Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Fourth 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 open for questions. This call is being recorded today, Wednesday, February 20, 2019. I would now like to turn the call over to Geri Weinfeld, Vice President of Investor Relations for Xperi. Please go ahead, ma’am.

Good afternoon, everyone. Thanks for joining us, as we report our fourth 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 discussions contain 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, stock-based compensation expense, interest income associated with ASC 606 and unrealized gains or losses on equity securities. 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. 2018 was a good year for Xperi. Total billings grew 6% year-over-year, driven by both our product licensing and IP licensing businesses. We made meaningful investments in new technology that we believe will impact our growth over the next three to five years. We generated $135 million in operating cash flow and returned $81 million to shareholders through dividends and share repurchases. Importantly, we continued to deliver on our strategic vision and accomplished several important milestones within each of our markets. In our automotive business, HD Radio penetration reached 52% of new cars sold in North America. We signed a significant partnership with IMAX that strengthens our content footprint and will help drive future codec penetration in the home and beyond. In mobile, we completed development and released our 3D facial recognition technology to a mobile partner and expect to see the product launch in a new smartphone this quarter. And in December, we reached a significant settlement with Samsung in our IP licensing business. Our outlook, our current outlook for 2019 reflects a degree of caution as we enter a period of macroeconomic and trade uncertainty. Additionally, given forecast challenges with regard to timing and amount, our outlook does not include any significant new IP licensing agreements, except for one Invensas-driven license agreement. And while we expected product licensing billings to grow mid-single digits in 2019, due to a mobile customer contract interpretation issue that recently emerged, we now anticipate product licensing to be flat plus or minus a few points. We will continue to work this issue toward resolution in 2019. Perhaps most important is that during 2019, we expect to see material progress toward the launches of our new technology solutions, such as connected radio, DMS, and 3D face…

Thank you, Jon. Before I begin, let me once again remind everyone that due to revenue accounting standard that we adopted at the beginning of last year, known as ASC 606, we'll be discussing billings instead of revenue as we feel it's 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 last year which can be found on our website in the Investor Relations section. For today's discussion, I'll provide details on our fourth quarter results and then a preview of our expectations for 2019. Total billings for the fourth quarter were $141.8 million, up from $130.2 million in Q4 2017. Total billings for the full year were $447.3 million, up from $422.5 million last year. GAAP operating expense including cost of revenue was $100.4 million compared with $102.7 million for the fourth quarter of 2017. Non-GAAP operating expense including cost of revenue was $64.6 million compared with 61.2 million for the fourth quarter of 2017. Cost of revenue increased by $1.9 million compared to the fourth quarter of 2017, due to IMAX program costs that are taken upfront while the actual cash payments and associated billings occur over multiple periods. Non-GAAP R&D expense increased by $4.6 million due primarily to higher development spending on certain machine learning programs and accrued compensation. Non-GAAP SG&A expense increased by $1.5 million due to higher accrued compensation. Litigation expense decreased by $4.6 million on a year-over-year basis due to lower litigation activity this year. Interest expense was $6.8 million and we paid $10.9 million in net cash taxes during the quarter, primarily for foreign withholding taxes. Moving to the balance sheet. We finished the year with $154.4 million…

[Operator Instructions] Our first question comes from Eric Wold with B. Riley FBR.

I guess, first of all, just kind of housekeeping. I want to make sure I can affirm the adjusted EPS that's kind of implied in the results in the guidance. I get to -- using your inputs, I get to $1.16 for Q4, $0.63 to $0.65 for Q1 and $2.35 [ph] to $2.37 for the year?

For Q4, 2018, I'm getting $1.19, it's actually $1.186, so $1.19 rounded up. And then, I think, yes, $0.64 to $0.66 probably this is the correct range for Q1 '19. And did you give a number for the full year as well?

$2.35 to $2.37, my prior opinion, so light on that then.

Yeah, I think if you take everything at the midpoint for 2019, it's roughly $2.40.

Perfect. On the billings, on the recognition of the product licensing billings, there were delays from Q4 to Q1. I'm assuming that because you have to give an estimate at year-end regardless of you knowing what was received now that gets pushed into Q1 and then, if that's the case, if you could give us a sense of how large that was, the delay?

Sure. It was roughly 3 million to 4 million in terms of the size of the delayed billings and we need to receive a customer’s report prior to sending a billing. So if the report comes in just at the beginning of the next year in this case, it will be a billing for Q1. So it's just a -- strictly need to have the report in hand.

Got it. And then couple more quick ones on -- sorry, maybe help us understand the issue around the contract interpretation on the mobile side as best you can, in terms of what the disagreement is? And should we assume kind of by your commentary that you've assumed kind of a -- or included kind of a worst-case scenario in the guidance for this year and if that's resolved to the positive, that would be added to that guidance?

Yeah, from a guidance perspective, that's correct. We've assumed that we're not going to resolve that during the year, though that's not necessarily how it will play out. I think Jon can probably give a little more color.

Yeah. Eric, it's -- because of the nature of the agreement and the confidentiality provisions, we really can't say too much except, what I can tell you is this relates to a customer that is continuing to pay ongoing royalties, but sometimes you get into contract interpretation issues that have to do with technology or classes of technology and how it gets deployed and what the resulting licensing obligations are. And so in that context, that's what's going on, not the first time we've seen something like this, but as I said at the top of the call and safe for this issue, we would have been right in line with kind of our expectations going into 2019 for product licensing, in terms of seeing growth in kind of the mid-single digits. So we're starting from a place of being conservative about it and obviously we'll work with the customer to work through it.

Perfect. And then final question if I may. Obviously now that you've got Broadcom and Samsung under license, I know -- I think it was in the Q2 call last year, you talked about at least one new license signed by year-end, obviously the major one came through. Maybe give us an idea kind of how those two signings and settlements have helped the discussions and maybe kind of adjunct to that, what should we expect in terms of litigation expense improvements this year versus last year?

Well, let me -- I'll let Robert address the guidance question. As it relates to ongoing discussions, as we said last year, we're in a number of discussions. That situation remains the same. I think as we've talked about repeatedly, timing of when these things resolve and the amount is obviously the hard part, which is why we've substantially removed any such risk out of the guidance for 2019, related to new license agreement. So obviously as we get them done, we'll report -- obviously report that out and be very pleased to do so. But I think you should conclude from the statements made last year and kind of as we continue to move forward in 2019 that there are multiple things at play and we're working to bring them to conclusion.

And just to address the guidance number, so we've given a range for litigation of $10 million to $15 million for 2019. It is a very difficult thing to forecast litigation. We finished the year, as Jon mentioned in his remarks, with no active litigation. And so we'll do some analysis work and that's typical for us to do that, but it's, I think that's a decent range for this point in the year and we'll update you on that if things change.

Just one clarification. One active -- no active IT litigation, yeah, because there is one pending matter we have, that we're continuing to work through with Toshiba.

That's correct, yes.

Thank you. Our next question comes from Matthew Galinko with National Securities.

Hey, thanks for taking my question. I might have missed it in the script, I had some technical issues. But I believe this is the first time you're reporting since the Samsung license was signed. I think -- I guess necessarily you're sort of limited in what you could say when that came out that we have the benefit of sort of seeing the, I guess, reporting under ASC 606 on the revenue line and sort of the contribution. Is there anything more you could share with us around the duration of the contract, structure of the contract or are we still kind of left to our own devices to figure that out?

Unfortunately the nature of the agreement confidentiality provisions are pretty severe. I think it's fair to say that there are license fees paid over time. Obviously, we're receiving license payments from Samsung during the course of this year as we've said. Beyond that, there's really not a whole lot we can say. Although over time as these things come up in a longer trajectory, I think we'll naturally see how we can put some shape around it as we can, at that point, but initially the disclosures in the 10-K are what they are and we're really limited to be able to say much more.

Okay, thank you. Maybe just generally speaking, given that these laser sync cycles do come up from time to time. Anything in place that would make the mix to go around with Samsung easier. Can you speak to that at all? I think if we look back in Tessera's history, there was maybe a hope a few years ago that you’d be able to get more licensing done without litigation and it hasn't necessarily played out with Broadcom and Samsung here, but just curious if anything set to be a little bit more collaborative and to sort of get past these -- the lumpiness of the IP business fundamentally?

Sure. I think one of the things that transpired in the course of some of our conversations with them was clearly a desire to move collectively toward more collaboratively licensing technology and kind of in a more traditional sense where we're providing solutions that are valuable to them, et cetera. So I think that mutual interest is there. Secondly, I would say that the deal was concluded incredibly professionally on both sides with, I would say with a certain amount of -- well not -- with plenty of positive intent on both sides in terms of getting it done and viewing it as important to move past it for both of us. So with that, we'll continue to work it. As you know, we do a fair amount of business with Samsung more broadly and we look to continue to do so. And it's up to us over time to try to avoid having to be back at the table in ways that are more contentious but rather can support each other's businesses for mutual growth.

Got it. Thank you. And I guess last one from me on the contract dispute, I think you specified that's in mobile product licensing, did you say whether that's an imaging the FotoNation or DTS customer?

It's imaging related.

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

Hi, Jon and Robert. Thanks for taking my question as well. I apologize, I jumped in a little bit late, I had a bit of technical issues here, so I'm not sure if you covered this in your prepared remarks, but maybe just like to understand what's implied for product licensing growth this year. I recognize that there is -- the mobile contract interpretation is impacting that, but I guess what's embedded in the numbers you've given us, what kind of growth is there?

From a guidance perspective, we mentioned this in the remarks earlier as Jon did, which is product licensing is expected to be flat plus or minus a few points. And that's really for 2019 as we move towards some of it -- launching some of the new technologies, connected radio, DMS and 3D face recognition in the next year or two. It's a challenge for us, these are very dynamic markets that we operate in. I think for the year, we have -- I think what's important is a diversified base that helps us provide stability as we move through the various cycles. And so we're pretty optimistic about the next few years. But for this year, it's flat to up or down.

