Geri Weinfeld - Senior Director, IR Jon Kirchner - CEO Robert Andersen - CFO.

Krish Sankar - Bank of America Merrill Lynch Richard Shannon - Craig-Hallum Capital Group Gary Mobley - The Benchmark Company.

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Xperi Second Quarter 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 Thursday, July 27, 2017.

I would now like to turn the call over to Geri Weinfeld, Senior Director of Investor Relations for Xperi. Geri, please go ahead..

Good afternoon, everyone. Thanks for joining us as we report our second quarter fiscal year 2017 financial results. With me on the call today are Jon Kirchner CEO; and Robert Anderson, 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 expectation 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 research and development, stock-based compensation expense, impairment charges on long-lived assets and goodwill, expense reductions from insurance recoveries and imputing 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?.

The Last Knight, our first domestic paramount title, The Dark Tower, our first domestic Sony release, Valerian and the City of a Thousand Planets and Hitman's Bodyguard. DTS Virtual:X lacks launched on the first consumer sound bar the Yamaha YAS-207 and has received rave reviews from the press.

We are also positioning Virtual:X as our flagship audio postprocessing solution for TVs and at least new SDKs to our TV SOC partners for 2018 models.

For the long-term our strategy of commercializing integrated audio, imaging, semiconductor packaging and deep machine learning capabilities progressed and we are confident we will show some of the development work we've done at CES in 2018. We look forward to sharing updates on our R&D progress on future calls.

Turning to the Investors Group, our ZiBond and DBI development and commercialization efforts continue to gain momentum. We progressed our ongoing evaluations with leading semiconductor manufacturers, particularly in the MEMS and RF markets. Importantly, the latest results look promising and have been well received by our customers.

We expect these activities to lead the license agreements and technology transfer programs over the coming quarters. In addition, increased business development and marketing outreach, particularly at key technical conferences, has led to the initiation of several new customer evaluations.

These evaluations typically take between 6 and 12 months to complete depending upon customer requirements and capabilities. As our technologies proliferate more broadly, we expect this timeline to compress.

Regarding ongoing technology transfer efforts, we are targeting completion of the process transfer to both SMIC and Teledyne Tulsa later this year and anticipate customer sampling to follow thereafter. With that, I'll turn the call to Robert to discuss our financials and our Q3 outlook..

Thanks John and thanks to everyone for joining us on the call today. For this call, I'd like to go into more detail on our second quarter results and then our expectations for the third quarter and the remainder of the year. Please note that with all of my comments, I'll begin with the GAAP and then provide the comparable non-GAAP figure.

Our GAAP to non-GAAP reconciliations can be found on our website and in the earnings release. As a reminder, in Q2 we recognized the full cost of DTS operation. Due to the purchase accounting rules, $7 million doesn't show up in revenue on the income statement, although we've already received the cash from the contracts.

It is also important to note that the purchase accounting rules impact both our GAAP and non-GAAP results. Revenue for the second quarter grew 36% year-over-year due to the acquisition of DTS. Revenue was at the high end of outlook we provided due to strength in the automotive business and higher royalties in the IP licensing business.

As expected GAAP and non-GAAP operating expenses for the quarter were up significantly year-over-year given that we now have the additional expenses associated with our audio business. Operating expense was $97 million compared with $32.9 million for the second quarter of 2016.

The year-over-year operating expense increased as primarily due to the addition of DTS expenses, higher amortization and stock-based compensation associated with the acquisition and increased litigation expense. R&D expense for the quarter was $26.3 million, an increase of $16 million from the second quarter of 2016.

SG&A expense for the second quarter was $33 million, an increase of $21.8 million from the prior year. Litigation expense for the second quarter was $8.2 million, an increase of $2.9 million from the prior-year, primarily due to increased activity with respect to Broadcom and litigation planning.

Non-GAAP operating expense was $56.8 million for the second quarter. Q2 interest was $7 million. GAAP net loss for the quarter was $39.1 million or a loss of $0.79 per share. The GAAP loss with significantly impacted by the recording of an income tax provision of $26.6 million to reflect changes in an estimated annual book tax rate.

