Good day, ladies and gentlemen, thank you for standing by. Welcome to the Xperi Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]. This call is being recorded today, as of the Tuesday of February 18, 2020. I would now like to turn the call over to Geri Weinfeld, Vice President of Investor Relations for Xperi. Geri, please go ahead.

Good afternoon, everyone. Thanks for joining us as we report our fourth 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 discuss today, including, but not limited to, risks associated with the TiVo transaction, the development and launch of new products and any potential impact of the coronavirus. 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, merger and acquisition-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 realized 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 website. Finally, Xperi and TiVo have launched a website, where you can find more information about the transaction, including our Form S-4 and other materials. Our latest website can be found on the homepage of xperi.com. I'll now turn the call over to Jon Kirchner.

Thanks, Geri, and thanks, everyone, for joining us. 2019 was both a strategic and a building year for Xperi. We generated record operating cash flow of $169 million, significantly above our original outlook. We paid down $150 million in debt and returned $40 million to shareholders through dividends. We also accomplished several key milestones within each of our markets. Starting with the product business. In automotive, we signed our first license agreements for both Connected Radio and occupancy monitoring, which is a growing opportunity for the company as a leader in entertainment and safety in the car. In home, we increased our penetration of DTS:X and Virtual:X in TVs, sound bars and AVRs. We continue to expand the IMAX Enhanced ecosystem now available with 4 streaming services, 17 device manufacturers and in 14 countries. This positions us well for further penetration and growth within the home entertainment market. In mobile, we advanced our leadership position in gaming through the launch of Sound Unbound, and continue to add PC, mobile and gaming headset partners in this space. Gaming is a key part of our growth opportunity in mobile. And lastly, I'm also incredibly excited to share with you for the first time, the significant progress we have made on a new initiative to develop an advanced machine learning, hardware and software platform that we expect will drive meaningful future growth and expand our business opportunity. We will cover this later in the call. In our IP business, we recently announced that we've entered into a new IP license, along with the technology transfer agreement with SK hynix. This is a major milestone and proof point for DBI Ultra bonding technologies in the memory market. In addition to providing access to our broader semiconductor IP portfolio, this agreement includes a technology transfer…

Thanks, Jon. Let me start today with a few observations of our planned merger with TiVo. I've personally liked the deal from the start, and that view has solidified as we analyze the benefits of the combination. The 2 companies clearly complement each other in the product and IP licensing business segments, which will enable focus on each company's respective strengths. We will achieve greater scale, have better visibility and improved free cash flow through business optimization and focus. And while there's complexity in combining the companies, I'm confident the integration teams we have assigned can achieve our aggressive goals. The ultimate goal is a growing business, increased profitability and a separation of the product and IP segments. We are providing a great deal of information today, both with the filing of the Form S-4 and the reporting of earnings and 2020 outlooks from both companies. This information should help investors a great deal in understanding the economics of the transaction and form a basis for which to value the combined enterprise. For me the number of the stands out most is the adjusted EBITDA for the combined business, which as Jon noted, is well in excess of $400 million for 2020 and should grow over time. Now moving to financial results, let me begin with a reminder that we'll be discussing billings today instead of revenue as we see it as an important measure of our financial progress. Also given the significant timing differences and the contest between revenue and billings on Xperi's IP licensing business, we intend to continue to report billings after the closing of the merger, hence billings is going to be an important measure in understanding the company's cash flow generation. Billings in the fourth quarter were $126.7 million, down from $141.8 million in the…

[Operator Instructions]. All right, we'll take our first question from Eric Wold at B. Riley.

I guess, a couple of questions. I guess, first off, on kind of the non-GAAP EPS calculations for Q4 and Q1 just to make sure I'm looking the right way. I have $1.19 to the fourth quarter reported and the guidance for Q1 would take a range of about $0.64 to $0.66. That sounds all right?

Yes, if one is using billings as a top line measure, if you calculate the earnings per share on a non-GAAP basis, then that's correct, $1.19 for Q4. And then I think $0.64 to $0.66 is a reasonable range for Q1. Thanks for checking, Eric.

And I'll just dive in a little bit for what I can on the guidance for the billings for the year, impressive to see flattish billings guidance for the year, even with loss of Micron, I guess, you have kind of uncertainty around that. I know you mentioned that you don't include IT semi-billings assumptions in unless you're fairly confident in a resolution. I guess, can you frame maybe kind of what's in there that would fall into that confident part versus try and maybe what's in hand? Just kind of get a sense of kind of what the visibility of that number?

