Q1 2020 Earnings Call

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Good day, ladies and gentlemen, thank you for standing by.

Welcome to the experienced first quarter 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 I'd now like to turn the call over to Jerry Weinfeld, Vice President of Investor Relations for experience. Jerry. Please go ahead.

Good afternoon, everyone. Thanks for joining up as we report our first quarter fiscal year 2020 financial results with me on the call today, or John caricatures, CEO and Robert Anderson CFO.

Before we begin I'd like to provide Q reminders first today's discussion contain forward looking statements at our 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 circumstance.

Please refer to the risk factor section in our SEC filings, including our most recent form 10-K, and 10-Q four more information on the risks and uncertainties that could cause our actual results to differ materially from what we discussed today, including but not limited to risks associated with the.

Hello transaction, the development and launch of new products and any potential impact of the Corona virus. 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 measure, which exclude restructuring and other exit costs merger and acquisition related expenses acquired intangible asset amortization charges for acquired in process research and development.

Based compensation expense interest income associated with AMC fixes fix 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.

The recording of this conference call will be available on our Investor Relations website at Www Dot Experie Dotcom I'll now turn the call over to John purchaser.

Thanks, Jerry and thanks, everyone for joining us Experie delivered a strong first quarter with billings above the high end of the increased outlook range. We provided on March 10.

While we feel good about the results we are reporting today I want to start todays call by emphasizing that our top priority remains the safety of our employees partners and customers. During this global pandemic flu.

We're all going through a challenging time and I want to express our sincere hope that you would your families are safe and well.

But also like to thank all of our employees for their dedication and support during this time given that we have a globally distributed workforce, we've been doing a great deal of our work virtually for many years now.

As a result, our employees have been able to effectively moved from working at the office to working from home.

Despite the circumstances, we continue to work creatively and ended the quarter closing several key deals even while learning different ways to engage and work with one another and our customers.

Our teams continue to drive hard to innovate and launch new solutions with our partners.

At the end of March we successfully launched our hedge inference solutions company perceive to very strong market media and investor reception.

Even though our office operations have been impacted by the spread of the virus. Some forms of normalcy are beginning to return to a few of our regional sites in Asia or Shenzhen office reopened on April seven and our Taiwan and Korea offices continue to maintain normal operations.

Importantly, our long term business drivers remain intact with a focus on delivering best in class immersive experiences in the home in the car and on the go.

Well parts of our business will be more challenge than others were extremely fortunate that we have a resilient business model.

This is due in large part to diversification across our end markets and product licensing and to an IP licensing business that delivers strong cash flow year after year.

Our balance sheet remains solid with $142 million in cash and investments at quarter end.

Generated $32 million, an operating cash flow during the quarter up significantly from the first quarter of last year.

Given our diversified business and strong balance sheet, we are well positioned to withstand the impact to covert 19.

Well no one has experienced a crisis quite like this before.

Our product licensing business successfully weathered and return to growth after prior economic downturns in 2000 2008.

And our IP licensing business has been resilient through challenging markets.

Robert will go into more detail on the puts and takes in each of the areas we operate but at a high level. We recognize there are significant uncertainties with regard to the impact from coded 19 on the various markets we serve.

Having said that we currently expect the annual impact to be moderated due to the fixed nature of our IP business and the diversity of our end markets.

Stepping away from the coated 19 discussion I want to spend a few minutes talking about the tremendous progress we've made on our technology solutions and importantly, with the Tivo merger.

First and foremost against the backdrop of the pandemic are perceived team came out of stealth and debuted its first product the ergo chip, a very exciting and innovative edge inference processing solution.

We believe ergo will set a whole new standard by bringing breakthrough accuracy and performance to consumer devices, such as security cameras, smart appliances and mobile phones.

Ergo improves key device features by enabling comprehension and intelligent reactions to surroundings without compromising consumer privacy.

Perceive enables a new growth vector for our business and extends the value of our imaging and audio solutions in our existing markets.

The launch was very successful with significant media and customer interest in the extraordinary features and capabilities with the new Ergo chip.

We are actively engaged with leading partners in the home security space in a range of other partners across the smart home and mobile markets.

