors to potentially increase shareholder value.

Company: Xperi (XPER)

Xperi is a technology company that specializes in developing software solutions and has four primary business segments. These segments include pay-TV, which provides backend software for internet-enabled cable boxes; consumer electronics, which delivers audio and media technology for home and mobile devices; connected cars, which offer high-quality multimedia and personalization for vehicles; and an independent media platform that enables Smart TV original equipment manufacturers to brand the experience, retain customer ownership, and generate recurring revenues through the company's TiVo brand.

Stock Market Value: $480.29M ($11.05 per share)

Activist: Rubric Capital Management LP

Percentage Ownership: 7.6%

Average Cost: $11.94

Rubric Capital, a New York-based hedge fund founded by David Rosen, was launched independently in October 2016. The firm is a deep value, long/short investor that will become active in situations that require it. Rubric has filed five previous 13D's in its history and gained board representation in three of those situations.

What’s happening

In January 22, Rubric put forward Deborah S. Conrad, a former senior vice president and chief marketing officer of Hinge Health, and Thomas A. Lacey, a former CEO and director of Xperi's predecessor company, as candidates for election to Xperi's board at the company's 2024 annual meeting.

Behind the scenes

Xperi is projected to have mid to high single-digit growth, over $500 million in revenue in 2023, and over 75% gross profit margins. However, the company is only forecasting $35 million in earnings before interest, taxes, depreciation, and amortization for 2023. Peer companies with similar gross profit margins generate 25% to 35% EBITDA margins. Meanwhile, Xperi is guiding for 6% to 8% EBITDA margins. The first opportunity for value creation is cost cutting. Currently, the company spends 45% of revenue on selling, general, and administrative expenses and 43% on R&D, which is well more than total gross profit. There needs to be more discipline in the company's spending. Decreasing R&D by 20% to 35% of revenue and SG&A by 5% would increase EBITDA from $35 million to over $95 million. Part of that can be done immediately by divesting or shutting down the Perceive artificial-intelligence chip business, which

Selling Perceive could help regain market credibility about management's strategic decisions following the puzzling divestiture of AutoSense, a cabin safety business with significant growth potential due to regulatory tailwinds. Xperi sold the business to Tobii AB for approximately $43 million, with about $28 million being a promissory note payable over three years starting in 2027 and $15 million in additional payments over four years starting in 2028. Tobii was a $50 million company, making Xperi the sole creditor of a Swedish micro-cap. This decision may have been made to achieve short-term margin guidance at the expense of long-term prospects.

The root cause of Xperi's problems is a culture that prioritizes shareholder value. This is evident in the company's executive compensation policies. In the past year, Xperi has granted 4.1 million restricted stock units to management, resulting in a 12% dilution to shareholders. Additionally, 75% of these grants are time-based, meaning that management owns RSUs for 14% of the company, with only 24% of these grants vesting during a period when the company's stock price has declined by 24%, while the S&P 500 has increased by 36%.

Despite the numerous issues that Xperi faces, there are positive aspects to the company, including its successful products and markets, as well as a management team that requires more discipline. To address the problems, the solution is to bring in new blood to the board to change the corporate culture, establish accountability, and prioritize shareholder value. In line with this, Rubric Capital has nominated Conrad and Lacey for election as directors at Xperi's 2024 annual meeting. Lacey, who has been a shareholder since leaving the company and has a deep understanding of the industry and Xperi, seems committed to the company's success.

The company is in dire need of board refreshment, with only five directors on the board. It could easily add two directors while still maintaining a manageable board of seven. However, three of the incumbent directors received over 12% of against votes at the last annual meeting, which is unusually high for a company that had only been public for seven months. With the use of the universal proxy card, Rubric should easily get at least one, and likely two, of its nominees elected if this goes to a proxy fight. However, Rubric is being amicable here and looking to work with management, not threaten them. The company would be unwise to take the risk of replacing two incumbent directors on a five-person board. While Rubric is the type of investor that prefers to settle amicably and has never taken a proxy fight to a decision before, the firm once came very close to doing so at UK-based Mereo BioPharma, and it would take this all the way to a decision if forced to.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.