Xperi Holding Corporation
Q4 2017 Earnings Call Transcript

Published: 14 Feb 2018

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Fourth Quarter and Full Year 2017 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] This call is being recorded today, Tuesday, February 13, 2018. I would now like to turn the call over to Geri Weinfeld, Senior Director of Investor Relations for Xperi. Geri, please go ahead.

[Geri Weinfeld:]

Good afternoon, everyone. Thanks for joining us as we report our fourth quarter fiscal year 2017 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 discontinued operations, restructuring and other exit costs, acquisition and related expenses, acquired intangible asset amortization, charges for acquired in-process for research and development, stock-based compensation expense, expense reductions from insurance recoveries and impute an estimated 31.5% effective tax rate on the non-GAAP pretax earnings of the Company. 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. A recording of this conference call will be available on our Investor Relations website at www.xperi.com and unauthorized recording of this webcast is not permitted. I’ll now turn the call over to Jon Kirchner?

[Jon Kirchner:]

Thanks, Geri, and thanks everyone for joining us. 2017 was a year of change for our Company. And despite some challenges, we achieved a number of significant milestones, which we believe will drive meaningful long-term shareholder value. We successfully completed the integration of Tessera and DTS, meting our synergy targets, and now operate as one company. We launched new innovative technology such as Virtual

[Robert Andersen:]

Thanks, Jon. I’d like to go into more detail on our fourth quarter results and then our full year highlights and finally a preview of our expectations for 2018. As a remainder, in Q4 2017, we recognized the full cost of DTS operations. However, due to purchase accounting rules, $6 million of revenue is not reflected on the income statement, while we have already received cash from the contracts. For the full year, $51.6 million of revenue is not reflected on the income statement due to purchase accounting. It is also important to note that the purchase accounting rules impact both GAAP and non-GAAP results. Revenue for the fourth quarter was $126.6 million, up from $70.1 million in Q4 of 2016. Revenue for the full year was $373.7 million. As expected, GAAP and non-GAAP operating expenses for the fourth quarter were up significantly year-over-year, given that we now have additional expenses associated with the audio business. This compares with only one month of audio expenses in Q4 2016. Operating expense including cost of revenue was $102.7 million compared with $75.6 million for the fourth quarter of 2016. R&D expense for the quarter was $23.8 million, an increase of $11.1 million from the fourth quarter of 2016. SG&A expense for the fourth quarter was $30.8 million, up slightly from the $30.3 million last year, which included transaction costs, severance and other acquisition-related expenses. Litigation expense for the fourth quarter was $9.1 million, an increase of $0.6 million from the prior year with the Broadcom matter settling late in the quarter and the Samsung matters beginning to ramp. Non-GAAP operating expense was $61.2 million for the fourth quarter. The full year GAAP operating expense was $405.2 million, compared with $170.2 million last year. Non-GAAP operating expense was $242 million compared with the $103.8 million in 2016. GAAP net income for the fourth quarter was $5.6 million or $0.11 per share on a diluted basis. GAAP net income was impacted by an increase tax provision of approximately $6.3 million due primarily to the recently enacted Tax Cuts and Jobs Act. Non-GAAP net income for the fourth quarter was $40.1 million or $0.77 per diluted share. GAAP net loss for the year was $56.6 million are a $1.15 loss per share on a basic share count. Non-GAAP net income for the year was $71.8 million or $1.37 per diluted share. Moving to the balance sheet. We finished the year with $200.7 million in cash, cash equivalents and investments. On January 23rd of this year, we completed a successful repricing of our Term B loans, reducing our borrowing rate by 75 basis points to a new rate of LIBOR plus 250 basis points. In connection with the repricing, we paid down a $100 million of our outstanding debt, bringing the debt balance to $494 million. We ended the year with average diluted shares outstanding of 50.2 million, flat versus last year. We repurchased an additional 269,000 shares during the fourth quarter. As of December 31, 2017, we had approximately a $142.8 available under our current share repurchase program. On December 13, 2017, we paid $9.9 to stockholders of record as of November 22 2017 for quarterly cash dividend of $0.20 per share of common stock. Additionally, on February 1, 2018, the Board of Directors approved a regularly scheduled quarterly dividend of $0.20 per share of common stock payable on March 22, 2018 to stockholders of record as of March 1, 2018. Let us now turn to outlook for the first quarter and full year of 2018. First, if you haven’t done so already, please review the presentation on the new revenue recognition standard ASC 606 that we gave on January 25, 2018. That presentation which can be found on the IR section of our website, outlines the impact of the new accounting standard on Xperi and concludes the customer billings and operating cash flow will become key metrics for measuring our business. Going forward, we will provide guidance on billings and fees guidance on revenue. For the first quarter of 2018, we expect billings to be between $99 million and $104 million. GAAP operating expense is expected to be between a $101 million and $105 million and non-GAAP operating expenses is expected to be between $63 million and $67 million. For the full year 2018, we expect billings between $415 million and $445 million and operating cash flow between a $120 million and $145 million. Note that operating cash flow is not linear throughout the year, with the first quarter being the lowest, due to timing of various payments could occur during Q1. GAAP operating expense for the year is expected to be between $394 million and $412 million and non-GAAP operating expense is expected to be between $245 million and $263 million. We expect stock-based compensation of approximately $37 million, acquisition-related expenses of approximately $3 million, amortization expense of approximately a $109 million, interest income of approximately $1 million, interest expense and debt amortization of approximately $22 million, and cash tax payments between $16 million $20 million, which represent approximately 4% of billings, assuming expenses fall within our guidance range. Expenses are expected to be relatively low over the year, except for SG&A being higher in Q1 due to marketing events and litigation being weighted approximately 40% in the first half and 60% in the second half, due to anticipated case timing. Please refer to the 2018 outlook slide in our updated investment presentation to find additional detail on the functional expenses. That concludes our prepared remarks. Now, we’ll open the call to your questions. Operator?

