Xperi Corporation (XPER) Q2 2019 Earnings Call Transcript

Xperi Corporation (XPER)
Q2 2019 Earnings Call
Aug 06, 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 second-quarter fiscal-year 2019 earnings conference call. [Operator instructions] This call is being recorded today Tuesday, August 6, 2019.

I would now like to turn the call over to Geri Weinfeld, vice president of investor relations for Xperi. Geri, please go ahead.

Geri Weinfeld -- Vice President of Investor Relations

Good afternoon, everyone. Thanks for joining us as we report our second-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 discussion contains 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 Risk Factors section in our SEC filings, including our most recent Forms 10-K and 10-Q for more information on our risks and uncertainties that could cause our actual results to differ materially from what we discussed 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 all 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've 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 the conference call will be available on our Investor Relations website at www.xperi.com. I will now turn this call over to Jon Kirchner.

Jon Kirchner -- Chief Executive Officer

Thanks, Geri, and thanks, everyone, for joining us. We had a good second quarter with our billings exceeding expectations and operating expenses lower than anticipated. Generation of operating cash flow during the quarter was strong at $55 million. We paid down another $50 million in debt.

We're well on our way toward executing on the strategy that we launched two years ago, and continue to feel good about the opportunity to realize our long-term vision. While we are pleased with the progress, we've made around certain strategic initiatives, global trade and mobile market disruptions have created some hurdles that are shown -- or are slowing our ability to realize near-term growth objectives for our product licensing business. And while we have factored this into our outlook for the year, we believe the growth in the product licensing business over the next few years is going to come from the successful execution of the following initiatives: advanced solutions in the connected car, including connected radio and our in-cabin monitoring technology; new ecosystems in the home, driven by the IMAX Enhanced program and smart solutions combining our imaging and audio technologies; gaming and premium content consumption on mobile phones, driven by the advent of 5G; and new platform solutions based on machine learning technology. In short, while we work through some mobile-specific challenges and slower growth in some of our larger markets we have focused on investments and energy to prepare for the next growth cycle.

We believe we are on the right path to unlock value for customers and shareholders and deliver meaningful mid to long term growth. Total billings in Q2 were $92.3 million, down from $100.7 million last year. The year-over-year decline was driven by expected declines in IP and mobile partially offset by increases in the automotive and home markets. Product licensing billings were $48.6 million, down 3% year over year.

Excluding recoveries, IP licensing billings were $43.4 million down 13% year over year. Turning to some highlights from the various markets we serve, the automotive market excluding any auto recoveries delivered $22.2 million in billings, an increase of 7% year over year. The increase was driven by the continued penetration of the HD Radio and receipt of NRE relating to our development of driver monitoring system solutions. Despite the prevalence of streaming audio consumption, the radio remains a format that more than 85% of the population listens to on a weekly basis, and our solutions like HD Radio and Connected Radio are integral to the ongoing expansion and modernization of the industry.

To date, HD Radio is in 66 million cars in North America with penetration in new cars sold at more than 15% annually. Highlights for this quarter in HD Radio, connected radio and in-cabin and driver monitoring solutions include the 2020 Lincoln Corsair, which launched with HD Radio at the New York International Auto show. The Connected Radio launch is tracking to plan and we expect to see it in cars early next year. We also won two Best of Show Awards at Radio World and NAB for HD Radio and Connected Radio, respectively.

We continue our work with DENSO on the development of driver monitoring system solutions. Notably, we have now engaged with several other tier one infotainment suppliers to address the broader market and set of needs for in-cabin monitoring of the driver and other occupants in the car. Industry safety standards and the desire for more contextual information inside the car are driving a large future market opportunity for in-cabin monitoring solutions. We are well positioned to benefit from this trend over the next three to five years.

Lastly, we launched DTS audio decoding in Infinity autos in Asia, extending our deployment of our DTS audio solutions in this market. Moving to the mobile market, as expected, billings declined year over year to $6.9 million, a decrease of 27%. This is due primarily to the previously mentioned ongoing contract interpretation issue with a key mobile customer. We continue discussions on the matter and the timing of resolution remains uncertain.

