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Xperi Corporation (NASDAQ:XPER)
Q3 2019 Earnings Call
Nov 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 third-quarter fiscal-year 2019 earnings conference call. [Operator instructions] This call is being recorded today, date, November 6, 2019.

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

Geri Weinfeld -- Vice President, Investor Relations

Good afternoon, everyone. Thanks for joining us as we report our third-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 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 realized 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 to report we delivered a solid third quarter. Billings were within our range, and operating expenses were lower than anticipated. Operating cash flow for the quarter was strong at $35 million, generating a total of $104 million year to date.

These results and the progress made during quarter on certain IP license matters give us improved visibility to narrow our 2019 billings range and puts us on track to hit the high end of our cash flow guidance range for the year. Total billings in Q3 were $90.6 million, down 10% from $100.6 million last year. The year-over-year decline was driven by expected declines in IP, automotive and mobile, in part due to IP agreement expirations at the end of last year, automotive NRE that occurred in the third quarter of 2018 and the previously mentioned contract interpretation issue within mobile. Turning now to some highlights from the various markets we serve.

The automotive market, excluding any auto recoveries, delivered $19.3 million in billings, down 18% year over year. The decrease was primarily driven by the receipt of NRE in this quarter last year and some second-half softness in North American automotive sales that has impacted HD Radio unit volumes. Importantly, HD Radio penetration continues to increase, and we remain focused on driving that number higher. In a recent positive development, the FCC announced that it will consider voluntary adoption of all-digital AM broadcasting, which would contribute to broader market adoption over time.

On the vehicle side, we now have four leading car brands, including BMW, Daimler, Masta and Volvo that have adopted HD Radio as a standard across all of their new vehicles. We expect to see several more brands reach 100% adoption of HD Radio in new vehicles as consumers continue to demand advanced radio entertainment. Highlights for the quarter on HD Radio, Connected Radio and in-cabin monitoring solutions include the 2020 Hyundai Palisade Limited Edition is shipping with HD Radio traffic and weather in U.S. and Canada.

Nissan launched its first vehicles with HD Radio in Mexico. Additionally, in Mexico, HD Radio launched in certain Alfa Romeo, Tesla and Bentley models. During the quarter, we signed an alliance with Quu Interactive to deliver metadata to vehicles as part of our connected radio service. This technology will allow broadcasters to leverage enhanced ads to increase advertising program effectiveness within the vehicle.

One recent Nielsen study showed that an automotive manufacturer using enhanced ads versus listen-only ads experienced 127% lift in ad recall. It is the addition of innovative tools like these that help elevate the value of our Connected Radio solution within the industry. Xperi's in-cabin monitoring technology continues to stand out in industry reports. During Q3, Xperi's in-cabin monitoring solution, which leverages advanced machine learning technology was highlighted in Strategy Analytics' September research on automotive cameras.

Lastly, we are pleased to report that we've recently won a significant program to provide occupancy monitoring solutions to a major European car manufacturer. This is our first design win directly with an OEM, and we expect to share more about this development in the next few weeks. Moving to the mobile market. As expected, billings declined year over year to $6.3 million, a decrease of 25% due to the previously mentioned online contract interpretation issue with a key mobile customer.

We continue to work toward resolution of this issue. Excluding the customer with whom we have the contract interpretation issue, the mobile business went up 23% year over year, mainly driven by our continued success in the gaming category. We achieved our highest billings quarter in this category from licensing gaming, headsets, PCs and motherboards and momentum is building. Importantly, in September, we launched our Sound Unbound app, a spatial audio and decoding solution in the Microsoft Store, earning positive reviews from customers, as well as tech journalists.

Moving to the home market. In Q3, we delivered billings of $21.5 million, nearly flat with last year. During the quarter, TPV, a leading European electronics manufacturer, announced they will be joining the Play-Fi ecosystem. TPV through its Philips brand will bring DTS Play-Fi-enabled televisions, sound bars and speakers to market, representing the addition of a high-caliber TV and audio solution partner to our expanding ecosystem.

We also announced new Alexa-enabled Yamaha sound bars with Virtual:X and the DTS digital surround Kodak. On the content front, we remain focused on delivering new streaming services, additional content and more devices for the IMAX Enhanced program. In September, we announced significant progress on the continued expansion of the IMAX Enhanced ecosystem. FandangoNOW began streaming IMAX Enhanced content in the U.S., and Rakuten TV is now streaming content across Europe.

