Good day, ladies and gentlemen, thank you for standing by. Welcome to the Xperi First 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 open for questions. [Operator Instructions]. This call is being recorded today Wednesday, May 3, 2017. I would now like to turn the call over to Ms. Geri Weinfeld, Senior Director of Investor Relations for Xperi. Geri, please go ahead.

Good afternoon, everyone. Thanks for joining us as we report our first quarter fiscal year 2017 financial results. With me on the call today are Tom Lacey, CEO; Jon Kirchner President; 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 belief 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 Form 10-K and 10-Q. For more information on the risks and uncertainties that could cause our actual results to differ materially from what we discussed today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call. Second, we refer 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 web site. A recording of this conference call will be available on our Investor Relations web site at www.xperi.com and unauthorized recording of this web cast is not permitted. Tom?

Thanks Geri and thanks everybody for joining us. We are very pleased to report our first full quarter of results, since closing the transformational acquisition of DTS to create Xperi. Before I begin discussing details of the quarter, let me address the other news that we announced this afternoon. After more than 30 years in the tech industry, including the last four leading Xperi, through a thoughtful, well executed and orderly succession plan process, I have decided it's time for me to step away from leading Xperi, effective June 1. On that date, Jon Kirchner will become the CEO. To help with the transition, Jon and the board have asked me to serve as an advisor for a transition period, primarily to assist the licensing team in driving resolution on a few outstanding matters including Broadcom and a large customer relicensing. Deciding to step away from this fantastic company was not a decision I reached easily. However, it is simply the right time for both the company and me personally. It's a change I have been contemplating for many-many months, and again, it's only really made possible by having such a strong successor in Jon. What was initially a board position, followed quickly by the interim CEO job, has turned into a fabulous four year journey of leading Xperi. As I stated when we acquired DTS, my goal when I joined this company, was to transform it into a growth oriented product technology and customer-focused business. With the completion of the DTS merger and substantial progress we have made on integration, I am confident Xperi is well on its way to realizing that goal. Jon Kirchner, is without question, the right leader to take our company to the next level. Jon has a clear view of the opportunities ahead for…

Thanks Tom and welcome everyone. I want to start by thanking Tom and the board. I am extremely excited to begin my new role as the CEO. I see tremendous potential in the future of Xperi. We have a great team and I have lots of new ideas on how to continue to expand on the foundation that Tom and the team have built. Importantly, I don't plan to change the fundamental business strategy or our efforts to leverage our unique blend of skills, experience and IP assets, in the pursuit of long term growth. As a reminder, within the product licensing segment, we focus our business activities around three revenue generating end markets; automotive, mobile or on-the-go, and home. During this call, I will discuss the progress we made during the quarter in each of these markets and provide an update on our product roadmaps. Please note, that all of the revenue numbers I reference here, exclude the impact of purchase accounting and audit recoveries related to audio licensing. Audit recoveries represent one time payments from licensees relating to activity from previous periods, thus are excluded to enhance comparability. In Q1, we continue to execute across our near term and longer term objectives, to deliver growth in each of our markets. The automotive market was up a little more than 15% year-over-year, driven by continued HD radio penetration in North America. Looking at our near term opportunity, we continue to make significant strides in the penetration of HD radio in North America. In Q1, approximately 10 new models adopted HD radio technology, including the Toyota Yaris iA and Corolla iM, the first Maserati vehicles and the Infiniti Q30 and Q60. In addition, Subaru is now shipping selected models with HD radio technology in Mexico. Importantly, we dramatically lowered the…

