Xperi Corporation (XPER) Q1 2019 Earnings Call Transcript

Xperi Corporation (XPER)
Q1 2019 Earnings Call
May. 08, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi first-quarter fiscal year 2019 earnings conference call. [Operator instructions] I would now like to turn the call over to Miss Geri Weinfeld, vice president of investor relations for Xperi.

Ma'am, please go ahead.

Geri Weinfeld -- Vice President of Investor Relations

Good afternoon, everyone. Thanks for joining us as we report our first-quarter fiscal year 2019 financial results. With me on the call today are Jon Kirchner, CEO, and Robert Andersen, CFO. Before we begin, I would like to provide two reminders.

First, today's discussions contain forward-looking statements that are predictions, projections or other statements about future events which are based on management's current expectations and beliefs,and therefore subject to risks, uncertainties and changes in circumstances. Please refer to the risk factors section in our SEC filings, including our most recent Forms 10-K and 10-Q, for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call. Second, we refer to certain non-GAAP financial measures, which exclude restructuring and other exit costs, acquisition and related expenses, acquired intangible asset amortization, charges for acquired in-process research and development, stock-based compensation expense, interest income associated with ASC 606 and unrealized gains or losses on equity securities.

We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the investor relations section of our website. The recording of this conference call will be available on our investor relations website at www.xperi.com. I'll now turn the call over to Jon Kirchner.

Jon Kirchner -- Chief Executive Officer

Thanks, Geri, and thanks, everyone, for joining us. We are pleased with our first-quarter results and the progress we made during the quarter on certain key initiatives. Billings were in line with our expectations and operating expenses came in lower than forecast producing strong financial results. We generated nearly $14 million in operating cash flow and paid down $50 million in debt during the quarter.

Total billings in Q1, were $104.3 million, up slightly versus last year. Both product and IP licensing were in line with our expectations for the quarter. Product billings for the quarter were $60.9 million, essentially flat with last year. This includes approximately $5 million in audit recoveries primarily relating to the home business.

At this point, we continue to expect product licensing to be flat plus or minus a few points for the year. In each of our markets we made progress on our key priorities that will contribute to our long term growth. In automotive we continue to support the development and commercialization of connected radio and DNS. Connected radio is on track for an early 2020 launch and our DNS solutions are targeted to be in passenger vehicles in 2021.

In mobile, our FaceSafe product launched on the LG G8 ThinQ phone, which is the first 3D facial recognition technology solutions shipping on a smartphone based on a time of flight sensor. In home, we added to the IMAX ecosystem and drove continued penetration of our DTS:X and Virtual:X solutions in TVs and soundbars. In IP licensing, we added to our pipeline of opportunities, remain focused on executing new license agreements, and accelerating the adoption of our DBI and ZiBond technologies and the memory space. Additionally, after lengthy discussions earlier today, we filed patent litigation against NVIDIA.

Turning to more specifics within our automotive business. The automotive market excluding any auto recoveries, delivered $21.6 million, down 4% year over year due to a higher comparable of NRE received in Q1 2018.  Importantly, automotive head unit billings were up year over year as we continue to increase penetration of our HD Radio technology. There are now 60 million HD Radio receivers in North America. Several car models from KIA, Honda, Mitsubishi, Chevrolet, Audi and Mercedes all launched with HD Radio during the quarter.

There are more than 100 stations with HD Radio broadcasting in Mexico, and in Canada we have doubled the number of stations licensed for our technology, and now reach about 60% of the population with HD Radio broadcasts. On the connected radio front, we increased broadcaster interest in our platform with demonstrations at the European radio show and digital radio week in Europe, at the CCBN show in Beijing China, and more recently at NAB in Las Vegas. At various shows are connected radio solution has been showcased in future vehicles to a very positive response from attendees. Lastly, we are gaining momentum establishing our DNS technology as a recognized solution in the market.

We've been working with several industry research firms to increase the profile of our technology, and we're prominently mentioned in the strategy analytics DNS industry report released in March. Through discussions with our OEM customers, we are discovering that more car manufacturers would like to build DNS into the infotainment cluster. By leveraging our significant footprint in the dash, our pipeline of DNS opportunities is expanding. We are now engaged with multiple car companies around quotations for our facial, eye gaze, and emotion detection technologies.