[Operator:]

[Operator Instructions] We’ll go first to Gary Mobley with Benchmark.

[Gary Mobley:]

Thanks for all the information and taking the time to share [ph] your five-year plan, it certainly helps clarify sort of the pockets of revenue and whatnot. I wanted to start with the question about purchase accounting. Do you expect any sort of impact of purchase accounting on your fiscal 2018 billings?

[Robert Andersen:]

No. Fortunately, purchase accounting won’t be a factor to billings at all. Billings is unimpacted by purchase accounting. So, I think going forward, [indiscernible] I won’t miss it either.

[Gary Mobley:]

So, apples-to-apples, taking into consideration, the purchase accounting headwind from last year, we’re looking at revenue comparison for 2018 of about $430 million versus $425 million last year?

[Robert Andersen:]

That’s close. I mean, we’re giving you guide on billings; revenue would probably be just slightly higher, but you’re in the ballpark. Yes.

[Gary Mobley:]

As far as product licensing goes, I’m assuming it was roughly, what, 51% of revenue in 2017. What do you expect in terms of product licensing growth for fiscal year 2018?

[Robert Andersen:]

We expect the growth to be positive on both ends of the range. It’s low single digits on the low-end of the range and high single digits on the high-end of our range.

[Gary Mobley:]

So, why you guys are not giving GAAP revenue growth outlook? Is it because you have no idea as to the actual impact of ASC 606 in Q1 end of fiscal year 2018?

[Robert Andersen:]

One of the reasons we are not doing it is that the impact to our business, you’ll recall from the presentation we gave in January, it doesn’t track our actual cash receipts and therefore not a very good proxy for how the business is performing. So, providing outlook on the revenue is actually not very helpful. And this is honestly not how we’re going to measure ourselves internally.

[Gary Mobley:]

Right. And I know you just touched on it a little bit, but in terms of the monetization of Ziptronix patent portfolio, specifically DBI and ZiBond. Would you expect 2018 to be a good year upfront in terms of converting some non-image sensor licensees, let’s call MEMS sensors potential licensing into actual patent licensees?

[Jon Kirchner:]

We certainly expect to sign licensees outside of image sensors during the course of 2018. And there is a multi-step kind of licensing process there, fees associated with technology transfer and then once people move into production, there is, if you will, base licensing that it assumes. [Ph] So, do we expect forward progress there? Absolutely, I think we’re engaged in a number of conversations that we’re very pleased with how they’re progressing.

[Operator:]

[Operator instructions] And we’ll take our next question from Matthew Galinko with Sidoti.