We look forward to sharing more with you as a year ago chip is implemented with our first customer later this year.

In addition to the launch of perceive last quarter I laid out a set of key priorities for 2020, and we continue to make good progress on each of these even while working under incredibly unusual circumstances, one of our key priorities in 2020 is the launch of new products and automotive.

Here, our focus is on the commercialization of connected radio and are in cabin monitoring solutions, both of which remain on track tier one and OEM partners continue to engage with us remotely to move engineering and contractual engagements to completion.

Much of the work we are doing today is for car platforms in the 2021 to 2023 timeframe and this work continues to progress forward in anticipation of a stronger car market in the future.

Another key priority addresses our home market, where we continue to add more content and devices to the IMAX enhanced program.

During the quarter, we added more than 60, new certified 2020, TV models for North America, Europe, Japan, China and other key territories.

And on the content front, we now have approximately 45 IMAX enhanced titles released.

Just this week, we announced a significant expansion of the IMAX enhanced ecosystem with Sony Pictures Entertainment.

Tony has committed to release hundreds of new and never before release titles over the next two years, including all upcoming Sony in IMAX theatrical releases.

The IP front, we remain focused on building out our portfolio advancing our pipeline of opportunities and accelerating the adoption of our invensys bonding technologies.

During the quarter, we signed a new agreement and began a tech transfer with SK Hynix.

We also settled our outstanding litigation with Toshiba.

Despite the challenges facing the industry as a result of cobot 19, we're seeing strong interest in our direct and hybrid bonding technologies for a wide range of applications, including image sensors time, a flight sensors stacked RF devices high performance memory in Threed NAND flash.

Lastly, we have been focused on closing the merger with Tivo.

And executing our integration and synergy plans.

The transaction brings scale and diversification to our product and IP businesses, which is even more important in today's market environment.

On the product side, we gained significant scale with the Tivo merger. In addition to technology depth and a platform relevant to one of the largest challenges consumers face today, how to find Washington enjoy entertainment.

Combining will enable us to offer consumers a seamless end to end entertainment experience from choice to consumption.

We will offer TV manufacturers are compelling user experience product, while providing the opportunity to differentiate and monetize consumer engagement through direct to consumer advertising.

We will enhance the in cabin entertainment experience, making it more seamless to enjoy content across different services utilizing experienced global digital radio platform, along with Tivo is industry, leading music search and discovery solutions.

On the IP side, the combined IP licensing business will be one of the industry's largest.

In addition to blend of episodic revenue with recurring subscriber based IP revenue provides important stability and diversification for the business.

We continue to believe that added scale and diversification of the portfolio the quality and expertise with the team and the broader market 10 will lead to better IP licensing outcomes greater cash flow generation and improved visibility over the long term.

Since announcing the merger on December 19, we've made significant progress on pre merger integration planning.

This effort has given us confidence that we will deliver on the expected key value drivers and strategic synergies post combination.

The integration planning is being led by an experienced cross functional team comprised of leaders from both Experie and Tivo.

We expect to share more details on roadmaps after the closing of the merger.

Importantly, Tivo is business model like ours is also showing resilience during a challenging time due to significant increases in the consumption of home entertainment and a robust IP licensing model with long term recurring revenue and significant cash flow generation.

The shareholder meetings for both experienced Tivo are scheduled for May 29.

We have committed financing and have cleared all regulatory hurdles, putting us on track for the closing of the merger following the shareholder meeting.

We will soon enter our post combination phase and continue to believe that by combining tivo and Experie, we will create significant strategic and financial value for our shareholders with that I'll turn the call over to Robert to discuss our financials.

Thanks, John.

Let me begin by making a few initial observations about our business in relation to the pandemic ships.

We are fortunate that a large portion of our billings is fixed for the year.

Nonetheless, we are mindful of uncertainties in the current environment and have taken a cautious approach to managing our business.

For instance, as the pandemic began we took immediate steps to manage our cost base by reducing outside services.

We're using all non essential hiring and cutting discretionary spending.

We believe these steps are prudent in the current environment and will place us in the stronger position coming out of this downturn.

I'll return to covert Nineteens estimated impact on our business on the moment. So let me first cover results for the first quarter.