Moving to the mobile market. As expected, billings declined year over year to $6.9 million, excluding audit recoveries, a decrease of 41%. This is due primarily to the ongoing contract interpretation issue with a key mobile customer we mentioned last quarter. We will continue to work toward resolution of that issue.

The release of FaceSafe on the LG G8 ThinQ in March and the execution of several other agreements throughout the year will deliver additional billings to the mobile market in the second half of the year. Following the launch of the announcement with LG, interest has been building around FaceSafe , which offers mobile OEMs more cost efficient sensor solutions while delivering best in class 3D facial recognition and face unlock functionality. Importantly, we believe our FaceSafe solution can meet financial service requirements for biometric security. We also launched our 3D portrait solution on the LG G8 ThinQ.

3D portrait provides more than 20 dedicated features including: skin smoothing while retaining natural texture, relighting effects, and even smart color correction and image denoising. In addition to the work we did with LG, Deveau announced their second gaming oriented mobile phone with DTS:X Ultra which will launch later this year. We continue to make progress with Microsoft support for DTS codac -- codecs on their windows 10 platform, and Xiaomi announced support for DTS post-processing on its newest gaming P.C. Moving to the home market.

In Q1 excluding audit recoveries, we delivered billings of $26.7 million, up 2% year over year. Growth was primarily driven by increased penetration of DTS:X and Virtual:X and TV ads, and soundbars. In the TV market, we executed a number of new TV codec and virtual license agreements, including the first license for our newest DTS:X codec solution for 2020 TV. This solution will play an important role in supporting our IMAX enhance program for TVs in 2020 and beyond.

In the soundbar market, we executed new OEM agreements for DTS:X and Virtual:X. These agreements for DTS:X and Virtual:X bring us to a total of 26 licensees across 29 brands in the AVR TV and soundbar market with major associate providers certifying their solutions over the next few months. We expect to see DTS:X in a growing number of TV shows in 2020, and there is plenty of runway for continued penetration of Virtual:X across soundbars and TVs. We continue to explore new product markets with our latest solutions for smart home and smart speaker applications.

We expanded the number of DTS sound design wins with Alibaba and Tencent for AI smart speakers in China, and we signed our first home imaging agreement for a home security product. On the content front, our IMAX enhanced program recently reached a significant milestone launching privilege 4K on Sony TVs. The first end-to-end streaming service supporting IMAX to enhance delivery. This launches the initial step toward building a stronger distribution platform that will include RAC attend TV, Tencent video, and Fandango Now, all of which, will be live later this year.

Moving to our IP licensing and semiconductor packaging business. Billings were $43.4 million, up 1% year over year during the quarter. We added to our pipeline of opportunities and progressed certain licensing discussions. In addition, today we filed a lawsuit against NVIDIA for patent infringement.

We believe that NVIDIA is using our patented semiconductor technology and certain of its CPUs and processors, and we have been speaking with NVIDIA for several years about taking a patent license. We ultimately could not reach an agreement and we felt that we needed to take this action to defend our intellectual property rights. We filed the case in Delaware federal court asserting five patents. As always, our preference remains to reach business resolution without litigation.

However, litigation remains a tool that is needed from time to time to receive fair value for our portfolio. Turning to the Investor's business. In Q1, we progressed evaluation efforts with key memory customers. The feedback we have received has been very positive, and has led to substantive discussions on both licensing and future to make technical collaboration.

In parallel, broader market interest and in demand for our DBI technology continues to grow as the industry looks to scale beyond Moore's law to deliver the performance, functionality, and cost improvements required by next generation mobile, consumer, and automotive electronics. When combined, these factors position as well to conclude at least one significant license this year and achieve our long -- longer term objectives for this business. With that, I'll turn the call over to Robert to discuss our financials. 

Robert Andersen -- Chief Financial Officer

Thank you, John. Once again, let me remind everyone the deed or adoption of the ASC 606 revenue accounting standard we'll be discussing billings instead of revenue, as we feel it's an important measure of our financial progress. On to review of our Q1 financials. Little billing for the quarter were $104.3 million, in line with our expectations for the quarter and as John noted, up slightly versus the same quarter last year.

GAAP operating expense including cost of revenue was $86.6 million dollars, compared with $98 million for the first quarter of 2018. Non-GAAP operating expense including cost of revenue was $53.5 million, down $8.5 million year over year due to lower litigation and outside service expenses during the quarter. Additionally, last year we had certain debt financing and net debt expense. Interest expense was $6.7 million and we paid $5.6 million in net cash taxes during the quarter.