As we look ahead, mobile continues to be challenging due to macro- and market-specific factors. Trade issues are impacting the supply chain and manufacturers are facing significant cost pressures, which in turn is impacting the adoption of new technologies. For example, the implementation of our FaceSafe technology on the LG phone has been well-received, yet these market dynamics are impacting the pace of adoption of this technology across broader models and among more clients. Despite these dynamics, we continue to make some progress with licensing solutions on phones, PCs and headsets.

During the quarter, ASUS' new high-end Smartphone, the ZenFone six and LG's Gram PC launched with DTS:X Ultra audio. In addition the gaming category continues to show strength. Logitech announced new headsets: the G Pro and Pro X, which offer its newest technology Blue VO!CE with DTS audio enhancements. ASUS announced its second Republic of Gamers smartphone with DTS:X Ultra with pre-orders for China alone exceeding two million units in less than 24 hours.

Lastly, we anticipate the launch of our first app for PC and Xbox gamers, who appeared in the Microsoft store to occur later this quarter. Moving to the home market. In Q2, we delivered billings of $19.4 million, excluding auto recoveries up 1% year over year. Growth was primarily driven by increased penetration of DTS:X, DTS:X Pro, Virtual:X and our newer solution Stereo Plus.

On the content front, we remain focused on delivering new content and devices for the IMAX Enhanced program. During this quarter, Sony announced the pricing and availability for its new flagship MASTER Series TVs, along with other new LCD and OLED TV models. To date, we've announced 12 consumer electronics device brands now supporting the IMAX Enhanced program. Separately, we're gearing up for announcements that will occur during the fall season trade shows, including IFA, CEDIA and IBC.

These announcements will include the launch of new content streaming services, expansion of studio support and more IMAX Enhanced-capable devices. Moving to our IP licensing and semiconductor business, billings were $43.4 million, down 13% year over year as expected. During the quarter, we added our pipeline of opportunities and we continued to progress certain discussions. In several instances, with regard to our IP pipeline and Invensas, we are on later-stage discussions though the exact timing of agreement remains to be uncertain.

Regarding ongoing litigation, we anticipate having a case schedule for NVIDIA later this quarter. Also in Q2, we received very positive reception to the launch of DBI Ultra technology, which extends our foundational wafer-to-wafer hybrid bonding platform to applications requiring die-to-wafer stacking like DRAM and high-bandwidth memory. DBI Ultra leverages the same room temperature bonding approach as wafer-to-wafer DBI with the added benefit of being both die-to-wafer and die-to-die processes. This allows for flexibility for stacking dies of different sizes on wafers with different sizes.

It accommodates different process technology nodes and disparate technologies. As such, we believe it should prove to be a foundational solution for stacking memory dies 16 high, as well as 2.5D and 3D assemblies allowing for the integration of memory with CPUs, GPUs, FPGAs or SoCs. Customer engagements and licensing discussions are well under way and represent significant future licensing and tech transfer opportunities for Xperi as we both have the know-how and foundational patent coverage in the area of hybrid bonding. With that, I'll turn the call over to Robert to discuss our financials.

Robert Andersen -- Chief Financial Officer

Thanks, Jon. Let's again begin with the reminder that due to our adoption of the ASC 606 revenue accounting standard, we'll be discussing billings instead of revenue as we feel it is an important measure of our financial progress. Billings for the second quarter of 2019 were $92.3 million partly exceeding the high end of our expectations due to strong royalty reports from licensees. GAAP operating expense, including cost of revenue was $83.4 million, compared with $91.6 million for the second quarter of 2018.

