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

Gary Mobley - Benchmark Matthew Galinko - Sidoti Richard Shannon - Craig-Hallum.

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..

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?.

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:X, Connected Radio and DMS, our Driver Monitoring System. They will drive increased penetration and ASPs in the home, mobile and automotive markets.

We accelerated certain investments in machine learning and next generation smart technologies that we believe will provide avenues for greater growth in the mid-term. We completed the first major step in our long-term IP licensing strategy by successfully settling our litigation with Broadcom and entering into our multiyear license agreement.

And we updated and refined Xperi’s long-term strategy, adjusting to reflect key market trends and better position us to drive long-term growth, increased cash flow and enhanced shareholder value.

Importantly, during a year of mixed results, we generated $147 million in operating cash flow, returned approximately $55 million to shareholders in the form of dividends and stock repurchases, and paid down $100 million of debt just after year-end.

During the last six months of 2017, I led a comprehensive review of Xperi in the markets we serve and refined our vision and long-term strategy.

Let me start by saying, I am very encouraged coming out of this process as it has given me the opportunity to validate the tremendous depth and breadth of Xperi’s technology portfolio and the quality and passion of our workforce to innovate and realize Xperi’s vision.

It has also enabled me to more clearly assess some of the unique challenges presented in parts of our business and a number of ways to address them over the long-term.

In short, our strategic vision is to make experiences better by making your devices smarter, becoming a leading provider of integrated, intelligent, immersive and low power on the edge solutions for the consumer electronics products.

Through our audio, imaging and semiconductor solutions, we help content, device and service partners deliver more contextually aware, personalized and immersive experiences.

Our vision and strategy are supported by a strong foundation built over the last two decades with best-in-class technology, outstanding talent, deep domain expertise and a broad footprint of OEM and IC partners. Our team of more than 400 innovative engineers are dedicated to developing and delivering next-gen technologies.

To drive further collaboration and improve company-wide focus on developing the intelligent, immersive, integrated solutions of tomorrow, we recently reorganized previously siloed engineering teams.

In addition, we expanded ongoing efforts in the machine learning area with the dedicated team and are hard at work, infusing state-of-the-art networks in a range of our technology solution offerings.

Underlying this vision is a strategy to focus on delivering product and technology solutions to our customers and partners, helping create the products of the future. As a result, our target business model over the next five years is expected to shift towards a billing mix of 70-30 in favor of product licensing versus IP licensing.

This progression towards product licensing will not only help us realize our vision, but provide improved stability, visibility and diversification. As a result, the business will be less impacted by event-driven outcomes common where IP licensing is the primary activity.

Importantly, I am convinced that the best way to generate attractive growth and cash flow for Xperi as a whole is to have both the product and technology solutions licensing function built around core IP, along with the strong and capable IP licensing function.

Together, these businesses provide multiple paths to the ultimate monetization of our innovations and key assets. We believe the IP business provides a solid long-term cash flow engine for investments in our faster growing product and technology licensing business and a source of attractive capital return for investors.

Xperi is well-positioned to pursue this strategy, and we recognize that monetization through parts of our business will happen over different timeframes and through different processes. To support our strategic direction over the next five years, we expect our capital allocation will be prioritized as follows.

First, on investments, whether organic or through M&A, integrated edge-based solutions on related IP. Second, on opportunistic stock repurchases under our buyback program. Third, on paying an attractive quarterly dividend, it reflects our strong cash generating model.

And fourth on continuing to pay down debt annually to further delver the balance sheet. Note, we intend to keep a target cash balance of approximately $100 million to provide us with strategic flexibility. Overall, I am truly excited about our progress. At the same time, there are still some challenges we need to work through.

Foremost among them is navigating the challenging IP licensing environment to successfully unlock the value of our IP portfolio in near to mid-term. Looking back to 2013, Tessera began a strategy to reposition the licensing of our semiconductor IP away from the OSATs and to move upstream the semiconductor manufacturers.

That initiative, while directionally correct, has not been easy due to a host of factors and has proceeded at a slower pace than we anticipated years ago.

The Broadcom, resolution through a multiyear license agreement was an important and valuable first step in that direction, as it validates the strength of our portfolio and will be helpful with others.

