Geri Weinfeld - Senior Director, Investor Relations Jon Kirchner - Chief Executive Officer Robert Andersen - Executive Vice President and Chief Financial Officer.

Gary Mobley - Benchmark Matthew Galinko - National Securities Richard Shannon - Craig-Hallum.

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Third Quarter Fiscal Year 2018 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the call will be open for questions.

It is now my pleasure to turn the conference over to Geri Weinfeld, Vice President of Investor Relations for Xperi. Ma'am, please go ahead..

Good afternoon, everyone. Thanks for joining us, as we report our third quarter fiscal year 2018 financial results. With me on the call today are Jon Kirchner, CEO; and Robert Andersen, CFO. Before we begin, I would like to provide two reminders.

First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs, and therefore, subject to risks, uncertainties and changes in circumstances.

Please refer to the Risk Factors section in our SEC filings, including our most recent forms 10-K and 10-Q, for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today.

Please note that the Company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call.

Second, we refer to certain non-GAAP financial measures, which exclude restructuring and other exit costs, acquisition and related expenses, acquired intangible asset amortization, charges for acquired in process research and development and stock-based compensation expense.

We've provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website. The recording of this conference call will be available on our Investor Relations website at www.xperi.com. I'll now turn the call over to Jon Kirchner..

Thanks, Geri, and thanks, everyone, for joining us. Let me begin today's call with a few financial highlights. Billings in Q3 were $100.6 million, an 18% increase versus last year and in line with our outlook for the quarter. Notably expenses for the quarter were lower than expected placing us above our profitability outlook.

We generated nearly $30 million in operating cash flow which was slightly impacted by certain balance sheet movements and approximately $6 million in billings that occurred late in the quarter most of which has been collected in Q4.

For today's call I will provide an update on each of our markets and the progress we made toward the 2022 targets we provided in February. Robert will then provide a more in-depth discussion of our Q3 financials and our outlook for the fourth quarter. Let's start with the product licensing business.

Total product licensing billings during the quarter excluding auto recoveries were $53.2 million, up 15% year-over-year. Growth in the quarter occurred across all three market categories and year-to-date product licensing is up approximately 4%. For the year we expect product licensing growth to tick upward as we enter a seasonally strong period.

Importantly, based on continued investments in each of our markets we expect our five-year growth rate to accelerate into the double digits as we move into 2020 and beyond. Much of our strategic investment continues to focus on building ecosystems that are both stable and attractive over the long term.

In September we announced an exciting new partnership with IMAX which for the first time allows consumers to enjoy the IMAX enhanced entertainment experience at home supported by a full range of consumer electronics products.

Importantly this initiative promotes the continued penetration of our audio technologies and expands the unique content support for our technologies and brands. The IMAX enhanced program exclusively licensed by DTS, offers consumers a new level of quality and immersive sight and sound entertainment for the home.

Launch partners announced so far include Sony Electronics, Sony Pictures, Paramount Pictures, and Sound United. In addition launch planning continues with new streaming services in North America, Europe and Asia showing strong potential for greater ecosystem expansion in the coming years.

To-date IMAX enhanced product licensees have announced more than 25 products including 4k, UHD TVs, projectors and AV receiver models with additional product lines coming soon. In addition to IMAX, we expanded our North America content footprint with Cineplex, the largest theater conglomerate in Canada.

Cineplex is now streaming DTS-HD content on their VOD service. Lastly, DTS:X is now installed in over 700 cinemas worldwide further promoting the availability of immersive content for downstream delivery. Turning to our automotive business.

The automotive market delivered $23.5 million in billings, an increase of 18% year-over-year driven by NRE payments in support of our DMS and HD radio businesses, as well as growth in HD radio penetration Over the quarter we made significant progress on our three key growth drivers in this market.

First, we increased penetration of our HD radio technology. In Q3 the GMC Canyon, Buick Regal, Genesis T70 and BMW 8 series all announced launches with HD radio technology in the U.S.

In addition, on the broadcast front we've seen a 33% increase versus last year in the number of HD radio HD 2 stations thus broadening the content offerings and value to both broadcasters and listeners of HD radio.