Non-GAAP operating expense including cost of revenue was $50.9 million down $5.2 million year over year due to lower litigation expense during the quarter. Interest expense was $6.2 million, and we paid $859,000 in net cash taxes during the quarter, which includes the benefit of a federal tax return of $4.8 million. Operating cash flow for the second quarter was $55.1 million, an increase of $20.5 million compared to the second quarter of 2018. This increase was mainly driven by strong collections, lower litigation spending, and the absence of our retention bonus that was paid last year.

Year to date, we've generated $68.9 million in operating cash flow. And with expenses coming in lower than forecasted, we are raising our operating cash flow outlook for the year. I'll cover that in a moment. Moving to the balance sheet, we finished the quarter with $98.3 million in cash, cash equivalents and investments.

We continue to focus on deleveraging the business and paid down another $50 million of our outstanding debt during the quarter. The debt balance is now $394 million, which reflects the reduction of $200 million over the last 18 months. In June, the company paid the cash dividend of $0.20 per share. And in July, the board approved a quarterly dividend of $0.20 per share payable in September.

Moving to our outlook for the third 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 $5.5 million.

GAAP other income is expected at approximately $2.3 million. And our non-GAAP other income, which excludes the impact of interest from ASC 606, is expected to be approximately $0.8 million. Cash tax is expected to be $5.8 million for the quarter. For the full year, we remain confident in the billings outlook we provided in February.

We are lowering the full-year expense outlook as follows: non-GAAP operating expense to be between $213 million and $227 million, amortization expense to approximately $100 million, interest expense and debt amortization to approximately $24 million, and net cash tax payments between $16.5 million and $20.5 million. Stock-based compensation remains unchanged at $31 million. As a result of these changes, we are raising our operating cash flow outlook for the year by $15 million to between $135 million and $155 million. Please refer to the 2019 outlook slides and our updated investor presentation to find additional detail on the breakout and timing of functional expenses.

Overall, we are very pleased by our second-quarter operating performance and we look forward to updating you on our progress over the coming months. That concludes our prepared remarks and we'll now open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Eric Wold with B. Riley.

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

Thank you. Good afternoon. I guess, maybe just a housekeeping one for Robert real quick. Just make sure I got the, kind of, the non-GAAP EPS calculations correct from the info you provided.

Looks like for the second quarter it was $0.68.

Robert Andersen -- Chief Financial Officer

That's correct, Eric. Thanks for checking.

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

And then for Q3, I got $0.51 to $0.53 and then that looks like you increased the full-year guidance from $2.44 to $2.46 up to $2.79 to $2.83.

Robert Andersen -- Chief Financial Officer

Those sound correct as well. It depends on where. For the full year, I think it depends on where you set the operating expenses. So it could be a wider range than what you said, but that's probably lengthier.

Your math seems to be correct.

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

OK. And then on the guidance while we're there Jon you mentioned in the beginning some trade issues and other factors that may be holding back kind of product licensing growth this year. Did that further kind of have some puts and takes within the guidance? Are you going to keep it where it was? And then maybe just trying to get a sense -- well, obviously, the $20 million delta within the high end and the low end of the billings guidance. Maybe trying to get a sense of kind of comfort levels around that range and where any kind of new IP semi license will be included?

Jon Kirchner -- Chief Executive Officer

Sure. So a couple of high-level comments and Robert maybe can chime in a bit as well. In general, we are, I think, very comfortable with the range we provided. There certainly are some puts and takes not unusual for us at this time of the year.

We've got a number of things in motion and depending on the exact timing of happening whether it's new license agreements that may involve some minimum guarantees to some NRE, as well as on the IP licensing front. The timing and extent of those things happening that'll determine kind of where we fall within the range. Robert?

Robert Andersen -- Chief Financial Officer

Yes. I think that's about right. We've always had a degree of IP in our number for the year. And I think the range that we maintained for the year really reflects the level of IP that occurs.

And of course we're -- as we guide for the second half there are always a number of things that can occur over the course of the remaining five months. So we put into our Q3 guidance what we have a high degree of visibility for and then we leave the rest of the risk kind of for the remainder of the year.