Had the estimated tax rate not changed our GAAP EPS would've been a $0.06 loss better than the outlook range we provided in May. Non-GAAP net income for the second quarter was $19 million or $0.36 per share. The better-than-expected non-GAAP EPS is driven primarily by lower than forecasted spending.

Keep in mind that our book tax rate can impact our GAAP earnings estimate each quarter, given that the rate is an estimate for the year it takes into consideration a number of factors that inherently change over the course of the year. The estimated rate is further complicated by the impact of purchase accounting.

As such our estimated GAAP tax rate for each quarter may fluctuate significantly. Moving to the balance sheet, we finished the quarter with $136.4 million in cash, cash equivalents, restricted cash and investments, an increase of $14.3 million from the prior quarter.

For the quarter, our basic shares outstanding were 49.5 million and diluted shares outstanding were 50.1 million. We generated $26.8 million in operating cash flow during the quarter, which does not include a late customer payment of $10.6 million that we received in early July.

We continue to expect operating cash generation between $155 million at the low end of our revenue guidance and $205 million at the high end of our guidance for the year.

On July 21, 2017, the Board of Directors approved a regular quarterly dividend of $0.20 per share of common stock payable on September 08, 2017 to shareholders of record on August 18, 2017.

As a combined company, we plan to continue the payment of a dividend on a quarterly basis and as I've stated previously, we plan to focus primarily on debt paydown for 2017. Let me now turn to outlook.

As a reminder, our revenue outlook for 2017 excludes approximately $51 million in contributions from DTS due to the impact of purchase accounting with approximately $7 million impact in the third quarter. Please refer to Slide 22 in our Q2 Investor Deck for additional detail.

For the third quarter, we expect total revenue to be between $90 million and $97 million. This includes approximately $7 million of impact from purchase accounting. While Q3 guidance does not include any contribution from a settlement with Broadcom or new license with Samsung, we expect to resolve at least one of these matters prior to year-end.

As such, we are not making any changes to our annual guidance range. We expect GAAP loss per share of between $0.31 and $0.19 and non-GAAP income per share between $0.30 and $0.39. That concludes our prepared remarks. We'll now open the call to your questions..

[Operator instructions] We'll take our first question from Krish Sankar with Bank of America Merrill Lynch. Please go ahead..

Thanks for taking my question. I had a few of them.

Jon, first one of the Samsung, thanks for giving some color, is there a timeframe or what is the trigger point for you guys to actually start a litigation with Samsung? Is it more about the pricing or is there a timeframe where once Samsung stalls it beyond a certain timeframe, you're going to start a litigation.

Is there any kind of boundary conditions there?.

Well, I think in general, the way to think about it is that there's a bunch of elements to the conversation and strategic conversations about, and strategic thinking on our part as to when you go about doing that.

I think the best, the best thing I can tell you is that the reason we haven't thus far is because we think there's been the benefit of some ITC-related data that discussions are fundamentally informed by data.

You can agree to disagree, but as you get more, as you get more data, some of those disagreements stand harder to truly stand behind, and I think we're in a position now with the ITC decision providing some fresh data, the opinion from Judge Lord will soon be public and so on and so forth that based on some of that additional data as well as some ongoing conversation we've chosen not yet to file.

Does that mean we have unlimited patience, the answer is absolutely not and suffice it to say that if we need to file, we will without hesitation and we have done the work necessary to -- we believe to put ourselves in a position to do that.

So, I realize it's still opaque for you a little bit, but I think as we work to get resolution, which is what we all want, we don't – in a perfect world, you would not litigate. We would find ourselves hopefully at the table getting it done rather than having to go down that path, but I don't think you'll be waiting forever for either to occur..

Got it. Got it. Thanks for the color. Also, just following up on the Samsung, looks like the real issue here is the DRAM licensing, if you do choose, given the fact that the legacy DRAM license is part of -- Samsung is a customer, Samsung is a customer for FotoNation, for DTS.

So, if you do choose to litigate, is it just going to be on the DRAM licensing side and if so, does it impact the other aspects of Xperi's business with Samsung?.

We have a number of license agreements with a number of different Samsung-related entities. So clearly, I think the thrust of the nature of our engagement if we litigate is really going to be driven primarily around semiconductor-related matters.