[Matthew Galinko:]

Hey, good afternoon, guys. I guess, my first question is around Greenfield. It’s been a few months now since you sort of I guess established validity of your IP relative to the Broadcom action and not to mention sort of getting a license little bit more recently. But, I’m just curious how the Broadcom process and how it played out has impacted discussions you’re having and if there’s been any motion on that front?

[Jon Kirchner:]

I think it has certainly been a positive factor in discussions that have been ongoing. And certainly, keep in mind, we’ve settled the Broadcom matter just before the holiday. So, there’s a, there’s a break in time. And as you pick it up on the early part of this year, we’ve been able to infuse some of that information and conversations. And the bottom line is that we feel good about the strength of the assets that were tested in that case and we believe they’re very relevant to the conversations we’re having. Those conversations that will progress at their own pace and it’s one of the challenges, as we’ve certainly seen looking backward, and it’s one of the reasons, I think we’ve taken a more conservative view of this. So, our 2018 guidance doesn’t include any material Greenfield wins, so it’s been stripped all out in part because trying to exactly call when they may get resolved is challenging, though they are progressing.

[Matthew Galinko:]

Got you. All right, appreciate that. Oddball question, I think, but when you first started moving into the driver monitoring space, there was some conversation about possibly getting after-market products and before kind of new sales solution. So, I’m just curious if that’s still opportunity to sort of move up the timeline at all for DMS pipe revenue or is it still sort of a timeline that you discussed on the call?

[Jon Kirchner:]

I think realistically, you will in fact see it in the aftermarket in 2019. That’s probably about as good as we think you’re going to see the timeline move and then more likely in passenger vehicles in 2020, 2021. A lot of this is just driven by the development schedules of some of the pieces around the DMS solution that we’re providing -- the piece that we’re providing as part of larger systems. So, we don’t have complete control over the timing. That being said, the feedback we’ve gotten through recent demonstrations at the CES in particular, was extremely strong and has expanded the pipeline of conversations we’re having. And therefore getting for doing all that we can to try to move it along. But it’s a business that works on slower cycles.

[Matthew Galinko:]

Got it. Okay. Last question just on -- you did call out M&A in conjunction with the patent licensing, and sort of relicensing discussions. But, I was wondering -- is there any way to -- for M&A landing on the product side of business versus the IP side of business, or do you look for deals that kind of apply to both?

[Jon Kirchner:]

Well, I think we’re strategically thinking about both sides of the business. But, a clear desire for reasons I think we laid out in the script, to accelerate the balance in the business towards product and technology. So, we’re looking at assets. It really comes down to I think having a very disciplined process of how you think about what is the right fit, what fits a strategic need, providing operating businesses whether they fit culturally and ultimately whether you think the valuation in the pricing makes sense, given the value that you can deliver, post combination. So, I think you’ll see activity on both sides of the isle. But, in part, it’s going to be driven by the discipline around the combination of those elements. And when it comes together, you’ll see us transact. And when it’s not there, you’ll see us stand down, because we believe it’s really important to get it right. And by doing so, we’ll be able to I think improve our long-term trajectory and the defensively sustainable market position.

[Operator:]

[Operator Instructions] We’ll go next to Richard Shannon with Craig-Hallum.

[Richard Shannon:]

Hi, guys. Thanks for taking my questions as well. And Jon, thanks for all the great detail in your prepared remarks. Very helpful. Maybe I’ll start with a follow-up question on the topic of Greenfields. Obviously, you had some conversations going on, I think even before you filed suit against Broadcom that just recently concluded. And I know in past litigation events that there is a timeframe by which Xperi runs out of patience. When do you hit that timeframe for some of these other Greenfields? Is it something that happens this year or is it timeframe beyond that?

[Jon Kirchner:]

Because each situation is a little bit different, it’d be hard without me getting in this specifically who they are and where they stand my answer would have no meaning. So, because I can’t do that for all kinds of reasons, in general, I think it’s fair to say, we’re mindful that you need to go through a thorough and comprehensive education process; you need to give the prospective partners, time to do some of their our own homework. But in every discussion, as you say, when it stalls, you’ve got to take other action. And so, right now, we’re clearly in the middle of that situation, the Samsung that’s obviously made very public, and we feel very good about it. And we’ll see if that extends itself to any of our other discussions in the course of this year. For strong preference, it’s obviously to see them results without litigation for all kinds of reasons on both sides.