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

OK. And then and final question on opex you brought it down -- lowered expectation for the quarter. Then you brought it down for the year as well. Is that would you characterize that as a kind of a reduction in the baseline? Or are there some delay in the next year, I guess, specifically kind of around litigation as well maybe a sense to kind of where you expect litigation to kind of ramp to now that kind of NVIDIA is starting to get going.

Robert Andersen -- Chief Financial Officer

That's a good question. Litigation, if you look at the want to say the midpoint of our range for the year we brought that down by about $4 million. It's as a hard one to forecast, obviously, just based on the timing and the case level activity. So we'll see how that goes.

I think we are able to tighten it a little bit for the remainder of the year just because we have a little bit better visibility now, but hard to say for next year. We did bring down SG&A to some extent for the year. That's really just us I think being prudent on how we manage expenses. Cost of revenue is lower as well, but that'll depend on some of the types of deals we strike particularly around IMAX Enhanced for the second half, so we'll see about that.

And we did make adjustments to interest and other income and cash tax that were all benefits. So in aggregate it's about almost $18 million in the middle down, so that's good for us. Let me flesh that last part out to, I really don't see things pushing into next year. These are all related to this year.

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

Thank you.

Operator

Thank you. Our next question comes from Richard Shannon with Craig-Hallum.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

Hi, Jon and Robert. Thanks for taking my questions as well. Let's see here. Let me ask a couple of product category questions here.

Last quarter, you talked to -- announced your first customer for FaceSafe. Wanted to get your sense of the degree to which -- I mean, as Jon you talked about a delay on maybe some of those programs rolling out. But maybe you could talk about how the pipeline is building there talk to -- you've talked in the past about that being the first solution for time to flight 3D sensing and I just want to get a sense of how fast that's moving for you.

Jon Kirchner -- Chief Executive Officer

We're engaged in a number of discussions around it. I think the feedback on the solution that we delivered to LG has been very very good. Quite candidly, I don't know that the phone has performed, as well as perhaps some expected. I also think there's this constant war going on in the mobile space about screen size, as well as priorities is one thing.

It's about whether you wanted it to be on a screen with a notch in the corner versus a notch across the top. And so as some of those decisions play out, there impacting how people think about the implementation of time of flight because of what's required to get the solutions to work. And I think, some of those discussions in a broader slow mobile market environment, as well as with some of the China trade issues where we have a lot of our discussions are in fact with Chinese-based handset makers that's impacted things. But as far as -- our dialogue has been good.

I think, we're currently cautious about just what the pace and timing of significant expansion around that solution will be thus some of the comments on the call.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

OK. That's fair enough. Thanks for the detail. Another product category is DBI and ZiBond, talked more about that in the last couple of calls, the next announcement last quarter here with the DBI Ultra.

I just want to get your update Jon on the kind of the pace of real industry adoption here, what kind of interim milestone steps in terms of contracts or partnership announcements. And then, what timeframe could we expect to see some sort of material revenue contribution? I mean could this happen before the end of next year? Are we looking a little bit farther out than that?

Jon Kirchner -- Chief Executive Officer

Let me answer maybe in reverse. I think to see material escalation of the use of the technology I think you're going to be slightly longer in the timeframe. I do think so that if you have attended any of the recent industry conferences, the amount of focus on hybrid bonding that's being a key technology for next-gen chips, whether it be for memory or other applications, is really building up quite a head of steam. And if you read some of the recent industry research, we are specifically called out by name as having a tremendous amount of know-how in a solution that is being evaluated and reviewed.

And I think all of which leads to I think there is going to be activity in and around the Invensas hybrid bonding solutions. I think obviously our goal is to close out some of the discussions that we've had under way with multiple parties who have expressed interest. And as that happens support them in their move to production around the technology. And as that happens, I think you'll see a lot more momentum build.