Sure. I think IP is probably the main issue here. We announced earlier this year that we've entered into a new arrangement with SK hynix, and that has an impact on 2020. And we also have some new IP licensing in the forecast, for which we have high confidence. So those are the 2 pieces. We also have some growth, of course, in the product licensing business for which we have confidence. So all those factors get us to our range for this year.

Okay. And I know you're not giving turns but should we assume that the Hynix deal would be a full year at the kind of recently signed level versus kind of partial year at your level and partial year at the new level?

Unfortunately, I can't give you too much detail on the Hynix structure just because it's subject to confidentiality, but it absolutely has a positive impact on 2020.

Okay. That's helpful. And then on the $125 million in revenue synergies by 2024 in the product business, home and auto, should we assume that's somewhat of a hockey stick as you go over that kind of 3- to 4-year period? Or maybe some -- can you maybe give some sense of kind of the ramp you see getting to that number? And how soon revenue should start to materialize in the numbers?

I think in the 1 to 3 year period, Eric, you're certainly going to see meaningful progress towards that number as it relates to the home synergy opportunities because the product cycles are shorter in TV, in particular. I think automotive probably skews towards the latter end of that time frame, just based on how fast that market moves and when designs are locked down. So I think that gives you a perspective. I don't think it's heavily back-end weighted. I think you'll start to see things happen pretty quickly. It's one of the things we've been primarily focused on is we're very excited about the respective customer and channel synergies. And we certainly got plenty of interest based on our announcement of the deal from customers who really understand that trying to manage your content universe is very, very difficult and having best-in-class technology to help you find watch and enjoy entertainment, play it back and the rest is critically important to providing a positive user experience.

No, that's helpful, Jon. Just want to make sure obviously I've not read through the entire S-4 yet, but just to clarify that $125 million in revenue that's an annualized number in the year 2024, not a sum between now and then, correct?

That's correct, yes. There's some detail in the S-4 that you can find embedded in that document.

Will take you a little bit to read, it's a thorn.

We'll now take our next question from Mitch Steves at RBC Capital Markets.

I wanted to focus a bit on the end markets like breakout you guys gave. Historically, you guys have provided some kind of long-term targets. It looks like mobile is clearly declining well and the other ones are doing a lot better. Is there any way you guys can provide an update where you guys think it's going to happen with the end markets in terms of auto, home and mobile in kind of walking us through what the growth rate should look like?

Yes, I think, we sort of held off trying to give particularly long-term guidance in terms of the markets themselves, because they've been, I think, we found to be quite unpredictable, particularly mobile. And I think we still have a great deal of confidence in our automotive and home business and so I think we could get comfortable. But I think mobile has just been the difficult one. So I think when you have to look at our forecast, I think, in totality, and again there's a avalanche or a ton of information available in the S-4 that sort of lays out a longer term view of the business itself, but not what the type of breakout you're looking for.

Yes, Mitch, I would add maybe 2 or 3 things to that. I think, as you think longer term, there are some new technology and opportunity cycles coming in automotive. So we previously said that being in the low double digits for automotive over a period of time is something we think that's achievable. Home, given its maturity, is probably more of a single-digit grower. But again, as you see new programs like IMAX and other activities, I think you see that skew more towards mid- to upper single digits depending on the period. And the last point I'd make is -- and this is really important. We talked today about a new machine learning initiative. That's a whole different animal as that ramps up because you're talking about much larger ASPs for our combined hardware, software solution that has application first-in-home and then later across a range of markets. And obviously, post combination with TiVo, we'll have a much broader stack of technology we'll be offering into the home space, which will meaningfully, potentially change our thoughts and guidance around what growth rates and opportunities look like.

Got you. And then in terms of the operating expense, I mean, it sounds like you guys have to increase that. I guess, is that going to come into your R&D side? Is it SG&A? Just trying to understand what the -- what segments should go up in '20?

Yes. In the comments on the call here, I noted we would work on keeping the expense level from 2019 to the extent that we make any investments, they would be on the R&D side and primarily focused, I think, on new initiatives. But given that we're heading toward a merger, it makes sense for us to keep things level at the moment.

We'll take our next question from Richard Shannon at Craig-Hallum.

I think I want to follow-up on the questions earlier on the 2020 outlook. Part of my question was asked here about -- but bridging kind of Hynix here, it sounds like you're -- I think it's kind of a net adder for this year. Maybe I want to touch on some of the other puts and takes here. I know you had a couple -- at least 1 licensee from the fourth quarter. Wonder if you can give us any sense of scale of how material those contributions could be this year? And then I want to follow-up on a couple of other points as well.

