Good day ladies and gentlemen. Thank you for standing by. Welcome to the Xperi Second Quarter Fiscal Year 2020 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 Monday, August 10, 2020. I would now like to turn the call over to Geri Weinfeld, Vice President of Investor Relations of Xperi. Geri, please go ahead.

Good afternoon everyone. Thanks for joining us as we report our second quarter fiscal year 2020 financial results. With me on the call today are Jon Kirchner, CEO; and Robert Andersen CFO. Also on the call is Samir Armaly, President of IP Licensing, who will be available along with Jon and Robert to answer questions during the Q&A portion of the call. Before we begin, I'd 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 Form 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 merger and acquisition-related expenses, integration and separation expenses acquired intangible asset amortization, charges for acquired in-process research and development, stock-based compensation expense, realized gains or losses on equity securities and gains or losses on debt extinguishment. We have provided reconciliation 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. A 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 start by saying that this is an exciting time for our company. This is our first earnings call, since we closed the merger between Xperi and TiVo and over the past few months, we've made tremendous gross toward unlocking the value of this transformative combination including progress around our planned separation of the IP and Product businesses. These efforts involve working jointly to sell technology across our combined customer channels, advancing product road maps and leveraging our respective IP strengths across the larger combined patent portfolio. As part of these efforts, we are making significant progress towards executing on our forecasted expense synergies and remain highly confident in our ability to realize at least $50 million in annualized cost synergies by the end of '21. We also continue to successfully execute on our underlying business including signing new licensing agreements in the IP and Product businesses, as well as making significant progress on outstanding litigation. While it's still early in our transformation, we've already validated many of the assumptions and benefits we had expected going into the transaction and now have even greater conviction that the Xperi TiVo combination will deliver significant long-term value to our shareholders. Together we've added scale and diversification to our IP business. We have an industry-leading platform in our product business that enables us to deliver technology solutions in multiple end markets. We believe we are well positioned to capitalize on the numerous growth opportunities ahead, due to key trends that involve the continued proliferation of entertainment content, changes in the entertainment consumption trends at home, in the car and on the go and a broader move towards artificial intelligence at the edge. On the call today, I will share more detail about some of…

Thanks, Jon. As noted earlier, we are pleased with the company's operating performance and financial results for the second quarter. As I will be discussing in more detail, our results highlight the resilience of our business model during these unique and challenging times. Before I get into the quarter's results, let me note that as a result of our combination with TiVo, we are making some changes to the way we measure and categorize our business performance. First, as Jon mentioned, the combined company will now focus on revenue as opposed to billings to describe the business performance. While the impact of ASC 606 will continue to cause lumpiness to revenue from the upfront recognition of semiconductor-based IP licensing deals, along with timing differences between revenue and operating cash flow on a relative basis these differences are expected to be less meaningful for the combined company going forward. Notably TiVo's IP licensing business does not have the dynamics of Xperi's legacy IP Licensing business that led to the previous use of billings as a business measure. Our financial outlook will also change providing revenue as opposed to billings. Second, we're making some changes to the expense categorizations of the combined company. Most notably both depreciation expense and litigation expense will be more visible as they are reported as separate line items on the income statement. Previously Xperi's depreciation expense was embedded in both R&D and SG&A, and TiVo's litigation expense was embedded in cost of goods sold. TiVo's patent-related expense, which is primarily for patent applications and maintenance is being moved from cost of goods sold and G&A into R&D consistent with Xperi's prior treatment. These changes will impact expense category comparability to our predecessor companies. Let me now proceed to the financial results for the second quarter. Legacy Xperi…

Thank you. [Operator Instructions] And we'll take our first question from Eric Wold with B. Riley. Please go ahead.

Thank you, and good afternoon. A couple of questions, I guess, one, you briefed -- Jon you talked about the ITC decision that came out last week, initial determination. I know that all three of the disputes filed with the ITC were initiated prior to the merger but is there a way to frame the importance to the industry in general of the patents in the third suit versus those in the first two? I know Comcast found a way to work around original patents remove features. Is that something that that's feasible here with the patents covered in the third ruling?