Moving forward, while we continue to expect the IP business to generate significant cash flow, there will also continue to be some lumpiness and uncertain timing in licensing revolutions. As we expand efforts to license our IP portfolio over the next five years, we will face certain license expirations and work through a number of renewals.

While our strong preference is to partner around negotiated licenses, we recognize that as with any IP licensing business, there is a reasonable probability in some circumstances we may need to litigate to get to desired outcomes and to adequately protect our IP.

As a solid base of cash flow generation for our business over time, our goal for IP licensing is to maximize value for shareholders over the long-term rather than pursue short-term deals that will undermine the value of our IP.

As a first step in communicating this vision and our strategic plan to investors, we have posted a new IR deck on our website that outlines our vision, long-term strategy and an overview of the drivers of our business and our long-term financial targets over five years.

Additionally, we launched the first of a series of videos that will educate investors about Xperi and where we are heading. That video is now live on our website at xperi.com. With that, let me provide an overview of the drivers for our long-term financial targets. Let’s start with the product licensing business.

We organize this business segment around three revenue generating markets, automotive, mobile and home. Beginning with automotive. In 2017, the automotive market delivered just over $80 million in billings.

Our long-term target for this business is to deliver between $150 million and $160 million in billings by 2022, representing a CAGR of approximately 13% over the next five years. We intend to generate this growth for several initiatives. First, continuing to deliver HD Radio designs wins within the North American market.

Currently, at about 50% penetration of new car sales in North America, we are targeting 65% penetration in five years by deploying HD Radio on lower end North American models. Second, establishing Connected Radio as a must have radio solution for global OEMs. Third, delivering next generation DMS solutions for the global market.

Our industry-leading imaging solutions paired with our automotive partnership ecosystem puts us in a position to be an industry leader in DMS solutions in the long-term. And fourth, we will drive growth through further investments in solutions that will enable or enhance future applications within connected cars.

For competitive reasons, I can’t be more specific, but we believe there will continue to be significant investment in next generation vehicles and Xperi’s well-positioned to play an important role.

Perhaps most important, the revenue streams coming from the automotive business are very stable and sticky, given product development cycles and natural competitive barriers to entry. Moving to the mobile market. In 2017, the mobile market delivered about $40 million in billings.

Our long-term target for this business is to deliver between $100 million and $110 million in billings by 2022, representing a CAGR of approximately 22% over the next five years. We intend to generate this growth through several initiatives.

First, increasing penetration in the near-term with best in class audio and imaging solutions that are available today, but not yet fully penetrated across mobile device models. These solutions capitalize on key trends such as immersive audio, 3D face recognition, multi-camera and multimodal biometric security features.

Second, we expect that new programs for mobile will drive demand for our solutions across a wider range of mobile devices and applications such as the one recently announced in China with partners Huawei and IMAX.

This collaboration is a collaboration to deliver an IMAX edition of Huawei VR 2 headset, which will provide world-class immersive AR/VR experiences. This product includes IMAX visual processing technology, our enhanced audio solutions, and is supported by high resolution IMAX created content.

Third, as we look further out and augmented and virtual reality become more prominent, we believe that mobile phones and emerging next generation glasses will play an important role in delivering AR/VR based experiences. We believe we’re well-positioned to play a key role in this market due to our focus on audio and visual sensory systems.

These systems are essential to help create immersive virtual experiences and analyze a person to actions and environment to better understand the user surroundings, identity, intent, area of interest, emotional state, and more. Moving to the home market. In 2017, the home market delivered about $95 million in billings.

Our long-term target for this business is to deliver between a $130 to $140 million in billings by 2022, representing a CAGR of approximately 7% over the next five years. We intend to generate this growth through several initiatives.

First, by continuing to deliver our innovative solutions that are in the market today, like Virtual:X and DTS:X on more devices and in smaller form factors in home. Over time, these solutions will be further infused with other smart technology elements. Second, through continued investment in DTS:X global content initiative.

We expect proliferation of DTS content to flow into home products by rolling out programs that introduce new technologies, solutions and content streams in conjunction with partners, similar to what we’ve done in mobile with Huawei.

Our unique ability to combine multi-sensory solutions and licensing broadly across the industry, positions us well to build our business through a combination of core development and strategic partnering.