Well, as we announced with the transaction in the fourth quarter, it's a onetime arrangement. So it's not going to have an impact going into 2020.

Okay. And Robert, I think in response to the last question, you're talking, you mentioned some other deals for which you had good line of sight on as well. I can't remember if they're on the IP and product side. If you can give us a sense of any other -- is there any real scale there? Or maybe just want to get a little help in bridging between last year and your guidance for this year?

Yes. The increase for 2020, I think, that you would -- that's going to have most impact is on the IP licensing side. So again, that, as I mentioned earlier, it really is an impact from SK hynix, and then at new IP licensing for which we have very high confidence in this year. And we are -- we've learned over time to be very cautious about providing guidance that is -- has too much risk in it. So we've derisked our guidance range as best we can. It's worth noting also that we do have growth in the product licensing business really across all the categories. And so that's another contributor to 2020 numbers.

Okay. And then my last question on the topic is, to what degree is there going to be any noticeable contribution either from bonding technology, the in-cabin monitoring and other new initiatives that really haven't generated much to date?

I think bonding is actually represented really by the SK hynix deal. So we have, I think, some fairly significant contributions from that initiative. And then in in-cabin monitoring, we're expecting that to ship initially in the second half of the year. And then I think the same could be said for Connected Radio, which was also a second half shift. So we start to see the benefit from some of these longer term initiatives in the latter half of this year, which will set us up very nicely for future growth.

Okay. That's helpful. Maybe two other quick question, I'll jump out of line here. It's interesting that of your three big licenses in the IP side, you had a fairly difficult long process going through a litigation with Samsung. And Hynix happened to relicense here well before the term of their deal expired. Maybe, Jon, if you can kind of help us understand what was the difference between these two? And how do you expect future IP license deals to go based on what you've seen between these two?

Well, I think, to a large extent, it has a lot to do with circumstance and where people are in their business. I think there's broad recognition that our hybrid bonding technology is kind of foundational in best-in-class to enable some of what people are trying to do in memory and ultimately in 3D-stacked ICs. And so I think you can attribute part of the discussion as it relates to some of the license that we both entered into and will to that interest in getting access to know-how and IP that we have, that's really critical to making that happen. And so I think depending on who the customer is in their respective road maps, I think in some cases, we're seeing tremendously more interest in hybrid bonding, certainly in places like memory and outside image sensors, whether it'd be RF or elsewhere. And we fully expect that to continue. In places where we're more talking about legacy IP or legacy technologies that are better known and understood, I think it may continue to be something that occasionally requires litigation and/or a fairly protracted discussion before you get to fair and reasonable licensing outcomes.

Okay. Thanks for that perspective, gentlemen. I'd ask 1 more question and jump out of line here. In your prepared remarks, you talked about your thought process on the TiVo acquisition. Appreciate the detail there. Maybe if you can give us a sense of what you're hearing from investors since you announced this in late December. And part of the reason I ask, Jon, is that we've seen the stock prices from both participants in this central acquisition come down here in a reasonably good market. So there's clearly some difference between your views and what you're hearing from others. Maybe if you could highlight a couple of things that you think are the biggest misperceptions of this deal?

Well, I think first and foremost, I think there has been a big information gap around just how the businesses were expected to perform. And I think part of the importance of today is that we've both been able to give 2020 guidance. And then secondarily, I think in the course of -- as one looks at the proxy and we share information about how we both think about our respective businesses over time, I think one of the things that will show through that maybe isn't completely well understood is really the benefits of size and scale and profitability is further optimized in the -- under the IP business and under the product business and now we believe we can take these businesses to very successful outcome as independent companies. So I think perhaps the information gap had a lot to do. I think naturally there are concerns maybe from one set of investors or another depending on who they're invested in about the other business. But our belief, after a ton of diligence and a lot of discussion as we think about the best way to set up and create value for the respective IP business and the product business is through this combination. And I think as the information gets out there and we have a chance to talk now more specifically and openly about how we drive that value, I think we believe that it will be very value-enhancing and value-creating for all of our shareholders.

There appears to be no further questions as of right now. I'd like to turn the conference back to Jon for any additional or closing remarks. Please go ahead.

Thanks, operator, and thanks, everyone, for joining us on today's call. We are excited about our progress on key initiatives across our business, and most importantly, about our pending transaction with TiVo. The business combination is highly complementary to address the strategic issues for both our product and IP businesses and sets the stage for significant value creation over time. We look forward to keeping you updated on our progress and look forward to an exciting and productive year ahead. This concludes today's call.

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