Yeah. Maybe it's best Eric since Samir is here to have him address it since he's got the deep history.

Hi, Eric. I think we're -- as we mentioned very pleased with the ID we got in our third ITC case. As you mentioned, we had success in the previous decisions. As we talked a little bit about the technology these patents cover in the third ID, we do think they're pretty integral to the pay-television business. We mentioned one of them covers whole-room, multi-room DVR. The other one covers communication between set-top boxes using the MoCA technology. And I think if you looked at how the pay-television systems of today's consumers are deployed these are things that we think are not only particularly valuable, but particularly well deployed throughout those systems.

Thank you. And then prior to the merger when TiVo was a stand-alone company, one of their key growth areas was coming from the Stream 4K product that was launching. And now that you've gotten your hands on it for a little bit, working through the integration, help us understand how you're thinking about you're getting that product to stand out and gain traction in what's a fairly competitive market? And is that something you'll be reporting metrics for separately in terms of subscriber’s revenue per subscriber? Or is that just going to be baked into large category?

Fair questions. I think first, we're very pleased with how the hardware has been selling. We priced it on an introductory basis at just under $50. And I think we've gotten very, very strong reviews from reviewers on the product. Our content-centric approach to how we organize content, we think is very consumer friendly and very unique. I think over time that is over the next few quarters, we expect there to be a pretty significant ramp in the volumes pushing through to consumers. And as we establish that footprint and further build it, I think we'll then be in a position to perhaps talk more meaningfully about how the monetization picture looks. But what is important is that, it is about footprint because with footprint you can begin to monetize engagement and that engagement has real value year-over-year. And so I think we see the Stream product as really kind of launching a new chapter in the TiVo history. We also believe that with some time and the knowledge and the relationships that the Xperi legacy team have in the TV space that this also serves as just an opening act in a broader move towards embedded applications and support for TVs directly, which will open up a much wider base of a footprint. And again allows you to further monetize that user engagement and that broader audience successfully. So in short, I think we're very, very pleased. We've got a lot going there. And I think over time, we'll be able to talk more directly about some of the metrics in and around it.

Perfect. And then just a final question for me. Robert of the $72 million to $112 million estimated COVID-19 impact for the year. How much of that was in the first half versus the second half?

I'd say it's probably weighted more towards the second half. Given that much of the shutdown particularly from automotive didn't occur until late in the first quarter, I think if you look at overall we would -- it's primarily in the second half but I think we'll probably see most of the dip in automotive during the second quarter because things were shut down, they've started to increase the manufacturing. So I would say, it's weighted a little bit more to the second half but not substantially.

Perfect. Thank you, guys.

You're welcome.

Thank you. We'll take our next question from Richard Shannon with Craig-Hallum.

Hi, guys. Thanks for taking my questions as well. Maybe I'll follow-up the last question by asking in a slightly different way here in terms of the COVID impact of 8% to 10% here. I apologize, if you've delineated this in some way in the prepared remarks, but how much of this is coming from TiVo versus the Xperi side? Any way to delineate those?

Yeah. It's a good question. I'm starting to try to look at the business on a combined basis. So I'm not necessarily thinking in those terms. But I think given that the impact is centered on automotive in particular is a challenged area, which I mentioned in the remarks that's a traditional Xperi legacy business. And then just on consumer electronics that's where we're also seeing some of the challenges. So I'd say it's more weighted towards the legacy Xperi side as opposed to TiVo. But I think both businesses have seen an impact from COVID-19.

Okay. That is helpful. Let's see here. I think you talked about just kind of a tactical question. You talked about some upside to Xperi's billings outcome versus your original guidance here. I guess given the automotive difficulties here you just mentioned where was the upside from? Was there a license that came through billings? Or can you help me understand that upside?

I'm not recalling an automotive, something that was unique in automotive. I'm not totally clear what you're referring to Richard.

I guess you're suggesting that automotive has been impacted by COVID which makes sense here. I get the Xperi side had upside to the billings original guidance. So I'm wondering where they came from.

So this might be more on the IP side as opposed to on the product side. I think if we're talking about billings versus revenue that's almost entirely within -- the difference for the year is almost entirely within IP. There's very little difference in the Product side. So if we say the numbers, I gave on the call were on the Xperi side there's about a $70 million difference where billings are higher than revenue during 2020 and that's almost entirely due to IP or the semiconductor IP I should say.

Okay.

Does that help?

Okay. It answers a slightly different question I also had, but maybe I'll follow-up a little bit later on that one just to clarify a little bit better. Two more questions. The next one is related to the TiVo and I'm going to butcher the nomenclature using that kind of your content media business licensing some of the social media market there. You've talked -- TiVo has talked a little bit about that in the past. It seems like a very exciting area to just be getting into. How would you clarify or think about the total markets you've been able to license so far? I know you kind of view that somewhat expansively. So maybe you could describe how you view that? And then how much of that market have you licensed to date?

This is Samir. I'll take that. I think as we mentioned, we've got a lot of established licensing program outside the traditional Pay-TV business. And if you think about that that probably has a couple of different components. There's the traditional OTT streaming and video streaming service companies. But then you also have a number of social media companies where video isn't the primary thing that they're doing, but it's increasingly becoming more and more important to their services. And I think what you've seen over the last year or so in the media licensing side is we've announced a number of agreements with some of the leading social media companies. We announced just last quarter our third in the last year. And we do think that's a growing and important area.

Okay. Samir could you characterize that as you're just kind of getting started in terms of licensing that potential? Or are we well underway? I mean, I don't know how you think of three of them in that greater context?

I think generally, we're -- we think we're -- we've got a good base in the new media area which includes social, but we do see a fair amount of upside in that area relative to where we've had a longer more established program in the traditional pay-TV space. So we're pleased with the initial progress we made, but excited about the upside we have there as well.

Richard earlier -- maybe I would describe it.

Okay. That's helpful, Jon. My last question I'll jump on the line here. The TiVo Stream seems a very exciting initiative here and I see the slides here I've been able to briefly absorb. How should we think about milestones for success as we go through Phase 2 and Phase 3 here? Is this agreements with smart TV vendors to get to embedded on there? Or what other interim milestones should we think about to judge your progress over the Phase 1 to Phase 2 and Phase 3 here?

Those certainly will be the most visible ones. Underneath the hood so to speak, there will be efforts engineering and porting the broader code set onto different platforms that are relevant in the TV space, but that will certainly be less likely less visible. Sometimes those agreements with chip vendors to become publicly known. But by and large, we're already well into conversations with TV folks about our road maps. And I think as we said back in December as we articulated the vision for the combination we reached out to a number of our customers across our business in home and automotive and elsewhere. And we've got quite a bit of positive feedback. So we're engaged in and around it I think. So stay tuned.

Okay. Fair enough. Look forward to following up on that. That's all my questions. Thank you.

Thank you.

Thank you. We'll take our next question from Mitch Steves with RBC Capital Markets.

Hey. Thanks for taking my questions. At the beginning of the remarks, you kind of talked about how you're more excited about the TiVo deal and you believe that you're going to be on track or better with kind of the targets you have laid out for some of the internal targets you may have. Can you maybe describe what you're referring to there? Is that more revenue opportunity, is that cost savings? Just trying to get understand what's making you guys more positive on the transaction now than you were before close?

Yes. I think, its three things, Mitch. It is that our teams have come together in an incredibly positive and collaborative way, such that the extent of preplanning we were able to get done before the transaction closed, I would say, is certainly above what you normally expect for a transaction of this size and complexity, which has really enabled us to hit the ground running. So, first and foremost, we had a whole bunch of metrics internally around integration steps and planning steps we wanted to take. And I think we've done extremely well against those internal measures. Secondly, from a revenue perspective, our teams have come together on day one began selling as Xperi and began articulating broader road maps, things like combining metadata with some of our automotive solutions, for example, are immediately possible. And so, we're very pleased with how well our teams and the road maps have come together, which is stimulating pretty significant conversations that I think over time will bear out as contributing positively to the revenue synergy targets we have, excuse me. And then on the cost side, similarly, we came into the deal with quite a bit of planning having been done, such that we were able to start auctioning it on the early day, the day after close. And I think as we kind of look out to the end of the year, we're well on our way to achieving many of the synergies that we talked about on an annualized basis. I would argue that perhaps by roughly year-end we'll be more or less on an annualized basis, roughly 60% of the way in our initial targets of $50 million of annualized synergies and we're continuing to work it. So, overall, very pleased on all three -- across all three different areas.

Got it. And then, the second one I had is just on the COVID impact, $72 million you got there on the slide. I'm worried a little bit less of what the number is and more worried about what exactly is causing issues? So, for example, of that $72 million, how much are you guys being forced to space out? How much is additional supply chain issues? Just trying to understand what exactly is driving those costs so we can -- when the world starts to open up a little bit more, we can get an idea of what cost will off as we get back to normal?

Yeah. This is Robert. So, you're familiar with Xperi's business, it's really a unit-based model where we get paid for each unit that ships. And so, the most dramatic impact is in automotive, which you talked about a little earlier where we get paid as -- for HD Radio technology in particular, as the unit ships. So when we have a decline in volumes that's where we're feeling it. It's also the case in some of our end markets for home and mobile. So that's probably the main place. There's some impact to kind of the TiVo side of the business. Less -- more on the product side than on the IP side. And so, I think, when you take those in totality, I'd say the weight is probably more on the legacy Xperi rather than TiVo per se, but we are kind of feeling it across the end product markets.

Understood. Thank you.

Thank you. Our final question comes from Matthew Galinko with Sidoti. Please go ahead.

Hey. Thanks for taking my questions. I guess, first one was on when we expect to start seeing in-cabin monitoring start to generate revenue, if or -- I guess, whether COVID is moving that out in terms of your expectation on starting to recognize revenue?

2021 is the short answer is when we expect to see some of the car models ship. COVID hasn't had a meaningful impact on some of the programs that we've been working on over the past 12 to 18 months. So I do think that you'll see it -- I think you'll see it accelerate as you get out of '21 into 2022 and beyond. But you'll see the first revenue at least as far as we understand in '21.

Okay. Great. And then I guess similar question on Perceive. You've been out of stealth mode for a few months now. How has the go-to-market been I guess? And how it's been going from I guess demonstrations to trying to generate commercial relationships there?

I would characterize the broader discussions we've had since coming out of stealth as being super exciting and very, very intense with a number of players in different areas that touch on the need for potentially edge-based solutions. And that's with regard to security cameras as well as in other areas like PC and mobile as well as other IoT applications. So in short, I would say the commercial interest and the discussions around it are going exceedingly well. We've seen a little bit of movement in and around the timing of some of these first home security-related products kind of slipping out of Q4 into Q1. But in general, as we look at '21, I think we feel very good about the progress we're making and ultimately, you're going to see Ergo, the Perceive chip show up on different products in that year and be accelerating probably towards the back half.

Got it. All right. Thank you.

Thanks, Matt.

Thank you. And that does conclude today's conference. I'd like to turn the conference back over to Mr. Kirchner for any additional or closing remarks.

Thanks, operator and thanks everyone for joining today's call. I couldn't be prouder of the team's successful effort to close the transaction amidst the pandemic, maintain important business momentum and preparing for an exciting future as we add scale and diversification to our IP and Product platforms. I believe we're well positioned to deliver on our combined company revenue and cost synergies over time and very much look forward to updating you on our progress in the coming months. This concludes today's call.

Thank you. And that does conclude today's conference. Thank you all for your participation. You may now disconnect.