10-K 1 xper-10k_20181231.htm 10-K xper-10k_20181231.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37956

 

XPERI CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

81- 4465732

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3025 Orchard Parkway, San Jose, California

 

95134

(Address of Principal Executive Offices)

 

(Zip Code)

 

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

The Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes  No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company  Emerging growth company 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes  No 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2018 was $463,642,793 (based on the closing sale price of the registrant’s common stock as reported on The Nasdaq Global Select Market).

The number of shares outstanding of the registrant’s common stock as of February 4, 2019 was 48,652,499.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders will be filed with the Commission within 120 days after the close of the registrant’s 2018 fiscal year and are incorporated by reference in Part III.

 


 

XPERI CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

PART I

 

Item 1.

Business

4

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

28

Item 4.

Mine Safety Disclosures

35

 

 

 

 

PART II

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

36

Item 6.

Selected Financial Data

39

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

40

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 8.

Financial Statements and Supplementary Data

57

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

60

Item 9A.

Controls and Procedures

60

Item 9B.

Other Information

61

 

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

62

Item 11.

Executive Compensation

62

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

62

Item 13.

Certain Relationships and Related Transactions, and Director Independence

62

Item 14.

Principal Accountant Fees and Services

62

 

 

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

63

Item 16.

Form 10-K Summary

106

 

 

Signatures

107

 

2


 

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management’s plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, the levels of customer spending or research and development activities, general economic conditions, and the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part I, Item 1A of this Annual Report and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

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PART I

Item 1. Business

Corporate Information

Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134 USA. Our telephone number is +1 (408) 321-6000. We maintain a corporate website at www.xperi.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website. Xperi, the Xperi logo, Tessera, the Tessera logo, DTS, the DTS logo, FotoNation, the FotoNation logo, Invensas, the Invensas logo, BVA, ZiBond, DBI, DTS‑HD,  DTS Audio Processing, DTS:X Ultra, DTS Virtual:X, DTS Headphone:X, DTS Play‑Fi, DTS:X and HD Radio are trademarks or registered trademarks of Xperi Corporation or its affiliated companies in the U.S. and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies.

In this Annual Report, the “Company,” “we,” “us” and “our” refer to Xperi Corporation (“Xperi”), which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Annual Report are those of the Company and its subsidiaries on a consolidated basis.

Overview

Xperi is a publicly-traded technology company with headquarters in Silicon Valley and operations around the world. Through its operating subsidiaries, Xperi creates, develops and licenses innovative audio, imaging, semiconductor packaging and interconnect technologies. We have approximately 700 employees and over 25 years of operating experience.

We completed the acquisition of DTS, Inc. (“DTS”), a publicly-traded developer of sound-based technologies, in December 2016. At the time of the acquisition, Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation. During the first quarter of 2017, we introduced our new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under a new ticker symbol XPER.

Xperi’s portfolio of products and technologies uniquely positions us to deliver innovative audio, imaging and semiconductor solutions for the home, automotive and mobile markets. Our products and technologies also enable entertainment media ecosystem connectivity and new products in emerging markets such as Internet of Things (IoT) and Augmented Reality/Virtual Reality (AR/VR). Our team of more than 400 world-class engineers is focused on creating core technologies that enable intelligent, immersive, and personalized experiences.

We license our innovative products, technologies and inventions to global electronics and media companies which, in turn, integrate these solutions into their own consumer electronics and semiconductor products. Our technologies and inventions are widely adopted and used every day by millions of people. Our audio technologies have shipped in billions of devices for the home, automotive, and mobile markets. Our imaging technologies are embedded in more than 25% of current smartphones. Our semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips.

Xperi operates in two segments. The Product Licensing segment is comprised of our Audio and Imaging businesses, which we license through the DTS, FotoNation, HD Radio, and IMAX Enhanced brands. These licenses typically include the delivery of software and/or hardware-based solutions to our customers or to their suppliers. Product Licensing revenue is derived primarily from sales into the home, automotive and mobile markets.

The Semiconductor and IP Licensing segment includes our Tessera, Invensas and Invensas Bonding Technologies subsidiaries, which license semiconductor packaging and interconnect technologies and associated intellectual property. Semiconductor and IP Licensing revenue is derived from technology and IP licenses to semiconductor companies, foundries and packaging companies. We have a long history of developing and monetizing next-generation technologies, including chip-scale packaging solutions and low-temperature wafer bonding solutions. Today, we are actively developing and licensing 3D semiconductor packaging, interconnect and bonding solutions for semiconductors that are used in every day products such as smartphones, tablets, and laptops as well as servers used in datacenters. We also provide engineering services to our customers to assist them in their evaluation and adoption of our technologies including the transition into high volume production.

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Product Licensing Segment

Overview of Solutions

The Product Licensing segment is comprised of solutions from our audio and imaging businesses.

Audio Solutions: Our audio business is a premier audio technology solutions provider for high definition entertainment experiences. The DTS codec is designed to enable recording, delivery and playback of immersive high definition audio and is incorporated by hundreds of customers around the world into an array of consumer electronics devices for use anywhere, at home, in the car, or on the go. We provide products and services to entertainment media ecosystem partners such as motion picture studios, radio and TV broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded audio within their content. This in turn allows consumers to experience immersive and compelling audio wherever they choose to enjoy it. Devices that incorporate DTS audio codec technology include televisions (TVs), personal computers (PCs), smartphones, tablets, automotive entertainment systems, set top boxes (STBs), video game consoles, Blu-ray Disc players, audio/video receivers (AVRs), soundbars, wireless speakers and home theater systems. We also offer DTS post-processing audio solutions designed to enhance the entertainment experience for users of consumer electronics devices, particularly those subject to the physical limitations of smaller speakers, such as TVs, PCs and mobile devices. In addition, our DTS PlayFi technology leverages our audio and technology expertise to enable a variety of high-quality audio playback options across wireless speakers, set top boxes, and mobile devices.

HD Radio is a key part of our automotive audio business as the only digital terrestrial broadcast system approved by the Federal Communications Commission (FCC) for AM/FM radio in the U.S., offering additional channels, crystal-clear sound and advanced data services with no subscription fees. HD Radio enables a high quality in-vehicle radio experience with innovative features and digital capabilities.

Imaging Solutions:  FotoNation, a pioneer in computer vision and computational imaging solutions, provides critical imaging technologies that enable millions of consumers to take incredible pictures with their smartphones. These technologies underpin many of the features today’s digital users enjoy every day such as advanced portrait modes, face detection and tracking, and automatic effects such as face beautification. Our imaging technologies have become must-have capabilities for mobile device manufacturers and are key to enabling our driver monitoring and driver assist solutions in the car.

Innovative Technology

Within our audio product line, we have a complete range of end‑to‑end solutions from content creation / mastering, through distribution and playback. We continue to expand our offerings through ongoing research and development, and strategic partnerships with content creators, chip makers, consumer electronics manufacturers, and others within the digital media ecosystem. Our innovative solution offerings are tailored specifically for each market.

Some of the audio technologies we license include:

 

DTS:X®, DTS’ flagship object-based audio decoder, includes object-based audio decoding, full backward compatibility with all DTS-encoded formats, and Neural:X, the latest spatial remapping technology that translates legacy bitstreams and PCM content to virtually any speaker layout.

 

DTS‑HD® Master Audio is our advanced surround sound decoder that utilizes variable bit‑rate technology to deliver ultimate audio quality while conserving file size and bandwidth, allowing for an uncompromised audio experience.

 

HD RadioTM technology enables digital AM/FM broadcast radio, creating significant benefits to all participants in the radio broadcasting ecosystem. In particular, radio listeners enjoy upgraded audio quality, expanded content choices, and new digital services.

 

DTS:X Ultra™ is designed for gaming and XR experiences with support for static, multi-channel and object-based audio. Now supported in Windows Spatial Sound PC Gaming platform.

 

DTS Headphone:X® includes our integrated surround headphone technology and DTS decoder, coupled with user‑driven, headphone-specific tuning and personalization features for an enhanced listening experience over headphones.

 

DTS Play‑Fi® is a smart audio platform that enables high-quality, synchronized streaming of music directly from a variety of sources to speakers over Wi-Fi. Play‑Fi is currently embedded in wireless speakers from many of the industry’s leading brands, in leading set top boxes, and for mobile devices that use the Android, Kindle Fire or iOS operating systems, as well as the Windows PC platform.

 

IMAX Enhanced program, which Xperi manages and licenses to CE customers worldwide, delivers the ultimate home cinema experience with unique IMAX cinematic content that leverages the DTS:X audio format to flawlessly deliver signature IMAX audio mixes.

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The proliferation of connected devices that can support streaming and downloadable content has made our active participation within the digital ecosystem increasingly important, as the availability of DTS-encoded content helps drive consumer demand for electronics that support DTS technologies.

Our immersive audio solutions such as DTS HD and DTS:X empower content creators and are supported by all the major Hollywood studios, many cinema operators in the U.S. and Asia, and leading streaming service providers in the U.S., Europe and Asia.  On the radio front, our HD Radio broadcast technology provides compelling advantages to consumers over traditional radio and is accordingly supported by more than 2,300 radio stations, including 98 of the top 100 stations in the top 10 U.S. radio markets.

Our imaging business licenses software solutions and technologies for mobile imaging and other markets. Some of the solutions we license include:

 

FotoNation FaceSafe is a 3D face recognition solution for mobile devices. It features a cohesive set of convolutional neural networks (CNN) driven technologies that enable full face detection and tracking, accurate feature detection, face modeling, texture and depth-based recognition, and liveliness detection.

 

FotoNation 3D Portrait is the next evolution of the FotoNation portrait enhancement suite. Through AI-based 3D relighting technology coupled with background processing, 3D Portrait enables enhancement of photos and videos created by single and multiple depth sensing cameras. 3D Portrait relighting innovation in video-preview mode showcases how changing the light source position in the frame will affect the outcome in real-time.

 

FotoNation Face Analytics is the backbone of several of our computer vision technologies. Face Analytics is able to use factors including exposure, focus, white balance calibration, biometrics, portrait enhancement, and emotion recognition to enable decision-making intelligent cameras. Driven by CNN, our face centric analytics pack contains FDX (FotoNation’s next generation face detection technology), Face Features Detection (FFD) and Face Classification (FC).

 

FotoNation Body Analytics is the natural extension of face-centric computer vision technologies. Body Analytics offers a new dimension to advanced tracking systems for action cameras and drones. It also plays a key role for body-based imaging techniques such as single camera still and video bokeh, background replacement and portrait enhancement.

 

FotoNation Electronic Image Stabilization (EIS) improves the user experience in smartphones when taking photos or recording video. FotoNation’s EIS solution delivers lightning-fast image processing with best-in-class motion estimation, filtering and correction. The product eliminates the effect of hand jitter and flight navigation vibration correcting for 6 degrees of freedom, including rotation, translation, lens distortion and rolling shutter effects.

 

FotoNation IrisXR is a highly effective iris authentication product. FotoNation provides iris detection and recognition that provide a layer of safety and security as a base with the potential to become a primary driver for augmented and virtual reality experiences.

 

FotoNation Driver Monitoring System (DMS) includes face detection and tracking, 3D face features detection, eye gaze tracking, and face and iris recognition. These technologies enable state-of-the-art attentiveness assessment and fatigue detection, as well as in-cabin security and customization options, based on driver identity.

 

FotoNation Image Processing Unit (IPU) is our unique collection of IP Cores that enable ultra-low power, low memory size, and low bandwidth consumption when using FotoNation and third-party imaging solutions. IPU is multi-use, feature rich, and programmable. These cores are ideal for enabling intelligence on the edge where power, form factor, privacy, and security are key factors.

Product Delivery

Traditionally, our technologies have resided on integrated circuit (IC) chips. We license a defined and limited set of rights to incorporate our technology into these IC chips, and the IC manufacturers sell these Xperi‑enabled chips to our consumer electronics products manufacturer licensees.

We also work closely with the world’s leading IC manufacturers to enable support for our technologies on the new programmable architectures that fuel innovation and flexibility in today’s consumer electronics products. Our partners specialize in key vertical markets and work closely with us to enable our latest technologies for these programmable parts. Together, we offer these solutions to Xperi consumer electronics products manufacturer licensees.

We have devoted significant time and resources to develop a broad range of solutions with key partners including Amlogic, Analog Devices, Cadence, Cirrus Logic, HiSilicon, Intel, Mediatek, Mstar, NXP, Qualcomm, Realtek, Synaptics, Texas Instruments, and others.

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In our automotive business, we engage directly with leading global auto manufacturers as well as their Tier-1 suppliers to get our radio products designed and delivered into the car.  We also work with radio broadcasters to support the adoption and implementation of our HD radio technology.

Our imaging business combines proprietary hardware design with software development to offer advantages in both processing speed and lower power, providing distinctive features to smartphones, drones, activity cameras and other battery-powered devices. We license our hardware designs to customers who, in turn, typically embed the hardware as modules within a larger chip. Our software typically runs on a microprocessor with capabilities that are augmented by our hardware within a customer’s system.

Customers

We have licensed our audio technologies and related trademarks to substantially all of the major consumer electronics product manufacturers worldwide. These customers include Fujitsu Ten, Harman, Huawei, LG, Microsoft, Panasonic, Samsung and            Sony, among others. Our HD Radio technology is incorporated into a number of our automotive partners’ products, including vehicles from Acura, Audi, BMW, Ford, GM, Honda, Hyundai, Tesla, and Toyota, among many others.

Our imaging technologies and products have been licensed to mobile phone and digital camera manufacturers worldwide, including to Huawei, LG, Nikon, Oppo, Socionext, ZTE and others.

Research & Development

As demonstrated by our portfolio of industry‑recognized, widely-deployed advanced technologies, we have a long track record of innovating in the fields of audio and imaging. Our audio business was founded more than 25 years ago on the basis of developing a unique audio solution for cinemas. Today, through a collection of world-class talent and strong research and development capabilities, we continue to focus on providing unique, cost effective and differentiated audio solutions for an ever larger universe of addressable markets.

Our imaging business was founded over 20 years ago as well, with the idea of connecting digital imaging devices to other computing platforms and enhancing the imaging experience for consumers. Starting with imaging research and advanced algorithm development, FotoNation pioneered a hybrid hardware-software delivery mechanism that has enabled the industry’s foremost low-power, high performance imaging capabilities on hand-held and edge devices. We have ongoing investment in world-class R&D supported by strong relationships with key OEMs and platform providers in consumer electronics.

Research and development and other related costs in our Product Licensing segment were approximately $78.9 million, $75.8 million and $16.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. These costs include DTS research and development costs since the acquisition date of December 1, 2016.

Intellectual Property Portfolio

As of December 31, 2018, our subsidiaries comprising the Product Licensing segment owned approximately 914 United States patents and patent applications, as well as approximately 1,471 foreign patents and patent applications. The last of the issued patents to expire is in 2037.

Strategy

Our product licensing business is focused on three markets: home, automotive and mobile devices.

Home Market Strategy

The Home market consists of TVs, Blu-ray stand-alone players, Audio/Video Receivers, sound bars, wireless speakers, game consoles, set-top-boxes, and smart home cameras and sensors.

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Our business strategy in the home market is focused on the following key drivers:

 

Driving the proliferation of DTS-encoded content among Hollywood studios and digital distribution partners,

 

Investing in and broadening the OEM and IC footprints that support DTS technologies,

 

Expanding the DTS:X and IMAX Enhanced programs from AVRs and sound bars to source devices - TVs and OTT/STB (Over-The-Top Streaming/Set-Top-Box), and

 

Developing and bringing to market a strong pipeline of innovative technology solutions including AI applications related to voice and image sensors.