And I would also say that we also have other assets that may find their way into the case, but from a core historical let's think about the DTS audio business, it's really quite separate and some of the technology we license is part of industry standards as well, which basically sets those things apart..

Got it. Got it. And then two other questions, one is you did mention that like your mobile outlook, kind of like dampened a little bit given like the Asian handset and one of your customers having some issues.

I am kind of curious so, is that like really small that it doesn’t impact your full year guidance because you guys still maintain your full year guidance.

I understand the moving parts of the big ones are Samsung and Broadcom, but if mobile impact really minor that these not –you feel comfortable with the full-year numbers?.

Yeah, I can take that one. So, it does have some bearing on the overall year, but I think given the fact that we're at midyear, there's actually a number of things that can occur in the second half and even particularly in Q4 that have us able to maintain the full year guidance and not need to make any adjustments to that.

These things can include product licensing seasonality uptick that we expect in the second half, particularly in Q4, revenue from a strategic partner coming online in Q4, key mobile model launches in Q3 that subsequently have revenue in Q4, and NRE work with a DMS partner, and it is possible actually that we could have some resolution with -- in some of the audio partners in Asia as well in the second half.

So, I think there's enough things that give us comfort to keep the ranges even without Samsung and Micron, pardon me, Samsung and Broadcom at the lower end of the range..

Got it. Got it.

And then Robert, how do we think about litigation expense for the rest of year, should it be in the $8 million to $9 million a quarter range or…?.

It's only the difficult one to forecast because it really depends on the case activity. We obviously have done some litigation planning that's occurred. We didn't have a trial during Q2 while we did in Q1 actually two trials. So, I think it will depend significantly on what happens over the next month and weeks thereafter.

So, I think when we're thinking about the year, we gave guidance range of $27 million to $35 million, and I would expect at this -- with this visibility that we would be on the higher end of that range..

Got it. And then one last question for Robert, I think as with last time too you're still focusing on de-levering, but your stock has come down a lot.

Why wouldn't you consider buying back your stock at these levels instead of focusing on de-levering? And along the same path, your dividend yield has increased, but I am just hoping that there is no risk to the dividend despite the stock price..

I'll take the second part first, there's no risk to our dividend. It's not predicated on the stock price. We have every plan to keep that going forward, so that's absolutely in our outlook.

In terms of buying back stock, I agree with you, it becomes much more challenging to not buyback, given where the prices are these days, but we're mindful of the -- I think of them as commitments that we've made to the debt market and I'd like to honor those.

So perhaps there will be opportunities to buy back later, but I -- we don't currently have plans to buy at this moment..

Got it. Thank you..

Thanks Kris..

We'll take our next question from Richard Shannon with Craig-Hallum. Please go ahead..

Hi guys. Thanks for taking my questions as well. Maybe I'll follow-up on the topic of Samsung and maybe I missed the key details here in one of the previous questions here.

Did I understand correctly that you're expecting some sort of response from the ITC, which would further inform your discussions with Samsung? Is that one of the key events here to happen before you can move forward there..

No.

My point was that with the ITC decision in the Broadcom case there is IP that has now been decided and battle tested and ruled upon that we believe is very relevant to Samsung's business such that that ruling and the opinion which will become public here very shortly helps further informed discussions we're having as we both think about the -- our various positions and let's call it the economic value of our respective positions.

And our goal of course is to use data to help informed discussions to move them constructively along. I can tell you that more broadly there is a lot of interest in this ITC decision because we have some assets that we believe broadly read across the semiconductor industry and that means two things.

That should be helpful to us as we engage in either relicensing discussions or other greenfield discussions, because there's clearly some significant industry exposure to this core IP and I think secondarily, it will hopefully accelerate the timelines under which given that we have some battle tested IP, we can move forward and get things done.

So, I think there's always lot of speculation going into a case what survives and how strong will it actually be and I think you've seen as a result of that ITC decision in the context of Broadcom and others, some really important data and we've additionally had a number of IPRs denied by challenges on some other patents including as we talked about the 231 patent which is as part of the same family.

which has some different claims that we believe will be very valuable to us as we seek to get licenses done..

