Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Third Quarter Fiscal Year 2019 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 Wednesday, November 6, 2019. I would now like to turn the call over to Ms. 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 2019 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 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 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 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. The recording of this conference call will be available on our Investor Relations Web site at www.xperi.com. I will now turn the call over to Jon Kirchner.

Thanks Geri, and thanks everyone for joining us. We are pleased to report we delivered a solid third quarter, billings were within our range and operating expenses were lower than anticipated. Operating cash flow for the quarter was strong at $35 million, generating a total of $104 million year to date. These results and the progress made during the quarter on certain IP license matters give us improved visibility to narrow our 2019 billings range and puts us on track to hit the high end of our cash flow guidance range for the year. Total billings in Q3 were $90.6 million, down 10% from $100.6 million last year. The year-over-year decline was driven by expected declines in IP, automotive, and mobile in part due to IP agreement expirations at the end of last year, automotive NRE that occurred in the third quarter of 2018, and the previously mentioned contract interpretation issue within mobile. Turning now to some highlights from the various markets we serve. The automotive market, excluding any audit recoveries delivered $19.3 million in billings down 18% year-over-year. The decrease was primarily driven by the receipt of NRE in this quarter last year and some second half softness in North American automotive sales that has impacted HD radio unit volumes. Importantly, HD radio penetration continues to increase, and we remain focused on driving that number higher. In a recent positive development, the FCC announced, it will consider voluntary adoption of all digital AM broadcasting, which would contribute to broader market adoption over time. On the vehicle side, we now have four leading car brands including BMW, Daimler, Mazda, and Volvo that have adopted HD radio as a standard across all of their new vehicles. We expect to see several more brands reach 100% adoption of HD radio in new…

Thanks John. Let me once again began with a reminder that due to our adoption of the ASC 606 revenue accounting standard, we'll be discussing billings instead of revenue as we feel it's an important measure of our financial progress. Billings for the third quarter of 2019 were $90.6 million meeting our expectations for the quarter. GAAP operating expense including cost of revenue was $83.4 million compared with 92.1 million for the third quarter of 2018. Non-GAAP operating expense including cost of revenue was $50.3 million down $7.2 million year-over-year due primarily to lower litigation expenses during the quarter. Interest expense was $5.5 million, and we paid not $5.9 million in net cash taxes during the quarter. Operating cash flow for the third quarter was $35.3 million, an increase of 6 million compared to the third quarter of 2018 primarily due to strong collections in the quarter. Moving to the balance sheet, we finished the quarter with $122 million in cash, cash equivalence and investments. From a capital allocation perspective, we continue to focus on deleveraging the business and we expect to pay down more of our outstanding debt during the fourth quarter. At the end of Q3, our debt balance was $394 million, and our net debt balance was $272 million. Notably since the start of 2017, our net debt balance has decreased by $215 million and we returned $165 million to shareholders through dividends and stock buybacks. In September, the company paid a cash dividend of $0.20 per, and in October, the Board approved a quarterly dividend of $0.20 per share payable in December. Moving to our outlet for the remainder of the year, for the fourth quarter, we expect billings to be between $111 million and $115 million, and we narrowed our assumptions for billing spaced on…

Thank you. [Operator Instructions] And first we have a question from Matthew Galinko with National Securities.

Hey, good afternoon, and thank you for taking my question. So just hoping you could clarify my math. I'm calculating earnings using billings, for the third quarter I got about $25.5 million or about $0.57 a share?

Yes. If you're using billings as the proxy for the topline, that's what I'm getting as well, about $0.57.

Okay. Thank you. And just the sort of guidepost on the guidance for 4Q. I'm getting about $0.87 a share at sort of the low end of the revenue and expense range. Is that about where you're coming out?

Yes. Again, I'm using billings here, which is as a proxy here for the topline performance, about $0.87 to $0.89, I suppose, if you're going across the expense range.