Thanks Jon, and again, huge, huge congratulations. Our Invensas Group continues to make significant progress towards developing and proliferating our ZiBond and Direct Bond interconnect technologies. Revolutionary wafer bonding and 3D interconnect platforms, that have been integrated into latest generation of smartphones, tablets and other consumer electronics products. Applicable to a wide range of semiconductor devices, including image sensors, MEMS and RF devices, DRAM, 2.5D logic and 3D-ICs assemblies, ZiBond and DBI are also well poised for integration into future high growth markets, such as autonomous vehicles, augmented in virtual reality headsets and a myriad of IOT devices. We continue to actively engage industry leaders in other semiconductor applications as well. We are well into the process of transferring our technology to both Teledyne Dalsaand SMIC, and continue to support their efforts to bring up and qualify the technology internally. Both have made excellent progress and are tracking to their respective schedules. With increasing demand for our technologies, particularly for image sensors and MEMS, we now have two high volume foundries, to which we can direct establish customers. We are also in the late stages of technology evaluations, with several prospective customers, that we anticipate will lead to license agreements. Over the longer term, we have efforts underway to optimize our die-to-wafer DBI process, targeting substantial DRAM, 2.5D logic and 3D-IC markets. We remain optimistic that DBI will become a foundational technology for decades to come in these important markets. Next, I will briefly provide an update on our relicensing activities with a significant customer. During the quarter, discussions continued in earnest, a customer requested additional data, and the time to analyze it. This review was scheduled to be completed in May, after which, we will either work to resolution or if necessary, take legal action. Importantly, we have previously…

Thanks Tom and thanks to everyone for joining us on the call today. For this call, I'd like to go into more detail on the first quarter results, and then our expectations for the second quarter and the full year. Please note that with all of my comments, I will begin with GAAP and then provide the comparable non-GAAP figure. Our GAAP to non-GAAP reconciliations can be found on our web site and in the earnings release. As a reminder, in Q1, we recognized the full cost of DTS operations, but due to purchase accounting rules, $31.3 million doesn't show up in revenue on the income statement, although we have already received the majority of the cash from the contracts. It's also important to note, that the purchase accounting rules impact both our GAAP and non-GAAP results. Revenue for the first quarter grew 12% year-over-year, due to the acquisition of DTS. This again does not account for the $31.3 million impact from purchase accounting, slightly lower than the $34 million we had previously projected, as a result of detailed contract reviews that were completed during the quarter. Revenue exceeded the high end of our outlook that we provided, due to the strength in the audio and IP licensing businesses, and the reduced amount of purchase accounting impact. As expected, GAAP operating expenses for the quarter were up significantly year-over-year, now that we have the full expense burden of DTS. Operating expense was $107.2 million compared with $33.8 million for the first quarter of 2016. The year-over-year operating expense increase is primarily due to the addition of DTS expenses, higher amortization and stock based compensation, associated with the acquisition, and increased marketing and litigation expense. R&D expense for the quarter was $26 million, an increase of $15.9 million from the first…

[Operator Instructions]. Our first question comes from Krish Sankar with Bank of America Merrill Lynch.

This is Chirag Odhav on for Krish. Two quick questions, first, with your stock down year-to-date, is your current focus still on deleveraging the balance sheet, or would you reconsider stock buybacks? And I have a follow-up?

Okay. So we are always evaluating the appropriate capital allocation, given the market circumstances. But admittedly, the stock prices, these levels are attractive for repurchase. But we do know that we have indicated that we have a focus on paying down debt for this first year of having debt outstanding.

Okay, got it. And my second question was, with your full year revenue outlook, could you give us some color on the breakdown on your exposure to different end markets? Like you mentioned, auto, DRAM, mobile segments throughout the year? How do you see those trending?

I think within the guidance, we don't really breakdown the end markets as a specific aspect of the guidance, so that becomes challenging to do. I think Jon, do you have --?

I would just add, we expect growth on automotive and I think we are going to see modest uptick in the home business, as well as some growth in mobile as well. So we certainly see the product and licensing side of the business growing, and I think obviously the IP licensing side of the business, is largely going to be determined by how a few of these issues resolve, and I think we feel -- as Tom said, very good about our position in those discussions and our ability to move towards resolution.

Okay, great. Thanks.

Thanks Chirag.

Our next question comes from Gary Mobley with Benchmark Capital.

Good afternoon. Hope you all are doing well?

Hey Gary.

Congratulations to Tom and Jon, I guess for different reasons.

Thanks.

Thanks.