[Richard Shannon:]

Let’s see here. Jon, in your prepared remarks regarding mobile space, you talked about the highest rate of CAGR there for that group over the next five years. And I think you specifically mentioned potential wins you think we’re going to ramp out, and I may have caught this wrong, so please correct me, in calendar 2020. Whatever timeframe that was, can you help us understand dynamics around that, what gives you confidence to be able to call it out right now?

[Jon Kirchner:]

Sure. I think a couple of things are key. We’re running into or we’re currently moving into a time where you’re seeing mobile phone capabilities advance pretty significantly, and there is a real strong need when you get into things like face recognition and other advanced applications for hardware and software based solutions. And some of our legacy business in mobile what I’ll call lower end competitive, in some cases internal team competition, is more software based. So, one of the key trends we think we’ll see in mobile is this move towards advanced applications that by definition require more sophisticated implementation in both hardware and software, which is an area of expertise we have. We have a ton of experience in how to deliver high quality imaging through low power solutions that involve hardware, software combinations. Another key trend we believe that you’ll see over the five-year period is you’re going to see higher quality content. And if you talk to the content community, new experiences is being delivered on the mobile devices in part through AR and VR based experiences. That trend’s given a strength in building content ecosystems and relationships as well as having both imaging and audio technology relevant to AR and VR. As we said recently announced something in China with both Huawei and IMAX, puts us in a very good position to ride that trend. And that’s partially content driven, it doesn’t necessarily fully require a move to AR and VR in a much bigger way. I think the third trend is to the extent that the AR and VR market grows up to be truly meaningful, as we get into 2020 and beyond, which has certainly been slower out of the gate over the last two or three years than I think some people thought, but there are a lot of signs, if you look around that it’s picking up momentum. To the extent that that happens, we are very well-positioned for some of the same reasons. having core technology that’s very relevant to some of these solutions. We showed some of this at CES. We are involved in a number of confidential conversations with people that have plans with AR and VR related applications. And I think that is fundamentally what will drive the business beyond just continued penetration of imaging, post processing and audio post processing solutions in mobile.

[Richard Shannon:]

Okay. That’s helpful. I’ll probably follow up offline on that topic, it’s very interesting. One or two quick questions for me, probably more for Robert. Talked about kind of a longer term growth rate on the top line blend between all your businesses. How should we think about the OpEx growth rate? And as a kind of a follow-on question in the OpEx topic here. How much of have you increased your spending in machine learning networks, how much is that adding to the growth rates over that time period?

[Robert Andersen:]

Sure. So, let me take the first one. I think, in terms of modeling longer term expense growth, I would put it between 4%, 5% as a reasonable proxy. And in terms of machine learning, in fact, this next year we’re making some specific investments in machine learning. And we see it as pretty critical to the growth of our products and looking out some pretty exciting opportunities there. I think that’ll probably continue to be a trend where we continue to adjust there.

[Richard Shannon:]

Okay. Fair enough. And last quick question for me, I’ll jump out of line. Again, for you, Robert, on tax rate. You touched the numbers for this year in terms of percent of billings. How do we think about that as a tax rate relative to pretax income, especially as we’re trying to think about our numbers for next year?

[Robert Andersen:]

Yes. It’s a little quirky for me. I think, if you made the decision to use billings as a top line and build an income statement with our non-GAAP expenses, then, given a tax range on cash taxes, if you do that math, you’re probably going to come up with something around 12%. And I think cash tax seems to be the primary area of interest for most investors that I talk to. So that seems to be the best way to get to. In terms of describing it, I believe the only way we could really talk about it is percentage of billings which [indiscernible]

[Operator:]

And it appears there are no further questions at this time. I’d like to turn the conference back to our speakers for any closing remarks.

[Jon Kirchner:]

Thanks, operator. We look ahead in 2018 with excitement and conviction around the power of the Xperi platform, our product solutions and IP portfolio and our ability to continue to advance the business toward our long-term strategic goals. Thank you for joining us today and we look forward to updating you on our progress next quarter. This concludes today’s call.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.