Automotive Market Strategy

In the Automotive market we primarily serve automotive OEMs and tier one automotive suppliers who deliver in-dash head units containing HD Radio technology, as well as DVD players with DTS decoding and audio post-processing solutions, such as DTS Neural:XTM. In late 2018, we announced DTS® Connected Radio™ technology was being integrated into the cars of a major global automotive brand and was planned for commercial launch for the 2020 model year. DTS Connected Radio will be the first global system to enable car makers to create a common, enhanced radio experience across different analog and digital broadcast systems deployed regionally. Utilizing an IP connection installed in a vehicle, DTS Connected Radio delivers an innovative analog AM/FM and digital (DAB and HD Radio) experience by pairing broadcast programming with IP-delivered content. DTS Connected Radio aggregates metadata, such as on-air radio program and talent information, artist and song information, station contact information and more, directly from broadcasters around the world to deliver an enhanced in-vehicle radio experience.

Our business strategy in the Automotive market is focused on the following key drivers:

 

Proliferating digital radio and auxiliary data services such as traffic, local weather and enhanced content,

 

Globalizing advanced digital radio solutions, including DTS Connected Radio, and

 

Developing and bringing to market integrated innovative safety solutions, such as ADAS (Advanced Driver Assistance Systems) and DMS (Driver Monitoring Systems) based on our industry-leading knowledge of computer vision and automotive connectivity technologies.

Mobile Market Strategy

The Mobile market consists of smartphones, tablets, PCs and gaming headsets, as well as emerging opportunities such as Augmented Reality, Virtual Reality and Mixed Reality (AR/VR/MR).

Our business strategy in the Mobile market is focused on the following key drivers:

 

Leveraging our long-time industry leadership in computer vision technology focused on human subjects to develop integrated solutions for 2D & 3D image capture and enhancement,

 

Developing and delivering integrated imaging solutions for biometrics and user authentication,

 

Further enhancing our imaging solutions with the application of artificial intelligence-based machine learning to our industry-leading database of 20 million real life images, and

 

Delivering premium content and DTS-branded entertainment experiences for applications such as movies, gaming, AR/VR/MR.

Competition

Our product licensing business faces competition from other third-party providers of similar solutions as well as internal engineering and design groups among industry IC provider and consumer electronic manufacturers.

In the audio market, our primary competitor is Dolby Laboratories, which develops and markets, among other things, high‑definition audio products and services. Dolby’s long‑standing market position, brand, business relationships, resources and inclusion in various industry standards provide it with a strong competitive position.

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In addition to Dolby, we compete in specific product markets with companies such as Fraunhofer IIS and various other consumer electronics product manufacturers. Many of these competitors have a wide variety of strengths that afford them competitive advantages, such as longer operating histories, greater resources, greater name recognition, or the ability to offer their technologies for a lower price or for free.  We have historically competed effectively against these competitors due in part to our ability to position our brand as a premium offering that contains superior proprietary technology, the quality of our customer service, our inclusion in industry standards and our industry relationships.

Our HD Radio and DTS Connected Radio solutions face competition from subscription-based digital service providers such as Sirius/XM, Pandora, Gracenote, and other digital audio and data service providers.

Our image processing technologies broadly compete with other image processing software vendors such as ArcSoft, Inc., as well as engineering and design groups of mobile phone and digital camera manufacturers that seek to provide similar technologies by employing different approaches. Over time, we expect to see new competitors and other competing technologies emerge.

Semiconductor and IP Licensing Segment

The Semiconductor and IP Licensing Segment licenses semiconductor packaging and interconnect technologies and related IP.  These technology and IP assets are licensed primarily through our subsidiaries, Tessera, Invensas and Invensas Bonding Technologies. Tessera’s research and development led to significant innovations in semiconductor packaging technology. We patented these innovations, often referred to as chip-scale packaging, which have been widely adopted in the electronics industry. The wave of adoption was initially led by Intel Corporation, and over time, many semiconductor companies and outsourced assembly and test (OSAT) companies entered into technology and patent license agreements with Tessera, Inc.

Invensas Corporation develops next generation semiconductor packaging and interconnect technologies for memory, mobile, computing and automotive applications. For these applications, Invensas innovates in three primary areas: (i) DRAM and NAND , (ii) imaging and RF, and (iii) three-dimensional integrated circuit (3D-IC) assemblies. Invensas engineering teams develop and prototype these technologies in advanced assembly and test laboratories, as well as perform product reliability and acceptance testing. Invensas builds collaborative partnerships with world-class manufacturing companies and high-volume equipment and materials suppliers and licenses its technology solutions to original equipment manufacturers (OEMs), original design manufacturers (ODMs), integrated device manufacturers (IDMs), fabless device suppliers, foundries, and outsourced assembly and test (OSATs) providers.  Invensas also supports the transfer of its technology at customer-designated sites.

Within each of these three areas of innovation (memory, mobile, and 3D-IC), Invensas has created specific product solutions that address critical needs in the market. For example, Invensas innovates in the 3D-IC space. 3D-IC, which typically includes Through-Silicon Vias (TSVs), is widely expected to be the next major inflection in the semiconductor industry and is applicable to multiple markets, including mobile, computing, data storage, and networking. In August of 2015, we augmented our 3D-IC portfolio with the acquisition of Ziptronix, Inc. (now known as Invensas Bonding Technologies, Inc.), a leading developer of low temperature wafer bonding technologies, which are targeted at the image sensor, DRAM, NAND, RF, MEMS, and 2.5D and 3D-IC markets. Our ZiBond® technology is a low temperature homogenous (e.g. oxide-to-oxide) direct bonding solution that forms strong bonds between wafers or die with the same or different coefficients of thermal expansion (CTE). ZiBond offers multiple benefits over conventional bonding techniques such as adhesives, anodic bonding, eutectic bonding and glass frit. Bonding is performed at room temperature, which enhances overall yield and reliability by eliminating the negative effects associated with CTE mismatch, warpage and distortion. Higher throughput and lower cost-of-ownership are realized by using industry-standard manufacturing equipment, such as wafer aligners and bonders. Our DBI® technology is a low temperature hybrid direct bonding solution that allows wafers or die to be bonded with exceptionally fine pitch 3D electrical interconnect. Like ZiBond, the DBI alignment and bonding process is performed at room temperature. DBI also leverages industry-standard manufacturing equipment, such as wafer and die bonders, enabling high-throughput, low cost-of-ownership fabrication processes required for high volume market applications. DBI can minimize the need for TSVs by allowing interconnection to occur at the bonding surface, thereby improving electrical performance and reducing cost. By incorporating dielectric bonding, DBI eliminates the need for under-fill while providing excellent thermal performance, reliability and hermeticity.

Customers

Our semiconductor packaging, interconnect and other related technologies have been licensed to more than 100 companies. These customers include Samsung, SK hynix, Micron, OmniVision and Broadcom, among others.

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Research & Development

As demonstrated by our industry‑recognized and widely-deployed advanced technologies, we have a long history of developing, licensing and delivering innovative semiconductor packaging and interconnect solutions worldwide. Many of our longstanding innovations have enabled core function and performance gains in a wide range of semiconductor devices and electronics products over the years.

As we have grown, we continue to develop new technologies internally as well as seek to acquire best-in-class technologies from outside sources. Our combination of experienced research and development engineers, our base of technology, and our constant efforts to innovate new industry-leading solutions, provides a strong foundation for the development and commercialization of new and unique semiconductor packaging and interconnect solutions going forward.

Research and development and other related costs for the Semiconductor and Intellectual Property segment were approximately $27.5 million, $30.0 million and $28.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Intellectual Property Portfolio

As of December 31, 2018, our subsidiaries comprising the Semiconductor and IP Licensing segment owned approximately 1,852 United States patents and patent applications, as well as approximately 1,287 foreign patents and patent applications. The last of the issued patents to expire is in 2037.

From time to time, we acquire complementary IP portfolios from other leading companies in the semiconductor industry. Our criteria for patent acquisitions include: the fit with our existing portfolios, the number and jurisdiction of patent assets, the technical and legal strength of the patents, the actual or likely adoption by industry, and the economic value of the inventions. See Part I, Item 1A- Risk Factors.

Strategy

We are focused on the development of advanced semiconductor packaging and interconnect technologies to enable the next generation of mobile, consumer, and computing products. Leveraging our extensive design, simulation and prototyping capability, we partner with leaders across the semiconductor ecosystem to develop and commercialize our technologies.  As an integral component of our commercialization effort, we transfer our technologies to customer-selected manufacturing sites, foundries and OSATs to enable our customers to manufacture semiconductor products in high volume.

Although we are engaged with and have successfully licensed and transferred our technologies to many semiconductor companies, some of the companies that use our patented technologies have nonetheless chosen not to enter into license agreements with us. Consequently, we have initiated litigation to enforce our IP rights. We view litigation as an instrument of last resort and we use it only when our efforts to reach negotiated licenses have stalled or failed. If we are unable to secure license agreements on favorable terms through negotiations, or if licensees do not comply with the terms of their licenses, we might have to file new litigation to enforce our rights. See Part 1, Item 3-Legal Proceedings.

Competition

We compete primarily with internal technology development groups at semiconductor manufacturers, foundries, assemblers, and electronic component and system manufacturers, who may create their own solutions that compete with technologies that we license. In general, there may be several ways to solve a particular technical problem and there can be no assurance that our inventions and approaches will be the ones generally adopted by the industry. We also compete with other firms in acquiring patent portfolios. The most significant impediments to our semiconductor and IP licensing business are (1) the time it takes for new technologies to be adopted in high volume production, and (2) the tendency for companies to use our inventions and intellectual property without first obtaining a license from us.

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Customer Concentration

Nearly all of our revenue is denominated in U.S. dollars. The following table sets forth revenue generated from customers comprising 10% or more of total revenue for the periods indicated:

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Samsung Electronics, Co. Ltd.

 

 

38

%

 

*

 

 

 

25

%

SK hynix Inc.

 

 

12

%

 

*

 

 

 

12

%

Micron Technology, Inc.

 

*

 

 

 

11

%

 

 

17

%

Amkor Technologies, Inc.

 

*

 

 

 

10

%

 

 

15

%

* denotes less than 10% of total revenue.

We adopted the new accounting standard, Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” effective January 1, 2018, which had a material impact on the financial reporting of our operating results as described below. We followed the modified retrospective transition method upon adoption, and under this method the comparative information for prior fiscal years has not been restated and continues to be reported under the accounting standards in effect for those periods. Refer to “Note 3 - Recent Accounting Pronouncements” and “Note 4 – Revenue” in the Notes to Consolidated Financial Statements for detailed information.

A significant portion of our revenue is derived from customers headquartered outside of the U.S., principally in Asia, and we expect this revenue will continue to account for a significant portion of total revenue in future periods. The table below lists the geographic regions of the headquarters of our customers (in thousands) and the percentage of revenue derived from each region for the periods indicated:

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Korea

 

$

209,245

 

 

 

51

%

 

$

50,155

 

 

 

13

%

 

$

95,170

 

 

 

37

%

Japan

 

 

88,513

 

 

 

22

 

 

 

81,688

 

 

 

22

 

 

 

6,866

 

 

 

3

 

U.S.

 

 

53,245

 

 

 

13

 

 

 

164,846

 

 

 

44

 

 

 

99,594

 

 

 

38

 

Europe and Middle East

 

 

31,864

 

 

 

8

 

 

 

13,632

 

 

 

4

 

 

 

1,321

 

 

 

1

 

Taiwan

 

 

2,360

 

 

 

1

 

 

 

33,861

 

 

 

9

 

 

 

34,763

 

 

 

13

 

Other

 

 

20,906

 

 

 

5

 

 

 

29,550

 

 

 

8

 

 

 

21,851

 

 

 

8

 

 

 

$

406,133

 

 

 

100

%

 

$

373,732

 

 

 

100

%

 

$

259,565

 

 

 

100

%

 

See “Note 16 - Segment and Geographic Information” in the Notes to Consolidated Financial Statements for additional geographic information about our revenue and long-lived assets.

The international nature of our business exposes us to a number of risks, including, but not limited to:

 

laws and business practices favoring local companies;

 

increased tax rates and withholding tax obligations on license revenue in non-U.S. jurisdictions that we may not be able to offset fully against our U.S. tax obligations;

 

difficulties in enforcing U.S. judgments and orders against foreign persons and products made overseas; and

 

less effective protection of intellectual property than is afforded in the U.S. or other developed countries.

Available Information

Our Internet address is www.xperi.com where we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not incorporated into this or any other report we file with or furnish to the SEC.

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Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.

Our revenue and billings have been concentrated and we anticipate that our revenue and billings will continue to be concentrated in a limited number of customers. If we lose any of these customers, or these customers do not pay us, our revenue and billings could decrease substantially.

We have earned a significant amount of our revenue from a limited number of customers. For the year ended December 31, 2018, there were two customers that accounted for 10% or more of total revenue. We expect that a significant portion of our billings and revenue will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers, or these customers do not pay us, our billings and revenue could decrease substantially. In addition, a significant portion of our recurring billings is the result of structured payment terms in connection with the settlement of litigation matters, including our settlements with Amkor Technology, Inc. and Powertech Technology Inc. which we received our last payments from in the fourth quarter of 2018. If we are unable to replace the billings from an expiring license or at the end of structured payment terms of a settlement agreement with similar billings from other customers, our royalties could be adversely impacted as compared to periods prior to such expiration or the end of such payment terms.

From time to time we enter into license agreements that have fixed expiration dates and if, upon expiration or termination, we are unable to renew or replace such license agreements on terms favorable to us, our results of operations could be harmed.

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements we need to renew or replace these agreements in order to maintain our royalty base. If we are unable to replace the royalties from an expiring license, either through a renewal or with similar royalties from other customers, our results of operations could be adversely impacted as compared to periods prior to such expiration.

Furthermore, we may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. While we have expanded our licensable technology portfolio through internal development and patents purchased from third parties, there is no guarantee that these measures will lead to continued royalties. If we fail to continue to do business with our current licensees, our business would be materially adversely affected.

The success of our patent licensing business is dependent on the quality of our patent assets and our ability to create and implement new technologies or expand our licensable technology through acquisitions.

We derive a significant portion of our billings from patent licenses and royalties, including structured settlement payments. The success of our patent licensing business depends on our ability to continue to develop and acquire high quality patents. We devote significant resources to developing new technologies and to sourcing and acquiring patents to address the evolving needs of the semiconductor and the consumer and communication electronics industries, and we must continue to do so in the future to remain competitive. Developments in our technologies are inherently complex and require long development cycles and a substantial investment before we can determine their commercial viability. Moreover, competition for acquiring high quality patents is intense and there is no assurance that we can continue to acquire such patents on favorable terms. We may not be able to develop and market new or improved technologies, or to develop or acquire high quality patents, in a timely or commercially acceptable fashion. Furthermore, our acquired and developed patents will expire in the future. Our current U.S. issued patents expire at various times through 2037. We need to develop or acquire successful innovations and obtain royalty-generating patents on those innovations before our current patents expire, and our failure to do so would significantly harm our business, financial position, results of operations and cash flows.

Our use of cash and substantial long-term borrowing to finance the DTS acquisition could limit future opportunities for our business, and could materially adversely affect our financial condition if we are unable to pay principal or interest on, or to refinance, such indebtedness.