As John mentioned, we delivered better than expected billings compared to the updated outlook that we provided on March 10th.

Billings in the first quarter were $112.8 million up 8% year over year.

We generated $32.6 million and operating cash flow.

An increase of 18.8 million from last year.

Primarily due to higher cash collection from customers and lower interest expense.

In Q1.

The automotive market delivered $20.5 million in billings down 5% year over year due in part to lower and are you payments.

For HD radio, we're working with several of our tier one partners to develop lower costs next generation IC solutions.

Target growth in the lower end of the automotive market.

And our efforts to address a growing trend towards software defined radio solutions in the market, we're working with multiple tier ones.

Our integrators and Esso see providers.

Who are evaluating arm based HD radio solutions.

We are on track with a key OEM for the launch of connected radio later this year.

We continue to develop solutions for broadcasters to enhance their connectivity and physician and connected radio for wider adoption.

For example, we launched phone apps for the largest commercial broadcasters and Spain and Australia.

Our first app for stations in Israel, and our first small sized station app in the U.S.

On the end cap and monitoring front, we continue to develop our next generation driver monitoring solutions and our advanced development of our first generation occupancy monitoring platform with the European automotive manufacturers signs two quarters ago.

Those CES, we are seeing growing interest in our technology for various tier one partner platforms.

As a result, we are engaging directly with those Oems to provide quotes on multiple gms and LMS programs.

Generally driven by demand in Europe.

For the home market in Q1, we delivered billings of $24.3 million down 9% year over year due to weakness in game consoles.

As consumers remain on the sidelines waiting for the launch of the next generation consoles.

During the quarter, we signed two new multibillion dollar Dts decoder.

An audio post processing licensing agreements with while non Chinese TV brands for their 2020 to 21 model years.

As expected billings in the mobile market declined year over year to $5.6 million.

The decrease of 19% from Q1 2019.

Due to the ongoing contract interpretation issue with the key mobile customer.

We continued to build momentum and gaming with the launch of the Nubia Fiveg with Dts technology.

Our sound Unbalance pollution maintains a solid four plus star rating in the Microsoft store, and we are seeing strength and downloads of the solution.

Moving to our IP licensing in semiconductor business.

First quarter billings were $56.2 million up 29% from last year, driven by the settlement of litigation with Toshiba.

Despite the pandemic, we continue to have patent licensing discussions with potential customers and have made significant progress on the transfer of our technology the SK hynix.

Supporting their internal developing efforts.

We remain confident in the broader opportunity that DRAM and NAND markets represent for our hybrid bonding technologies over next several years and see memory, serving as the proving ground for high volume logic applications, such as microprocessor graphics processors network processors and other high performance logic.

Yes.

GAAP operating expense, including cost of revenue was $93.1 million.

Compared with 86.6 million for the first quarter of 2019.

Non-GAAP operating expense, including cost of revenue was $59.6 million.

An increase of 6.1 million compared with the first quarter of 2019.

Year over year increase was primarily driven by investment and perceive and machine learning initiatives.

Higher bad debt reserves and costs related to expanding the IMAX enhanced program for which the benefit received overtime.

Interest expense for the quarter was $4.3 million, and we paid $5.6 million and net cash taxes.

Moving to the balance sheet, we finished the quarter with $142.1 million in cash cash equivalents and investments.

Our solid balance sheet positions us well to continue to execute on our strategic initiatives, while we manage through an uncertain environment.

Let me now returned to cope with 19 and the impact we think it will have on our business.

Given the uncertainties around the impact that covered 19 could have on our end markets over the remainder of the year.

Along with the upcoming merging with Ti vo versus spending our 2020 billings outlook, we will continue to monitor that situation and after closing the merger and receiving updated market information. After Q2, we should be in a better positioned to provide an updated outlook for the combined company.

Let me now provide some additional contacts for the year.

And how we see the impact relative to our prior annual guidance.

For the IP license business following the SK Hynix and to Sheba agreements are 2020 outlook did not include any new IP licensing deals.

Consequently, IP licensing provides a fixed base of billings that account for approximately 45% of the 2020 outlook provided in February.