Okay. That's fair enough. Maybe staying with the -- or moving over the topic of greenfield and I think Broadcom is starting this, but did I catch your ear freezing right John that you think the licensing opportunity for Broadcom in broader greenfield opportunities. So that the words I wrote down were several hundred million dollars.

If so can you help us understand how you arrived at such a number?.

Just to make sure we're crisp on the verbiage, we said outside the two open matters, so Broadcom and Samsung we believe that the opportunity is in the several hundred or more millions of dollars as it relates to the value of just a small group of assets.

As we think about their application to other large semiconductor players we've obviously done some work.

We obviously have a number of ongoing engagements where we're already engaged with people around various aspects of our IP portfolio and simply put, this helps because the discussion is it -- is that really going to stand up is now decided as people have attempted and you're talking about sophisticated parties with world-class counsel trying to attack these things and we're seeing a lot of what we have prevail, which we always believed in, but we think the validation simply helps licensing discussions along..

Okay. That's helpful as well, maybe one or two more questions for me Jon, I think you mentioned you have -- you signed up a second licensee for FotoNation embedded in SOC, I think the details were by me pretty quickly here. I think you said some of them being from Asia Pacific.

Anyway, you can describe this more in a few different ways may be opportunity relative to the first license you signed up whether this is an in-house solution or a merchant solution or any other way you can describe the opportunity with this second licensee..

It's a merchant solution a major player and one that we believe will help facilitate more penetration of imaging-based solutions particularly in the Asia handset market. So, it expands our -- expands the potential pace of deployment of some of our technology solutions into the marketplace..

Okay. Perfect. Great to hear that. My last quick question is on DBI and ZiBond, I think you mentioned -- expecting to see licenses signed up. I think your verbiage was on the next few quarters.

Do you think that's possibility even likely of happening this year?.

We've seen some of the -- we've seen some of the engagements and some of the testing regimes I would say be slightly slower than our original expectations. It's possible, but anything that doesn't happen, we expect to see let's call it after the turn of the year, not necessarily deeply into '18.

And I think the good -- there's a silver lining in that in that cloud of slight delay, which is that we're working with some -- naturally very sophisticated and rigorous partners. They want to make sure that the application of ZiBond and DBI going to withstand their critical applications particularly in areas such as MEMS and RF.

And every test that has gone down so far has turned out very well for us. The technology works and I think and maybe a notable just industry recognition, we put out a release just recently that 3-D Insight named Invensys in a couple of awards.

One for one of our key inventors [Paul] but also named Invensys, Fabless of the Year and also basically highlighting the DBI and ZiBond technology as Technology of the Year in that space and so what that says is visibility is growing.

We're getting more inbound calls than we certainly had over and more of late as opposed to let's call in the last 12 months and it simply works. So, we look forward to what will take time, but will be a very good road ahead for that core technology..

Okay. Excellent. We look forward to hearing more about that. Thanks, that's all the questions for me guys..

All right. Thanks Richard..

We'll take our next question from Gary Mobley with Benchmark. Please go ahead..

Hi everyone. Good afternoon.

Can you hear me okay?.

Yeah. Hi Gary..

So, adjusting for the purchase accounting headwind, it appears as though the quarter's here running at about $100 million give or take and can you confirm is about half of that coming from the product side the DTSI side and the FotoNation and whether you do it on a 2Q basis or first half '17 basis or full year '17 basis? Can you give us a sense of how the product business is trending on a year-over-year basis?.

Sure. That's right. Without the purchase accounting, we're running in the $100 million little bit north range and it is running I think for the first half this year pretty close, I don't know it's exactly 50-50. We don't show that much at this stage, but we will do the 10-Q, which will come out on Wednesday of next week.

So that'll give you the segment accounting and that'll answer a big piece of it. I think to the last part of your question, how are we trending year-over-year.

I think the audio business is up, I would say single digits at this juncture and I think the IP licensing business is I would -- well it depends on how we do in the second half of the year I think. So, we'll see how that goes..

Okay. All right. And if I look at what your Q3 guidance is without the purchase accounting, it appears to be just north of $100 million and I'm assuming you're expecting some seasonality, some seasonal uptick in Q4 primarily in the product side.