The DTS acquisition was financed with existing cash balances and a $600 million secured term loan. The combination of reduced cash balances and the incurrence of substantial long-term debt could limit our ability to make future acquisitions, investments and capital expenditures that may be necessary or desirable for the operation or expansion of our business.  Moreover, our ability to service the principal and interest payments on such indebtedness will depend on our continuing ability to generate requisite cash flow from our existing and acquired business operations.  The terms of the indebtedness include covenants that may limit our operating flexibility and create a risk of default if we are unable to meet financial ratios and other covenant requirements.  While we made a voluntary prepayment of $100 million of principal on the

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indebtedness in January 2018 in connection with the refinancing of the debt, we may be unable to generate sufficient cash flow to make principal and interest payments in future periods, and in any event we may be required to refinance the remaining indebtedness upon its maturity in 2023.  We may be unable to refinance such indebtedness on favorable terms or at all.  For example, a downgrade in our credit rating could make any such refinancing more difficult to secure on favorable terms.  A default under, or inability to refinance, our indebtedness could substantially adversely affect our continuing financial viability, and could lead to insolvency, bankruptcy, and the reduction or elimination of stockholders’ equity.

Our variable rate indebtedness may expose us to interest rate risk, which could cause our debt costs to increase significantly.

As of December 31, 2018, we had $494.0 million of outstanding indebtedness that was subject to floating interest rates. Changes in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other purposes. At December 31, 2018, a 1% increase in the effective interest rate on our outstanding debt throughout a one-year period would result in an annual increase in our interest expense of approximately $5.0 million. Any significant increase in our interest expense could negatively impact our results of operations and cash flows and also our ability to pay dividends in the future. If the U.S. Federal Reserve raises its benchmark interest rate during 2019, any increases would likely impact the borrowing rate on our outstanding indebtedness, and increase our interest expense, comparably.

We are currently involved in litigation and administrative proceedings involving some of our patents and may be involved in other such actions in the future; any adverse decisions, findings of non-infringement, or invalidation or limitation of the scope of our patents could significantly harm our business.

We are currently involved in litigation involving some of our patents, and may be involved in other such actions in the future. The parties in these legal actions often challenge the infringement, validity, scope, enforceability and/or ownership of our patents. In addition, in the past requests for reexamination or review have been filed in the U.S. Patent and Trademark Office (“PTO”) with respect to patent claims at issue in one or more of our litigation proceedings, and oppositions have been filed against us with respect to our patents in the European Patent Office (“EPO”). During a reexamination or review proceeding and upon completion of the proceeding, the PTO or EPO may leave a patent in its present form, narrow the scope of the patent, or cancel or find unpatentable some or all of the claims of the patent. For example, the PTO has issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in some of our patents. From time to time we assert these patents and patent claims in litigation and administrative proceedings. If the PTO’s adverse rulings are upheld on appeal and some or all of the claims of the patents that are subject to reexamination are canceled, our business may be significantly harmed. In addition, counterparties to our litigation and administrative proceedings may seek and obtain orders to stay these proceedings based on rejections of claims in PTO reexaminations or review proceedings, and other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.

We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. If there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our patents, or if a court or an administrative body such as the PTO limits the scope of the claims of any of our patents or concludes that they are unpatentable, we could be prevented from enforcing or earning future royalties from those patents, and the likelihood that customers will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly reduced. The resulting reduction in license fees and royalties could significantly harm our business, consolidated financial position, results of operations and cash flows, as well as the trading price of our common stock.

Regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and diverts our management’s time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings have historically been protracted and complex. The time to resolution and complexity of our litigation, its disproportionate importance to our business compared to other companies, the propensity for delay in civil litigation, and the potential that we may lose particular motions as well as the overall litigation could all cause significant volatility in our stock price and have a material adverse effect on our business and consolidated financial position, results of operations, and cash flows.

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The timing of billings under our license and settlement agreements may cause fluctuations in our quarterly or annual financial results.

From time to time we enter into license and settlement agreements that include pricing or payment terms that result in quarter-to-quarter or year-over-year fluctuations in our billings and cash flows. The effect of these terms may also cause our aggregate annual billings to grow less rapidly than annual growth in overall unit shipments in the applicable end market. Additionally, our customers may fail to pay, delay payment of or underpay what they owe to us under our license and settlement agreements, which may in turn require us to enforce our contractual rights through litigation, resulting in payment amounts and timing different than expected based on the terms of our license and settlement agreements. This also may cause our revenue, billings and cash flows to fluctuate on a quarter-to-quarter or year-over-year basis.

We expect to continue to be involved in material legal proceedings to enforce or protect our intellectual property and contract rights, including material litigation with existing licensees or strategic partners, that could harm our business.

From time to time, our efforts to obtain a reasonable royalty through our sales efforts do not result in the prospective customer agreeing to license our patents or our technology. In certain cases, we become involved in litigation to enforce our intellectual property rights, enforce the terms of our license agreements, determine the validity and scope of the proprietary rights of others, and defend against claims of infringement or invalidity. For example, on September 28, 2017, we filed legal proceedings against Samsung Electronics and certain of its affiliates, alleging infringement of certain of our patents, and settled these matters in December 2018.  Our current legal actions, as described in Part II, Item 1 - Legal Proceedings, are examples of disputes and litigation that impact our business. If we are not able to reach agreement with customers or potential customers we may be involved in similar legal proceedings in the future, including proceedings to ensure proper and full payment of royalties by licensees under the terms of their license agreements.

Existing and any future legal actions may harm our business. For example, legal actions could cause an existing customer or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such customer or strategic partner and, as a result, prevent the adoption of our technologies and intellectual property by such customer or strategic partner. Litigation could also severely disrupt or shut down the business operations of our customers or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalties. Moreover, the timing and results of any of our legal proceedings are not predictable and may vary in any individual proceeding. Further, our product licensing business could be subject to greater risk of claims of infringement of third-party intellectual property rights as a result of our IP licensing business. The risks of third-party infringement claims could be heightened by our need to engage in enforcement activities with respect to our existing patents, as our existing or potential licensees may seek to assert infringement claims against our DTS or other product businesses in response to our enforcement activities relating to our existing patents. For example Broadcom had filed patent litigation against our Play-Fi business which we believe was in response to our patent litigation filed against them. Competitors of our product licensing business would not be subject to such heightened risk of third-party claims, and such claims could adversely affect our product licensing business as well as impair our enforcement ability and licensing royalties.

The cost of litigation is typically very high and can be difficult to predict, and such high costs and unpredictability may negatively impact our financial results.

From time to time we identify products that we believe infringe our patents. We seek to license the companies that design, make, use, import, sell, or offer for sale those products, but sometimes those companies are unwilling to enter into a license agreement. In those circumstances, we may elect to enforce our patent rights against those companies and products. Litigation stemming from these or other disputes could harm our relationships with those companies or other licensees, or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and may significantly reduce our profits.

In addition, from time to time our customers with existing license agreements dispute their obligations under such agreements, or we may dispute their reporting of royalties due under such agreements.  In the past, customers have threatened to initiate litigation against us regarding our licensing royalty rate practices including our adherence to licensing on fair, reasonable, and non-discriminatory terms and potential antitrust claims.

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The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within our control. These costs may be materially higher than expected, which could adversely affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations and cash flows.

Even if we prevail in our legal actions, significant contingencies may exist to their settlement and final resolution, including the scope of the liability of each party, our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon, and the dismissal of the legal action by the relevant court, none of which are completely within our control. Parties that may be obligated to pay us royalties or damages, or that may otherwise be subject to a judgment, could become insolvent or decide to alter their business activities or corporate structure, which could affect our ability to collect royalties or damages from, or enforce a judgment against, such parties.

Recent and proposed changes to U.S. patent laws, rules, and regulations may adversely impact our business.

Our business relies in part on the uniform and historically consistent application of U.S. patent laws, rules, and regulations. There have been numerous recent administrative, legislative, and judicial changes and proposed changes to patent laws and rules that may have a significant impact on our ability to protect our technology and enforce our intellectual property rights.  For example, there have been and may be bills introduced in the U.S. Congress relating to patent law that could adversely impact our business depending on the scope of any bills that may ultimately be enacted into law.  As another example, the U.S. Supreme Court and lower courts have in recent years issued decisions that are not favorable to patent owners. Some of these changes or potential changes may not be advantageous for us and may make it more difficult to obtain adequate patent protection, or to enforce our patents against parties using them without a license or payment of royalties. These changes or potential changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement of our patent rights and could have a negative effect on our ability to license our patents and, therefore, on the royalties we can collect.

Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, or upon certain milestones, and we may not receive royalties after that time.

From time to time we enter into license agreements that automatically convert to fully paid-up licenses upon expiration or upon reaching certain milestones. We may not receive further royalties from customers for any licensed technology under those agreements if they convert to fully paid-up licenses because such customers will be entitled to continue using some, if not all, of the relevant intellectual property or technology under the terms of the license agreements without further payment, even if relevant patents or technologies are still in effect. If we cannot find another source of royalties to replace the royalties from these license agreements converting to fully paid-up licenses, our results of operations following such conversion would be materially adversely affected.

A significant amount of our royalty revenue and billings comes from a few end markets and products, and our business could be harmed if demand for these market segments or products declines.

A significant portion of our royalties comes from the manufacture and sale of packaged semiconductor chips for DRAM, application-specific standard product semiconductors, application-specific integrated circuits, and memory. In addition, we derive substantial royalties from the incorporation of our technology into mobile devices, consumer products and computer hardware. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalties may be reduced significantly and our business would be harmed.

The long-term success of our business is dependent on a royalty-based business model, which is inherently risky.

The long-term success of our business is dependent on future royalties paid to us by customers. Royalty payments under our licenses may be based, among other things, upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, a percent of net sales, a rate per package, a per unit sold basis or a fixed quarterly amount. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties, as well as upon our customers’ compliance with their agreements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

 

the rate of adoption and incorporation of our technology by semiconductor manufacturers, assemblers, foundries, manufacturers of consumer and communication electronics, and the automotive and surveillance industry;

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the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technology, in a quantity sufficient to enable volume manufacturing;

 

the ability of our customers to purchase such materials and equipment on a cost-effective and timely basis;

 

the length of the design cycle and the ability of us and our customers to successfully integrate certain of our imaging technologies into their integrated circuits;

 

the demand for products incorporating semiconductors that use our licensed technology;

 

the cyclicality of supply and demand for products using our licensed technology;

 

the impact of economic downturns; and

 

the impact of poor financial performance of our customers.

It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenue and billings.

The terms of our license agreements often require our customers to document their use of our technology and report related data to us on a quarterly basis. Although our license terms generally give us the right to audit books and records of our customers to verify this information, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our customers’ businesses, especially given the international nature of our customers. Our license compliance program audits certain customers to review the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty to which we are entitled under the terms of our license agreements, but we cannot give assurances that such audits will be effective to that end.

The markets for semiconductors and related products are highly concentrated, and we may have limited opportunities to license our technologies or sell our products.

The semiconductor industry is highly concentrated in that a small number of semiconductor designers, foundries, and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating our technologies. Continued consolidation in the semiconductor industry may increase this concentration. Accordingly, we expect that licenses of our technologies and sales of our products will be concentrated with a limited number of customers for the foreseeable future. As we develop and acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results significantly depend on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers’ sales and business results.

We make significant investments in new products and services that may not achieve technological feasibility or profitability or that may limit our growth.

We have made and will continue to make significant investments in research, development, and marketing of new technologies, products and services, including audio, imaging, and advanced semiconductor packaging, bonding, and interconnect technologies. Investments in new technologies are speculative and technological feasibility may not be achieved. Commercial success depends on many factors including demand for innovative technology, availability of materials and equipment, selling price the market is willing to bear, competition and effective licensing or product sales. We may not achieve significant revenue or billings from new product and service investments for a number of years, if at all. Moreover, new technologies, products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically or originally anticipated.

We may not be able to evolve our audio and imaging technologies, products, and services, or develop new technologies, products, and services, that are acceptable to our customers or the evolving markets, and our customers may use technologies offered at lower cost by others.

The markets for our audio and imaging technologies, products, and services are characterized by:

 

rapid technological change and product obsolescence;

 

new and improved product introductions;

 

changing consumer demands;

 

increasingly competitive product landscape; and

 

evolving industry standards.

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Our future success in our product licensing business depends upon our ability to enhance our existing technologies, products, and services and to develop enhanced and acceptable new technologies, products, and services on a timely basis. The development of enhanced and new audio and imaging technologies, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to accurately identify, develop, market, or support new or enhanced technologies, products, or services on a timely basis, if at all. Furthermore, our new imaging and audio technologies, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. Any failure to respond to these changes or concerns would likely prevent our imaging and audio technologies, products, and services from gaining market acceptance or maintaining market share and could lead to our imaging and audio technologies, products, and services becoming obsolete.

Furthermore, the decision by a party dominant in the entertainment value chain to provide audio or imaging technology at very low or no cost could cause our customers and other manufacturers not to utilize our technologies or services in the future. Our customers may choose to use technologies that their own in-house audio or imaging engineering teams have developed, or in which they have an interest.  Accordingly, our revenue or billings could decline if our customers choose not to incorporate our audio or imaging technologies in their products, or if they sell fewer products incorporating our audio or imaging technologies.

Competing technologies may harm our business.

We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic component, foundries and system manufacturers. The internal design groups of these companies create their own semiconductor, packaging, audio and imaging solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.

DTS audio technologies compete with other providers of audio products and services, with Dolby Laboratories as the primary competitor in high-definition audio processing.  Dolby Laboratories enjoys certain competitive advantages in selling its digital multi-channel audio technology, having introduced such technology before we did, and having achieved mandatory standard status in product categories that we have not, including terrestrial digital TV broadcasts in the United States.

For our embedded image processing technologies such as Face Detection and our other products, our offerings compete with other image processing software vendors such as ArcSoft, Inc. as well as internal design groups of mobile phone and digital camera manufacturers providing similar technologies by employing different approaches.

In the future, our licensed technologies may also compete with other technologies that emerge. These technologies may be less expensive and provide higher or additional performance. Companies with these competing technologies may also have greater resources. Technological change could render our technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our technologies and intellectual property.

If we do not successfully further develop and commercialize the technologies we acquire, or cultivate strategic relationships that expand our licensable portfolio, our competitive position could be harmed and our operating results adversely affected.

We attempt to expand our licensable technology portfolio and technical expertise by further developing and acquiring new technologies or developing strategic relationships with others. These strategic relationships may include the right for us to sublicense technology and intellectual property to others. However, we may not be able to acquire or obtain rights to licensable technology and intellectual property in a timely manner or upon commercially reasonable terms. Even if we do acquire such rights, some of the technologies we invest in may be commercially unproven and may not be adopted or accepted by the industry. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future needs of the semiconductor, consumer and communication electronics, and consumer imaging and audio processing industries. Our failure to acquire new technologies that are commercially viable in the semiconductor, consumer and communication electronics, and consumer imaging and audio processing industries could significantly harm our business, financial position, results of operations and cash flows.

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The way we integrate internally developed and acquired technologies into our products and licensing programs may not be accepted by customers.

We have devoted, and expect to continue to devote, considerable time and resources to developing, acquiring and integrating new and existing technologies into our products and licensing programs. However, if customers do not accept the way we have integrated our technologies, they may adopt competing solutions. In addition, as we introduce new products or licensing programs, we cannot predict with certainty if and when our customers will transition to those new products or licensing programs. Moreover, with respect to certain of our imaging technologies, even after we have signed a license agreement with a customer, we will often not see significant royalties from that customer until after such technologies have been successfully designed into the customer's integrated circuits, which can take 18 months or longer. If customers fail to accept new or upgraded products or licensing programs incorporating our technologies, our financial position, results of operations and cash flows could be adversely impacted.

If we fail to protect and enforce our intellectual property rights, contract rights, and our confidential information, our business will suffer.