Turning to our product licensing segment.

We've analyzed the potential impact of covered 19 to the various end markets and do expect some variance versus what we had in the prior outlook.

For automotive our billings from HD radio another sound based technology.

Sure. The work you're doing today is for car platforms, and the 2021 to 23 timeframe.

We anticipate slightly less of an impact in our home and mobile markets given that in home entertainment as a major source of consumption for individuals during this time.

Analysts are predicting a wide range of outcomes for TV sales in 2020 from down 5% to down 17%.

It is also possible the new game console cycle will occur later than anticipated due to production delays, which could have an impact on our billings.

Let me summarize how this all fits together in context of our full year.

First quarter is of course now complete.

We also have a good view into Q2, because our product licensing billings of determined by the royalty reports for Q1 that we received at the beginning of this quarter.

As a result, we cannot fixed IP licensing with the first two quarters of product licensing.

Yield high certainty into about 70% of our initial billings outlook for the year.

The remaining 30% is based on unit shipments within each markets that are impacted by that and dynamic, but the degree and duration of impacted on sir.

As for the second quarter.

Because visibility through unit based royalty reports already received.

We're able to provide standalone experie guidance on billings and directional guidance on expenses, excluding any impact from the business combination.

We expect experienced second quarter billings to be between $85 million to $90 million.

Non-GAAP operating expense to be sequentially lower than Q1 2020.

Successively 8% to 10%.

That concludes our prepared remarks.

Let us now open the call to your questions operator.

Thank you, Sir ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If we're using a speakerphone. Please make sure. Your mute function is turned off the line signal from each hour equipment again, ladies and gentlemen that a star one of this time for your questions Star One we'll pause for just a moment to assemble the queue.

And we'll take our first question from Richard Shannon with Craig Hallum Capital Group.

Hi, guys. Thanks for taking my questions here.

Let's see I, just think lost a quick question on the other billing guidance for the quarter.

Hi, Yes, obviously, you didn't give us a guide for that back in February just yearly number which is now that month drawn but if you compare what this billing outlook looks like compare to what you were implicitly thinking back in February and maybe that's a good starting point for us thinking about impact your from Cowen.

Hi, Richard This is Robert I think we were feeling a little bit of the impact from Covance and our Q2 numbers, but as you well know the theres a delay in the time.

The lag so we recognize the relative reports from Q1 in Q2 as billings and so we're feeling a little bit the impact from covered 19, but that that really we didn't go to jail.

Shelter in place orders until sort of early to mid March So I think.

It's it's not all that different than what we would have originally expected, but I think it does have a small amount of impact.

Okay.

All right, we would I know this maybe a little bit too early to to asked in this kind of environment, but would you anticipate reinstating your.

Your yearly guidance next quarter, assuming things have not deteriorated from here.

Yes, I think if we can as I mentioned on the call as we can get better visibility from.

Within the next quarter or so in terms of where the markets are heading.

Will intend to provide updated guidance thats at least what we'd like to do.

Okay, that's fair enough and.

Maybe a question of IMAX enhanced you had a nice released earlier this week I haven't had a chance to really absorb that.

Maybe I can kind of give us a sense in the context here of how big a deal. This is for you.

And maybe if you can kind of give us a sense of when you expect to see some real contribution to your product licensing in home.

From an IMAX enhanced in general matches, the Sony but the entire entire program.

Sure Richard It's John I think.

The key thing to think about as were building an ecosystem here between content and devices and we've had a number of announcements in and around content as well as devices as we now have nearly.

I want to say 20 different.

Partners, who are working on the platform from hardware perspective.

We've also had content support but the significance of this announcement is that.

Sony is this made the decision that the interest in the program and the importance of presenting their content.

Across a much wider base of titles.

It is important to the at home viewing experience. This represents the best in class way to enjoy home entertainment and as a result, there are committing.

To a significant number of titles that in turn will further support.

Other hardware decisions in support of the program so.

Totality weaker systems build kind of.

One step at a time across both content as well as devices. This represents a significant step on the content side and then we'll obviously have.

You know near and medium term benefits to the question of how do we think about this in the context of all of our numbers.

Clearly.