A robust slate of titles will be released in IMAX Enhanced across these platforms. Paramount Pictures will release Bumblebee, Crawl, Pet Sematary and Rocketman in the format. Sony Pictures home entertainment will release the first Marvel title, Spider-Man: Far From Home, in addition to The Angry Birds Movie 2 and Jumanji: Welcome to the Jungle. Finally, we added Anthem and StormAudio to our growing list of device partners and now have 14 device partners throughout the United States, Europe and China.

Moving to our IP licensing and semiconductor business. Billings were $42.6 million, down 8% year over year as expected. During the quarter, we continued to add to our pipeline of opportunities and progress certain IP licensing discussions. We received a positive summary judgment order in the Toshiba matter and won a jurisdiction challenge in the NVIDIA case.

On the Invensas front, hybrid bonding has become a hot topic at semiconductor conferences around the world. Leading semiconductor manufacturers, foundries and IC design houses are espousing the performance, form factor and cost benefits of hybrid bonding in a range of products, including stacked image sensors, 3D DRAM, 3D NAND and a variety of high-performance computing and network switching applications. Recently, a semiconductor partner shared their analysis on DBI, showing a greater than 75% reduction in interconnect power between chips and a greater than 45% projected reduction in unit costs from using DBI interconnect. It is the potential to realize such benefits that is driving the industry toward our bonding and interconnect solutions.

As the recognized leader in hybrid bonding with our DBI and DBI Ultra solutions, we continue to see meaningful progress in licensing discussions. With that, I'll turn the call over to Robert to discuss our financials.

Robert Andersen -- Chief Financial Officer

Thanks, Jon. Let me once again begin with a 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's an important measure of our financial progress. Billings for the third quarter of 2019 were $90.6 million, meeting our expectations for the quarter. GAAP operating expense, including cost of revenue, was $83.4 million, compared with $92.1 million for the third quarter of 2018.

Non-GAAP operating expense, including cost of revenue, was $50.3 million, down $7.2 million year over year due primarily to lower litigation expenses during the quarter. Interest expense was $5.5 million, and we paid $5.9 million in net cash taxes during the quarter. Operating cash flow for the third quarter was $35.3 million, an increase of $6 million compared to the third quarter of 2018, primarily due to strong collections in the quarter. Moving to the balance sheet.

We finished the quarter with $122 million in cash, cash equivalents and investments. From a capital allocation perspective, we continue to focus on deleveraging the business, and we expect to pay down more of our outstanding debt during the fourth quarter. At the end of Q3, our debt balance was $394 million, and our net debt balance was $272 million. Notably, since the start of 2017, our net debt balance has decreased by $215 million, and we returned $165 million to shareholders through dividends and stock buybacks.

In September, the company paid a cash dividend of $0.20 per share. And in October, the board approved a quarterly dividend of $0.20 per share payable in December. Moving to our outlook for the remainder of the year. For the fourth quarter, we expect billings to be between $111 million and $115 million.

And we narrowed our assumptions for billings based on some softness in the U.S. automotive market sales for the second half of 2019 and changes in expected timing and amounts of NRE around our in-cabin monitoring solutions. GAAP operating expense for the fourth quarter is expected to be between $88 million and $91 million. Non-GAAP operating expense is expected to be between $55 million and $58 million.

Interest expense will be approximately $5.1 million. GAAP other income is expected at approximately $2 million and non-GAAP other income, which excludes the impact of interest from ASC 606, is expected to be approximately $0.7 million. Cash tax is expected to be $6.1 million for the quarter. Based on our Q4 outlook, we've made the following adjustments to our full-year outlook.

We're narrowing our billings range to between $398 million and $402 million. We are also lowering our full-year expense outlook as follows. Non-GAAP operating expense will be between $210 million and $213 million. Litigation expense maybe slightly lower to $6 million.

Interest expense and debt amortization are reduced to approximately $23.5 million. Non-GAAP other income is down to approximately $3 million. Net cash tax payments will be about $18.5 million. And stock-based compensation is adjusted to about $32 million.

As a result of these changes, we're raising the low end of our operating cash flow outlook for the year by $10 million to between $145 million and $155 million. Please refer to the 2019 outlook slides in our updated investor presentation to find additional detail on the breakout and timing of functional expenses. Overall, we're pleased with our third quarter operating performance, and we look forward to updating you on our progress over the coming months. That concludes our prepared remarks.

We will now open the call for your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] And first, we have a question from Matthew Galinko with National Securities.

Matthew Galinko -- National Securities -- Analyst

Hey, good afternoon. Thanks for taking my question. So just hoping you could clarify my math. If I'm calculating earnings using billings for the third quarter, I got about $25.5 million or about $0.57 a share?

Robert Andersen -- Chief Financial Officer

Yeah. If you're using billings as the proxy for the top line, that's what I'm getting as well, about $0.57.

Matthew Galinko -- National Securities -- Analyst

OK. And just sort of the guidepost on the guidance for 4Q, I'm getting about $0.87 a share at sort of the low end of the revenue and expense range. Is that about where you're coming out?

Robert Andersen -- Chief Financial Officer

Yeah. Again, I'm using billings here, which is -- as a proxy here for the top line performance, about $0.87 to $0.89, I suppose, if you're going across the expense range.

Matthew Galinko -- National Securities -- Analyst

Great. Thank you. And then just one last question. It sounds like maybe you'll be limited in what you could say about the European wind and auto.

But I'm just curious if you could share a little bit more around whether that's -- maybe a little bit -- maybe if you could be a little bit more specific about what segment of the market that might be targeting? And if it's sort of a new solution that you're bringing to market for engineering? Or if it's sort of what we'd expect then sort of what you've been working on recently?

Jon Kirchner -- Chief Executive Officer

Sure. So we expect that this win will lead to vehicles in the 2022 model year. And we'll certainly have more to say in the near term. The program relates to occupancy monitoring, which is, if you will, an umbrella that sits broader over the top of what you might call DMS, which is driver monitoring.

But in general, it leverages our imaging technology and advanced face and head position-related work that we've been doing now for the last two years, and then part of talked to, obviously, very openly about working with some Tier 1s on the program. So what's significant about it is while we continue to advance efforts with Tier 1s, this is the first direct OEM win with a major car company. And we think it's representative of the fact that we've got some best-in-class technology. And I think the last point I'd make is that Europe has made it very clear that they intend to go down a path of advanced monitoring technologies for safety reasons.

And I think, obviously, this is a great win for our team, and we look forward to having more to say about it in the not-too-distant future.

Matthew Galinko -- National Securities -- Analyst

Great. Thank you.

Operator

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

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

Hi, guys. Thanks for taking my questions as well. Maybe I'll follow-up on the topic here of DMS or in-cabin monitoring. Jon, maybe if you can tell us a little bit about how you're differentiated versus the variety of other solutions out there, both directly for driver monitoring, as well as in-cabin? And do you expect to win or be involved with motor driver monitoring stuff in the future as well?

Jon Kirchner -- Chief Executive Officer

Certainly. I think ICM or so-called in-cabin monitoring is the big umbrella. Occupancy monitoring covers passengers and people in the vehicle. DMS is kind of a further subset of that focusing just on the driver, all of which really revolves around advanced imaging technology.

One of the places that we've invested over a long period of time, particularly in mobile, is an advanced imaging and, in particular, face-related technologies. And so this broader effort for vehicles really leverages that core world-class expertise that we have. I think you're going to see different automakers over time adopt these systems in the broader category for safety reasons. And I think depending on the level of vehicle and the advanced state-of-the-art that they incline to implement it may extend all the way to more broadly to occupancy monitoring.

For things like baby monitoring, for example, don't leave a young child in a hot car, to much more specific technologies that are focused on the state of the driver, the driver's attention, things like eye gaze, emotion detection, interestingly plays into some of what the manufacturers are interested in. And we have a ton of expertise in the broad area. What makes us different in many cases is that depth of expertise, advanced machine learning technologies that we have developed and continue to develop, as well as the fact that we have a very flexible implementation system around camera locations. So some of these systems only work in a very narrowly defined position of where the cameras or the types of cameras or sensors that people can use, and we bring a much more flexible platform to automakers, which allows them to further refine and determine how they want to deploy the systems for whatever end consumer benefit they're trying to achieve.

So I think that's really where we differentiate ourselves, and I think we'll continue to obviously show up well in this market. As you know, the harder part that automotive's slightly longer lead times, but these wins have very long tails, and we've been working on this now for a couple of years and we feel very good about the progress we've made.

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

OK. That's great to hear. Jon, maybe my second, probably actually a two-part question here. But I know some -- number of quarters ago, again two or three, four quarters ago, you talked about a couple of large historical licensees in the DRAM space up for relicensing.

I think, one by around the end of the year and one sometime in the middle of next year. Can you give us any thoughts as to the progress there in hopes that we can avoid more of a longer -- an elongated process that includes litigation. Any way you can characterize what's going on there? And what we should expect for next year?

Jon Kirchner -- Chief Executive Officer

I think the way I would characterize, Richard, is we continue to engage in conversations with all of our existing licensees. And it's our intent naturally to try to facilitate a smoother transition to a renewal as 1 can. That being said, the discussions are highly technical. They don't move incredibly quickly.

And at this point, we're not -- we're not guiding to any particular outcome. And in fact, as we've been -- as we've said and practiced over the last a year or more, to the extent that we don't have direct line of sight to resolution as we think about guidance in 2020 -- at that point, we don't have much better resolution. We're inclined to remove it from guidance, just believing that it's better to announce those things when they happen. So at this point, not much more we can say naturally.

The discussions are also inherently sensitive. So when we have resolution, we'll of course be the first to tell everyone.

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

OK. I certainly understand the sensitivity there, makes total sense not to include unless you have good line of sight there. I guess with that in mind, Jon, if someone were to think about how your billings outlook may like if you excluded entirely the relicensing of either of those two companies. How should we think about 2020 billings in terms of growth rate? Or any way you can characterize, I think, would be very helpful.

Robert Andersen -- Chief Financial Officer

Richard, let me take that one. The -- we'll obviously provide guidance for 2020, when we do our Q4 earnings in February of next year. As Jon mentioned, from an IP perspective, that -- we have those two licensees, specifically Micron at the end of this year, and Hynix for about two-thirds of next year. That's when the payment streams go through.

And in terms of trying to measure that, I think you can look at our prior disclosures in our 10-Ks to kind of get a feel for how large those licensees were or are. And -- so that will give you, I think, a feel for the IP business. Around IP, there's obviously a number of factors, including the state of negotiations and various licensing matters. So it's a little too early to provide much more color at this time.

So -- but I would definitely consider Micron and Hynix at this point. The product licensing business. Again, we'll have another quarter to get a feel for the business. But I think you can estimate that it will be up next year.

And that's probably as much as I can give you right now.

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

OK. That's a fair enough starting point. I appreciate that, Robert. Thanks.

I think it's all my questions. I will jump in the line for you guys.

Operator

Thank you. Our next question will come from Mitch Steves with RBC.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. I just wanted to get some clarity. Hopefully, you guys can provide some clarity on kind of 2020 outlook or something like that.

So when I look at the December number, looks like you're going to be returning to growth or potentially return to growth. And so when we look at our 2020 models, I mean, I think the street's only got a little bit of growth. Do you think that's fair? Or do you think that there's potential that you guys could have a more meaningful growth year similar to '18? I'm just looking for kind of a qualitative metric to build off of?

Jon Kirchner -- Chief Executive Officer

Yeah, it's -- I don't know that we can say much more than what I just described to Richard, which is it's early to really give 2020 numbers. If you're trying to get a broad outline, growth in the product licensing business and IP licensing business, we have the two contracts that are rolling off that I just described. And I think that's as much as I can give right now.

Mitch Steves -- RBC Capital Markets -- Analyst

OK, got it. And then in terms of the, I guess, the roll-off, when you look at your current pipeline, I mean, or the number of deals that are going through, the number of transactions you're working on. Is there any reason why you wouldn't be able to offset that? Or is this going to be something that you think is going to be significant enough to compete growth in '20?

Robert Andersen -- Chief Financial Officer

I think Mitch, it really depends on when you may see resolution. It also depends naturally on whether those resolutions happen with or without litigation because that tends to drive the overall economics of what you might ultimately see. And I think it's also fair to say that as we get closer to the year, we'll have a better perspective on what even might be achievable within a particular time window based on how these discussions are progressing. And so I think you have multiple drivers.

I think it's realistic to assume that within the range of possibilities, if those things roll off and they're not matched, that is perhaps a more representative place to start with more guidance to come. Naturally, we will be doing everything we can and continue to believe that there's value in the pipeline and our assets, and we'll continue to work that. The hard part is just when and how much? When do they fall? And how are they structured when they're ultimately resolved?

Mitch Steves -- RBC Capital Markets -- Analyst

Understood. Thank you.

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 CEO Jon Kirchner for closing remarks.

Jon Kirchner -- Chief Executive Officer

Thanks, operator, and thanks, everyone, for joining today's call. We continue to focus on innovation as a key component of extending our competitive advantage across the markets we serve. We look forward to updating you on progress we've made in areas such as Connected Radio, in-cabin monitoring, IMAX Enhanced and machine learning-based initiatives during the first quarter of 2020. And finally, we're hosting an investor event at CES in January, and we hope to see many of you there.

This concludes today's call.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Geri Weinfeld -- Vice President, Investor Relations

Jon Kirchner -- Chief Executive Officer

Robert Andersen -- Chief Financial Officer

Matthew Galinko -- National Securities -- Analyst

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

Mitch Steves -- RBC Capital Markets -- Analyst

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