But for the contract issue, we would have landed pretty much exactly where we thought we would be in '19, which is kind of mid-single digits.

That's right.

Okay. And just to follow up on that. I can't probably do the math fast enough of my head to -- with an accurate answer, but I would imagine that you're expecting both auto and home to be modestly -- nicely positive growth offsetting the -- I think you said something like 25% decline in mobile assuming the contract interpretation issue.

Correct. And just keep in mind that both the mobile -- both the automotive and home businesses are meaningfully larger than the mobile business for us. So when they're up, it offsets the decline the other way.

Okay, that's helpful. Just another question on your 3D facial recognition discussion, you said you expect to be the -- on the first device that uses time-of-flight for 3D sensing in the phone to be introduced this quarter. Did I catch that correctly?

Correct.

So we've been hearing about a number of Android-based phones with that sort of technology, introducing throughout this year. How do you expect your share position to be in this supporting those, are they -- do you have a line of sight into other introductions this year? Maybe Jon, if you could discuss what you're seeing there, please.

We're in a range of discussions, the one that I'm privy to talk about is the phone that we know that will be launched next week at MWC. But we've gotten -- let me step back for half a second. As 3DFR solution was popularized in the marketplace with dual cameras in part because it's an easier unlock situation and more reliable than is a fingerprint sensor, we got a lot of interest from people across the handset space in part because we're known for having world-class facial imaging expertise. At that point, we were working on some solutions, but have since completed the work around a solution and then obviously one of the key issues is that implementing that kind of a solution can be very expensive depending on whether you're using the structure of flight solution or a time-of-flight solution and whether you have multiple cameras or whether ultimately you can do something similar, using less cameras. And so we have gone forward with a one particular customer who was the earliest that we'll be -- we're launching it here at MWC. And we feel very good about that solution and its performance as well as its cost advantage relative to other means of doing it. I think our goal is to more broadly commercialize and have that solution penetrate in not only the mobile phone space, but ultimately the PC space and elsewhere anywhere. The advantages of some kind of a secure face unlock feature could be valuable to a user device, and -- so stay tuned. But we feel very good about where things sit and will play out in the course of 2019.

Okay. And we look forward to hear more about that. I'll ask one last question and jump at the line here. Jon, I think you made some comments on Invensas about -- I don't want to put words in your mouth, it sounds like you're pretty excited about how things are going there. And I certainly got that feeling from what we saw at CES as well. When you talk about contributions, are we talking about revenues or just making additional progress and seeing the revenues beyond this year? Just wanted to get clear on that one.

I think you're going to see progress on both fronts. But I think the larger economic progress, if you will, will be playing out over the next couple of years, but we are seeing increasing interest across the board, the urgency with which these conversations are being held from multiple parties is I think notable. And I think over time, it's pretty clear that hybrid bonding is going to be a key feature in enabling performance and greater functionality, not only in memory, but of course in RF and other sensor categories. So in general, I think it's -- it remains a work in progress, but I think we'll see some material milestones and steps reached this year that kind of set the stage for what happens in 2020 and beyond.

Thank you. [Operator Instructions] Our next question comes from Gary Mobley with Benchmark.

Hi, everyone. Thanks for taking my question. Robert, it looks like, according to your 10-K, the Samsung revenue was about $78 million as applied to ASC 606 GAAP revenue. And I'm assuming all that was in the fourth quarter. Is that the present value of the contract, the sum of the contract at that unique discount rate?

No, that's not accurate, but this becomes challenging because as Jon mentioned, we can't share the -- too much in the way of details around the Samsung agreement. And it's -- some of it's reflected on our balance sheet, but not the entirety of it. So it's a difficult thing to communicate to you or to share.

Okay, fair enough. Also disclosed in the K is SK Hynix contribution to your ASC 606 GAAP revenue, looks to be about $48 million, if I'm not mistaken, that's about a 50% increase from the prior two years. What's sort of the underlying dynamics going on there with SK Hynix?

Again, we can't share too much around the details of the contract, other than to say that the ASC 606 revenue, sometimes either deflates or inflates the underlying billings related to those contracts. So that -- again trying to read the revenue line even as a contribution from greater than 10% customers is challenging. So we -- they do remain a very important customer, of course, but I can't get into specifics in terms of the billing side from that for Hynix.

Okay. I also wanted to confirm what is embedded in your fiscal year '19 billings outlook. I just wanted to confirm, is that exclusive entirely of the roughly $62 million in structured OSAT payments? And I'm assuming none of that is included in the Q1 guidance either, right?

Yeah, of course, so those OSAT contracts ended at the end of 2018. So there's no PTI nor Amkor in our 2019 guide.

Thank you. And we have no further questions in the queue at this time. I would now like to turn the conference back over to Mr. Jon Kirchner for closing remarks.

Thank you, operator. In closing, while we have work to do in 2019, we feel quite optimistic about our business over the next few years. I'd like to thank our partners, customers and employees for their significant support and efforts throughout 2018 and we look forward to sharing more news with you over the course of the quarter and the rest of the year. Operator, that concludes today's call.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.