Xperi
Xperi Corp (Form: 10-Q, Received: 08/02/2017 17:23:20)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
  _______________________________________________________________
FORM 10-Q
______________________________________________________________
(Mark One)
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
 
o      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 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  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer  ý Accelerated filer  ¨ Non-accelerated filer  ¨ (Do not check if a smaller reporting company) 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 Exchange Act). Yes  ¨ No  ý
The number of shares outstanding of the registrant’s common stock as of July 27, 2017 was 49,519,088 .




Table of Contents

XPERI CORPORATION
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2017
TABLE OF CONTENTS
 

   
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents


XPERI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 (unaudited)

 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,415

 
$
65,626

Short-term investments
53,533

 
47,379

Accounts receivable, net
32,603

 
15,863

Unbilled contract receivable
15,516

 
51,923

Other current assets
15,961

 
19,150

Total current assets
192,028

 
199,941

Restricted cash
8,469

 

Property and equipment, net
37,172

 
38,855

Intangible assets, net
485,174

 
541,879

Goodwill
386,413

 
382,963

Other assets
16,150

 
22,798

Total assets
$
1,125,406

 
$
1,186,436

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,580

 
$
7,531

Accrued legal fees
6,164

 
7,505

Accrued liabilities
36,723

 
29,086

Current portion of long-term debt
6,000

 
6,000

Deferred revenue
3,968

 
895

Total current liabilities
59,435

 
51,017

Long-term deferred tax liabilities
15,972

 
32,565

Long-term debt, net
575,451

 
577,239

Other long-term liabilities
17,697

 
17,830

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding

 

Common stock: $0.001 par value; 150,000 shares authorized; 60,341 and 59,596 shares issued, respectively, and 49,511 and 48,854 shares outstanding, respectively
60

 
59

Additional paid-in capital
665,633

 
644,194

Treasury stock at cost: 10,830 and 10,742 shares of common stock at each period end, respectively
(303,525
)
 
(300,114
)
Accumulated other comprehensive loss
(94
)
 
(148
)
Retained earnings
94,777

 
163,794

Total stockholders’ equity
456,851

 
507,785

Total liabilities and stockholders’ equity
$
1,125,406

 
$
1,186,436


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
  (unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Royalty and license fees
$
91,322

 
$
67,020

 
$
158,577

 
$
126,997

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue
1,303

 
52

 
2,703

 
139

Research, development and other related costs
26,313

 
10,306

 
52,325

 
20,376

Selling, general and administrative
33,003

 
11,166

 
74,208

 
22,259

Amortization expense
28,151

 
6,052

 
56,706

 
12,074

Litigation expense
8,226

 
5,292

 
18,204

 
11,842

Total operating expenses
96,996

 
32,868

 
204,146

 
66,690

Operating income (loss)
(5,674
)
 
34,152

 
(45,569
)
 
60,307

Interest expense
(7,046
)
 

 
(13,505
)
 

Other income and expense, net
220

 
802

 
266

 
1,609

Income (loss) before taxes
(12,500
)
 
34,954

 
(58,808
)
 
61,916

Provision for (benefit from) income taxes
26,557

 
11,471

 
(8,722
)
 
20,343

Net income (loss)
$
(39,057
)
 
$
23,483

 
$
(50,086
)
 
$
41,573

Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.79
)
 
$
0.48

 
$
(1.02
)
 
$
0.84

Diluted
$
(0.79
)
 
$
0.48

 
$
(1.02
)
 
$
0.83

Cash dividends declared per share
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

Weighted average number of shares used in per share calculations-basic
49,475

 
48,836

 
49,261

 
49,392

Weighted average number of shares used in per share calculations-diluted
49,475

 
49,420

 
49,261

 
49,993

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


 
XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 (unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Net income (loss)
$
(39,057
)
 
$
23,483

 
$
(50,086
)
 
$
41,573

Other comprehensive income:
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities, net of tax
16

 
367

 
54

 
1,830

Other comprehensive income
16

 
367

 
54

 
1,830

Comprehensive income (loss)
$
(39,041
)
 
$
23,850

 
$
(50,032
)
 
$
43,403


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5


XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(50,086
)
 
$
41,573

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of property and equipment
3,614

 
810

Amortization of intangible assets
56,706

 
12,074

Stock-based compensation expense
15,585

 
7,568

Deferred income tax and other, net
(16,676
)
 
7,069

Amortization of debt issuance costs
1,212

 

Amortization of premium or discount on investments
190

 
1,789

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(16,740
)
 
163

Unbilled contract receivable, net
32,430

 

Other assets
11,282

 
4,321

Accounts payable
(951
)
 
131

Accrued legal fees
(1,341
)
 
2,595

Accrued and other liabilities
7,504

 
(1,231
)
Deferred revenue
3,073

 
(4,088
)
Net cash from operating activities
45,802

 
72,774

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,938
)
 
(2,487
)
Purchases of short-term investments
(11,975
)
 