Second on the connected radio front, we began collaborating with the BBC on a development program to enhance the in-car listening experience. Through this collaboration we will trial content, services, and user interfaces for next generation of radio and connected cars. We also announced a similar arrangement with the U.S.

National Association of Broadcasters. Lastly, building on the recent DENSO launch of aftermarket DMS for trucks, we continue to develop OEM grade implementations of our technology. Three major vehicle manufacturers in Japan are currently in testing for deploying truck fleet vehicle systems with their DMS capabilities.

Moving to the mobile market billings were $8 million, increase of 19% year-over-year driven by favorable mixed shift at a key imaging customer partially offset by soft PC related unit volumes for legacy audio products. Importantly, we continue to make progress on all three of the mobile related long term growth drivers.

First we continue to work with our mobile partners to deliver more immersive audio and imaging solutions on their higher-end smartphones and gaming headsets. During the quarter we licensed our imaging and audio solutions with several OEMs.

Huawei launched our imaging 3D relighting technology and the ASUS ROG gaming phone launched with DTSX ultra which includes headphone X. In addition or gaming headset business through double digits here over a year driven by the growing popularity of PC gaming.

Second, market interest in our 3D facial recognition solutions continues to grow and we added 3D portrait capabilities to an ever-growing portfolio solutions. We expect to see or 3D FR solution integrated into certain upcoming 2019 models.

Third on the AR/VR front we completed work to provide always-on tracking and user perception capabilities to eye tracking cameras designed for future AR/VR devices. We continue to work with a number of leading partners in this space. However, we’ve recognized it remains a longer-term market opportunity. Moving to the home market.

In Q3 we delivered billings of $21.1 million, up 12% year-over-year. Growth was primarily driven by the timing of a customer conversion from minimum guarantee to per unit licensing which resulted in a lower comparable last year and was also driven by increased penetration of DTS:X and virtual:X and sound bars.

We made solid progress towards our long-term targets in this market. First we increased our AVR sound bar and TV customer penetration through the greater adoption of our newest technology solutions virtual X and DTSX. The team signed more than 10 new licensing contracts in the TV, OTT, set-top box AVR sound bar and smart speaker markets.

We also continued some exciting development efforts relating to smart home that involve a combination of sight and sound technologies with our machine learning capability. We expect to show some of these products for the first time at CES in January. Moving to our IP licensing and semiconductor packaging business.

Billings were $46 million, up 18% year-over-year primarily due to an increased contribution from the Broadcom license entered into in December of last year. Looking ahead there are a few key things to note.

First several discussions involving relicensing and with new customers have progressed positively over the past quarter and we continue to work towards closing at least one IP licensing matter by the end of the year. While timing is always difficult to predict we are focused on receiving fair value for our IP portfolio.

Second, we continue to add new licensing opportunities to our pipeline that we believe will positively contribute to license revenue over the long term. Third in our Samsung matter we have eight actions pending in various jurisdictions across the world. Three of them in Texas were scheduled to come to trial in 2019.

In our first Texas case we recently received a very favorable claim construction ruling. However, just a few hours ago we were notified that the court reversed a prior decision on venue and ordered the case to be transferred to Delaware.

This is a procedural matter and has no impact on the merits of this case and we are currently evaluating our options. Overall, we believe our position remains strong across our case strategy. We remain in regular discussions with Samsung as we try to seek resolution to the matter.

Turning to Invensas, we have now engaged multiple customers and evaluations of our DBI technology for memory related application including stacked DRAM and 3D Nand.

Interest in our hybrid bonding solutions is accelerating and we anticipate the initial memory products leveraging this technology to become commercially available in the 2019-2020 timeframe. With that I'll turn the call over to Robert to discuss the financials..

Thank you Jon. Before I begin let me remind everyone that due to the new revenue accounting standard that we adopted at the beginning of the year known as ASC 606 we've been discussing billings instead of revenue as we feel is an important measure of our financial progress.

For additional information on the impact of the new accounting standard on Xperi please refer to the presentation on ASC 606 we gave back in January of this year which can be found on our website in the Investor Relations section. Now on to review of our Q3 financials.

Total billings for the quarter were $100.6 million in line with our expectations for the quarter and an increase of 18% from the same quarter last year. GAAP operating expense including cost of revenue was $92.1 million compared with $98.4 million for the third quarter of 2017.

Non-GAAP operating expense including cost of revenue was $57.5 million compared with 58.6 million for the third quarter of 2017. So down slightly year-over-year.

Cost of revenue increased by $3.3 million compared to the third quarter of 2017 did a higher [indiscernible] costs which are moved from R&D expense and to IMAX program costs that are taken on an upfront basis for accounting while the actual cash payments and associated billings occur over multiple periods.

Thus much of the cost of revenue increase is non recurring. Non-GAAP expenses for R&D and SG&A declined on a year-over-year basis due primarily to lower outside services spending and reduced bad debt expense.

Litigation expense decreased on a year-over-year basis, primarily due to concluding litigation activity against Broadcom partially offset by increases in Samsung related litigation spent. Interest expense was $6.3 million and we paid $4.5 million in net cash taxes during the quarter.

Moving to the balance sheet we finished the quarter with a $105.4 million in cash, cash equivalents and investments and our outstanding debt balance was $494 million. Operating, cash flow for the third quarter of 2018 was $29.4 million a decrease of $10.6 million compared to the third quarter of 2017.

Q3, 2018 operating cash flow was negatively impacted by late in the quarter billings of approximately $6 million most of which has already been collected.

The third quarter of 2017 included a late payment of approximately $11 million received from a significant customer that should have been received in Q2 of 2017 On a year-to-date basis operating cash flow for the first three quarters of 2018 was $68.6 million compared with $85.8 million for the comparable period in 2017.

The year-over-year decline is primarily attributed to the payment of $18 million relating to the previously discussed DTS employee retention bonus plan during the first half of 2018 but for these non recurring payments cash flow for the first three quarters would have been up year-over-year.

As Jon mentioned we continued to buy back shares during the quarter and are approximately $100.6 million remaining under authorized share repurchase program. Given our current valuation we expect to continue buying back shares during the fourth quarter on an opportunistic basis.

On September 6, 2018 the company paid a cash dividend of $0.20 per share and on October 25, 2018 the Board of Directors approved the quarterly dividend of $0.20 per share payable on December 19, 2018. Moving to our outlook for the fourth quarter and full year. For the fourth quarter we expect billings to be between $109 million and $124 million.

GAAP operating expense is expected to be between $95 million and $99 million. Non-GAAP operating expense is expected to be between $59 million and $63 million.

We are lowering the high end of our fiscal year 2018 billings range to reflect greater visibility at this point in the year and updated timing and risk adjustments associated with the semiconductor and IP licensing forecast. We are also reducing our operating expense outlook for the year and adjusting down our diluted share count due to buybacks.

Additionally, we are updating the operating cash flow outlook to reflect changes in billing and expenses and balance sheet movements. The revised 2018 outlook is as follows. We expect billings to be between $415 million and $430 million. Non-GAAP operating expense is expected to be between $377 million and $381 million.

Non-GAAP operating expense is expected to be between $235 million and $239 million. These changes reflect an improved profitability outlook. Lastly, our operating cash flow is expected to be between $120 million and $130 million.

Overall, we were pleased by our third quarter operating performance and we look forward to updating you on our progress over the coming months. That concludes our prepared remarks. We will now open the call for questions.

Operator?.

Yes sir. [Operator Instructions] And our first question will come from Gary Mobley with Benchmark..

Hi everyone. Thanks for taking my question. Robert I want to start asking about the unbilled receivables.

I see that it decreased only a slight amount quarter-over-quarter dropping about $5 million sequentially to about $214 million despite the fact that you recognized about $50 million in patent licensing and, so should we have to mean that you backfilled the majority of that recognized in the quarter with new license deals?.

Yes I think that that's a balance sheet account. So it's going to reflect both the ins and outs that occur during a quarter. So we would of course have taken some of that unbilled receivables to billed receivables.

So that's going to reflect on our NRE balance, so we would have collected it and then we would have had potentially some activity such as new minimum guarantee deals that would go into a unbilled receivable balance.

Just to be clear the unbilled receivables is the present value of various license deals discounted that you [indiscernible] right?.

It's effectively assets. It's you can think of it as our billings, it's our bookings backlog that we haven't actually billed yet simple as that..

Got you. Okay. That's it on that topic. So the fact that you're tightening the guidance range or I guess lowering the guidance range obviously implies that maybe a wildcard is slipping out of the year or slipped into later in the year and perhaps it has to do with this one license deal you expect to have consummated by the end of the year.

Am I reading that correctly?.

I think this is really just a function of trying to forecast the timing of when certain events occur.

We're lowering the high end of the range just to reflect this we said it in our prepared remarks that kind of create a visibility at this point in the year and that's risk adjusted associated with products and technology audits as well as semi and IP licensing forecasts.

So it's any number of things but as we get to this stage in the year and it makes sense to tighten things down a little bit based on our current visibility..

Okay.

Jon despite the memory industry adopting perhaps DBI technology, can you give us some anecdotal evidence perhaps in what ways some of the memory IDMS are showing in their preliminary roadmap support for DBI?.

I can point to a couple of things. Some public and some obviously private that we can't discuss and maybe working backwards there. We have seen a significant acceleration interest in engagement in the use of DBI and our hybrid bonding technologies for these applications just in the last quarter or two.

There have been some interest percolating at publicly if you go to some of the industry events there's been some dialogue about this from others, but I think what we've noticed recently is that the interest is accelerating and people are talking very specifically about their potential roadmaps as well as the technical challenges of how they're going to deliver on their desired product strategies and we believe as we stated in the script that hybrid bonding and our knowledge as well as our core foundational IP in that area is going to be an important ingredient.

So I'm not at liberty to discuss the specifics of some of our customer engagements but I think we are certainly pleased with, I think the accelerated interest and the greater specificity about how it maybe fits into a longer run for the memory industry..

Okay. I will hop into the queue. Thanks everyone..

All right. Thank you. [Operator Instructions] And our next question comes from Matthew Galinko with National Securities..

Hey, thank you for taking my questions. To hit your expense guidance for the year, frankly, sequentially we're seeing a significant build.

I'm not sure if you touched on it in the prepared remarks but can you just comment on maybe the seasonality of that number and what's driving the significant uptick quarter-over-quarter?.

Matt, on this question you described in between Q3 and the intrinsic for Q4 based on your guidance?.

Correct..

Well, I think we currently preparing for a number of trials next year. So there's an uptick in litigation expense.

So that's part of it and then we have some like I would say some normal range of spending that'll depend on where we finish for the – there's seasonal spending, I guess is one way to put it and then there's how much we accrue toward the end of the year based on compensation matters. So that's one of the reasons for the width of the range..

Got it. All right. Thank you. On the –.

And actually Matt, on expense apparently, I read in the script that operating expense of 377 to 381 was non-GAAP that's actually GAAP. So that's correct on our earnings release but my reading was not correct there..

All right.

Regarding the venue change for one of your two Texas cases, to Delaware is it reasonable to expect that slows the cadence of the particular case and I guess can you remind me if there's anything that kind of renews any progress in the ITC case or is that just functionally on pause for the long term?.

No, it's not on pause. We continue to work on the arbitration schedule as well as selection of arbitrators for that case. So there is activity but we're not in a position currently because there has not been a date scheduled to give you more clarity around that.

With regard to the Texas decision that came out a few hours ago, it's one of a number of cases that are pending as you go through 2019. We are given that the order is very fresh and in fact reverses a prior decision that denied this attempt to shift venue.

We are looking at our options and we'll need to study that a little bit but the bigger picture is the strength of our case, the amount of IP coverage across all of the cases and the merits of those cases have yet -- there is yet to be any developments which would say anything other than our case is very strong.

There's a lot of procedural stuff going on, that has to do with venue, whether it's the ITC issue was about venue, this is about venue not about any of the merits. So we'll continue to work it yet at the same time we remain in very regular discussions with Samsung and obviously our desire is to find fair and reasonable resolution of the case.

So in short, we'll continue to work it aggressively in the background and as we know more it has any impact obviously we'll update you..

Got it. Thank you. I know you don't put out a traditional earnings number on billing but just hoping maybe you could confirm, if I take kind of a back-of-the-envelope billings number, take out your non-GAAP OpEx and sort of your non-GAAP adjustments, so I come out around a $33 million, $0.63 a share calculation.

Am I in the right ballpark there?.