We rely primarily on a combination of license, development and nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade secret and copyright laws, to protect our technology and intellectual property. If we fail to protect our technology, intellectual property, or contract rights, our customers and others may seek to use our technology and intellectual property without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on our ability to secure intellectual property rights in a timely manner, our ability to convince third parties of the applicability of our intellectual property rights to their products, and our ability to enforce our intellectual property rights.

In certain instances, we attempt to obtain patent protection for portions of our technology, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents in a timely manner or if the patents issued to us do not cover all of the inventions disclosed in our patent applications, others could use portions of our technology and intellectual property without the payment of license fees and royalties. For example, our business may suffer if we are unable to obtain patent protection in a timely manner from the PTO due to processing delays resulting from examiner turnover and a continuing backlog of patent applications.

We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. However, trade secrets can be difficult to protect. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants, suppliers and customers. We cannot be certain that these contracts have not been and will not be breached, that we will be able to timely detect unauthorized use or transfer of our technology and intellectual property, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use adequate mechanisms to protect our technology and intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.

Further, the laws and enforcement regimes of certain countries may not protect our technology and intellectual property to the same extent as do the laws and enforcement regimes of the U.S. In certain jurisdictions we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.

Our business may suffer if third parties assert that we violate their intellectual property rights.

Third parties may claim that either we or our customers are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time-consuming and costly to defend against and will divert management’s attention and resources away from our business. Furthermore, third parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our products or services in the U.S. and abroad. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements, pay costly damage awards, or defend or indemnify our customers against judgments, damages, or other losses. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to perform its contractual obligations under the agreement. If we cannot or do not license the allegedly infringed intellectual property on reasonable terms, or need to substitute similar technology from another source, our business, financial position, results of operations and cash flows could suffer.

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Our licensing cycle is lengthy and costly, and our marketing, legal and sales efforts may be unsuccessful.

We generally incur significant marketing, legal and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship, and/or for our customers to incorporate certain of our technologies in their integrated circuits, can be 18 months or longer. As such, we may incur significant expenses in any particular period before any associated royalty or cash flow stream begins.

Our business incurs significant reverse engineering expenditures on products of potential licensees in order to prepare sales and marketing collateral. We employ intensive marketing and sales efforts to educate licensees, potential licensees and original equipment manufacturers about the benefits of our technologies. In addition, even if these companies adopt our technologies, they must devote significant resources to integrate fully our technologies into their operations. If our marketing and sales efforts are unsuccessful, then we may not be able to achieve widespread acceptance of our technology. In addition, ongoing litigation could impact our ability to gain new licensees which could have an adverse effect on our financial condition, results of operations and cash flows.

If our licensees delay, refuse to or are unable to make payments to us due to financial difficulties or otherwise, or shift their licensed products to other companies to lower their royalties to us, our operating results and cash flows could be adversely affected.

A number of companies in the semiconductor and consumer electronics industries face severe financial difficulties from time to time. As a result, there have been bankruptcies and restructuring of companies in these industries.  As an example, in our quarter ended September 30, 2017 we recorded a bad debt charge for $1.6 million relating to past due receivables from two LeEco affiliates, based on our significant doubts about full collection due to substantial financial stress and negative payment history that these affiliates exhibited. Other customers may face similar financial difficulties which may result in their inability to make payments to us in a timely manner, or at all. In addition, we have had a history of, and we may in the future experience, customers that delay or refuse to make payments owed to us under license or settlement agreements. Our customers may also merge with or may shift the manufacture of licensed products to companies that are not currently licensees to us. This could make the collection process complex and difficult, which could adversely impact our business, financial condition, results of operations and cash flows.

Failure by the semiconductor industry to adopt our technology for the next generation high performance chips used in consumer electronics would significantly harm our business.

To date, our technology has been used by several companies in high performance semiconductor chips, including DRAM. For example, semiconductor packaging, circuitry and processing using our technology is used for DDR3 and DDR4 DRAM and we currently have customers who are paying royalties for DRAM chips in advanced packages.

We anticipate that royalties from shipments of next-generation semiconductor chips using our technology may account for a significant percentage of our future royalties. If semiconductor manufacturers do not continue to use our technology for the next-generation chips and find viable alternative technologies for use with next-generation chips, or if we do not receive royalties from the next-generation chips that use our technology, our future financial performance and cash flows could be adversely affected.

Our technology may be too expensive for certain next-generation semiconductor manufacturers, which could significantly reduce the adoption rate of our technology in next-generation chips. Even if our technology is selected for at least some of these next-generation chips, there could be delays in the introduction of products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of our technology for next-generation semiconductor products include delays or shortages of materials and equipment and the availability of testing services.

Similarly, our audio licensing royalties from consumer electronics product manufacturers depends, in large part, upon the availability of ICs that implement our technologies. IC manufacturers incorporate our audio technologies into these ICs, which are then incorporated into consumer electronics products. We do not manufacture these ICs, but rather depend upon IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers’ decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling to implement our technologies into their ICs, production is delayed, or if they sell fewer ICs incorporating our technologies, our operating results and cash flows could be adversely affected.

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The investment of our cash, cash equivalents and investments in marketable debt and equity securities are subject to risks which may cause losses and affect the liquidity of these investments.

At December 31, 2018, we held approximately $113.6 million in cash and cash equivalents and $40.7 million in investments. These investments include various financial securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills, and money market funds. In the third quarter of 2018, we initiated an equity position in Onkyo Corporation, a publicly traded company listed on the JASDAQ market of the Tokyo Stock Exchange. Upon making the investment, we hold a 6.3% ownership interest in Onkyo. Although we invest in high quality securities, ongoing financial events have at times adversely impacted the general credit, liquidity, market and interest rates for these and other types of debt securities. Changes in monetary policy by the Federal Reserve, government fiscal policies, and global economic and market conditions may adversely affect the value of our investment portfolio. While we have historically held our debt investments to maturity, we may in the future have a need to sell investments before their maturity dates, which could result in losses on the sale of those investments. For example, the DTS acquisition resulted in us liquidating a significant portion of our investments.  The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, results of operations and cash flows.

Our intellectual property business operates in a highly cyclical industry, which is subject to significant downturns.

The semiconductor and electronics industries in which our intellectual property business primarily operates has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, declining economic conditions, maturing product and technology cycles, and excess inventories. This cyclicality could cause our operating results to decline from one period to the next. Our business depends, in part, upon the volume of production by our customers, which, in turn, depends upon the current and anticipated market demand for semiconductors and products that use semiconductors. Semiconductor manufacturers, foundries, and package assembly companies generally sharply curtail their spending during industry downturns, and historically have lowered their spending more than the decline in their revenue. As a result, our financial results have been, and will continue to be, impacted by the cyclicality of the electronics industry. If we are unable to control our expenses adequately in response to lower royalties from our customers in such downturns, our results of operations and cash flows will be materially and adversely impacted.

If we are unable to maintain a sufficient amount of content released in the DTS audio format, demand for the technologies, products, and services that we offer to consumer electronics product manufacturers may significantly decline, which would adversely impact our business and prospects.

We expect to derive a significant percentage of our billings from the technologies, products, and services that we offer to manufacturers of consumer electronics products. We believe that demand for our audio technologies in growing markets for multi-channel and/or high resolution audio, including TVs, tablets, mobile phones, video game consoles, automobiles, and soundbars, will be based on the amount, quality, and popularity of content (such as movies, TV shows, music, and games) either released in the DTS audio format or capable of being coded and played in the DTS format. In particular, our ability to penetrate the growing markets in the network-connected space depends on the presence of streaming and downloadable content released in the DTS audio format. We generally do not have contracts that require providers of streaming and downloadable content to develop and release such content in a DTS audio format. Accordingly, our billings could decline if these providers elect not to incorporate DTS audio into their content or if they sell less content that incorporates DTS audio.

In addition, we may not be successful in maintaining existing relationships or developing new relationships with other existing or new content providers. As a result, we cannot assure you that a sufficient amount of content will be released in a DTS audio format to ensure that manufacturers continue offering DTS decoders in the consumer electronics products that they sell.

Demand for our HD Radio technology may be insufficient to sustain projected growth.

Demand for and adoption of HD Radio technology may not be sufficient for us to continue to increase the number of customers of our HD Radio system, which include IC manufacturers, manufacturers of broadcast transmission equipment, consumer electronics products manufacturers, component manufacturers, data service providers, manufacturers of specialized and test equipment and radio broadcasters.

Among other things, continuing and increased consumer acceptance of HD Radio technology will depend upon:

 

the number of radio stations broadcasting digitally using HD Radio technology;

 

the willingness of automobile manufacturers to include HD Radio receivers in their vehicles;

 

the willingness of manufacturers to incorporate HD Radio technology into their products;

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the cost and availability of HD Radio enabled products; and

 

the marketing and pricing strategies that we employ and that are employed by our customers and retailers.

Demand for HD Radio also may be impacted by declines in the automotive industry which historically has been cyclical and experienced downturns during declining economic conditions.

If demand for HD Radio technology does not continue to increase as expected, we may not be able to increase our DTS royalties as projected.

Our HD Radio technology may not remain competitive if we do not respond to changes in technology, standards and services that affect the radio broadcasting industry.

The radio broadcasting industry is subject to technological change, evolving industry standards, regulatory restrictions and the emergence of other media technologies and services. Our HD Radio technology may not gain market acceptance over these other technologies. Various other audio technologies and services that have been developed and introduced include:

 

internet streaming, cable-based audio programming and other digital audio broadcast formats;

 

satellite delivered digital audio radio services that offer numerous programming channels;

 

other digital radio competitors, such as Digital Radio Mondiale, or DAB; and

 

growth in use of portable devices for storage and playback of audio content.

Competition arising from these or other technologies or potential regulatory change may have an adverse effect on the radio broadcasting industry or on our company and our financial condition and results of operations.

If we are unable to further penetrate the streaming and downloadable content delivery markets and adapt our technologies for those markets, our royalties and ability to grow our audio business could be adversely impacted.

Video and audio content has historically been purchased and consumed primarily via optical disc-based media. However, the growth of the internet and network-connected device usage, along with the rapid advancement of online and mobile content delivery has resulted in download and streaming services becoming mainstream with consumers in various parts of the world. We expect the shift away from optical disc-based media to streaming and downloadable content consumption to continue. If we fail to continue to penetrate the streaming and downloadable content delivery market, our audio business could suffer.

The services that provide content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s) to deliver their products and services. This freedom of choice on the part of online content providers could limit our ability to grow if such content providers do not incorporate our technologies into their services, which could affect demand for our technologies.

Furthermore, our inclusion in mobile and other network-connected devices may be less profitable for us than optical disc players. The online and mobile markets are characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology developments, frequent new product and service introductions, short product and service life cycles, and price sensitivity on the part of consumers, all of which may result in downward pressure on pricing. If we are unable to adequately and timely respond to the foregoing, our business and operating results could be adversely affected.

Changes in financial accounting or taxation standards, rules, practices or interpretations may cause adverse unexpected revenue and expense fluctuations which may impact our reported results of operations.

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP).  These principles are subject to interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are generally complex, frequently changing and subject to interpretation. Changes to taxation rules, changes to financial accounting standards, or any changes to the interpretations of these standards or rules may adversely affect our reported financial results or the way in which we conduct business. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Note 3 - “Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements.

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In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and since May 2014 the FASB has issued amendments to this new guidance, which collectively provide guidance for revenue recognition. ASU 2014-09 became effective for us beginning January 1, 2018 and we adopted the new standard under the modified retrospective approach. Under the new standard, the historical practice of many licensing companies of reporting revenue from per-unit royalty-based agreements one quarter in arrears is no longer accepted and instead companies must now estimate royalty-based revenue. This guidance significantly impacts our revenue recognition.  First, we are no longer allowed to follow our past practice of recording per unit license revenue on a quarter lag basis, a practice precipitated by the lack of reliable estimates for such revenue. Estimating per unit royalty revenue prior to receiving the licensee’s royalty report requires us to make significant assumptions and judgments and could cause significant fluctuations of royalty revenue on a quarterly basis. Second, we are now required to record all or a significant majority of revenue under our fixed fee and minimum guarantee license agreements when such agreements are effective rather than recording them over time as was our past practice and which generally aligned revenue more closely with the billing cycle and cash flows from such agreements. While the changes in revenue recognition do not impact our cash flows, the impact on our Statement of Operations under the new accounting standard may impact how investors perceive our business which could materially impact the value of our common stock.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that significantly changed the federal income tax laws. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017. We continue to analyze additional information and new guidance issued by relevant authorities related to the Tax Act. The prospects of supplemental legislation or regulatory processes to address uncertainties that arise because of the Tax Act, or evolving technical interpretations of the tax law, may cause our financial statements to be impacted in the future. In addition, the measurement period allowed by Staff Accounting Bulletin (“SAB”) No. 118 has closed during the fourth quarter of 2018 with no material impact. We will continue to analyze the effects of the Tax Act as subsequent guidance continues to emerge.  

Our future effective tax rate may be affected by such factors as changes in tax laws, changing interpretation and new guidance related to the Tax Act, withholding taxes determinations by foreign tax authorities, the impact of accounting for stock-based compensation, the impact of accounting for business combinations, changes in the composition of global earnings, the expiration of statute of limitations, settlements of audits, changes in our domestic and international organization and changes in overall levels of income before tax.

Our effective tax rate depends on our ability to secure the tax benefits of our international corporate structure, on the application of the tax laws of various jurisdictions and on how we operate our business.

Our international corporate structure and intercompany arrangements, including the manner in which we market, develop, use and license our intellectual property, fund our operations and structure transactions with our international subsidiaries, may result in the increase or reduction of our worldwide effective tax rate. Such international corporate structure and intercompany arrangements are subject to examination by the tax authorities of the jurisdictions in which we operate, including the United States. The application of the tax laws of these jurisdictions to our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. Moreover, such tax laws are subject to change. Tax authorities may disagree with our intercompany transfer pricing arrangements, including our transfer of intangibles, or determine that the manner in which we operate our business does not achieve the intended tax consequences. Additionally, current and future changes in the tax laws or interpretations may have an adverse effect on our international corporate structure and operations. The result of an adverse determination of any of the above items could increase our worldwide effective tax rate and harm our financial position and results of operations.

We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, and the recording and release of such allowances may have a material impact on our results of operations.

The need for a valuation allowance requires an assessment of both positive and negative evidence on a jurisdiction-by-jurisdiction basis when determining whether it is more-likely-than-not that deferred tax assets are recoverable.  In making such assessment, significant weight is given to evidence that can be objectively verified. In the future, new facts and circumstances and new guidance related to the Tax Act may require us to re-evaluate our valuation allowance positions which could potentially affect our effective tax rate.

We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is recorded.  There can be no assurance that we will generate profits in future periods enabling us to fully realize our deferred tax assets. The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be readily predicted in advance. Both the establishment of a valuation allowance and the reversal of a previously recorded valuation allowance may have a material impact on our financial results.

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The international nature of our business exposes us to financial and regulatory risks that may have a negative impact on our consolidated financial position, results of operations and cash flows, and we may have difficulty protecting our intellectual property in some foreign countries.

We derive a significant portion of our royalties from licensees headquartered outside of the U.S. We also have operations outside of the U.S., including our research and development facilities in Ireland, Romania and the United Kingdom, to design, develop, test or market certain technologies. International operations are subject to a number of risks, including but not limited to the following:

 

changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;

 

regulatory requirements and prohibitions that differ between jurisdictions;

 

laws and business practices favoring local companies;

 

withholding tax obligations on license royalties that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;

 

security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;

 

differing employment practices, labor issues and business and cultural factors;

 

less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries; and

 

limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers.

Our intellectual property is also used in a large number of foreign countries. There are many countries in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our licensees increase their manufacturing and sales in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business, financial position, results of operations and cash flows.