But I think we are super pleased with the amount of interest, as well as just kind of the direction the industry seems to be skating toward which is very consistent with what felt years ago and thus I've spent a lot of time developing background IP know-how and knowledge in order to support the industry move that direction as we get into 2020 and beyond.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

OK. That's helpful. Maybe last question for me. I'll jump on the line.

In the auto space, we've got a couple of interesting initiatives, one for connected radio and one for DMS. And I think on the last call you talked about connected radio is hopefully starting to ramp sometime next year and then DMS maybe in 2021. Maybe you can confirm those time lines still fit what you're thinking here. And then maybe, on DMS additionally, can you talk about the pipeline there.

And what kind of share expectation you may have?

Jon Kirchner -- Chief Executive Officer

Sure. And in general, your timeframes are correct. We expect to see connected radio in 2020. I think you'll start to see DMS in 2021.

And you'll see it ramp, meaningfully thereafter. I think with regard to what we're seeing, we've seen more tier one and in automotive OEM, interest in what we're doing. And I think notably, we've historically talked about DMS, which technically is driver monitoring systems, which has to do with really focusing on the driver. There seems to be a growing industry interest in, in-cabin monitoring, which is kind of a superset.

That deals with not only the driver, but ultimately the other occupants in the car for various reasons. And to provide various features if you will. And as a result, our multi-camera systems that are very flexible. And allow you to position cameras in different places and use our algorithms for various purposes.

I think we're getting a fair bit of interest. So we're very pleased with how it's going as we work with multiple tier ones. And our goal is to get some things both inked and slated for cars here as we get into the next six to 12 months.

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

OK. That's helpful comments. So I think I'll see next time, you guys.

Jon Kirchner -- Chief Executive Officer

Thanks, Richard.

Operator

Thank you. Our next question comes from Mitch Steves with RBC Capital Markets.

Mitch Steves -- RBC Capital Markets -- Analyst

Yeah. Thanks for taking my questions. Just in terms of the opex reduction that you guys are looking at. Is there a new kind of model we should be aware of in terms of what you guys think you can maintain that as a percentage of revenue? Or is this kind of more of just a one-time thing, where you're seeing lower opex for the full year?

Robert Andersen -- Chief Financial Officer

Yeah. We haven't really described an operating model so much as just providing an annual view on our spending. I think to a great extent our G&A is scalable. But we do continue to kind of focus more, as we're looking at the mix on R&D.

And in fact if you look at year over year, we really sort of moved between G&A over to R&D. As we make some kind of key strategic investments. But I don't think we have so much as an operating model as much as we have an annual view.

Mitch Steves -- RBC Capital Markets -- Analyst

OK. Perfect. And then for the NVIDIA piece, is there any sort of update you can give us in terms of the revenue contribution there? Are you guys still, essentially out there keep waiting for another quarter to get more visibility on that?

Jon Kirchner -- Chief Executive Officer

We typically don't size these things just for strategic discussion reasons. But what we can say is there is -- we've got five patents at issue at least currently being litigated. Three of them have been involved in prior cases, where we have been successful. And we believe the IP is broadly relevant to their core processor and GPU business.

So I think if you just think about that, obviously, we expect the case ultimately progress to the point, where hopefully we can get into a reasonable ZIP code of economic resolution. And we obviously feel very strongly about the quality of our case.

Mitch Steves -- RBC Capital Markets -- Analyst

OK. Perfect. Thank you.

Operator

Thank you. We have no further questions at this time. I would now like to turn the conference back to Mr. Jon Kirchner for closing remarks.

Jon Kirchner -- Chief Executive Officer

Thanks, operator. While we're pleased with our first-half progress, we still have work to do as we focus on our efforts on building an exciting and next phase of growth for Xperi. We look forward to sharing more news with you over the coming months. And perhaps, we'll see some of you at various conferences here in the not-too-distant future.

Thanks, operator. That concludes today's call.

Operator

[Operator signoff]

Duration: 30 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

Richard Shannon -- Craig-Hallum Capital Group LLC -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

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