Moving to the balance sheet. We finished the quarter with $107.5 million in cash, cash equivalents, and investments. We paid down $50 million of our outstanding debt during the quarter, and the balance is now $444 million. Operating cash flow for the first quarter was $13.8 million, an increase of $9.2 million compared to the first quarter of 2018.

The increase was mainly driven by lower litigation spend in the absence of the retention bonus. On March 27th, 2019, the company paid a cash dividend of $0.20 per share. Additionally, on May 2nd, 2019, the board of directors approved the quarterly dividend of $0.20 per share payable on June 19th to shareholders of record on May 29th. Moving to our outlook for the second quarter, we expect billings to be between $88 million and $92 million, GAAP operating expense is expected to be between $84 million and $87 million, Non-GAAP operating expense is expected to be between $51 million and $54 million.

Interest expense will be approximately $6.2 million. GAAP other income is expected at approximately #2.3 million, and non-GAAP other income which excludes the impact of interest from ASC 606 is expected to be approximately a half million. Since the cash tax number is net of refunds and the company received a significant federal tax refund in early April, cash taxes expected to be $1.1 million for the quarter. We men -- we remain confident in the full-year billings and expense outlook we provided in February, the details of which are included in today's earnings release.

We have adjusted our cash tax range downward to $18.5 million to $22.5 million to reflect the receipt of the tax refund this quarter. Overall, we're very pleased with our first-quarter operating performance, and we look forward to updating you on our progress over the coming months. That concludes our prepared remarks. We'll now open to the call for questions.

Operator?

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] All right. Our first question will come from Eric Wold with B. Riley.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Thank you, and good afternoon. Two questions. I guess, one just get it out of the way make sure you get the calculations correctly to get to the adjusted non-GAAP EPS. For the quarter, I'm getting, you know $0.77 for the Q2 I'm getting, you know between $50 million and $60 million, and then, it's over between of $244 million and $46 million for the year?

Robert Andersen -- Chief Financial Officer

Yeah. So I can -- for Q1 I think you're right on the money. Same thing for Q2. Obviously, there's a range involved and given the range for the year the annual numbers you've quoted sound correct to me as well.

So thanks for checking on that Eric.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

OK. Thank you. And then, I guess I know you're not giving Q3 Q4 guidance specifically within the year. But you know just looking at the timing of how things should flow.

Should we assume that Q2 is kind of at the low point in billings for the year with what we've been trending higher on Q3 and Q4?

Robert Andersen -- Chief Financial Officer

Yeah. That's correct. This is sort of typical seasonality for us on the product licensing side, Q2 is the weaker quarter. So that's correct.

This is not unexpected, and I think we're -- you know as we reiterate --reiterated our guidance for the year, we're comfortable with our overall numbers.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

OK. And then covering longer term, looking out into 2020 and 2021 with [Inaudible] you got a lot more visibility into, you know launching with the DMS and connected radio. How quickly should we expect those penetration and kind of launch schedules to take form in those years? You know in terms of numbers of partners initially. How quickly can you get them all there? We've got fairly good visibility into the models you'll be in at this point.

Maybe just a little help on how quickly that could ramp up in those years.

Jon Kirchner -- Chief Executive Officer

Sure. So I think, Eric, you know we've talked about connected radio in 2020. I think you'll see at least one party and possibly two. You know we'll see and there is a fluid situation.

You know adopting in 2020, '21 and I think thereafter, you'll you'll certainly see and we think broader adoption. Just has to do with people's internal product development timelines in their implementation schedule. So I think you'll see things start on Conrad, you know in 2020. I do think you'll see it progressively ramp as you get out a couple of years thereafter because as you know, the automotive business is, you know as such that it doesn't necessarily move incredibly quickly.

But you know it's a very strong business over a long period of time. Well, it's been our experience when you -- when you have solutions people value, and in our history, I think has shown that very well with HD Radio among others -- among other technologies we've provided. On the DNS side, I think we're already in some commercial aftermarket implementations. I think you'll see us in passenger vehicles in 2021.

And I think if you look at the industry projections around DMS in general, they show a very aggressive ramp between '21 and '25. And I think the level of interest we're getting, you know from a number of parties, OEMs and tier ones, I think would make us feel pretty comfortable that some of the stuff we're seeing in the industry will certainly play out in support of DMS being an important feature. So I think that's when you should expect this to kind of ramp as well.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Perfect. And just final question if I may. You just filed NVIDIIA this morning and not looking to get into a lot of the details there, but just at a high level did the asserted patents and claims kind of fallen into a similar buckets as what we saw with Samsung and Broadcom?