Our business and operating results may be harmed if we are unable to manage growth in our business, if we undertake any restructuring activities or if we dispose of a business division or dispose of or discontinue any product lines.

We have in the past expanded our operations, domestically and internationally, and may continue to do so through both internal growth and acquisitions. In December 2016, we acquired DTS, resulting in our headcount more than doubling year over year.  If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success will depend, in part, upon the ability of our management team to manage any growth effectively, requiring our management to:

 

recruit, hire, and train additional personnel;

 

implement and improve our operational and financial systems, procedures, and controls;

 

maintain our cost structure at an appropriate level based on the royalties, billings and cash we forecast and generate;

 

manage multiple concurrent development projects; and

 

manage operations in multiple time zones with different cultures and languages.

If we are unable to effectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.  Moreover, if our acquisitions or other growth initiatives do not prove to be profitable, we may undertake to restructure our business, including the disposition of a business division, or the disposition or discontinuance of a product line. Any restructuring, disposition or discontinuance would require substantial management time and attention and may divert management from other important work, and may result in significant liabilities and costs as described earlier.

Disputes regarding our intellectual property may require us to defend or indemnify certain customers or licensees, the cost of which could adversely affect our business operations and financial condition.

While we generally do not defend or indemnify our customers, some of our license agreements in our imaging and audio businesses provide limited defense and indemnities for certain actions brought by third parties against our customers, and some require us to provide technical support and information to a customer that is involved in litigation for using our technology. Our defense, indemnity and support obligations could result in substantial expenses. In addition to the time and expense required for us to defend, indemnify or supply such support to our customers, a customer’s development, marketing and sales of licensed image or audio products could be severely disrupted or shut down as a result of litigation, which in turn could have a material adverse effect on our business operations, consolidated financial position, results of operations and cash flows.

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If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy effectively.

Our success depends, in large part, on the continued contributions of our key management, engineering, sales, marketing, intellectual property, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key-person life insurance covering our key personnel or have restrictions on their post-employment ability to solicit our employees, contractors or customers if key personnel voluntarily terminate their employment. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. Our future success will depend to a significant extent on the ability of these executives to effectively drive execution of our business strategy, and on the ability of our management team to work together effectively.

Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. We have also experienced difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.

Our business operations could suffer in the event of information technology system failures or security breaches.

Despite system redundancy and the implementation of security measures within our internal and external information technology and networking systems, our information technology systems may be subject to security breaches, unauthorized access (malicious or accidental), misuse of information by authorized users, data leaks or unintentional exposure of information, failed process, loss of data, damages from computer viruses or malware, natural disasters, terrorism, telecommunication failures or disruption of service. Any system failure or security breach could cause interruptions in our operations in addition to the possibility of losing proprietary information and trade secrets. To the extent that any disruption or security breach results in inappropriate disclosure of our confidential information, we may incur liability or additional costs to remedy the damages caused by these disruptions or security breaches.

Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options, restricted stock grants and other forms of stock-based compensation as key components of employee compensation in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. We incur significant compensation costs associated with our stock-based compensation programs. Failure to obtain stockholder approval of equity compensation plans or changes to the plans could make it harder or more expensive for us to grant stock-based compensation to employees in the future. As a result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could have a materially adverse impact on our business.

Failure to comply with environmental regulations could harm our business.

We use hazardous substances in the manufacturing and testing of prototype products and in the development of technologies in our research and development laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of substantial fines, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liabilities under certain statutes. The imposition of such liabilities could significantly harm our business, financial position, results of operations and cash flows.

We have business operations located in places that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters are located in the San Francisco Bay Area and we have engineering activities in several locations throughout California, which in the past have experienced severe earthquakes. We do not carry earthquake insurance for any of our facilities except for our office in Calabasas, California. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

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We have made and may continue to make or to pursue acquisitions which could divert managements attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.

We have made several acquisitions, and it is our current plan to continue to acquire companies, assets, patents and technologies that we believe are strategic to our future business. For example, in the fourth quarter of 2016, we acquired DTS, Inc., for approximately $955 million.  Investigating businesses, assets, patents or technologies and integrating newly acquired businesses, assets, patents or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such activities divert our management’s attention from other business concerns. In addition, we might lose key employees while integrating new organizations or operations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, impairment charges related to goodwill and possible impairment charges related to other intangible assets or other unanticipated events or circumstances, any of which could harm our business.

Our plans to integrate and expand upon research and development programs and technologies obtained through acquisitions may result in products or technologies that are not adopted by the market. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be successful in integrating any acquired businesses, assets, products or technologies, and might not achieve anticipated revenue and cost benefits.

There are numerous risks associated with our acquisitions of businesses, technologies and patents.

We have made a number of acquisitions of businesses, technologies and patents in recent years. These acquisitions are subject to a number of risks, including but not limited to the following:

 

these acquisitions could fail to produce anticipated benefits or could have other adverse effects that we currently do not foresee. As a result, these acquisitions could result in a reduction of net income per share as compared to the net income per share we would have achieved if these acquisitions had not occurred. We may also be required to recognize impairment charges of acquired assets or goodwill, and if we decide to restructure acquired businesses, we may incur other restructuring charges;

 

the purchase price for each acquisition is determined based on significant judgment on factors such as projected cash flow, quality and availability of the business, technology or patent. In addition, if other companies have similar interests in the same business, technology or patent, our ability to negotiate these acquisitions at favorable terms may be limited and the purchase price may be artificially inflated;

 

following completion of these acquisitions, we may uncover additional liabilities, patent validity, infringement or enforcement issues or unforeseen expenses not discovered during our diligence process;

 

any such additional liabilities, patent validity, infringement or enforcement issues or expenses could result in significant unanticipated costs not originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results;

 

the integration of technologies, patent assets and personnel, if any, will be a time consuming and expensive process that may disrupt our operations if it is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or other benefits from any of these acquisitions;

 

we have incurred substantial direct transaction and integration costs as a result of past acquisitions.  In future acquisitions, the total direct transaction costs and the costs of integration may exceed our expectations;

 

sales by the acquired businesses may be subject to different accounting treatment than our existing businesses, especially related to the recognition of revenue. This may lead to the loss or deferral of revenue under current and emerging accounting standards;

 

there may be a significant time lag between acquiring patent assets and recognizing royalties from those patent assets. During that time lag, material costs are likely to be incurred in preparing licensing or litigation efforts and amortization of acquired patent assets that would have a negative effect on our results of operations, cash flows and financial position;

 

we may require external financing that is dilutive or presents risks of debt; and

 

we are required to estimate and record fair values of contingent assets, liabilities, deferred tax assets and liabilities at the time of an acquisition. Even though these estimates are based on management’s best judgment, the actual results may differ. Under the current accounting guidance, differences between actual results and management’s estimate could cause our operating results to fluctuate or could adversely affect our results of operations.  

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If our amortizable intangible assets (such as acquired patents) become impaired, we may be required to record a significant charge to earnings.

In addition to internal development, we intend to broaden our intellectual property portfolio through strategic relationships and acquisitions such as the acquisitions of DTS, Inc. in the fourth quarter of 2016. We believe these strategic relationships and acquisitions will enhance the competitiveness and size of our current businesses and provide diversification into markets and technologies that complement our current businesses. Future acquisitions could be in the form of asset purchases, equity investments, or business combinations. As a result, we may have intangible assets which are amortized over their estimated useful lives. We review our amortizable intangible assets (such as our patent portfolio) for impairment when events or changes in circumstances indicate the carrying value may not be recoverable or the useful life is shorter than originally estimated. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable or other intangible assets may not be recoverable include a decline in future cash flows, fluctuations in market capitalization, slower growth rates in our industry or slower than anticipated adoption of our products by our customers. As we continue to review for factors that may affect our business which may not be in our control, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our amortizable intangible assets or equity investments is determined, resulting in an adverse impact on our business, financial position, or results of operations.

Current and future governmental and industry standards may significantly limit our business opportunities.

Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology may be, but is not required to be, utilized. If standards are re-examined or a new standard is developed in which we are not included, our growth in that area of our business could be significantly lower than expected.

As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are currently characterized by competing formats, such as the market for PCs. We may not be successful in our efforts to include our technology in any such standards.

Changes in or failure to comply with FCC requirements could adversely impact our HD Radio revenue and royalties.

In October 2002, the Federal Communications Commission, or the FCC, selected our “In-Band, On-Channel” (“IBOC”) technology, also known as “HD Radio technology,” as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations.  In the United States, the FCC regulates the broadcast radio industry, interprets laws enacted by Congress and establishes and enforces regulations governing radio broadcasting.  It is unclear what rules and regulations the FCC may adopt regarding digital audio broadcasting and what effect, if any, such rules and regulations will have on our Product Licensing segment, the operations of stations using our HD Radio technology or consumer electronics manufacturers.  Any additional rules and regulations imposed on digital audio broadcasting could adversely impact the attractiveness of HD Radio technology and negatively impact our business. Also, non-compliance by us, or by radio stations offering HD Radio broadcasts, with any FCC requirements or conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions.

Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which we believe means that we treat similarly situated customers similarly. In these situations, we may be required to limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies to and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could harm our reputation and otherwise materially and adversely affect our business, operating results and prospects.

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Our financial and operating results may vary, which may cause the price of our common stock to decline.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, one should not rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period or that could adversely affect our ability to achieve our strategic objectives include those listed in this “Risk Factors” section of this report and the following:

 

the timing of, and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;

 

fluctuations in our royalties caused by the pricing terms of certain of our license agreements;

 

the amount of our product and service revenue;

 

changes in the level of our operating expenses;

 

delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;

 

our ability to protect or enforce our intellectual property rights or the terms of our agreements;

 

legal proceedings affecting our patents, patent applications or license agreements;

 

the timing of the introduction by others of competing technologies;

 

changes in demand for semiconductor chips in the specific end markets in which we concentrate;

 

changes in demand for camera-enabled devices including cell phones, security systems and personal computers;

 

the timing of the conclusion of license agreements;

 

the length of time it takes to establish new licensing arrangements;

 

meeting the requirements for revenue recognition under generally accepted accounting principles;

 

changes in generally accepted accounting principles including new accounting standards which may materially affect our revenue recognition and the comparability between revenue recognition and cash flow from customer royalties; and

 

cyclical fluctuations in semiconductor markets generally.

Due to fluctuations in our operating results, reports from market and security analysts, litigation-related developments, and other factors, the price at which our common stock will trade is likely to continue to be highly volatile. In future periods, if our revenue, royalties, billings, cash flows or operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.

We may not continue to pay dividends at the same rate we are currently paying them, or at all, and any decrease in or suspension of the dividend could cause our stock price to decline.

We currently pay a quarterly dividend of $0.20 per share. We also have returned capital to shareholders through stock repurchases. We anticipate that all quarterly dividends and stock repurchases will be paid out of cash, cash equivalents and short-term investments.  The payment of future cash dividends is subject to the final determination each quarter by our Board of Directors that the dividend remains in our best interests, which determination will be based on a number of factors, including our earnings, financial condition, actual and forecasted cash flows, capital resources and capital requirements, alternative uses of capital, economic condition and other factors considered relevant by management and the Board of Directors.  Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.

Our stock repurchase program could increase the volatility of the price of our common stock, and the program may be suspended or terminated at any time, which may cause the trading price of our common stock to decline.

In August 2007, we authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. As of December 31, 2018, the total amount available for repurchase under the plan was $101.4 million.

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The amount of repurchases under our stock repurchase program will vary. In 2016, we repurchased approximately 2,300,000 shares for an aggregate amount of $67.7 million. In 2017, we repurchased approximately 654,000 shares for an aggregate amount of $15.3 million. In 2018, we repurchased approximately 2,137,000 shares for an aggregate amount of $41.4 million. Additionally, the timing of repurchases is at our discretion and the program may be suspended or discontinued at any time. Any suspension or discontinuation could cause the market price of our stock to decline. The timing of repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we effected repurchases. Furthermore, we may engage in mergers, acquisitions, or other activity that could result in us reducing or discontinuing share repurchases for a period of time. For example, the DTS acquisition resulted in a significant decrease in cash, cash equivalents and short-term investments, as well as the issuance of approximately $600 million in debt. The terms of our current or future debt agreements could limit our ability to repurchase shares.

Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market price of our stock.

Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check” preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, and establish advance notice procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of Delaware law that could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our principal corporate headquarters, which houses administrative, sales, marketing and research and development facilities, are located in San Jose, California, and are held under an operating lease. We own real property, including an approximately 89,000 square foot building, in Calabasas, California, which houses additional administrative, sales, marketing, research and development facilities. We lease smaller facilities in other locations including the United States, Republic of Ireland, Romania, Hong Kong, China, the United Kingdom, Japan, South Korea, Taiwan, Singapore and Mexico. We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space, to the extent needed, will be available in the future on commercially reasonable terms.

Item 3. Legal Proceedings

Other than to the extent the proceedings described below have concluded, we cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm our business and our consolidated financial position, results of operations, and cash flows.

Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)

On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court.  Tessera, Inc.’s complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief, generally alleging that Toshiba underpaid royalties and failed to cooperate with audits conducted pursuant to the parties’ license agreement.

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On June 8, 2015, Toshiba removed the action to the U.S. District Court for the Northern District of California.  On June 18, 2015, Toshiba filed its answer, affirmative defenses, and counterclaims to Tessera, Inc.’s complaint.  Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of good faith and fair dealing.  The counterclaims seek, among other things, judicial determinations about the interpretation of the parties’ agreement, termination of the agreement, an accounting of the amount of alleged overpayments by Toshiba, restitution, and damages.  On July 10, 2015, Tessera, Inc. filed its answer and affirmative defenses to Toshiba’s counterclaims.  On March 17, 2016, Tessera, Inc. filed an amended complaint adding a claim for declaratory relief regarding a February 12, 2016 letter sent by Toshiba to Tessera, Inc. purporting to terminate the parties’ license agreement.  On March 18, 2016, Toshiba filed its amended answer, affirmative defenses, and counterclaims.  On April 4, 2016, Tessera, Inc. filed an answer to Toshiba’s amended counterclaims.

An initial summary judgment hearing on contract issues took place on September 22, 2016.  On November 7, 2016, the Court entered an order granting Toshiba’s motion regarding the definition of “TCC,” and denying summary judgment on the other issues raised by the parties’ cross-motions.  On December 6, 2016, Tessera, Inc. filed a motion pursuant to Federal Rule of Civil Procedure 54(b) seeking authorization to appeal the order and for a stay.  On March 6, 2017, the Court granted the Rule 54(b) motion.  The Court subsequently vacated the trial date and stayed the remainder of the district court proceedings.

On April 4, 2017, Tessera, Inc. filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit.  On November 21, 2018, the Ninth Circuit dismissed the appeal for lack of appellate jurisdiction and remanded the case to the district court for further proceedings.  

A case management conference is scheduled for March 7, 2019, and a summary judgment hearing is scheduled for August 8, 2019.  No trial date has yet been scheduled.

Tessera Advanced Technologies, Inc. v. Samsung Electronics America, Inc. et al, Civil Action No. 2:17-cv-07621 (D. N.J.)

On September 28, 2017, Tessera Advanced Technologies, Inc. filed a complaint against Samsung Electronics America, Inc. and Samsung Electronics Co., Ltd. (collectively, “Samsung”) in the U.S. District Court for the District of New Jersey.  The complaint alleged that Samsung infringes U.S. Patent Nos. 6,954,001 and 6,784,557 and requested, among other things, that Samsung be ordered to pay compensatory damages.  On November 22, 2017, Samsung filed an unopposed motion to stay the action pending resolution of a U.S. International Trade Commission investigation involving the same patents.  On November 27, 2017, the Court granted Samsung’s motion.  In December 2018, the parties reached a global settlement and the Court dismissed the case.  This matter is now concluded.

Invensas Corporation v. Samsung Electronics Co., Ltd., et al., Civil Action No. 1:17-cv-01363 (D. Del.)

On September 28, 2017, Invensas Corporation filed a complaint against Samsung Electronics Co., Ltd. and Samsung Austin Semiconductor, LLC (collectively, “Samsung”) in the U.S. District Court for the District of Delaware.  The complaint alleges that Samsung infringes U.S. Patent Nos. 6,232,231 and 6,849,946 and requested, among other things, that Samsung be ordered to pay compensatory damages. On December 19, 2017, Samsung filed an Answer and Affirmative Defenses.  

On July 27, 2018, Samsung filed a motion to stay pending determination of inter partes review of the patents-in-suit. The Court denied the motion on October 2, 2018.

A claim construction hearing was held on October 10, 2018.  In December 2018, the parties reached a global settlement and the Court terminated the case.  This matter is now concluded.

Invensas Bonding Technologies, Inc. v. Samsung Electronics America, Inc., et al., Civil Action No. 1:17-cv-07609 (D. N.J.)

On September 28, 2017, Invensas Bonding Technologies, Inc. filed a complaint against Samsung Electronics America, Inc. and Samsung Electronics Co. Ltd. (collectively, “Samsung”) in the U.S. District Court for the District of New Jersey.  The complaint alleged that Samsung infringes U.S. Patent Nos. 7,553,744, 7,807,549, 7,871,898, 8,153,505, 9,391,143, and 9,431,368 and requested, among other things, that Samsung be ordered to pay compensatory damages.  On December 19, 2017, Samsung filed an Answer and Affirmative Defenses.  In December 2018, the parties reached a global settlement and the Court terminated the case.  This matter is now concluded.  

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FotoNation Limited, et al v. Samsung Electronics Co., Ltd., et al, Civil Action No. 2:17-cv-00669 (E.D. Tex.)

On September 28, 2017, FotoNation Limited and DigitalOptics Corporation MEMS (collectively, “FotoNation”) filed a complaint against Samsung Electronics America, Inc. and Samsung Electronics Co. Ltd. (collectively, “Samsung”) in the U.S. District Court for the Eastern District of Texas. FotoNation amended its complaint several times, and on March 16, 2018, filed a third amended complaint. Each complaint alleged that Samsung infringes U.S. Patent Nos. 8,254,674, 8,331,715, 7,860,274, 7,697,829, 7,574,016, 7,620,218, 7,916,897 and 8,908,932, and requested, among other things, that Samsung be ordered to pay compensatory damages. Samsung answered all the complaints.

On February 1, 2018, Samsung filed a motion to transfer the action to the U.S. District Court for the District of Delaware. On March 23, 2018, Samsung filed a motion to dismiss certain counts of the third amended complaint. A hearing on the motions was held on May 16, 2018.  On October 11, 2018, Samsung filed a motion to stay pending determination of inter partes review of the patents-in-suit.  A claim construction hearing was held on October 3, 2018.   In December 2018, the parties reached a global settlement and the Court dismissed the case.  This matter is now concluded.

Invensas Corporation v. Samsung Electronics Co., Ltd., et al., Civil Action No. 2:17-cv-00670 (E.D. Tex.)

On September 28, 2017, Invensas Corporation filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (“Samsung”) in the U.S. District Court for the Eastern District of Texas. The complaint alleged that Samsung infringes U.S. Patent Nos. 6,232,231 (the “‘231 patent”), 6,849,946 (the “‘946 patent”), 6,054,336, 6,566,167, and 6,825,554 and requested, among other things, that Samsung be ordered to pay compensatory damages. On December 19, 2017, Samsung filed an Answer and Affirmative Defenses to the Complaint.

On February 1, 2018, Samsung filed a motion to sever and stay proceedings for the ‘231 and ‘946 patents.  On August 16, 2018, the Court denied the motion, and on August 30, 2018, Samsung filed an objection to the order.

On July 27, 2018, Samsung filed a motion to stay pending determination of inter partes review of the patents-in-suit.  The court denied the motion on November 6, 2018.  

A claim construction order issued on October 26, 2018.

On February 1, 2018, Samsung filed a motion to transfer the action to the U.S. District Court for the District of Delaware. On August 14, 2018, the Court denied the motion, and on September 10, 2018, Samsung filed a renewed motion to transfer. A hearing was held on the renewed motion on October 12, 2018.  On November 7, 2018, the Court granted Samsung’s renewed motion to transfer.  On December 11, 2018, the case was transferred to the U.S. District Court for the District of Delaware and docketed as civil case number 1:18-cv-01947. On that same date the parties stipulated to dismiss the case pursuant to a global settlement.  On December 12, 2018, the Court closed the case pursuant to the stipulation.  This matter is now concluded.

Tessera Advanced Technologies, Inc. v. Samsung Electronics Co., Ltd., et al., Civil Action No. 2:17-cv-00671 (E.D. Tex.)

On September 28, 2017, Tessera Advanced Technologies, Inc. (“Tessera”) filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (“Samsung”) in the U.S. District Court for the Eastern District of Texas.  The complaint alleged that Samsung infringes U.S. Patent Nos. 6,512,298 and 6,825,616 and requested, among other things, that Samsung be ordered to pay compensatory damages. On December 19, 2017, Samsung filed an Answer and Affirmative Defenses to the Complaint.

On February 1, 2018, Samsung filed a motion to transfer the action to the U.S. District Court for the District of Delaware.  The Court granted the motion on September 5, 2018. On September 11, 2018, Tessera filed a motion for reconsideration of the court’s order. On September 14, 2018, the Court stayed the transfer to allow the parties to fully brief the motion for reconsideration.  

On February 22, 2018, Samsung filed a motion to stay pending arbitration. On May 11, 2018, Samsung filed a motion to dismiss for lack of standing.  On June 29, 2018, Samsung filed a motion to stay pending determination of inter partes review of the patents-in-suit.  The Court denied the motion on July 19, 2018.

In December 2018, the parties reached a global settlement and the Court dismissed the case.  This matter is now concluded.

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Tessera Advanced Technologies Inc. vs. Samsung (China) Investment Co., Ltd. et al. Case No. (2018) Jing Min Chu No. 12 (Beijing High Court, People’s Republic of China)

On January 25, 2018, Tessera Advanced Technologies Inc. (“TATI”) filed a complaint against Samsung (China) Investment Co., Ltd., Samsung Electronics Huizhou Co., Ltd. and Beijing Jiu Jiu Shun Fa Technologies Development Co., Ltd. (collectively the “Defendants”) with the Beijing High Court, People’s Republic of China. The complaint alleged that the Defendants infringe TATI’s Chinese Patent No. 02155954.6. The complaint sought damages; an injunction prohibiting the Defendants from manufacturing, using, offering for sale, and selling infringing products in China; and orders requiring that the Defendants destroy infringing products and semi-finished products in their possession in China, as well as equipment, drawings and other objects and information used to manufacture infringing products.

On March 29, 2018, the Beijing High Court granted TATI’s evidence preservation petition, and preserved from Samsung’s Beijing offices certain financial documents related to its sale of allegedly infringing products.  On April 4, 2018, Samsung (China) Investment Co., Ltd. filed a petition for reconsideration of the evidence preservation decision, which the Beijing High Court denied on April 10, 2018.

The Defendants filed petitions to challenge the jurisdiction of the Beijing High Court. On May 11, 2017, the Beijing High Court issued an order denying the Defendants’ jurisdiction petitions. The Defendants appealed the order to the Supreme People’s Court of the People’s Republic of China (“PRC”).  

In December 2018, the parties reached a global settlement and TATI filed a petition to withdraw the case with the Beijing High Court.  The case is currently pending a ruling from the Beijing High Court permitting the withdrawal.

Samsung Electronics Co., Ltd. v. Panasonic Corporation (f/k/a Matsushita Electric Industrial Co.), Ltd., Pannova Semic, LLC, and Tessera Advanced Technologies, Inc. (International Chamber of Commerce)

On May 18, 2018, Samsung Electronics Co., Ltd. (“Samsung”) filed a Request for Arbitration against Tessera Advanced Technologies, Inc. (“Tessera”), Panasonic Corporation (f/k/a Matsushita Electric Industrial Co.) (“Panasonic”) and Pannova Semic, LLC (“Pannova”) with the International Chamber of Commerce.  The Request sought declaratory judgments that Samsung has a license to practice U.S. Patent Nos. 6,954,001, 6,784,557, 6,512,298, and 6,852,616 (“Patents-in-Suit”); damages of at least $15 million for alleged breach of contract; and a declaratory judgment that Panasonic’s assignment of the Patents-in-Suit is null and void.  The Request further sought an order requiring reimbursement to Samsung of all expenses, including attorneys’ fees, incurred in defending against lawsuits that Tessera or its affiliates filed in various jurisdictions. On June 25, 2018, Tessera and Pannova filed a Response to the Request for Arbitration, objecting to the jurisdiction of the Tribunal and denying the merits of Samsung’s claims.  

In December 2018, the parties reached a global settlement and jointly requested that the arbitration tribunal terminate the arbitration.  On December 22, 2018, the tribunal confirmed termination of the arbitration.  This matter is now concluded.

Patent Office Proceedings

CN Patent No. 02155954.6

On April 27, 2018, Samsung (China) Investment Co., Ltd. (“Samsung China”) and Samsung Electronics Huizhou Co., Ltd. (“Samsung Huizhou”) filed two invalidation petitions against CN Patent No. 02155954.6 (the “‘954 patent”) before the Patent Reexamination Board of State Intellectual Property Office of the PRC (the “PRB”). Both invalidation petitions requested a determination that claims 1-12 of ‘954 patent are unpatentable. Tessera Advanced Technologies, Inc. filed its response to the first invalidation case on July 19, 2018, and its response to the second invalidation case on July 29, 2018.  The PRB held an oral hearing on November 16, 2018.

In December 2018, the parties reached a global settlement and Samsung China and Samsung Huizhou filed petitions to withdraw their invalidation petitions before the PRB.  On December 20, 2018, the PRB issued a notification granting Samsung China and Samsung Huizhou’s withdrawal of their invalidation petitions.  These matters are now concluded.

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U.S Patent No. 6,054,336

On June 15, 2018, Samsung Electronics Co., and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 6,054,336 (the “‘336 patent”) with the U.S. Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”).  The petition requested a determination that claims 1-3 of the ‘336 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on January 4, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 6,232,231

On July 13, 2018, Samsung Electronics Co. Ltd., Samsung Electronics America, Inc., and Samsung Austin Semiconductor LLC filed a petition for inter partes review of U.S. Patent No. 6,232,231 (the “‘231 patent”) with the PTAB.  The petition requested a determination that claims 1-16 of the ‘231 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on January 4, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 6,512,298

On June 15, 2018, Samsung Electronics Co. Ltd., and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 6,512,298 (the “‘298 patent”) with the PTAB.  The petition requested a determination that claims 1-6 and 8-13 of the ‘298 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on December 18, 2018 and the proceeding was dismissed. This matter is now concluded.

U.S Patent No. 6,566,167

On June 15, 2018, Samsung Electronics Co. Ltd., and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 6,566,167 (the “‘167 patent”) with the PTAB.  The petition requested a determination that claims 1-12 of the ‘167 patent are unpatentable. On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on January 4, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 6,784,557

On January 11, 2018, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., and Samsung Semiconductor, Inc. filed a petition for inter partes review of U.S. Patent No. 6,784,557 (the “‘557 patent”) with the PTAB.  The petition requested a determination that claims 1-8 of the ‘557 patent are unpatentable. On July 19, 2018, the PTAB instituted an inter partes review of claims 1-8.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on February 4, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 6,825,554

On June 15, 2018, Samsung Electronics Co. Ltd., and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 6,825,554 (the “‘554 patent”) with the PTAB.  The petition requested a determination that claims 1-5 of the ‘554 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on January 4, 2019 and the proceeding was dismissed. This matter is now concluded.

U.S Patent No. 6,849,946

On July 13, 2018, Samsung Electronics Co. Ltd., Samsung Electronics America, Inc., and Samsung Austin Semiconductor LLC filed a petition for inter partes review of U.S. Patent No. 6,849,946 (the “‘946 patent”) with the PTAB.  The petition requested a determination that claims 16-22 of the ‘946 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on January 4, 2019 and the proceeding was dismissed.  This matter is now concluded.

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U.S Patent No. 6,852,616

On June 15, 2018, Samsung Electronics Co. Ltd., and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 6,852,616 (the “‘616 patent”) with the PTAB.  The petition requested a determination that claims 1-6 and 8-9 of the ‘616 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on December 18, 2018 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 6,954,001

On March 16, 2018, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., and Samsung Semiconductor, Inc. filed two petitions for inter partes review of U.S. Patent No. 6,954,001 (the “‘001 patent”) with the PTAB.  

The first petition requested a determination that claims 1-18 of the ‘001 patent are unpatentable. On October 1, 2018, the PTAB granted the first petition and instituted an inter partes review of claims 1-18.

The second petition requested a determination that claims 1-4, 6-13, and 15-18 of the ‘001 patent are unpatentable. On October 1, 2018, the PTAB granted the second petition and instituted an inter partes review of claims 1-4, 6-13, and 15-18.

On December 13, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement. The motion was granted on December 19, 2018 and the proceedings were dismissed.  These matters are now concluded.

U.S. Patent No. 7,553,744

On October 1, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 7,553,744 (the “‘744 patent”) with the PTAB.  The petition requested a determination that claims 41, 44, and 45 of the ‘744 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on December 21, 2018 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 7,574,016

On September 27, 2018, Samsung Electronics Co. Ltd. filed a petition for inter partes review of U.S. Patent No. 7,574,016 (the “‘016 patent”) with the PTAB.  The petition requested a determination that claims 1 and 2 of the ‘016 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 7,620,218

On October 3, 2018, Samsung Electronics Co., Ltd. filed a petition for inter partes review of U.S. Patent No. 7,620,218 (the “‘218 patent”) with the PTAB.  The petition requested a determination that claims 1, 11, 14, 26, and 32 of the ‘218 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 7,697,829

On October 3, 2018, Samsung Electronics Co., Ltd. filed a petition for inter partes review of U.S. Patent No. 7,697,829 (the “‘829 patent”) with the PTAB.  The petition requested a determination that claims 1, 7, 11, 14, and 15 of the ‘829 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on February 1, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 7,807,549

On October 1, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed two petitions for inter partes review of U.S. Patent No. 7,807,549 (the “‘549 patent”) with the PTAB.  The petitions requested a determination that claims 53, 60-63, 67-70, 74-77, 83-86, 89, and 92 of the ‘549 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement. The motion was granted on December 21, 2018 and the proceedings were dismissed.  This matter is now concluded.

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U.S Patent No. 7,860,274

On September 27, 2018, Samsung Electronics Co. Ltd. filed a petition for inter partes review of U.S. Patent No. 7,860,274 (the “‘274 patent”) with the PTAB.  The petition requested a determination that claims 1, 5 and 9 of the ‘274 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 7,871,898

On October 1, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 7,871,898 (the “‘898 patent”) with the PTAB.  The petition requested a determination that claims 1-4, 9, 13-16, 21, 26, 32, and 37 of the ‘898 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on December 21, 2018 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 7,916,897

On October 3, 2018, Samsung Electronics Co., Ltd. filed a petition for inter partes review of U.S. Patent No. 7,916,897 (the “‘897 patent”) with the PTAB.  The petition requested a determination that claims 1, 4, 5, and 14 of the ‘897 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 8,153,505

On October 2, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed two petitions for inter partes review of U.S. Patent No. 8,153,505 (the “‘505 patent”) with the PTAB.  The petitions requested a determination that claims 77, 79, 80–82, 84, 93–95, 99–101, 104–106, 110–114, 192, and 197 of the ‘505 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement. The motion was granted on December 21, 2018 and the proceedings were dismissed.  This matter is now concluded.

