Xperi Holding Corporation
Q1 2019 Earnings Call Transcript

Published: 9 May 2019

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi First Quarter Fiscal Year 2019 Earnings Conference Call. Today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. [Operator Instructions] I would now like to turn the call over to Geri Weinfeld, Vice President of Investor Relations for Xperi. Ma’am, please go ahead.

[Geri Weinfeld:]

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 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 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 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 will now turn the call over to Jon Kirchner.

[Jon Kirchner:]

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 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 continued to support the development and commercialization of connected radio and DMS. Connected radio was on track for an early 2020 launch and our DMS 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 solution shipping on a smartphone based on the time of light sensor. In home, we added to the IMAX ecosystem and drove continued penetration of our DTS

[Robert Andersen:]

Thank you, Jon. Once again, let me remind everyone that due to our adoption of the ASC606 revenue accounting standard, we will 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 billings for the quarter were $104.3 million in line with our expectations for the quarter and as Jon noted, up slightly versus the same quarter last year. GAAP operating expense, including cost of revenue, was $86.6 million 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 bad 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 27, 2019, the company paid a cash dividend of $0.20 per share. Additionally, on May 2, 2019, the Board of Directors approved a quarterly dividend of $0.20 per share payable on June 19 to shareholders of record on May 29. 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 $0.5 million. Since the cash tax number is net of refunds and the company receives a significant federal tax refund in early April, cash tax is expected to be $1.1 million for the quarter. 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 tax refund this quarter. Overall, we are 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 up the call for questions. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] Alright. Our first question will come from Eric Wold with B. Riley.

[Eric Wold:]

Thank you, and good afternoon. Few questions, I guess one, just get it out of the way and make sure I’m getting calculations correctly to get to the adjusted non-GAAP EPS. For the quarter, I’m getting $0.77, for the Q2, I’m getting between $0.58 and $0.60, and then somewhere between kind of $2.44 and $2.46 for the year?

[Jon Kirchner:]

Yes. 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:]

Okay, thank you. And then I guess, I know you’re not giving Q3 or Q4 guidance specifically within the year, but just looking at the timing of how things should flow, should we assume that Q2 is kind of at the low point and billings for the year with – with then trending higher into Q3 and Q4?

[Jon Kirchner:]

Yes, 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 – as we reiterated the guidance for the year, we’re comfortable with our overall numbers.

[Eric Wold:]

Okay. And then couple of longer-term, looking out into 2020 and 2021 now that you’ve got little more visibility into kind of launching with DMS and Connected Radio. How quickly should we expect those penetration kind of launch schedules to take form in those years in terms of numbers of partners initially, how quickly to be getting them all, I assume you’ve got fairly good visibility into models being at this point, so, maybe just a little help on how quickly that could ramp in those years?

[Jon Kirchner:]

Sure. So, I think, Eric, we’ve talked about Connected Radio in 2020, I think you’ll see at least one party and possibly two. We’ll see and it’s – this is a fluid situation adopting in 2020, 2021. And I think thereafter, you’ll certainly see and we think broader adoption just has to do with people’s internal product development timelines and their implementation schedule. So, I think you’ll see things start on CONRAD 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 such that it doesn’t necessarily move incredibly quickly, but it’s a very strong business over a long period of time. It’s been our experience when you have solutions, people value. And in our history, I think it’s shown that very well with HD Radio among others, among other technologies we’ve provided. On the DMS side, I think we’re already in some commercial aftermarket implementations. I think you’ll see us in passenger vehicle in 2021. And I think if you look at the industry projections around DMS in general, they show a very aggressive ramp between 2021 and 2025. And I think the level of interest we’re getting from a number of parties, OEMs and Tier 1s, 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 you – that’s when you should expect this to kind of ramp as well.

[Eric Wold:]

Perfect. And then just final question, if I may. I know you just filed the NVIDIA 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 fall into similar buckets as what we saw with Samsung and Broadcom?

[Jon Kirchner:]

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 and processor offerings. And 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 our respective views.

[Eric Wold:]

Perfect, thanks, Jon.

[Operator:]

Alright, thank you. [Operator Instructions] And our next question will come from Richard Shannon with Craig-Hallum.

[Joe Flynn:]

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 trending to towards like already been in the aftermarket?

[Jon Kirchner:]

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 – it’s still early innings in so far as people carving up 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 1s. And I think critically important in this space is that we are a trusted long-time partner with regard to what happens in the dash and the infotainment cluster. And so that’s not a role that some of I think the desired competitors potentially can fill. There’s certainly some smaller newer folks trying to get into this game. But I think our historical market position, our channel relationships coupled with our – the quality, the 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 give better visibility in terms of what our expectations maybe. But we feel very good about the work we’re doing and the feedback we’re getting from the marketplace.

[Joe Flynn:]

Alright, great. And for DBI and 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:]

Sure. A couple of things I would point it to. If you track or follow any of the industry conferences, there is a tremendous amount of discussion going on around hybrid bonding and 3DIC in general. I think if you go to some of those conferences and you – and/or if you follow some of 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, is the execution of more license agreements. And we’re – we’ve already signaled that we’re deepened into one significant one that we think will occur this year that will further I think catalyze the broader space. As people realize that this trend is going to accelerate as people look to differentiate their products and solve other kinds of issues in memory and elsewhere. And 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 for 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:]

Alright. One more just on the litigation expense side, it looks like it came on – came in lower than expected this quarter, but are we still – should we still expect the previous guidance for the full-year now that will likely pick up with the video litigation that is going on – that’s going on?

[Jon Kirchner:]

Yes, 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:]

Alright, that’s all for me. Thanks.

[Operator:]

Alright, 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:]

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:]

Thank you, ladies and gentlemen, this concludes today’s teleconference. You may now disconnect. Please enjoy the rest of your day.