We are beginning to see an acceleration.

Revenue related to.

Next I would say in this in the scheme or the Grand totality of our businesses, you'll see it show up more meaningfully in 21 and 22.

But overall, we're very pleased with the progress of the program.

Okay sounds good and one last Patrick questions from me I'll jump out of line here.

Obviously, the automotive space has been impacted significantly no surprise about your comments about the unit driven demand here your product license business, but I guess I'm.

Little bit surprised perhaps on your comments that some of the new programs and Kevin monitoring connected really haven't been affected at all.

Do you have full view and visibility and confidence in that or is that just what's your your partners you telling you.

And there is still perhaps another shoe to drop your look tenants confidence you have in in that sustaining.

Well I think our our feedback at this point is based on the data we have which is really along the lines of three key points.

Yes.

Kind of next Gen programs that are deemed important to our customers over the next three to five years continued to be worked on.

Actively and aggressively.

And that includes both in cabin monitoring as well as next Gen Entertainment and connected radio in the car. The second thing is is that as our partners launch. These technologies. They typically launch them in a limited number of units and then they expand more aggressively overtime and so as we think about the.

Impact on our business from coal going in the short Ron.

Our our partners intending to launch these projects. We are slated later in the year in into 21 in the first place so it doesn't necessarily.

Add up the short term disruptions in supply would directly.

Impact the trajectory of these programs and then I think the third and final key point is that.

As I think automakers looking ahead, and obviously recognize the importance of both.

More advanced infotainment as well as safety, we are riding an art because that is very relevant to where that business is going over the next three to five years, which I think bodes well for us as we look to grow in and around these technologies.

Ultimately come to the place even stronger with more technology in the context of the Tivo combination.

Okay. That's helpful, leaving us to a less on quickly to Robert I think you mentioned your opex being down 8% to 10% on a pro forma basis. This quarter just want to verify that's correct and then how do we think about it beyond that as I kind of correlated with the.

General activity or is this a new cost structure or can you help us understand.

Hello.

Yes, I wanted to give directional guidance for experienced specifically rule were planning to close this merger transaction in in early June and so we'll have a mix of spend for the quarter. So I.

I think for given that we suspended guidance for the entire year I think it's best to kind of hold off on and figure out what that's going to look like until we have the combination done, but I did want to give directional guidance and that's just from Q1 through to Q2, so sequentially down 8% to 10% this last on call.

Okay perfect Thats all from you guys. Thank you.

We'll go next to Mitch Steves with RBC capital markets.

Hi, guys. Thanks for taking my question I, just wanted to kind of talk about the end marketing towards year. Thank you typically its auto mobile et cetera, just from a high level can you maybe I really I think if my memory, but from a high level for 2020, so automotive home mobile.

Which one of those would be down the most it sounds like mobile in automotive interview, but you kind of wanted to hear what you guys. Thank you turn the mix going forward for 2025.

Paul.

Sure let me start out this Robert So we are getting a range of industry reports on I think those that well said that situation is still developing with initial reports indicate automotive units down.

Year over year between 15 and 20%.

I think in the home.

Category, It's it's still early to say because that's obviously driven to some extent by the demand for entertainment within the home so.

We've seen ranges between 5% to 17% down and that's as best we can figure at the moment.

Mobile I think still remains a question mark as well.

Okay, and then secondly in terms of the overall opex structure. The company you get it and the work environment. If you do have you guys noticed any sort of changes your operational structure allow you to kind of reduce costs going forward or do you think that.

Kind of the way you run into getting it back down we'll venture.

Well with regard to Capex for the year.

You have most of what we're incurring there is really for I T.

Matt and machine learning equipment and so.

We.

We're going to pretty actively manage that spend over the remainder of the year just given the uncertainty in the business.

Let's get to the heart of your question.

Okay, Yeah, I guess I guess in it and just one really small on anniversaried asking rates of the EPS number for March and diluted basis that the Athree center with around that.

Thats correct. If I was calculated based on billings, we would get to 83 cents.

Okay perfect. Thank you.

We'll take our next question from Eric Wold with B. Riley FBR.

Thank you good afternoon guys.

Yes.