U.S. Patent No. 8,254,674

On October 3, 2018, Samsung Electronics Co., Ltd. filed two petitions for inter partes review of U.S. Patent No. 8,254,674 (the “‘674 patent”) with the PTAB.  The petitions requested a determination that claims 29, 35, 36, 40, 41, and 42 of the ‘674 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 8,331,715

On September 27, 2018, Samsung Electronics Co. Ltd. filed a petition for inter partes review of U.S. Patent No. 8,331,715 (the “‘715 patent”) with the PTAB.  The petition requested a determination that claims 1-4 and 6 of the ‘715 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S Patent No. 8,908,932

On September 27, 2018, Samsung Electronics Co. Ltd. filed two petitions for inter partes review of U.S. Patent No. 8,908,932 (the “‘932 patent”) with the PTAB.  The petitions requested a determination that claims 7-9, 11-15, 17, and 18 of the ‘932 patent are unpatentable.  On December 21, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement.  The motion was granted on January 22, 2019 and the proceeding was dismissed.  This matter is now concluded.

U.S. Patent No. 9,391,143

On October 2, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed two petitions for inter partes review of U.S. Patent No. 9,391,143 (the “‘143 patent”) with the PTAB.  The petitions requested a determination that claims 1, 3-4, 6, 14-15, 20-22, 24, and 29-33 of the ‘143 patent are unpatentable.  On December 13, 2018, the parties filed a joint motion to terminate the proceedings on the basis of settlement. The motion was granted on December 21, 2018 and the proceedings were dismissed.  This matter is now concluded.

34


 

U.S. Patent No. 9,431,368

On October 1, 2018, Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. filed a petition for inter partes review of U.S. Patent No. 9,431,368 (the “‘368 patent”) with the PTAB.  The petition requested a determination that claims 1, 2, 4, 9-11, 13, 14, and 18 of the ‘368 patent are unpatentable. On December 13, 2018, the parties filed a joint motion to terminate the proceeding on the basis of settlement. The motion was granted on December 21, 2018 and the proceeding was dismissed.  This matter is now concluded.

Item 4. Mine Safety Disclosures

Not applicable.

35


 

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Since February 23, 2017, our common stock has traded publicly on The Nasdaq Global Select Market under the symbol “XPER.” Prior to February 23, 2017, our common stock traded publicly on The Nasdaq Global Select Market under the symbol “TSRA”. The price range per share is the highest and lowest bid prices, as reported by The Nasdaq Global Select Market, on any trading day during the respective quarter.

 

 

 

High

 

 

Low

 

Fiscal Year Ended December 31, 2018

 

 

 

 

 

 

 

 

First Quarter (ended March 31, 2018)

 

$

24.90

 

 

$

20.05

 

Second Quarter (ended June 30, 2018)

 

$

23.50

 

 

$

15.75

 

Third Quarter (ended September 30, 2018)

 

$

17.45

 

 

$

14.20

 

Fourth Quarter (ended December 31, 2018)

 

$

18.74

 

 

$

12.33

 

 

 

 

High

 

 

Low

 

Fiscal Year Ended December 31, 2017

 

 

 

 

 

 

 

 

First Quarter (ended March 31, 2017)

 

$

45.80

 

 

$

33.70

 

Second Quarter (ended June 30, 2017)

 

$

34.25

 

 

$

29.80

 

Third Quarter (ended September 30, 2017)

 

$

33.70

 

 

$

24.70

 

Fourth Quarter (ended December 31, 2017)

 

$

27.60

 

 

$

17.75

 

 

As of February 4, 2019, there were 48,652,499 outstanding shares of common stock held by 26 stockholders of record. In addition, a substantially greater number of stockholders may be "street name" or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

In both 2018 and 2017, we paid quarterly dividends of $0.20 per share in each of March, June, September and December.

We also have historically returned capital to shareholders through stock repurchases. We anticipate that all quarterly dividends and stock repurchases will be paid out of cash, cash equivalents and short-term investments.

36


 

PERFORMANCE GRAPH

The following graph shows a comparison of total stockholder return for holders of our common stock, the Nasdaq Composite Index and the Russell 2000 Index from December 31, 2013 through December 31, 2018. The graph and table assume that $100 was invested on December 31, 2013 in each of our common stock, the Nasdaq Composite Index and the Russell 2000 Index, and that all dividends were reinvested. This graphic comparison is presented pursuant to the rules of the SEC.

 

 

 

12/13

 

 

12/14

 

 

12/15

 

 

12/16

 

 

12/17

 

 

12/18

 

Xperi Corporation

 

$

100.00

 

 

$

188.59

 

 

$

161.85

 

 

$

244.38

 

 

$

138.92

 

 

$

109.58

 

Nasdaq Composite

 

$

100.00

 

 

$

114.75

 

 

$

122.74

 

 

$

133.62

 

 

$

173.22

 

 

$

168.30

 

Russell 2000 Index

 

$

100.00

 

 

$

104.89

 

 

$

100.26

 

 

$

121.63

 

 

$

139.44

 

 

$

124.09

 

 

This section is not “soliciting material,” is not deemed “filed” with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (“Exchange Act”), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

37


 

STOCK REPURCHASES

The following are our monthly stock repurchases for the fourth quarter of 2018, all of which were made as part of a publicly announced plan.

 

 

 

Total number of

shares purchased

 

 

Average price

paid per share

 

 

Total number of

shares purchased

as part of our

share repurchase

program

 

 

Approximate

dollar value of

shares that may

yet be purchased

under our share

repurchase

program (a)

(Shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October

 

 

251

 

 

$

13.73

 

 

 

251

 

 

 

November

 

 

54

 

 

 

13.85

 

 

 

54

 

 

 

December

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

305

 

 

$

13.75

 

 

 

305

 

 

$101.4 million

 

(a) Calculated as of December 31, 2018. In August 2007, our Board of Directors authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. In January 2016, the Board authorized an additional $200.0 million in future repurchases under the plan. No expiration date has been specified for this plan. All repurchases in the three months ended December 31, 2018 were made under this plan.

 

38


 

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016 (1)

 

 

2015

 

 

2014

 

 

 

(in thousands, except per share data)

 

Consolidated statements of operations data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

406,133

 

 

$

373,732

 

 

$

259,565

 

 

$

273,300

 

 

$

278,807

 

Total operating expenses

 

$

382,153

 

 

$

405,232

 

 

$

170,177

 

 

$

111,098

 

 

$

113,111

 

Operating income (loss)

 

$

23,980

 

 

$

(31,500

)

 

$

89,388

 

 

$

162,202

 

 

$

165,696

 

Net income (loss)

 

$

(1,763

)

 

$

(56,558

)

 

$

56,089

 

 

$

117,016

 

 

$

170,454

 

Net income (loss) attributable to Xperi (2)

 

$

(289

)

 

$

(56,558

)

 

$

56,089

 

 

$

117,016

 

 

$

170,454

 

Income (loss) per share attributable to Xperi:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (3)

 

$

(0.01

)

 

$

(1.15

)

 

$

1.14

 

 

$

2.26

 

 

$

3.23

 

Diluted (3)

 

$

(0.01

)

 

$

(1.15

)

 

$

1.12

 

 

$

2.23

 

 

$

3.18

 

Cash dividends declared per share

 

$

0.80

 

 

$

0.80

 

 

$

0.80

 

 

$

0.80

 

 

$

0.92

 

Weighted average number of shares used in per share calculation-basic (3)

 

 

48,823

 

 

 

49,251

 

 

 

49,187

 

 

 

51,802

 

 

 

52,819

 

Weighted average number of shares used in per share calculation-diluted (3)

 

 

48,823

 

 

 

49,251

 

 

 

50,190

 

 

 

52,586

 

 

 

53,563

 

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(in thousands)

 

Consolidated statements of cash flows data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities (4)

 

$

135,133

 

 

$

147,265

 

 

$

153,860

 

 

$

147,276

 

 

$

134,204

 

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(in thousands)

 

Consolidated balance sheets data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

154,364

 

 

$

200,692

 

 

$

113,005

 

 

$

381,744

 

 

$

434,421

 

Working capital

 

$

343,378

 

 

$

148,695

 

 

$

148,924

 

 

$

390,880

 

 

$

441,484

 

Total assets

 

$

1,235,107

 

 

$

1,110,024

 

 

$

1,186,436

 

 

$

539,352

 

 

$

577,123

 

Debt (5)

 

$

494,000

 

 

$

594,000

 

 

$

600,000

 

 

$

 

 

$

 

Total Xperi stockholders’ equity

 

$

619,442

 

 

$

435,576

 

 

$

507,785

 

 

$

515,157

 

 

$

541,359

 

 

(1) Fiscal 2016 includes one month of financial results from DTS as well as one-time acquisition related expenses. All periods subsequent to 2016 include financial results from DTS post-acquisition.

(2) Excludes net income (loss) attributable to noncontrolling interest. See Note 1 of the Notes to Consolidated Financial Statements for further detail.

(3) See Note 11 of the Notes to Consolidated Financial Statements for an explanation of the methods used to determine the number of shares used to compute per share amounts.

(4) As a result of the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), we retrospectively adjusted our Consolidated Statements of Cash Flows to reclassify excess tax benefits of $8.2 million and $0.7 million from financing activities to operating activities in fiscal 2016 and 2015, respectively.

(5) Includes both the short-term and long-term portions of debt principal and excludes approximately $11.8 million, $14.3 million and $16.8 million in debt issuance costs as of December 31, 2018, 2017 and 2016, respectively.

39


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion (presented in thousands, except for percentages) should be read in conjunction with our consolidated financial statements and notes thereto.

Business Overview

Xperi is a publicly-traded technology company with headquarters in Silicon Valley and operations around the world. Through its operating subsidiaries, Xperi creates, develops and licenses innovative audio, imaging, semiconductor packaging and interconnect technologies. We have approximately 700 employees and over 25 years of operating experience.

We license our innovative products, technologies and inventions to global electronics companies which, in turn, integrate the technologies into their own consumer electronics and semiconductor products. Our technologies and inventions are widely adopted and used every day by millions of people. Our audio technologies have shipped in billions of devices for the home, mobile and automotive markets. Our imaging technologies are embedded in more than 25% of the current smartphones. Our semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips.

We completed the acquisition of DTS in December 2016. At the time of the acquisition, Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation. During the first quarter of 2017, we introduced our new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under a new stock symbol XPER.

Results of Operations

Significant events occurred over the past three years that affect the comparability of our financial statements. Key events and their financial impacts include the following:

 

On December 10, 2018, we entered into an agreement with Samsung Electronics, Co., Ltd. (“Samsung) to settle and dismiss all pending litigation matters. In conjunction with the settlement, Samsung entered into a new patent license agreement with us. The settlement had a material impact on our financial results in 2018. Samsung was a significant customer in 2016 and before. The expiration of Samsung’s license agreement at the end of 2016 had a material impact on our financial results in 2017.

 

On December 18, 2017, we entered into agreements with Broadcom Ltd. and certain of its affiliates (“Broadcom), customers, and suppliers to settle and dismiss all pending litigation matters. In conjunction with the settlement, Broadcom entered into a new multi-year patent license agreement with us. The settlement had a material impact on our financial results in 2017.

 

On December 1, 2016, we completed our acquisition of DTS, Inc. (“DTS”). We incurred significant one-time expenses in the fourth quarter of 2016 related to this acquisition, including transaction costs (e.g. bankers fees, legal fees, consultant fees, etc.), severance costs and stock-based compensation expense resulting from the acceleration of equity instruments for departing executives. Additionally, our amortization expense increased significantly due to the acquired intangible assets resulting from the DTS acquisition.

Under generally accepted accounting principles regarding business combinations, we were unable to record $15.6 million and $51.6 million in revenue in the years ended December 31, 2018 and 2017, respectively, which would have been recognized by DTS under Topic 605 if not for the acquisition. If allowed, this revenue would have had a significant impact on the operating results as described below.

We adopted the new accounting standard, ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” effective January 1, 2018, which had a material impact on the financial reporting of our operating results as described below. We followed the modified retrospective transition method upon adoption, and under this method the comparative information for prior fiscal years has not been restated and continues to be reported under the accounting standards in effect for those periods. Refer to “Note 3 - Recent Accounting Pronouncements” and “Note 4 – Revenue” in the Notes to Consolidated Financial Statements for detailed information.

The adoption of Topic 606 does not impact customer billings or the cash flow from our contracts with customers. We expect to experience greater variability in quarterly and annual revenue as a result of Topic 606 being applied to minimum guarantee and fixed fee licensing contracts. We plan to place greater emphasis on billings and operating cash flows rather than revenue and net operating results to evaluate our financial performance in current and future periods.

40


 

Revenue

Our revenue is generated primarily from royalty and license fees. Revenue is recognized upon transfer of control of promised products, services or intellectual property and technologies (“IP) rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of the IP rights.

Certain licensees have entered into fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate our technology in the licensee’s products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. For these agreements, we recognize the full fixed fee amount as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license.

If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, we also consider the scheduled payment arrangements to determine whether a financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, we treat a portion of the payments as a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, we recognize a portion of the financing component through interest income.

For certain licensees, royalty revenue is generated based on a licensee’s production or shipment of licensed products incorporating our IP, technologies or software. Licensees with a per-unit arrangement pay a per-unit royalty for each product manufactured or sold, as set forth in its license agreement. Licensees generally report manufacturing or sales information in the quarter subsequent to when such activity takes place. Under Topic 606, we estimate the royalties earned each quarter based on our forecast of manufacturing and sales activity incurred by our licensees in that quarter. Any differences between actual royalties owed by a licensee and our quarterly estimates are recognized in the following quarter, when the licensee’s royalty report is received. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments that could have a material impact on the amount of revenue we report on a quarterly basis.

The timing of revenue recognition and the amount of revenue actually recognized for each type of revenue depends upon a variety of factors, including the specific terms of each arrangement, our ability to determine and allocate the transaction price to each separate performance obligation, and the nature of our deliverables and obligations. In addition, our royalty revenue will fluctuate based on a number of factors such as: (a) the rate of adoption and incorporation of our technology by licensees; (b) the demand for products incorporating semiconductors that use our licensed technology; (c) the cyclicality of supply and demand for products using our licensed technology; (d) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers, and (e) the impact of economic downturns.

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would in turn harm our results of operations.

In the past, we have engaged in litigation, arbitration proceedings, and royalty audits to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights.