Great. Thank you. And then, just one last question. It sounds like maybe you'll be limited in what you could say about the European win in auto, but I'm just curious if you could share a little bit more around whether that's maybe a little bit -- maybe if you could be a little bit more specific about what segment of the market that might be targeting, and if it's sort of a new solution that you're bringing to market for engineering or if it's sort of what we'd expect them sort of what you have been working on recently?

Sure. So, we expect that this win will lead to vehicles and in the 2022 model year, and we'll certainly have more to say in the near term. The program relates to occupancy monitoring, which is if you will an umbrella that sits broader over the top of what you might call DMS, which is driver monitoring. But in general, it leverages our imaging technology and advanced face and head position related work that we've been doing now for the last two years, and in part have talked obviously very openly about working with some tier ones on the program. So, what's significant about it is while we continue to advance efforts with tier ones, this is the first direct OEM win with a major car company. And we think it's representative of the fact that we've got some best-in-class technology. And I think the last point I'd make is that Europe has made it very clear that they intend to go down a path of advanced monitoring technologies for safety reasons. And I think obviously, this is a great win for our team, and we look forward to having more to say about it in the not too distant future.

Great.

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

Hi guys. Thanks for taking my questions as well. Maybe I'll follow up on the topic here of DMS or in-cabin monitoring. Jon maybe if you can tell us a little bit about how you're differentiated versus the variety of other solutions out there, both strictly for driver monitoring as well as in-cabin, and do you expect to win or be involved with more driver monitoring stuff in the future as well?

Certainly. I think ICM or so-called in-cabin monitoring is the big umbrella, occupancy monitoring covers passengers and people in the vehicle. DMS is kind of a further subset of that focusing just on the driver, all of which really revolves around advanced imaging technology. One of the places that we've invested over a long period of time, particularly in mobile, is in advanced imaging, and in particular face related technologies. And so, this broader effort for vehicles really leverages that core world-class expertise that we have. I think you're going to see different automakers over time adopt these systems in the broader category for safety reasons, and I think depending on the level of vehicle and the advanced state-of-the-art that they incline to implement, it may extend all the way to more broadly to occupancy monitoring for things like baby monitoring, for example. Don't leave a young child in a hot car, too much more specific technologies that are focused on the state of the driver, driver's attention, things like eye gaze, emotion detection, interestingly plays into some of what the manufacturers are interested in, and we have a ton of expertise in the broad area. What makes us different in many cases is that depth of expertise, advanced machine learning technologies that we have developed and continue to develop as well as the fact that we have a very flexible implementation system around camera locations. So, some of these systems only work in a very narrowly defined position of where the cameras or the types of cameras or sensors that people can use, and we bring a much more flexible platform to automakers, which allows them to further refine and determine how they want to deploy the systems for whatever consumer benefit they're trying to achieve. So, I think that's really where we differentiate ourselves and I think we'll continue to obviously show up well in this market. As you know, the hard part on the automotive side, the longer lead times, but these wins have very long tails. And we've been working on this now for a couple of years and we feel very good about the progress we've made.

Okay. That's great to hear. Jon maybe my second, probably actually a two-part question here, but I know some number of quarters ago, two or three or four quarters ago, you talked about a couple of large historical licensees in the DRAM space up for relicensing. I think one by around the end of the year and one sometime in the middle of next year. Give us any thoughts as to the progress there in hopes that we can avoid more of a longer -- an elongated process that includes litigation any way you can characterize what's going on there and what we should expect for next year.

I think the way I would characterize it, Richard is, we continue to engage in conversations with all of our existing licensees. And it's our intent naturally to try to facilitate a smoother transition to a renewal as one can. That being said, the discussions are highly technical. They don't move incredibly quickly. And at this point, we're not guiding to any particular outcome. And in fact, as we've said and practiced over the last a year or more to the extent that we don't have direct line of sight to resolution as we think about guidance in 2020, if at that point we don't have much better resolution, we're inclined to remove it from guidance, just believing that it's better to announce those things when they happen. So, at this point, not much more we can say naturally the discussions are also inherently sensitive. So, when we have resolution, we'll of course be the first to tell everyone.