Yes, that's correct Matt. I get again back in the envelope $0.63, so I can confirm your calcs..

Thank you okay and then last question for me and then I'll jump back in the queue, regarding the – it sounds like you are being evaluated, I think you mentioned you're being evaluated in Asia for DMS for fleets deal.

How do you feel that winning those evaluations? Sort of what are the steps and what is the competition like?.

We feel good about our expertise on in-cabin face related applications, which is why I think we're seeing the evaluations of some adoption our work with Denso as a partner as well as more broadly on the program.

I think is progressing pretty well and we're in discussions with a number of others as well about things like the progression towards passenger vehicles. So competitively there are other people playing in the space, but I think one of the biggest things to understand that sometimes I think gets missed is we're not providing an entire DMS solution.

That is something that a lot of the tier ones are going to be providing.

We're providing a component of that solution and with regard to that component there certainly is competition amongst a few smaller companies primarily but few with the level of depth history and long term automotive infrastructure and platform support that we have provided over a number of years by virtue of our relationships through HD radio with all of the tier ones as well as with the auto guys.

So I don't think at the end of the day you win them all but we believe there's a very strong opportunity ahead and certainly the progression of interest in what we're doing continues at pace..

Great. Thank you..

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

Hi guys. Thanks for taking my question. I just got a couple for [indiscernible], to have to jump to another call but I did want to follow up on the comments on prepared remarks as well as a press release around your bonding technologies here.

May be a question for Jon, can you maybe describe the technology is a little bit better particularly around DRAM and would these be enabling things that compete with or kind of extend the capabilities of HBM that's out in the market today?.

Yes, is a short answer.

The issue of courses is how do you more effectively stack in a limited [height] package, greater performance in memory and I think some of the bonding technology that we are providing is unique in its ability to accomplish some of those objectives and certainly when you think about connecting various elements with our DBI technology just the amount of contacts and what not are pretty unique.

So you don't need under-film in our application, which is key to why it potentially may be game-changing as far as how the industry thinks about it. So happy to take more detailed questions offline and get Geri or somebody to walk you through in more detail but that's that a high-level that's what's differentiating..

Okay. That's very helpful. I will take advantage of that at some point. Thanks for that offer. Maybe one last quick question for me before I jump here connected radio sounds like you're making some good progress there.

How should we think about some milestones going forward for the next few quarters in terms of direct customer announcements, other engagements and then how fast does revenue fill in such that we see a meaningful contribution?.

I think you're going to just based on the pace of automotive adoption and the way these things work, I think you'll start to see vehicle show up in late ‘19. I don't expect it to be meaningful until you hit kind of the late ‘20 and into ‘21 cycle just based on relative expected rates of adoption and what certain vehicle plans are.

I think one way to measure of course is to the extent there are additional announcements either with development partners, broadcasters, or news attending automotive models and it's admittedly it's one of the challenges where you're dealing in a business like automotive where our customers don't want us talking about their plans, even though in many cases we may be inking deals that are three, four years ahead of when they're coming to market, but I think you can tell from a broader kind of macro view that connected radio is doing very well.

We've got major industry support and trials going on. We've talked about a relationship with majors tier one automotive makers that will adopt it and we are engaged broadly across the global automotive business with this solution and we're unique in our ability to provide it on a global basis.

So in short, I think you'll see it emerge in the early 2020s but we're on a very good path there and in a good trajectory and I think it will continue to propel our HD radio franchise and offer some new opportunity along the way as well..

Okay. Thanks for that detail. I will jump in line. Thanks guys..

Thanks Richard..

Thank you and at this time there are no further questions in the queue so I'd like to turn the call back over to Jon Kirchner for closing remarks..

Great. Thanks operator. We recognized it's been a challenging time for our shareholders and stakeholders as we work through resolving various licensing matters. However, our primary focus is really to maximize the value of our IP portfolio and we look forward to getting through this period.

Despite these headwinds we continue to perform well on an operational basis and remain confident in our long term prospects. We thank you for joining us on the call today and we look forward to updating you during the quarter on our progress and hope we'll see a few of you at CES in January. Thanks very much..

Thanks operator..

Thank you ladies and gentlemen. This concludes today's teleconference and you may now disconnect..