And so therefore is it reasonable to think that you're pretty close to hitting the low-end of the full-year revenue guide without the fruition of Samsung, Broadcom or any other greenfield?.

Yes, that's correct, I mentioned that I think on one of the earlier answers. So, there's a number of things that occur in Q4 that can get us there, but I think I'm looking at it more broadly.

We've indicated we expect one of these two key matters to get determined in the second half and that would obviously indicate also that we're comfortable with the range we've provided..

Okay. So, the line in the sand with the Samsung matter was supposed to be this earnings call right, for legal action if I'm not mistaken and so now we've got a new development on the ITT front, it's certainly done out for you.

And so, you're not assuming any contribution from Samson in Q3 and then logical to conclude perhaps the final decision by the ITC in October 30, is that the new line in the sand?.

No. And I am actually not going to get into it in part because any data I may give you may compromise internal strategic either litigation-related thinking or for that matter may have bearing on discussions that are ongoing.

So, the bottom line is yes, we had said that we expected to either resolve or get it or to file litigation as of before this call. I think you can take away that there've been some developments that for we think a good business reasons we've chosen not to file. Obviously, we're not the resolution because if we were you would know that as well.

But you can you can anticipate that we will be aggressively continuing to seek resolution to the matter and/or putting in place the strategy we think that makes the most sense if we do need to litigate.

I think just general, there is an interesting data point along the ITC arc, which is even before October 30, which is August 31, where basically the commission will rule on what is -- what they're going to consider on appeal and to the extent that they decline to consider a number of things, which is not uncommon, then what happens is basically as we said in the script, the original ruling stands.

So, there won't be any other consideration of that issue.

So, I think all of this is data that is it is helpful in these conversations, but I think obviously we'll be able to provide a more robust update and some of this likely will make more sense in the rearview mirror, but it's not productive for us to really get into the details at this point in public..

Okay. I appreciate that. All right.

So obviously what you're trying to do here is create some legal leverage to convert some of these guys in the patent licensees and along that front how are your injunction efforts going in Germany against importation of Broadcom product? How are you getting help from the court system and how financial penalties imposed by the court system ultimately lead to this legal leverage that you're seeking?.

Great question. We have been actively putting in place the various procedures and mechanisms needed for enforcement. We do know for a fact both directly and indirectly that it is having an impact on Broadcom's business for example their website, their highlights that there are more than 600 products that are not available-for-sale.

We filed five contempt motions in relation to what we believe to be violations of the existing injunction order. We are working with the governmental authorities on customs related activities and a number of those content motions will be heard in the near term in due course.

So there has yet to be fines levied but there continues to be an accumulation of evidence that we think will have more bearing on the situation over time. So were actively doing it and I think the take away is in all these things right.

People want to conduct business and we believe that it is productively assisting dialogue between us and we are in active dialogue with Broadcom and its professional and we're working through the data we have and obviously the ITC case and a lot of these IPR decisions are also helpful and informative and there were two more today, one of which has no bearing on any of the cases because it wasn't part of any of the litigation where they decided that they would at least hear arguments about one of our patents.

But in another case where we do have a patent head issue in our Delaware case, they have once again denied to review that patent believing that there's no chance of proving its invalidity. So, I think in short, these are dynamic situations. We're working through it and stay tuned.

We as Robert said, we expect to resolve at least one of these if not more in the second half..

All right. Appreciate that. Thank you, guys..

You're welcome. Thanks Gary..

There are no further questions at this time. I'll turn the call back over to management for their closing remarks..

Great. Thank you, operator. From product licensing to packaging solutions, Xperi is dedicated to collaborating with its partners to enable extraordinary experiences.

As we continue to work towards resolving the Broadcom and Samsung matters and prepare for the launch of various product licensing initiatives for the balance of the year, we believe we are well-positioned to deliver on our strategic plans and growth objectives across the business.

We believe in the strength of our talent, IP technology and market position and in our ability to realize this vision and uniquely capitalize on some tremendous market opportunities in front of us. We look forward to presenting at the Doherty Conference in September and providing further updates to our shareholders in the coming months.

Thank you, operator. This concludes today's call..

Once again, ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect..