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Edited Transcript of XPER.OQ earnings conference call or presentation 3-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Xperi Corp Earnings Call

SAN JOSE May 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Xperi Corp earnings conference call or presentation Wednesday, May 3, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geri Weinfeld

* Jon E. Kirchner

Xperi Corporation - President

* Robert J. Andersen

Xperi Corporation - CFO and EVP

* Thomas A. Lacey

Xperi Corporation - CEO and Director

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Conference Call Participants

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* Chirag Odhav

BofA Merrill Lynch, Research Division - Analyst

* Gary Wade Mobley

The Benchmark Company, LLC, Research Division - Research Analyst

* Matthew Galinko

Sidoti & Company, LLC - Research Analyst

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Xperi First Quarter 2017 Earnings Conference Call. (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.

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Geri Weinfeld, [2]

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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 Andersen, CFO.

Before we begin, I would like to provide 2 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 beliefs and, therefore, subject to risks, uncertainties and changes in circumstances. Please refer 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 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 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, along with the assets and goodwill, expense reductions from insurance recoveries and impute in an estimated 31.5% effective tax rate on the non-GAAP pretax earnings of the company. 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. And recording of this conference call will be available on our Investor Relations website at www.xperi.com, and unauthorized recording of this webcast is not permitted. Tom?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [3]

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Thanks, Jerry, and thanks, everybody, for joining us. We're very pleased to report our first full quarter results since closing the transformational acquisition of DTS to create Xperi.

Before I begin discussing the 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 4 leading Xperi, through a thoughtful well executed and orderly succession plan process, I 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 adviser for a transition period, primarily to assist the licensing team and driving resolution on a few outstanding matters, including Broadcom and our 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 4-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 that 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 Xperi and a very strong team to work with to get there. After spending the last 5 months working directly together and knowing Jon for almost 2 years, I know that he will and the rest of the Xperi's outstanding leadership team will continue to build on the important progress we've made here. Over the next month, Jon and I will spend time on the road meeting with customers and shareholders.

For those that are less familiar with Jon's success in leading DTS, he helped grow it from a startup to one of the world's leading technology licensing companies. Serving as its leader for 17 years, 12 of which were as a public company CEO. I hope many of you will get a chance to meet him as we transition. I know you will come away with the same confidence I felt when we first met.

Now turning to the quarter. As you will hear from Jon, Robert and me, we are executing well as a combined company. Revenue for the quarter exceeded the high end of our guidance, driven by the strength in our product licensing business and a lower-than-estimated impact from purchase accounting. The DTS integration continues to track to plan. While we exceeded our revenue guidance for the quarter, we certainly acknowledge that shareholders have focused in the near-term on the resolution of the Broadcom litigation and the impact of the relicensing of the key customer. I'll provide additional details on the IP side of our business, but I do want to convey confidence that we will resolve both matters, though predicting the exact timing, of course, remains a challenge.

I also want to emphasize that this is the nature of IP licensing. As a management team, we are focused on creating long-term shareholder value, and our strategies across the business are geared to create this result. I want to assure you that we're working diligently to reach a resolution on both matters in the short term, while also remaining committed to doing the right things to preserve value for the business over the long term. Importantly, I don't believe the recent market reaction to some uncertainty in our IP business, properly reflects the future prospects for overall business. We're performing well as a combined company, have a strong product pipeline and fully believe in the strength of our IP portfolio and strategic actions we are taking in the marketplace. With this as our backdrop, let me provide some additional details on the quarter.

The integration of DTS continues to track ahead of plan. This is the result of significant advanced planning, a detail-driven process and strong cultural alignment. During the quarter, our financial organization met an aggressive time line by successfully consolidating many of our financial systems, including moving on to a single ERP system.

In addition, we exited the quarter at 75% of our annualized cost synergy target, and our teams have begun to identify numerous potential technology synergies through ongoing collaboration between our imaging, audio, radio and interconnect teams. We remain confident that we will achieve the organizational and financial synergies we've laid out when we announced the transaction.

Lastly, I want to reiterate that the recent combination of Tessera and DTS is truly transformational for the industry, and we're excited about the vast market opportunity it presents. Looking to products of the future from smart home devices, AR, VR, autonomous-connected vehicles and the application of machine learning, our innovative team and technologies are poised to become an essential part of the anticipated $50 billion device world of IoT. As we continue to capture a greater share of the market, our scalable business model is set to generate increasing highly attractive operating margins and cash flow.

With that, I am extremely and genuinely pleased to formally congratulate Jon publicly and to hand the call over to Jon to provide an update on the product licensing business. Jon?

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Jon E. Kirchner, Xperi Corporation - President [4]

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Thanks, Tom, and welcome, everyone. I want to start by thanking Tom and the Board. I'm extremely excited to begin my new role as the CEO. I see tremendous potential and 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 on IP assets in the pursuit of long-term growth.

As a reminder, within the product licensing segment, we focus our business activities around 3 revenue-generating end markets: automotive, mobile or on-the-go and home. During this call, I will discuss the progress we've made during the quarter in each of these markets and provide an update on our product roadmaps. Please note that all the revenue numbers I reference here exclude the impact of purchase accounting and auto recoveries related to audio licensing. Auto recoveries represent onetime 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 cost for broadcasters to implement HD Radio capability. From approximately $35,000 to $10,000 per site, which will help us convert small stations with smaller audiences that are critical to their local communities. Importantly, we currently have HD Radio broadcast footprint that covers over 90% of the U.S. population.

Consistent with our mid-term objectives for global expansion, we continued development testing and marketing of our Connected Radio solution. This solution combines terrestrial radio with IP delivery to provide a seamless media-rich next-generation radio experience to consumers. In Q1, we joined the WorldDAB Organization to support the rollout of connected radio across a wider base of digital radio platforms. We launched our Connected Radio API allowing our partners to access the system for testing.

Lastly, we introduced our Connected Radio platform to European broadcasters at the RadioDays Europe Conference in Amsterdam. The feedback from broadcasters has been very positive, and we believe there is significant opportunity for global expansion through this platform.

In pursuit of longer term and additional automotive growth, we continue to make progress on optimizing our driver monitoring solution on embedded platforms. We are working with silicon and Tier 1 partners to deliver a market-ready solution to automotive OEMs at approximately the 2019-2020 time frame.

Turning next to the mobile market, which includes smartphones, PCs, headphones, drones and activity cameras. The mobile market declined 20% year-over-year, primarily driven by the roll-off of certain onetime licenses and the delay in completion of certain relicensing discussions with Asian customers in audio and imaging, some of which have now been resolved. As the year progresses, we expect our mobile business to grow on the strength of back half product releases, an uncapped contract with a major customer and continued penetration of imaging and audio solutions across the smartphone, gaming headset and activity camera markets.

Looking at our near-term opportunity, we continue to penetrate core imaging and audio solutions across new mobile brands and models. In Q1, we made significant progress with Headphone:X design integrations with 2 smartphone OEMs, one of which is a top 10 global OEM. These models are expected to launch this summer. We renewed a long-term license for our legacy red-eye removal product with a leading digital still camera company.

Lastly, we advanced our leadership position with gaming headsets, and our Headphone:X penetration will increase from 14 SKUs to more than 20 by year-end. In the mid-term, we made progress with FotoNation's advanced biometric solutions. Following our agreement to deliver our biometric solution as part of the India's Aadhaar program, we began working with several Indian mobile OEMs to deploy our iris solution, some of which are expected to ship in the back half of this year.

For the longer term, we gained traction with perspective customers at CES and Mobile World Congress for various vision and imaging solutions, including our multi-camera depth-sensing technology that was acquired from Pelican Imaging in 2016.

Turning to the home market. Q1 revenue grew nearly 30% year-over-year, driven partially by a lower Q1 '16 comp due to a delay in a TV customer audio contract renewal last year. The strength in Q1 was also driven by continued growth in gaming consoles, Play-Fi and DTS:X adoption in AVRs, sound bars and TVs.

In the near-term, we see continued expansion of the Play-Fi ecosystem in the home. In Q1, we launched Play-Fi on Arcam’s rPlay music streamer and Thiel’s Aurora Lifestream. We also deployed discrete speaker support for Play-Fi wireless surround sound. For the mid-term, our DTS:X ecosystem continues to develop and strengthen. In Q1, we released DTS:X pass-through capability on both the Xbox One and the Xbox One S consoles. Now customers can enjoy DTS object-based audio content in the home through our partnership with Microsoft.

Key DTS:X titles launched included Fate of the Furious; Logan; Kong: Skull Island; Power Rangers and the first Disney title, Beauty and the Beast, supporting the growth of our content ecosystem. In total, there are approximately 85 theatrical titles and more than 380 theaters equipped with DTS:X.

For the long term, our strategy of commercializing integrated audio, imaging, semiconductor packaging and deep machine learning capabilities progressed. We completed our first of many internal summits dedicated to road mapping future and integrated product solutions. Importantly, we believe that we are seeing fast progress on a few initial ideas and may be able to share progress publicly as soon as CES 2018. We look forward to sharing updates from our world-class engineering teams on future calls.

I'll now turn the call back to Tom to discuss our Invensas and IP licensing business. Tom?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [5]

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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 in 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 3DICs assemblies, ZiBond and DBI are also well poised for integration into future high-growth market 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 DALSA and SMIC and continue to support their efforts to bring up and qualify the technology internally, both have made excellent progress and are tracking to the respective schedules. With increasing demand for our technologies, particularly for image sensors and MEMS, we now have 2 high-volume foundries to which we can direct fabulous 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've efforts underway to optimize our die-to-wafer DBI process targeting substantial DRAM 2.5D Logic and 3DIC 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. Our customer requested an additional data and the time to analyze it. This review is scheduled to be completed in May, after which we will -- we will either work to resolution or if necessary take legal action. Importantly, we've previously successfully renewed licenses multiple times with these customers, and we remain positively engaged.

To reiterate what I stated in my opening comments, the Broadcom matter is proceeding very well. We remain confident in our overall position. While there is a lot of activity, let me share with you the key events of the last quarter and what is likely to happen in the near term. In a significant development that we believe the broad market may not fully appreciate, in March, we successfully defeated a petition for Inter Partes Review or IPR that Broadcom filed against one of our key patents that is also an issue in the ITC proceedings. Broadcom requested a rehearing, which was, in fact, denied today. The Patent Trial and Appeal Board found that Broadcom had no reasonable likelihood of prevailing on any of its challenges to the patent and denied Broadcom's IPR petition in its entirety. This is a very important patent that we believe not only widely reads on Broadcom's products, but also has broad applicability to other unlicensed and significant semiconductor companies.

In the ITC, our case against Broadcom and certain of its customers went to trial during the last week of March on all 3 of our patents in suit. The trial proceeded as expected, and we were extremely pleased with the presentation of our case. The case is currently under submission with the administrative law judge, the ALJ is expected to make an initial determination on or around June 26, 2017. The decision can then be presented to the full commission for final determination in October.

As we announced in March, we won our infringement cases against Broadcom and certain of its affiliates and distributors in Germany. As a result, the court barred them from selling or distributing infringing products in Germany. As expected, they appealed the rulings and the infringement case is now before the appellate court. There are a few aspects to the appeal worth highlighting for the near term. Broadcom asked the appellate court to stay the injunction and substantially increase the amount of the bonds, arguing that it would suffer and I quote, "Immense Damages" from the enforcement of the injunction.

We have submitted our response, and as is customary in German courts, we voluntarily decided to delay enforcement of the injunction pending the appellate court's ruling on the stay. We expect the appellate court to make its ruling concerning the stay this month. We remain confident in our position and intend to move as quickly as possible to enforce the injunction against Broadcom upon appellate court's positive determination.

Notably, Broadcom's distributors did not seek a stay. And earlier today, in fact, we took formal action against them to enforce the court's judgment that they seize sales of infringing products in Germany. On the bond issue, under German law, our hearing is required before the court can render a decision. The hearing has not yet been scheduled, and it may be several weeks to, perhaps, a few months before the bond issue was heard. While it is possible, we believe it is unlikely that the bond issue could impact the timing of our ability to enforce the injunction against Broadcom.

The overall takeaway for the Broadcom matter is that, with a favorable IPR ruling, a strong presentation of our case before the ITC and a pending late June decision and a favorable German decision, we are more confident than ever that we can successfully resolve these matters.

With that, I'll turn the call to Robert to discuss our financials and our Q2 outlook. Robert?

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Robert J. Andersen, Xperi Corporation - CFO and EVP [6]

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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'll begin with GAAP and then provide the comparable non-GAAP figure. Our GAAP to non-GAAP reconciliations can be found on our website 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've 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 quarter of 2016. The increase was primarily related to the addition of more than 225 engineers from the acquisition of DTS in December 2016.

SG&A expenses for the first quarter were $41.2 million, an increase of $30.1 million from the prior year. This increase is related to the addition of more than 200 employees as part of the DTS acquisition.

Additionally, marketing spend increased significantly in the quarter due to several key trade shows, including CES and Mobile World Congress and a onetime expense related to the brand launch of Xperi. We expect SG&A expense to sequentially decline over the course of the year due to the front-end nature of the marketing spend and as we experienced cost synergies from the business integration.

Litigation expense for the first quarter was $10 million, an increase of $3.4 million from the prior year, primarily due to increased activity on our docket of open legal matters, particularly from the Broadcom ITC and German trials during the quarter.

Non-GAAP operating expense was $65.5 million for the first quarter. Interest expense in Q1 was $6.5 million due entirely to the debt issued to finance the DTS acquisition.

GAAP net loss for the first quarter of 2017 was $11 million or a loss of $0.22 per share. Non-GAAP net loss for the quarter was $3.2 million or a loss of $0.07 per share. The better-expected EPS is driven by the higher-than-expected revenue and on a GAAP basis by adjustments to the estimated book tax rates.

Moving to the balance sheet. We finished the quarter with $122 million in cash, cash equivalents, restricted cash and investments, an increase of $9 million from the prior quarter. We ended the quarter with basic shares outstanding of 49.1 million and diluted shares outstanding of 50.3 million.

We generated $19 million in operating cash flow during the quarter, which was consistent with the lower range of our current annual revenue guidance. We continue to expect operating cash generation of between $155 million at the low end of our guidance and $205 million at the high end of our guidance range for the year. Given the impact of purchase accounting for the year and the expected impact of new revenue recognition guidelines next year, we expect operating cash flow to be a key metric for measuring our business going forward.

On April 26, 2017, the Board of Directors approved a regular quarterly dividend of $0.20 per share on common stock payable on June 14, 2017, to shareholders of record on May 24, 2017. As a combined company, we plan to continue the payment of the dividend on a quarterly basis, and as I previously stated, we plan to focus primarily on debt pay down for 2017.

Let me now turn to outlook. As a reminder, our revenue outlook for 2017 excludes approximately $51 million in contributions from DTS with the impact of purchase accounting with approximately $7 million impacting the second quarter. Please refer to Slide 22 in our Q1 investor deck for additional detail.

Despite the treatment from a purchase accounting, we still maintain the associated assets on our balance sheet in unbilled contract receivables and other noncurrent assets.

For the year, our revenue guidance remains on track consistent with the range previously provided of $370 million to $445 million. Our range of outcomes reflects the degree to which we resolve multiple outstanding matters, including one significant relicensing matter and at least one ongoing greenfield engagement. We've not included the resolution of any of these matters in Q2 or in the low end of our revenue guidance. The resolution of one or more of these matters will drive significant upside to our Q2 outlook and put us well above the low end of our annual guidance.

For the second quarter of 2017, we expect total revenue to be between $88 million and $92 million. Again, this excludes the $7 million impact from purchase accounting noted earlier. We expect a GAAP loss per share between $0.11 and $0.08 and non-GAAP income per share between $0.25 and $0.32.

That concludes our prepared remarks. Now we'll open the call to your questions. Over to Denise for Q&A.

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Questions and Answers

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Operator [1]

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

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Chirag Odhav, BofA Merrill Lynch, Research Division - Analyst [2]

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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.

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Robert J. Andersen, Xperi Corporation - CFO and EVP [3]

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Okay. So we're always evaluating the appropriate capital allocation given the market circumstances. But -- and admittedly with the stock price, these levels are attractive for repurchase. But we do note that we've indicated we've focus paying down debt for this first year of having debt outstanding.

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Chirag Odhav, BofA Merrill Lynch, Research Division - Analyst [4]

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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?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [5]

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

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Jon E. Kirchner, Xperi Corporation - President [6]

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Yes. I would just add. We expect growth on automotive. And I think we're going to see modest uptake 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.

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Operator [7]

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Our next question comes from Gary Mobley with Benchmark Company.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [8]

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Congratulations to Tom and Jon, I think, it's for different reasons. 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 impact, the 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?

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Robert J. Andersen, Xperi Corporation - CFO and EVP [9]

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

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [10]

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

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Thomas A. Lacey, Xperi Corporation - CEO and Director [11]

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Absolutely. That business is performing very well.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [12]

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Okay.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [13]

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

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Jon E. Kirchner, Xperi Corporation - President [14]

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Record audio quarter.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [15]

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

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Robert J. Andersen, Xperi Corporation - CFO and EVP [16]

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No. I don't think so, Gary. When we have 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 let's include 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 (inaudible)...

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [17]

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Let me stop you there. I'm just sort of taking the first half 2017 revenue outlook, excluding any impact to purchase accounting, which presumably excludes any contribution from your license renewal and any conversion on the Broadcom legal matter. And so just sort of annualizing that.

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Robert J. Andersen, Xperi Corporation - CFO and EVP [18]

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I understand, what you're -- go ahead.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [19]

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

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Robert J. Andersen, Xperi Corporation - CFO and EVP [20]

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

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [21]

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Okay. All right. Well, let me ask you a different way. And so the fact that you're not changing your fiscal year '17 outlook and you're not presumably including any positive impact from a license renewal and conversion of Broadcom or anybody else in the greenfield. Is it safe to assume that you're assuming conversion of it after June 31 or some time -- is it some point in the midpoint of 2017 and what gives you confidence that you can convert at least one of these issues?

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Robert J. Andersen, Xperi Corporation - CFO and EVP [22]

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Let me leave the second part of that question to Tom. I think in the first part of the question, there's a reason why we reiterated our guidance range, right, the $377 million to $445 million. And what we've indicated, I think even in the remarks here, is it doesn't include any impact from the 2 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.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [23]

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Yes. In terms of -- as you know, Gary, when we have these deals and we're in discussion with deals, we're going to announce them when they're done, right? We're not going to forecast them until they're done, right, because just the nature of them. So your assumption that there is -- we didn't include in -- Robert didn't include in Q2 is exactly right, right? And as further as that is in the low bottom end of our annual guidance, which you reiterated, right, that doesn't include either of the -- either a major customer relicense or a greenfield such as a Broadcom in the numbers, so those would be upside. And you've heard our conference on how those 2 items are going.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [24]

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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 strategy and active shareholder campaign you were on the board initially and then became CEO. Was it your intent to all along to just stay in the CEO role in the interim basis? And is this decision to retire a function of you having confidence in Jon to take the baton and run with it?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [25]

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Yes. All good points. When you say temporary, it was interim, if you remember initially, it was supposed to be 6 months. And then the 6 months turned into 4 years, so if you ask Janet, my wife, that wasn't exactly interim. But yes, as I just mentioned, (inaudible)all hands meeting where we went in a little bit more detail on this, Gary, the reality of the fact is, I'd loved this place. I love this company and I love what we've 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've made this major transformational acquisition. And as you rightfully say, I've tremendous confidence in Jon. If I didn't, we wouldn't be making this announcement today. So I informed the board and here we go. Excited about the future of the company and very supportive of Jon and entire board and management team.

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Operator [26]

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(Operator Instructions) Our next question comes from Richard Shannon with Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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I'll add my congratulations to Tom and to Jon. Jon, I look forward to meeting you in person at some point. But Tom, sorry, to see you go. It's been -- loved working with you for the last 4 years.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [28]

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Richard, thank you. Feeling's mutual.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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I guess, maybe a follow-up on the last set of questions here about the time of your decision to retire. I guess what I'm curious about is, I've got to believe you've been important, if not instrumental, in some of these 2 large legal situations you have going on. You mentioned the decision to return on June 1, but remain as a, I guess, on a consultant role of some kind. Is your expectation to stay in that role to the conclusion of both of those? Or how would you characterize your tenure beyond retiring from the CEO role?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [30]

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Yes. So 2 things. And I'll give you a little bit more color personally. So for 8 years, I have been driving back and forth. You can appreciate this, I know from a commuting thing, from Sacramento to -- on Sunday nights to Silicon Valley and 8 years is a long time. But again, as I mentioned to Gary's point, I would not have made the decision to step away if I wasn't comfortable in Jon and where the company was at. I'm just putting way too much into it, and I have a personal level and professional level. In terms of the 2 large deals, that's precisely what we're going to do, right? So first of all, we've got a window left while I'm still the CEO, so what's -- we're going to keep pushing like hell to get it (inaudible) done just as quickly as we can understanding that sometimes as I mentioned in the prepared remarks, sometimes these things, the timing is difficult to predict. 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 2 items to the floor. And then Jon's free to use me whatever other capacity things that might be helpful in. But by no means, am I backing away from bringing these fishing to the boat.

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Jon E. Kirchner, Xperi Corporation - President [31]

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Yes. 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'm very comfortable with the situation here, 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 preferred to build productive long-term partnering relationships that can bring in innovation to the marketplace.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [32]

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Richard, you're going to enjoy meeting Jon, I promise it. As we've -- Jon and I've been working together probably approaching 2 years from when we first got engaged and potentially in an acquisition and then arm-in-arm in the last 5 plus months going on 6 months. And as we could, it happens all the time remarkably how frequently we see the world the same way, and it's in very, very capable hands, and trust me, very, very capable hands.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33]

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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 top line here, I guess I'm asking on a -- I guess, it doesn't matter whether it's GAAP or non-GAAP, but I'm assuming the -- let's assume the low end of the guidance range where you're not expecting anything from the legal matters here. How should we think about the cadence into the third and fourth quarter? And how would that cadence compared to how you expect the seasonality to go forward in future years?

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Robert J. Andersen, Xperi Corporation - CFO and EVP [34]

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Actually, a lot of questions. So let me see if I can take them one by one. I think in terms of trying to forecast the company, we've given the very specific timing of the purchase accounting impact, and even though it was a little bit lower in Q1, we do -- we have given the numbers for Q2, 3 and 4 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'll report it. And so for the year, given the range and given the timing, if we -- again, if we look at the timing at the low end of the range, I think, we're still looking at kind of high 50%s on the back end of the year at probably where the analyst consensus is. It's closer to 60% in the back of the year. And I think -- our comfort in 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 obviously forecast. We need to get those matters done. Does that help answer your question?

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35]

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

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Thomas A. Lacey, Xperi Corporation - CEO and Director [36]

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Yes. 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.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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Yes, we did.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [38]

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During the quarter or late last year. So that business from a kind of design win. And the way to think about it, Richard, is, it's smaller this year and what we're doing is planning the seeds. We've got a very strong foothold, of course, as you mentioned, in knowing image sensors, and we've Teledyne DALSA, 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're pursuing. Did I mention the SMIC as well. SMIC also obvious(inaudible) for lot of reasons, that has more to do probably with the image sensor market. So the image sensor market, we've a very high percent in total share of it today, right? That's the way to think about it. We haven't got all of it, but we've got a large, large percentage of it. You put Sony on top of -- so couple of the other ones we've done. Beyond that, we now have a -- I call it a toe in the water or footprint, if you will, in MEMS. And I mentioned in the prepared statements on the die-to-wafer activity. What we're 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're after. Now how big can that business be? We have not changed from the time we did the acquisition, and we've reiterated probably in the last year and half. We're on plan to what we told the board. We're at this point, on plan all the way one quarter through the year, which would be, if we execute to the plan this year, we'll be substantive growth multiple times -- substantive growth of the small dollars we had on plan last year. And from there, you'll start to see it growing to the double digits of millions if we're successful of dollars, right, as we proceed out of this year and into the next several years.

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Jon E. Kirchner, Xperi Corporation - President [39]

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Tom, if I may, I'd just add one. I think the industry mine share around DBI is growing. When we go out to conferences, and we're 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 remains small and power and heat distribution become super, super important. So we're bullish, but it's going to take time.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [40]

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Yes. Exactly that.

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Operator [41]

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

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Matthew Galinko, Sidoti & Company, LLC - Research Analyst [42]

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So can you help me understand why, I guess, on one hand you mentioned a comfort level with the relicensing effort, whereas sort of (inaudible) suspect of litigation kind of on the back end of the same remark. So can you just kind of talk about the signaling there? And what we should take away from it?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [43]

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Both are options, right. At the end of the day, you know how these things work. You've watched us for quite a number of years. At some point, you get through the discussion and, at the end, you either get to -- you going to be betrayed and -- or get fair value of your intellectual property. And our track record, that's our preference 10x 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 a preferred path, but it's one that's certainly as we've demonstrated with Broadcom and [willing] and prepared to take.

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Matthew Galinko, Sidoti & Company, LLC - Research Analyst [44]

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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?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [45]

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In this day and age , incredibly routine process, right? This is just more of a -- especially, when you're pursuing both the scope and the size and length of agreements we're pursuing, right, very often it will get down to this. So this is -- never, I don't like it. None of us like it because, look, what's happening with stock market and the uncertainty that it drives. But that's partially in our prepared remarks we wanted to say, people -- you need to understand that the bad about this is part of our business. Now the good news is, for some investors, it's now half of what it once was. We've a much more diversified revenue base and customer base on the one hand. On the other hand, the cash flow and earnings potential in this segment of our business is incredible as we witnessed over the past many years. But we're 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, and I call it disappointing, right? I'll tell you personally, I 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 role.

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Matthew Galinko, Sidoti & Company, LLC - Research Analyst [46]

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Okay. Maybe, just 2 more, if you allow me continuing on, but you -- just following on the last remark you made, is there anything that you can point to in the IP licensing world that inhibits these sorts of deals from getting them done sooner from the patent owner's perspective? And are there any changes that you can see on the horizon that would strengthen your position as the starter?

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Thomas A. Lacey, Xperi Corporation - CEO and Director [47]

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The single biggest thing that could strengthen our position on the horizon is success in the Broadcom matter for sure, right? You can imagine a lot of people are watching that, right, 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're in lengthy discussions, and we've mentioned before, we've been in discussions with all the matters we've been talking -- the members or customers we've been talking about, there is back and forth. So it wouldn't be uncommon at all to see back and forth. So at the end of the day, what you want to do is get to a value that you're comfortable with. So I don't think that there's anything inherently different in the market other than -- there really isn't anything different in the market. We do -- 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.

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Jon E. Kirchner, Xperi Corporation - President [48]

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

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Thomas A. Lacey, Xperi Corporation - CEO and Director [49]

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If I change tomorrow.

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Jon E. Kirchner, Xperi Corporation - President [50]

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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 patent holders bring. And the extension of time frames 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's 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 the 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 negotiating posture perspective. But we're 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 legitimate option to ensure that you can drive fair value in the course of your customer negotiations.

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Thomas A. Lacey, Xperi Corporation - CEO and Director [51]

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As Jon was talking, Matt, I had 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 happen, 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, of course, lost initial PTAB in a 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 is broadly reads across the industry big and small.

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Operator [52]

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

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Thomas A. Lacey, Xperi Corporation - CEO and Director [53]

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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 3 of us, we continue to believe passionately in our ability to address this significant market opportunities ahead for both our product and IP licensing businesses. And as we continue to execute well, there's tremendous operating cash flow we expect to generate this year and over the long term.

And just at a bit of a personal note. As we conclude today's remarks, I want to say 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 customer shareholders, our talented executive leadership team, more than 700 employees now at the company and the board, given so much support in the company during my tenure. And again, if I can lead 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 good hands with a very, very bright future ahead. So thanks, again.

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Operator [54]

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