In the past, you guys have talked about roughly a 50-50 split between product revenue and licensing revenue, and if I look at the Q1 revenue, absent any purchase accounting in the back, that revenue would have been about $99 million -- just shy of $99 million. Can you share with us what the product revenue was for the quarter?

Yes. The product revenue for the quarter was about just over $59 million, if it would have excluded the impact of purchase accounting.

Okay. I am assuming FotoNation contributed somewhere in the neighborhood of $8 million to $10 million, and that's $59 million, so it's safe to think, correct me if I am wrong that, the DTSI side of the business is chugging along, as previously expected, prior to the acquisition?

Absolutely.

You got it.

Business is performing very well.

Okay.

Actually, I'd probably add, Jon correct me if I'm wrong, this is the best quarter --

Record audio quarter.

Okay. And if I look at your first half 2017 revenue guidance, excluding any impact in purchase accounting, that translates to an annual revenue run-rate of about $390 million. And again, excluding any impact to purchase accounting, it looks like you are on an annual EPS run rate, non-GAAP, somewhere in the neighborhood of $1.60 to $2. Is that what you think about the base case earnings power of Xperi, excluding any impact of these outstanding legal matters?

No, I don't think so Gary. When we had the call last quarter, I was asked what the timing of the revenue for the year was. And at that time I said, 55% to 60% would be in the back half. I think at the low end of our revenue guidance and that's including the impact of purchase accounting in this instance, that's $370 million. That still holds true, and that holds true, I think at the higher end of that range, so probably closer to 60% at I think, where the Street has us.

Robert, let me stop you there. I am just sort of taking the first half 2017 revenue outlook, excluding any impact of purchase accounting, which presumably excludes any contribution from your license renewal and any conversion on the Broadcom legal matter, and just sort of annualizing that. Should we --

I understand what you are -- go ahead.

Should we think about the base case earnings, somewhere in the neighborhood of -- just shy of $2?

That's not the way I think about it for the year, because I think you are underestimating the impact of the second half.

Okay. All right. Well let me ask you in a different way. So the fact that you are not changing your fiscal year 2017 outlook and you are not presumably including any positive impact from a license renewal and a conversion of Broadcom or anybody else, any greenfield; is it safe to assume that you are assuming conversion of it after June 31, or at some point in the midpoint of 2017 and what gives you confidence that you can convert at least one of these issues?

Let me leave the second part of that question to Tom. But I think in the first part of the question, there is a reason why we reiterated our guidance range, right, the $370 million to $445 million. And what we have indicated, I think even in the remarks here, is it doesn't include any impact from the two kind of key matters that people are focused on, as well as us. I think in terms of confidence, let me have Tom answer that.

Yeah. As you know Gary, when we have these deals and we are in discussion of the deals, we are going to announce them when they are done? We are not going to forecast them until they are done, right; because of just the nature of them. So your assumption that there is -- we didn't include it in -- Robert didn't include it in Q2, is exactly right; and as further as that is in the low bottom end of our annual guidance, which he reiterated, right? That doesn't include either a major customer relicense or a greenfield, such as a Broadcom in the numbers. So those would -- upside. And you heard our confidence on how those two items are going.

Okay. Tom, let me ask you about your personal decision to retire. So you became CEO, around the time I guess there was some change in the strategy in active shareholder campaign. You were on the board initially and then became CEO. Was it your intent all along to just stay in the CEO on an interim basis, and is this decision to retire a function of you having confidence in Jon to take the baton and run with it?

All good points. When you say temporary, it was interim if you remember initially, it was supposed to be six months, and then the six months turned into four years. So [indiscernible], that wasn't exactly interim. But yeah, as I just mentioned [indiscernible] meeting, where we went in a little bit more detail on this story, the reality of the fact is, I love this place, I love this company and I love what we have done here, and I love everything about it, right? And at the same time, for many-many months, I have been wrestling with this whole work-life balance, and the fact that the company -- we have made this major transformational acquisition, and as you rightly say, I have tremendous confidence in Jon. If I didn't, we wouldn't be making this announcement today. So informed the board, and here we go. Excited about the future of the company and very supportive of Jon and the entire board and management team.