And as long as loan journey around Kogas number question, you're going to ask around kind of the guidance and kind of different end markets, you're seeing potential was due to make sure I kind of.

Okay, Triangulating I get to make sure understood. The comments include beginning right. So.

During the call can you give you a 70% in the prior guidance was fixed and highly visible 30% in today's on units.

Does that impact based on automotive Inc.

Mobile and home.

Automotive being the highest risk due to points and everything else being less than that so 30%, Ohio limited impact and continue to 20 would kind of thing it.

The only going to 5% to 6% at the high end the prior going guidance for the year. Okay at risk because that is that fair am I right now if you dig in roadmap that learning magnitude.

Hi, This is Robert I think you're in the ballpark. If we were looking at the remainder of the year. That's correct about 30% is not high certainty.

Although we will get part of that for sure. So if we're looking at the risk for the total year billings.

Compared to the prior guidance I would say, it's roughly 10%.

Okay.

And then.

You know maybe kind of what you're hearing from your key partners around the supply chain I know there's lot of uncertainty around demand with economics and consumer is not going to get the stores in the shutdown LT that kind of reopened the economy short term, but what are you hearing in terms of the supply chain in general under the how much impact that had.

And if you're hearing anything around what impact and could linger and thing could linger into into the holiday season.

Yes, I think.

The data is changing so reports that we were getting say four to six weeks ago I think things have based on what we're hearing of stabilized quite a bit I.

I think people are beginning to think more constructively about what the fall and holiday season is going to look like and beginning to think about their plans I don't think we yet now.

Exactly how thats going to go down, but I think the summer is typically.

Time, where.

People are not only making those decisions, but they're putting things into production I think there's more likely to be more product moving in early Q4 than perhaps in a more stable year.

Based on demand patterns.

From what we're hearing, but I think we're still gathering data, but definitely the supply chain situation is improving many.

And in a number of our markets feedback has been positive I think the second thing to appreciate is at retail.

Obviously is changing and will change as a function of this experience.

The good news is that people are very comfortable buying electronic.

Online is as need be and so when we think about some of the variables that were.

Looking at and thinking about.

There clearly is a path to obtain goods.

Yes, even if it isn't a physical retail.

Secondly, as we look at some of the industry data and Robert was touching on some of this as we think about different guidance areas also keep in mind that.

Some of that macro data needs to be further parse because some of the products were in may be less or more affected and we and were our own ingredient in lots of different products and so you can directly easily necessarily just.

We'll take a macro number and say, yes, you'll be right. There. So we're looking at all of those variables but.

But I think the good news is is the things seem to be stabilizing a bit and will be a lot smarter here in the next.

Two three months.

Okay, and then kind of question for me I know you noted that.

No change in your discussions in the automotive.

Oems in terms of you're going to integrations, the kind of 21 to 23 model years in what kind of what's happening now I know that some of the home and mobile segment going out so.

Shorter product cycles.

Has there been an impact to.

Kind of what you would have expected to be kind of integrated implemented this year in those markets and and or kind of what may have been plan for kind of 21 of the on.

I would say not not significantly.

Mobile remains a top tough space the the home product cycles.

For.

The latter part of this year into early next week.

Many of those planning decisions were kind of made last fall.

Technically so.

I think were you're on a fairly straight shot except for things that maybe truly on the margin.

Regardless of the the late in year 2020 kind of products I think theres a bigger question. Obviously this is the one we're studying carefully is just.

What happens with end demand.

In these markets and how do people respond to some kind of normalization in the broader economy.

Perfect. Thank you guys.

And this does conclude our Q question answer session I'd like to turn it back to management for any additional or closing remarks.

Thanks, operator, and thanks, everyone for joining todays call. We look forward to meeting with many of you either virtually or in person over the coming months and we hope that everyone stays healthy and safe. During these unprecedented times and again I want to extend my thanks to our employees for their dedication and hard work during very challenging time.

As we approach the close of the Tivo merger, we will be well position with an industry, leading platform and an exciting roadmap for long term growth.

Forward, telling you more about it as we move ahead and this concludes todays call.

Okay.

Ladies and gentlemen, thank you for your participation you may now disconnect.

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