Third, by developing a pipeline of advanced imaging and audio solutions that leverage machine learning, we will expand both the usefulness and prominence of our solutions in a connected home environment. Efforts have already begun in this area.

As an example, we’ve recently demonstrated our first intelligent, immersive and integrated imaging and audio solution targeted at the soundbar market. This product places an image sensor in a soundbar to better optimize sound delivery, based on what’s happening in the environment among other uses. Moving to our IP licensing business.

Murali Dharan, our new Head of the IP business and an executive with a long track record in the IP area has hit the ground running. Together, we have spent a great deal of time reviewing the IP business or our opportunity set in the broader landscape. We have several key takeaways.

First, our IP portfolio holds significant value as proven by our recent license with Broadcom and the breadth and depth of patents asserted in recent litigation. Building on this success, we believe that we can deliver significant new revenue from semiconductor-related licensing over the long-term.

Second, we believe that our continued development around DBI and ZiBond technology will be foundational to next generation semiconductors. In the long run, as we gain more traction and licensing interest in these solutions, we believe there is significant value in product categories such as image sensors, MEMS, RF DRAM, and more.

Lastly, as we think about long-term trends in growth areas such as imaging, we believe that our business relationships could fall into two categories, customers that prefer to utilize our product and technology solutions, and other customers that prefer to leverage some of our core inventions in their own solutions and thereby will need an IP license.

This will allow us multiple ways to continue to monetize our existing research and development efforts, key innovations and evolving IP portfolio. As an example of this approach, we included key imaging assets in our Samsung litigation and are exploring other opportunities to license these assets.

However, it’s important to understand some key dynamics we will face over the next five years to put the opportunity set in proper context. We have agreements with two large OSATs rolling off at the end of 2018 that we do not expect to renew and as such, we have work to do to fill this gap for 2019.

We made significant progress on this front last year by settling the Broadcom matter. In addition, the resulting battle-tested IP from that litigation has increased our confidence that we will advance other licensing opportunities. As always, the timing of resolution on IP matters is difficult to predict, but our confidence in resolving them is high.

We also need to work through a series of relicensing efforts in the memory space. While these renewals are a few years away before occurring at the end of 2019 and another in late 2020, the nature of these relicensing efforts involves an IP portfolio that has a different composition of assets from the one licensed years ago.

We also intend to supplement our own internal development by acquiring additional assets in this area to further enhance our portfolio. As a result, including licensing renewals will take time effort and customer education.

The performance in the IP business will be driven by the net impact of expanded licensing efforts, the timing of various licensing resolutions and license expirations. In total, our goal five years from now is to keep the IP licensing business flat when compared to 2017.

However, depending on the timing and amount of certain licensing activities, under a more challenging scenario and licensing environment, the business may reflect a negative CAGR of 5% over the period.

Alternatively, with insignificant relicensing or success of new IP licensing initiatives over the next few years, our outlook in the forecast period could improve.

Importantly though, throughout this period, we expect the IP business to continue to contribute substantial positive cash flows to our business and provide an engine for growth for our product and technology licensing business.

Stepping back and taken as a whole, the long-term targets across our entire business five years from now including approximately $10 million a year for audit settlements and other product licensing activities, represent annual billings of approximately $550 million to $630 million, and annual operating cash flow between $220 million to $290 million.

These targets deliver a total billings CAGR of between 5% and 8%, and an operating cash flow CAGR between 8% and 15% in a highly attractive and well-established model.

The Company’s long-term outlook reflects an aggregate CAGR in the products and technology licensing business of 12% to 14%, offset by the IP licensing business CAGR being flat to down 5%. Importantly, this model captures the revenue streams primarily coming from the products and assets we have today and does not include any material M&A.

The long-term model includes certain development costs associated with new initiatives, but none of the related potential billings.

Given the dynamic nature of the markets in which we operate and the way ecosystems naturally develop, we expect our growth to be non-linear and to accelerate over time, particularly as we see increased penetration in mobile and our new automotive solutions begin to ship in the market in 2020 and we work through fluctuations in the IP business.

Now, on to a brief review of the business. Throughout the year, we made significant strides in laying the groundwork to achieve our long-term targets.

Some of our achievements during 2017 include, our automotive business for the year was up more than 19% compared to last year, driven by continued penetration of HD Radio and new cars sold in North America, which reached approximately 50% as we exited the year.