Okay. I certainly understand the sensitivity there. Makes total sense not to include [indiscernible], good line of sight there. I guess with that in mind Jon, if someone were to think about how your billings outlook may look like, if you exclude it entirely, the relicensing of either those two companies, how should we think about 2020 billings in terms of growth rate or any way you can characterize? I think it'd be very helpful.

Hey Richard, let me take that one. We will obviously provide guidance for 2020 when we do our Q4 earnings in February of next year. As Jon mentioned, from an IP perspective that we have those two licensees specifically Micron at the end of this year and Hynix through about two-thirds of next year. That's when the payment streams go through. And in terms of trying to measure that, I think you can look at our prior disclosures in 10-K's to kind of get a feel for how large those licensees were or are. And so that, that will give you, I think a feel for the IP business. Around IP, there's obviously a number of factors including the state of negotiations and the various licensing matters. So, it's a little too early to provide much more color at this time. But, I would definitely consider Micron and Hynix at this point. The product licensing business, again, we'll have another quarter to get a feel for the business, but I think you can estimate that it will be up next year and that's probably as much as I can give you right now.

Okay. Well, that's a fair enough starting point. I appreciate that Robert. Thanks. I think it's all my questions. I will jump in the line. Thank you, guys.

Thanks Richard.

Thank you. Our next question will come from Mitch Steves with RBC.

Hi, guys. Thanks for taking my question. I just wanted to get some clarity. Hopefully you guys can provide some clarity on kind of like 2020 outlook or something like that. So, when I look at the December number, it looks like you're going to be returning to growth or potentially return to growth. And so, when we look at our 2020 models, I mean I think the streets only got a little bit of growth. Do you think that's fair or do you think that there's potentially you guys could have a more meaningful growth year similar to '18? I'm just looking for kind of a qualitative metric to build off of?

Yes. I don't know if we can say much more than what I just described to Richard, which is, it's early to really give 2020 numbers if you're trying to get a broad outline, growth in the product licensing business and IP licensing business we have the two contracts that are rolling off that I just described, and I think that's as much as we can get right now.

Okay. Got it. And then in terms of the -- I guess the roll off, I guess when you look at your current pipeline, I mean, or the number of deals that are going through with number of transactions as we're working on, is there any reason why you wouldn't be able to offset that or is this going to be something that you think is going to be significant enough to impact growth in '20?

I think Mitch, it really depends on when you may see resolution, it also depends naturally on whether those resolutions happen with or without litigation because that tends to drive the overall economics of what you might ultimately see. And I think it's also fair to say that as we get closer to the year, we'll have a better perspective on what even might be achievable within a particular time window based on how these discussions are progressing. And so, I think you have multiple drivers. I think it's realistic to assume that within the range of possibilities, if those things roll-off and they're not matched, it perhaps a more representative place to start with more guidance to come. Naturally, we'll be doing everything we can and continue to believe that there's value in the pipeline and our assets. And we'll continue to work that. The hard part is just when and how much when do they fall and how are they structured when they're ultimately resolved.

Understood. Thank you.

All right. Thank you. And at this time there are no further questions in the queue. So, I would like to turn the call back over to CEO, Jon Kirchner for closing remarks.

Thanks, operator. And thanks everyone for joining today's call. We continue to focus on innovation as a key component of extending our competitive advantage across the markets we serve. We look forward to updating you on progress, we've made on areas such as connected radio, in-cabin monitoring, IMAX enhanced and machine learning based initiatives during the first quarter of 2020. And finally, we'll be hosting an investor event at CES in January, and we hope to see many of you there. This concludes today's call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect. Please enjoy the rest of your afternoon.