Jon Kirchner -- Chief Executive Officer

Yes. There are five asserted patents, three of which were litigated either with Broadcom and or Samsung. So I think it's IP that we are obviously very comfortable with. We think it's broadly applicable to their core GPU, you know in processor offerings.

And you know it's our preference to see a resolution to this, but after working diligently for an extended period of time, we felt it was necessary to take this step to help try to close the gap essentially on on our respective views.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

All right. Thanks, John.

Operator

All right. Thank you. [Operator instructions] And our next question will come from Richard Shannon with Craig-Hallum.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Hi, this is Joe Flynn on for Richard. I was hoping you could give some thoughts on the DMS, I guess funnel looking out and do you have any indication of like what your share position would be drawn into -- toward like already been in the aftermarket?

Jon Kirchner -- Chief Executive Officer

No, in part because the aftermarket efforts are very small given the scale of expected implementation of DMS and passenger vehicles. I would say it's still early innings in so far as, you know people carving up, you know potential market share. However, we are widely recognized as having a very advanced solution in front of multiple automakers. And again, having discussions with multiple tier ones and I think critically important in this, you know in this space is that we are a trusted longtime partner with regard to what happens in the dash and the infotainment cluster.

You know and so that's not a role that some of -- I think the desired competitors potentially can fill. There is certainly, some some smaller, newer folks trying to get into this game. But I think our our historical market position or channel relationships coupled with our -- the quality of world class quality of our solution, I think gives our partners confidence that we're going to be an important player in this market. I think we'll need to get further into it before, I think we can get better visibility into terms of what our expectations may be.

But we feel very good about the work we're doing and the feedback we're getting from the Marketplace.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Great. And board -- DB -- DBI and on ZiBond. Do you still feel this is -- we're going to start to materialize more in 2020? And I was hoping you could give us maybe some milestones to look for so we can stay up to date on these technologies this year.

Jon Kirchner -- Chief Executive Officer

Sure. I -- a couple of things I would point you to. You know if you track or follow any of the industry conferences, there is a tremendous amount of discussion going on around hybrid bonding and 3D I see in general. I think if you go to some of those conferences and, you know and or if you follow some of the the industry analysts you're going to see us in many cases called out by name in terms of being both thought leaders and technology leaders in this space.

So that's one way to kind of just track the tenor of where the industry is going. I think the second key milestone to look for is the execution of more license agreements. And you know we're -- we've we've already signaled that we're deep into one significant one that we think will occur this year, that will further I think catalyze the broader space. As people realize that that this you know this trend is going to accelerate, as people look to differentiate their products and solve other kinds of issues in memory, you know and elsewhere.

And you know I would say again, while this is a longer term game in general, in terms of technology adoption cycles. We believe we've got some of the fundamental IP and most importantly some of the deepest industry knowledge about how to make this work in high volume manufacturing from memory and elsewhere. And I think the nature of the discussions people are bringing to us these days -- what I think would support that in terms of their interest and having us help them evaluate the feasibility of this technology and different types of products.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

All right. One more just just on the litigation expense. It looks like it came on -- came in lower than expected this quarter. But are -- should we still  expect the previous guidance for the full year.

Now that will likely make up with NVIDIA litigation that's going on?

Robert Andersen -- Chief Financial Officer

Yeah. That's correct. We consider the video litigation as part of our litigation expense for the year. And so that was indeed some of the prep work was over the last several months actually.

But it's included in our range for the year, and I would say that the range we've given is still appropriate given the level of activity we have going on within the litigation world.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

All right. There's all for me. Thanks.

Operator

All right. Thank you. And at this time, there are no further questions in the queue. So I would like to turn the call back over to management for closing remarks.

Jon Kirchner -- Chief Executive Officer

Great. Thanks, operator. We are pleased with the progress we continue to make in certain areas of the business, and look forward to seeing many of you at the B. Riley and Craig-Hallum conferences later this month.

With that, we'll conclude today's call. Operator?

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Geri Weinfeld -- Vice President of Investor Relations

Jon Kirchner -- Chief Executive Officer

Robert Andersen -- Chief Financial Officer

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

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