Our newest audio technologies including DTS:X and Virtual:X doubled in revenue and we expect them to double again in 2018. We reorganized all product licensing business units under home, mobile and automotive as a strategic step towards realizing Xperi’s vision. Moving to Q4 specifics for each market.

Please note that the revenue trend data excludes the impact of purchase accounting and compares fourth quarter 2017 revenue to the fully combined revenue of Tessera and DTS for the fourth quarter of 2016.

Automotive was up 13% year-over-year, driven by the continued penetration of HD Radio offset by market declines in Blu-ray and DVD drives in the car. The automotive team is fully integrated and we are now selling our full suite of audio and imaging solutions to the automotive industry.

In the U.S., Canada, and Mexico markets, HD Radio was included in the launch of more than 15 new models. In all three markets, we continue to support the automotive rollout with the launch of more HD Radio stations.

We continue to showcase the DTS connected radio system at events across the globe, most recently at CES, and the feedback has been very encouraging. For the first time, we introduced our DMS platform to an industry wide audience at European Automotive Summit.

Interest in our solutions is growing and we expect the first Xperi DMS solutions to be in the market by late 2019 or early 2020. Turning to the mobile market. For the quarter, as expected, mobile declined 7% year-over-year.

The decline was due to see partners moving older audio and imaging software solutions to internal teams due to a cost constraints in a competitive environment. Offsetting this decline, we saw growth from our largest imaging customer and revenue from new design wins that reflect the importance of our advanced imaging solutions.

Given the dynamic nature of the mobile market, we may experience near-term fluctuations on a quarterly basis.

However, we expect our most advanced, lower power technology solutions and our engagement strategy of deeper product integration and closer partner collaboration to deliver meaningful top-line growth for us in mobile over the next three to five years. Turning to the home market.

Q4 revenue was essentially flat compared to the prior year, in part driven by lower game console volumes and the previously disclosed financial challenges with Echo, [ph] offset by growth in DTS:X and Virtual:X implementations. Echo [ph] challenge masks otherwise slightly positive growth for the business.

We also saw a continuing traction in wireless audio with our Play-Fi solution. And with a number of new program initiatives rolling out in 2018, we are encouraged by the growth prospects in the home business as we look forward.

We continued our Virtual:X audio solution rollout beyond soundbars, deploying it for the first time on select Denon and Marantz AV receivers, and we’ll see the first deployments of Virtual X in the TV market in 2018. Our content ecosystem continues to develop and strengthen.

We now have more than 500 theaters worldwide equipped with DTS:X and more than a 130 theatrical movies have been released to-date. The catalog of DTS:X titles for home entertainment has also grown to more than a 100. Moving to our IP licensing business.

Revenue was up 19% year-over -year, driven mainly by our settlement with Broadcom in the fourth quarter, which balanced the lack of IP license revenue from Samsung. While the terms of the license agreement with Broadcom are confidential, we are very pleased with the result.

This new agreement not only provides the Company with significant cash flow uncertainty but also enables us to redirect substantial legal expenses and resources to other matters. Turning to Samsung. We now have trial dates in five matters.

In ITC, the hearing will take place in late July and early August of 2018 and four of our district court cases have been scheduled for trial in 2019. In January, we filed an additional proceeding in China. The Samsung matters are still in their early stages and there have been no other material developments to-date.

We remain confident in our position and continue to believe that these matters will ultimately result in a positive outcome for the Company and our shareholders. During the quarter, we reached a significant milestone in transferring DBI technology to multiple high-volume manufacturing facilities.

DBI technology is now available from SMIC, one of the leading semiconductor foundries in the world. In addition, Teledyne DALSA, one of the world’s foremost pure play MEMS foundries is ready to offer DBI technology to its foundry customers.

License discussions are well underway with several leading semiconductor manufacturers and suppliers focused on MEMS, sensors and RF devices. We expect to conclude one or more of these agreements in the first half. With that, I will turn the call to Robert to discuss our financials..

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

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?.

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..

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?.

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..

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?.

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..

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?.

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..

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?.

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

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?.

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..

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?.

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..

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?.

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

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?.

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..

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?.

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..

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?.

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..

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?.

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].

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..

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..

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