41


 

The following table presents our historical operating results for the periods indicated as a percentage of revenue:

 

 

 

Years ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Royalty and license fees

 

 

100

%

 

 

100

%

 

 

100

%

Total Revenue

 

 

100

 

 

 

100

 

 

 

100

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

3

 

 

 

1

 

 

 

 

Research, development and other related costs

 

 

26

 

 

 

28

 

 

 

18

 

Selling, general and administrative

 

 

32

 

 

 

39

 

 

 

28

 

Amortization expense

 

 

27

 

 

 

30

 

 

 

12

 

Litigation expense

 

 

6

 

 

 

10

 

 

 

8

 

Total operating expenses

 

 

94

 

 

 

108

 

 

 

66

 

Operating income (loss) from continuing operations

 

 

6

 

 

 

(8

)

 

 

34

 

Interest expense

 

 

(6

)

 

 

(8

)

 

 

(1

)

Other income and expense, net

 

 

2

 

 

 

 

 

 

2

 

Income (loss) before taxes

 

 

2

 

 

 

(16

)

 

 

35

 

Provision for (benefit from) income taxes

 

 

2

 

 

 

(1

)

 

 

13

 

Net income (loss)

 

 

(0

)%

 

 

(15

)%

 

 

22

%

 

Fiscal Year 2018 and 2017

The following table sets forth our revenue by year (in thousands, except for percentages):

 

 

 

Years Ended December 31,

 

 

Increase/

 

 

%

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

 

Change

 

Royalty and license fees

 

$

406,133

 

 

$

373,732

 

 

$

32,401

 

 

 

9

%

 

The primary driver for the year-on-year changes in revenue was the purchase accounting impact on revenue of $51.6 million in fiscal 2017, amounts that would have been recognized as revenue by DTS under Topic 605 if not for the acquisition. Significantly offsetting the purchase accounting impact on 2017 was our inability to record billings as revenue in 2018 from minimum guarantee and fixed fee licensing contracts in place prior to the start of 2018 as a result of adopting Topic 606, which was partially offset by revenue recognized from the new patent license agreement with Samsung executed in the fourth quarter of 2018. Had we not implemented Topic 606, our revenue in 2018 under prior GAAP would have been $427.0 million. Refer to “Note 3 – Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements for further detail.

The following table sets forth our billings by year (in thousands, except for percentages):

 

 

 

Years Ended December 31,

 

 

Increase/

 

 

%

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

 

Change

 

Total billings

 

$

447,347

 

 

$

422,476

 

 

$

24,871

 

 

 

6

%

 

The year-on-year changes in billings were primarily driven by higher billings from the aforementioned Samsung license agreement executed in December 2018, coupled with higher non-recurring engineering (“NRE”) services revenue and licensing growth in the automotive and home markets, partially offset by lower billings from Broadcom (as a result of an upfront payment in 2017) and the expiration of a fixed fee licensing contract in the Semiconductor and IP segment in 2017.

With changes in revenue recognition due to the adoption of Topic 606 in 2018, we anticipate our revenue for 2019 will continue to be significantly impacted due principally to our inability to record future billings as revenue in 2019 and later periods from minimum guarantee and fixed fee licensing contracts in place prior to adoption of ASC 606 on January 1, 2018. This accounting change will not impact billings or the cash flow from these contracts. Furthermore, we may experience greater variability in quarterly and annual revenue in future periods as a result of the revenue accounting treatment applied to future minimum guarantee and fixed fee licensing contracts. Management plans to place greater emphasis on billings and cash flows, rather than revenue and net operating results, to internally evaluate our financial performance in future periods.

42


 

Cost of Revenue

Cost of revenue consists of royalties paid to third parties and direct compensation and related expenses to provide NRE services.

Cost of revenue for the year ended December 31, 2018 was $13.3 million, as compared to $6.3 million for the year ended December 31, 2017. The increase was due to higher costs on NRE contracts, which are generally reclassified from research and development as we satisfy the underlying performance obligations, as well as royalties recorded in connection with recently signed Product Licensing contracts. While the revenue and cost of revenue under these Product Licensing contracts is recorded when the contract becomes effective, the billings, cash inflows from customer payments, and cash outflows for royalty payments generally occur over several years.

Research, Development and Other Related Costs

Research and development is conducted primarily in-house and targets development of audio and image enhancement technologies, chip-scale, multi-chip and wafer level packaging, circuitry 3D-IC architectures, wafer and die bonding technologies and machine learning. Research, development and other related costs include expenses associated with applications engineering necessary to port and integrate our technologies and products on third party silicon and into end devices. These costs consist primarily of compensation and related costs for personnel, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, product “tear downs” and reverse engineering, materials, supplies and equipment depreciation. All research, development and other related costs are expensed as incurred.

Research, development and other related costs for the year ended December 31, 2018 were $106.4 million, as compared to $105.8 million for the year ended December 31, 2017, an increase of $0.6 million or 1%. The increase was primarily related to a $0.8 increase in equipment and materials expense and a $0.5 million increase in outside services, partially offset by R&D tax credits and development grants received in 2018.

We believe that a significant level of research and development expenses will be required for us to remain competitive in the future, and we expect total R&D expense will increase in 2019 as compared to 2018.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items.

Selling, general and administrative expenses for the year ended December 31, 2018 were $127.9 million, as compared to $144.6 million for the year ended December 31, 2017, a decrease of $16.7 million or 12%. The decrease was due to a $6.1 million decrease in personnel related expenses, driven primarily by lower acquisition related severance and retention bonus expenses in 2018, a $3.7 million decrease in outside services which were associated with acquisition transaction costs in 2017, a $2.3 million decrease in stock-based compensation, and a $2.7 million decrease in legal and bad debt expense.

Amortization Expense

Amortization expense for the year ended December 31, 2018 was $108.5 million, as compared to $111.9 million for the year ended December 31, 2017, a decrease of $3.4 million. The decrease was primarily attributable to certain intangible assets becoming fully amortized over the past twelve months.

We anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $479 million in intangible assets from the acquisition of DTS and other acquisition activity in 2016, which will be amortized over the next several years. See Note 9 – “Goodwill and Identifiable Intangible Assets” in Notes to Consolidated Financial Statements for additional information.

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Litigation Expense

Litigation expense for the year ended December 31, 2018 was $26.1 million, as compared to $36.5 million for the year ended December 31, 2017, a decrease of $10.4 million. The decrease was primarily related to concluding litigation activity against Broadcom in December 2017, partially offset by increases in Samsung related litigation expenditures during 2018. In December 2018, we reached a settlement with Samsung which ended all related litigation.

We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate between periods, because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the years ended December 31, 2018 and 2017 (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Research, development and other related costs

 

$

13,168

 

 

$

13,277

 

Selling, general and administrative

 

 

17,843

 

 

 

20,185

 

Total stock-based compensation expense

 

$

31,011

 

 

$

33,462

 

 

Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock purchases. For the year ended December 31, 2018, stock-based compensation expense was $31.0 million, of which $0.4 million related to employee stock options, $28.0 million related to restricted stock awards and units and $2.6 million related to employee stock purchases. For the year ended December 31, 2017, stock-based compensation expense was $33.5 million, of which $2.0 million related to employee stock options, $28.9 million related to restricted stock awards and units and $2.6 million related to employee stock purchases. The decrease in stock-based compensation expense in 2018 compared to 2017 was due primarily to the expenses recorded in 2017 relating to stock awards issued in connection with the DTS acquisition.

Interest Expense

Interest expense for the year ended December 31, 2018 was $25.7 million, as compared to $28.3 million for the year ended December 31, 2017. The decrease in interest expense in the year ended December 31, 2018 was primarily a result of lower debt principal as we made a $100.0 million pay-down in January 2018, partially offset by higher interest rates in 2018 due to the variable rate included in our debt. Consequently, interest expense may increase in future periods if market-based interest rates increase.

Other Income and Expense, Net

Other income and expense, net, for the year ended December 31, 2018 was $8.6 million, as compared to $1.4 million for the year ended December 31, 2017. Other income was higher in the current year principally due to interest income of $7.7 million earned from significant financing components on our fixed fee licensing contracts pursuant to Topic 606. As discussed above, we adopted Topic 606 in the first quarter of 2018.

Provision for (benefit from) Income Taxes

For the year ended December 31, 2018, we recorded an income tax expense of $8.7 million on pretax income of $6.9 million, which resulted in an effective tax rate of 125.5%. The income tax expense for the year ended December 31, 2018 was primarily related to foreign withholding taxes, certain non-deductible permanent differences, valuation allowance recorded against our unutilized tax credits, and shortfalls from stock-based compensation offset by tax benefit from the utilization of foreign tax credits and a deduction for foreign-derived income.

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The income tax benefit of $1.8 million for the year ended December 31, 2017 is primarily related to losses generated from foreign operations, and tax benefit from the remeasurement of deferred taxes from the federal tax rate reduction, offset by tax expense from recording a valuation allowance against federal tax credits as a result of the Tax Act, foreign withholding taxes net of foreign tax credits, non-deductible stock-based compensation expense and other non-deductible expenses. The change from income tax benefit to income tax expense for the year ended December 31, 2018 as compared to the prior year is largely attributable to an increase in U.S. and foreign profitability for the current period and an increase in foreign withholding taxes.

On December 22, 2017, the Tax Act was signed into law. The Tax Act introduced a broad range of tax reform measures that significantly changed the federal income tax laws. As of December 31, 2017, we recorded a provisional tax expense in the Statement of Operations of approximately $5.6 million, comprised of approximately $13.5 million tax expense from recording additional valuation allowance against federal tax credits due to certain provisions of the Tax Act, offset by approximately $7.9 million of tax benefit from the remeasurement of U.S. deferred taxes using the 21% tax rate at which we expect the deferred amounts to reverse in the future. The one-time transition tax on post-1986 foreign unremitted earnings did not have a material impact on our effective tax rate. In accordance with Staff Accounting Bulletin (“SAB”) No. 118, we have completed our accounting related to tax reform in the fourth quarter of 2018 and no material adjustments to the provisional tax expense were required. We continue to monitor supplemental legislation and technical interpretations of the tax law that may cause the final impact from the Tax Act to differ from the amounts previously recorded.  

 

Fiscal Year 2017 and 2016

The following table sets forth our revenue by year (in thousands, except for percentages):

 

 

 

Years Ended December 31,

 

 

Increase/

 

 

%

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

Change

 

Royalty and license fees

 

$

373,732

 

 

$

259,565

 

 

$

114,167

 

 

 

44

%

 

The $114.2 million or 44% increase in revenue was due to our acquisition of DTS in December 2016, offset by a reduction in licensing revenue resulting from the expiration of our patent license agreement with Samsung. This reduction in licensing revenue was partially offset by revenue from the new patent license agreement with Broadcom in the fourth quarter of 2017. The majority of per-unit royalties reported by DTS licensees in the first quarter of 2017, which are associated with fourth quarter 2016 shipments by these licensees, as well as minimum guarantee fees from DTS licensees for contracts entered into prior to the December 1, 2016 acquisition, were not recorded as revenue in 2017, as under business combination accounting guidance the earnings process was deemed to have been completed prior to the acquisition.

Cost of Revenue

Cost of revenue for the year ended December 31, 2017 was $6.3 million, as compared to $0.6 million for the year ended December 31, 2016. The increase was a result of royalties paid to third parties in connection with audio revenue from the acquired DTS business.

Research, Development and Other Related Costs

Research, development and other related costs for the year ended December 31, 2017 were $105.8 million, as compared to $44.7 million for the year ended December 31, 2016, an increase of $61.1 million or 137%. The increase was primarily related to a $43.2 million increase in personnel related expenses, a $6.2 million increase in stock-based compensation and a $5.0 million increase in outside services. These increases are a direct result of adding over 230 engineers as part of the acquisition of DTS in December 2016.

Selling, General and Administrative

Selling, general and administrative expenses for the year ended December 31, 2017 were $144.6 million, as compared to $72.1 million for the year ended December 31, 2016, an increase of $72.5 million or 101%. The increase was primarily attributable to an increase of $42.2 million in personnel related expenses, a $2.1 million increase in outside services, a $6.2 million increase in stock-based compensation, a $3.8 million increase in travel and other expenses, a $4.6 million increase in depreciation and a $4.1 million increase in materials and supplies. These increases are a direct result of adding over 185 selling, general and administrative personnel as part of the acquisition of DTS in December 2016. Additionally, marketing expenses increased $8.0 million due primarily to greater participation in product marketing conferences, one-time expenses related to the branding of our new company name, and marketing initiatives and campaigns we undertook in 2017.

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Amortization Expense

Amortization expense for the year ended December 31, 2017 was $111.9 million, as compared to $31.9 million for the year ended December 31, 2016, an increase of $80.0 million. This increase was primarily attributable to intangible assets recorded in connection with the DTS acquisition in the fourth quarter of 2016.

Litigation Expense

Litigation expense for the year ended December 31, 2017 was $36.5 million, as compared to $21.0 million for the year ended December 31, 2016, an increase of $15.5 million, or 74%. This increase was primarily related to our legal proceedings with Broadcom and our new proceedings filed against Samsung, as well as reflecting an offset to litigation expense of $5.0 million in 2016 due to an insurance settlement which refunded certain litigation costs incurred in prior years.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the years ended December 31, 2017 and 2016 (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

Research, development and other related costs

 

 

13,277

 

 

 

7,104

 

Selling, general and administrative

 

 

20,185

 

 

 

13,997

 

Total stock-based compensation expense

 

$

33,462

 

 

$

21,101

 

 

Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the year ended December 31, 2017, stock-based compensation expense was $33.5 million, of which $2.0 million related to employee stock options, $28.9 million related to restricted stock awards and units and $2.6 million related to employee stock purchases. For the year ended December 31, 2016, stock-based compensation expense was $21.1 million, of which $3.3 million related to employee stock options, $17.0 million related to restricted stock awards and units and $0.8 million related to employee stock purchases. The increase in stock-based compensation expense in 2017 compared to 2016 primarily resulted from increased awards issued and headcount due to our acquisition of DTS.

Interest Expense

Interest expense for the year ended December 31, 2017 was $28.3 million, as compared to $2.4 million for the year ended December 31, 2016.  We incurred a full year of interest expense in 2017 on the debt issued December 1, 2016 in connection with the acquisition of DTS, Inc.

Other Income and Expense, Net

Other income and expense, net, for the year ended December 31, 2017 was $1.4 million, as compared to $3.7 million for the year ended December 31, 2016. Other income was higher in 2016 due to interest income earned on higher cash and investment balances.

Provision for (benefit from) Income Taxes

The income tax benefit of $1.8 million for the year ended December 31, 2017 is primarily related to losses generated from foreign operations, and tax benefit from the remeasurement of deferred taxes from the federal tax rate reduction, offset by tax expense from recording a valuation allowance against federal tax credits as a result of the Tax Act, foreign withholding taxes net of foreign tax credits, non-deductible stock-based compensation expense and other non-deductible expenses.

The income tax expense of $34.6 million for the year ended December 31, 2016 was primarily related to tax liabilities generated from U.S. and foreign operations, non-deductible acquisition costs, non-deductible stock-based compensation expense and foreign withholding taxes net of foreign tax credits. The change from income tax expense to income tax benefit for the year ended December 31, 2017 as compared to the prior year is largely attributable to a decrease in U.S. and foreign profitability for the current period.  

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Segment Operating Results

We operate in two reportable segments: (1) Product Licensing and (2) Semiconductor and IP Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

The Chief Executive Officer is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting.

The Product Licensing segment is comprised of our Audio and Imaging businesses, which we license through the DTS, FotoNation, HD Radio, and IMAX Enhanced brands. These licenses typically include the delivery of software and/or hardware-based solutions to our customers or to their suppliers. Product Licensing revenue is derived primarily from sales into the home, automotive and mobile markets.

The Semiconductor and IP Licensing segment includes our Tessera, Invensas and Invensas Bonding Technologies subsidiaries, which license semiconductor packaging and interconnect technologies and associated intellectual property. Semiconductor and IP Licensing revenue is derived from technology and IP licenses to semiconductor companies, foundries and packaging companies. We have a long history of developing and monetizing next-generation technologies, including chip-scale packaging solutions and low-temperature wafer bonding solutions. Today, we are actively developing and licensing 3D semiconductor packaging, interconnect and bonding solutions for semiconductors that are used in every day products such as smartphones, tablets, and laptops, as well as servers used in datacenters. We also provide engineering services to our customers to assist them in their evaluation and adoption of our technologies including the transition into high volume production.

We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth our segment revenue, operating expenses and operating income for the years ended December 31, 2018, 2017 and 2016 (in thousands):