Okay. All right. I think I have asked enough questions. I will hop in the queue. Thank you, guys.

Thanks Gary.

[Operator Instructions]. Our next question comes from Richard Shannon with Craig-Hallum.

Well thanks guys for taking my questions, I will add my congratulations to Tom and to Jon. And Jon, I look forward to meeting you in person at some point. But Tom, sorry to see you go. Had been lovely working with you for the last four years.

Well Richard, thank you. The feeling is mutual.

Maybe I will follow-up on the last set of questions here about the time of your decision to retire. I guess what I am curious about is, I have got to believe, you have been important, if not instrumental in some of these two large legal situations you have going on; you mentioned the decision to retire on June 1, but remain I guess, in a consultant role of some kind. Is your expectation to stay in that role till the conclusion of both of those, or how would you characterize your tenure beyond retiring from the CEO role?

So two things, I will give you a little bit more color personally. So for eight years, I have been driving back and forth, you can appreciate this, I know from a commuting thing from Sacramento on Sunday nights to Silicon Valley, and eight years is a long time. But again, as I mentioned to Gary's point, I would not have the decision to step away, if I wasn't comfortable in Jon and where the company was at. He has put way too much into it, on a personal level and professional level. In terms of the two large deals, that's precisely what we are going to do, right? So first of all, we have got a window left, while I am still the CEO. So we are going to keep pushing like hell to get it done, just as quickly we can, understanding that sometimes; as I mentioned in the prepared remarks, sometimes these things -- the timing is difficult to predict. What the board and I and Jon thought was -- made complete sense, is for me to stay on in an advisory capacity, primarily to help bring those two items to the floor and then Jon is free to use me in whatever other capacity he thinks that might be helpful. But by no means am I backing away from bringing these fish into the boat.

Richard I would just add, given DTS's history, no stranger to any of these clients. The silicon providers or for that matter, litigating around it. Historically, DTS did not have a super rich and long litigation history. We certainly had some very sizable matters that we brought to successful resolution. So I am very comfortable with the situation here, to understand the dynamics, understand the strength of our current position and understand ultimately how to build relationships. Most importantly, to try to create partnering situations with people and industry, rather than, if you will, drag it all the way through the courts; which at the end of the day, is not only inefficient, but highly expensive. Much prefer to build productive long term partnering relationships that can bring innovation to the marketplace.

Richard, you are going to enjoy meeting Jon, I promise it, and as we have -- Jon and I have been working together probably, approaching two years from when we first got engaged and potentially in the acquisition, and arm and arm in the last five plus months going on six months, and we are -- this week and it happens all the time, remarkably, how frequently we see the world the same way, and it's you know, it's in very-very capable hands, trust me. Very-very capable hands.

Okay. Great. I appreciate all that detail. Maybe I will engage Robert here for a question. Robert, wondering how we should be thinking about modeling for the second half of the year, on the topline here, and I guess I am asking on a -- I guess, it doesn't matter whether it's GAAP or non-GAAP, but I am assuming the -- let's assume the low end of the guidance range, where you are not expecting anything from the legal matters here. How should we think about the cadence, end of the third and fourth quarter, and how will that cadence compare to how you expect the seasonality to go forward in the future years?

Actually a lot of questions, Richard. So let me see if I can take them one by one. I think in terms of trying to forecast the company, we have given the very specific timing of the purchase accounting impact, and even though it was a little bit lower in Q1, we have given the numbers for Q2, Q3 and Q4 in our earnings deck. So you should use those and calculate back into whatever you would like to. I can't do that. So let me just talk about the revenue as we will report it. And so for the year, given the range and given the timing -- again, if we look at the timing, at the low end of the range, I think we are still looking at kind of the high 50% on the back end of the year. Probably, where the analyst consensus is, it's closer to 60% in the back half of the year. And I think in our comfort and starting to get to the middle of the range is predicated on -- mostly on IP licensing. So we have -- internally, we have forecast there, but that's -- it's obviously forecast. We need to get those matters done. Does that help answer your question?

Yes. That was kind of the essence of what I was -- or at least a starting point, so I appreciate that. Maybe I will ask one other quick question, actually I hope it's a quick question; but Tom, I know you have talked about, more willingly about the potential from your Ziptronix acquisition from DBI into ZiBond in the other applications outside of image sensors, where you've initially been. You have provided some detail in your presentation on a unit basis of how much that could address, but I am wondering if you could help us understand -- is that a proxy for the amount of market opportunity you see there as well, or is it better or worse and than that unit proxy I guess? And also, if you give any sense of how long it takes to extract those opportunities outside of image sensors?

Yeah. Really, really good questions. Number one, Q1 part of the strength and slightly going over the top of our revenue, was the strength of some of the licenses signed in that particular business. And we announced those, right? You saw a couple of those license announcements during the quarter, or late last year. So that business, from a kind of design win, the way to think about it Richard is, it's smaller this year, and what we are doing is planting the seeds, right? We have got a very strong foothold. Of course as you mentioned, in knowing image sensors, and with Teledyne Dalsaand, we have now a foothold in MEMS and you can expect and should expect to see from us, additional design wins in some of these different vertical markets we are pursuing. Did I mention SMIC as well? SMIC also, albeit for a lot of reasons. That has more to do probably with the image sensor market. So the image sensor market, we have a very high percent and total share of it today. That's the way to think about it. We haven't got all of it, but we have got a large-large percentage of it. You put Sony on top of just a couple of the other ones we have done. Beyond that, we now have a -- call it [indiscernible] lot of footprint if you will, in MEMS, and I mentioned in the prepared statements on the die wafer activity, what we are working on there is to begin to get a footprint or a presence in the logic side and the memory side. That's really what we are after. Now, how big can that business be? We have not changed from the time we did the acquisition and we have reiterated probably in the last year and a half. We are on plan to what we told the board. We are at this point, on plan, all the way one quarter through the year, which will be, if we execute to the plan this year, will be substantive growth multiple times. Substantive growth of the small dollars we had on plan last year. And from there, you will start to see it grow into the double digits of millions, if we are successful, of dollars, right, as we proceed out of this year and into the next several years.

Tom, if I may just add one; I think the industry mindshare around DBI is growing. When we go out to conferences and we are having discussions with people. There is, I would say, very clearly more interest and desire to engage, realizing the benefits that it can provide, as we move into some of these areas, and obviously, form factors remain small, and power and heat distribution become super-super important. So we are bullish, but it's going to take time.

Okay. Great. I appreciate all the perspective. Thanks a lot. And Tom, thanks again.

Okay man. Thanks.

Our next question comes from Matthew Galinko with Sidoti and Company.

Hey, good afternoon guys. Appreciate you taking my question and congratulations to all.

Hey Matt.

Hey. So can you help me understand why -- I guess on one hand, you mentioned a comfort level with the relicensing effort, whereas [indiscernible] specter of litigation kind of on the back end of the same remarks. So can you just kind of talk about the signaling there, and what we should take away from it?

Both are options. At the end of the day, you know how these things work. You have watched for quite a number of years. At some point, you get through the discussion, and at the end, you either get to -- you are going to be treated or get fair value of your intellectual property. And you know our track record, that's our preference 10 times out of 10, if we can do it that way. And if not, if we can't ultimately get there at the end, at some point, you draw a line in the sand and say, it's time to go down a different path. That's never our preferred path, but it's one certainly, as we demonstrated with Broadcom, we are willing when prepared to take.

Got you. And can you kind of refresh our memory on your last licensing effort with this licensee? Is it atypical for it to go -- make it to this stage, or do you see this as a fairly routine process?

In this day and age, incredibly routine process, right? There is just more of them, especially when you are pursuing both the scope and the size and the length of the agreements we are pursuing, right? Very often it will get down to this, so this is -- I don't like it. None of us like it, because looks what has happened in the stock market and the uncertainty it drives. But that's partially in our prepared remarks we wanted to say, people, you need to understand that about this part of our business. Now, the good news is, for some investors, it's now half of what it once was. We have a much more diversified revenue base and customer base on one hand. On the other hand, the cash flow and earnings potential of this segment of our business is incredible, as we have witnessed over the past many years. But we are always striving and pushing to try to get these deals done, prior to them going public. That's our preference, and that's how we align it. But when it gets to this point, it's not terribly surprising. I call it disappointing, I will tell you personally, tried to get them done prior to this. But it happens and I think it probably happens more often than not, in today's intellectual property licensing world.

Okay. Maybe just two more, if you don't mind me continuing on. Just following on that last remark you made, is there anything that you can point to in the IP of licensing world, that inhibits these sorts of deals from getting them done sooner, from the patent owners perspective. And are there any changes that you can see on the horizon, that would strengthen your position as a starter?

The single biggest thing that can strengthen our position on the horizon, is success in the Broadcom matter for sure. You can imagine, a lot of people are watching that, in and around the greenfield space. That's why we are incredibly bullish about that. The other thing, Matt, as you know in these deals, when you are in lengthy discussions, and we have mentioned before, we have been in discussions with all the matters we have been -- the members are -- customers we have been talking about, there is back and forth. So it wouldn't be uncommon at all to see back and forth. So you know what, at the end of the day, what you want to do, is get to a value that you are comfortable with. So I don't think that there is anything inherently different in the market, other than -- there really isn't anything different in the market. We are engaged affirmatively in both matters, and are diligently working to see that we can't get something done that works for our shareholders and candidly, our customers too.

Tom, maybe I'd just augment it, maybe from a different perspective. If you look at the regulatory environment currently in Washington with the new administration, there is nothing that seems on the precipice of coming into reality, that would dramatically change the circumstance.

Might change tomorrow.

You never know. But maybe more importantly, as the industry consolidates, you have bigger players, who by virtue of their resource base and the magnitude of their exposure, are naturally inclined to want to test very carefully and very thoroughly, the value that potential holders bring. And the extension of timeframes, as well as potentially the need to at least start the litigation process, is part and parcel to validating, in some cases, value; because these deals tend to be long and they tend to be big and they tend to have good coverage. So I think, that is a trend that has been going on for some time, but if you really want the answer to why does it take longer and why is it harder? The answer to that question is partially just what's happening in industry, and of course, the nature of the courts are such, where you can start down that path and try to create a different environment from a negotiating positive perspective. But we are very careful about what we choose to put in front of people. We are very careful about building our cases very strategically in our claim charts, and when we make that decision, we go in with a very-very high degree of confidence, and I think the Broadcom results so far, I think bear that out. So it's our hope that, we can never get there. But you have to have it as a legitimate option, to ensure that you can drive fair value in the course of your customer negotiations.

As Jon was talking Matt, one other thought on -- you kind of said, what other things might drive -- your first question, what are the things that might drive? And I think the other thing that happened actually -- it happened today, is on the 946 patent, which is an important patent, it's a significant patent. That's why we, again, highlighted it on the call. Broadcom, first lost initial PTAB IPR process. And then they immediately appealed it. And that was denied again today. So that just makes that particular asset, that much more, I don't know solid, valuable, and that's one that broadly reads across the industry, big and small.

Excellent. Thank you.

Okay.

And there are no further questions at this time. I'd turn the call back over to Tom Lacey for any closing remarks.

Hey great, thank you, Denise. Thank you for mediating the phone call today, and thanks to everybody for attending whether it's live or on the web later. As you can tell from the three of us, we continue to believe passionately in our ability to address the significant market opportunities ahead for both our product and IP licensing businesses. And as we continue to execute well, there is tremendous operating cash flow we expect to generate this year and over the long term. And just a bit of a personal note, as we conclude today's remarks, I want to say a quick thank you or more in line with my style is the high five to the analysts certainly who were on the call today, our customers, shareholders, our talented executive leadership team, more than 700 employees now at the company and the Board have given so much support and company during my tenure. And again, if I can leave you with anything, it's with the combination of Jon, the management team, the Board of Directors, this very talented employee base, the company is in exceptionally hands with a very bright future ahead. So thanks again.

And this concludes today's call. Thank you for your participation. You may now disconnect.