(77,612
)
Proceeds from sales of short-term investments
1,035

 
24,285

Proceeds from maturities of short-term investments
4,650

 
84,182

Net cash from investing activities
(8,228
)
 
28,368

Cash flows from financing activities:
 
 
 
Dividend paid
(19,740
)
 
(19,747
)
Repayment of debt
(3,000
)
 

Proceeds from exercise of stock options
4,680

 
2,208

Proceeds from employee stock purchase program
1,155

 
1,081

Repurchase of common stock
(3,411
)
 
(63,856
)
Net cash from financing activities
(20,316
)
 
(80,314
)
Net increase in cash, cash equivalents and restricted cash
17,258

 
20,828

Cash, cash equivalents and restricted cash at beginning of period
65,626

 
22,599

Cash, cash equivalents and restricted cash at end of period
$
82,884

 
$
43,427

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
14,493

 
$

Income taxes paid, net of refunds
$
7,209

 
$
9,358

 
 
 
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6


XPERI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Xperi Corporation (the "Company") 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 and shares of the combined company traded on the NASDAQ market under Tessera’s ticker symbol TSRA. During the first quarter of 2017, the Company introduced its new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under the new stock ticker, XPER.

Xperi Corporation licenses its innovative technologies and inventions to global electronic device and manufacturing companies which, in turn, integrate the technologies into their own enterprise, consumer electronics and semiconductor products. The Company's technologies and solutions are widely proliferated. The Company's audio technologies have shipped in billions of devices for the home, mobile and automotive markets. The Company's imaging technologies are embedded in more than 25% of smartphones on the market today. The Company's semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips. Key end-markets enabled by the Company's technology solutions include mobile, home, datacenter, and automotive.
The accompanying interim unaudited condensed consolidated financial statements as of June 30, 2017 and 2016, and for the three and six months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2016 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 27, 2017 (the “Form 10-K”).
The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2017 or any future period and the Company makes no representations related thereto.
Reclassification
Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have not been notable changes in the Company’s significant accounting policies during the six months ended June 30, 2017, as compared to the significant accounting policies described in the Form 10-K.

Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-01, "Classifying the Definition of a Business." This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted for transactions for which the acquisition date occurs before the effective date of the ASU only when the transaction has not been reported in financial statements that have been issued. The Company chose to early adopt this standard effective for the year ended December 31, 2016.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." This ASU provides guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The Company chose to early adopt this standard effective January 1, 2017. The Company had an $8.5 million increase in

7


restricted cash during the six months ended June 30, 2017 which would have been shown as a use of cash and cash equivalents under previous guidance.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted this update effective January 1, 2017. The cumulative impact of this update was an adjustment of $0.8 million to retained earnings.

Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has further clarified this new guidance for revenue recognition by issuing ASU No. 2016-08 (principal versus agent considerations), ASU No. 2016-10 (identifying performance obligations and licensing), ASU No. 2016-12 (narrow-scope improvements and practical expedients), and ASU No. 2016-20 (technical corrections and improvements to Topic 606). The new standard is effective for the Company beginning January 1, 2018. The Company expects the standard to have a material impact on the timing of revenue recognition and expects that the standard will cause volatility in its quarterly revenue trends. Under the new standard, the current practice of many licensing companies of reporting revenue from per-unit royalty based arrangements one quarter in arrears would no longer be accepted and instead the Company will be expected to estimate per-unit royalty-based revenue. The Company also expects the standard to have a significant impact on the timing of revenue recognition associated with its fixed fee arrangements, as a majority of such revenue is expected to be recognized at the initiation of the license term. The Company is currently reviewing the accounting for its minimum guarantee contracts under the new standard to determine whether revenue recognition is recorded at the initiation of the license term or over the life of the agreement. In addition, the Company currently expects to adopt this standard using the modified retrospective method, under which the Company would record a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2018 determined on the basis of the impact of the new standard on contracts that are not completed as of January 1, 2018. The Company is currently evaluating and finalizing the full impact of this new standard on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)." The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases while the accounting by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this new standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for the Company in the first quarter of the year ending December 31, 2020. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal

8


years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the effect this standard will have on its consolidated statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements have not been issued. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted.

NOTE 3 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Prepaid income taxes
$
528

 
$
6,645

Income tax receivable
6,499

 
3,109

Interest receivable
304

 
310

Other
8,630

 
9,086

 
$
15,961

 
$
19,150


Property and equipment, net consisted of the following (in thousands):

 
June 30, 2017
 
December 31, 2016
Equipment, furniture and other
$
29,810

 
$
28,071

Building and improvements
18,196

 
18,153

Land
5,300

 
5,300

Leasehold improvements
6,482

 
6,346

 
59,788

 
57,870

Less: accumulated depreciation and amortization
(22,616
)
 
(19,015
)
 
$
37,172

 
$
38,855


Depreciation and amortization expense for the three months ended June 30, 2017 and 2016 amounted to $1.8 million and $0.4 million , respectively.

Depreciation and amortization expense for the six months ended June 30, 2017 and 2016 amounted to $3.6 million and $0.8 million , respectively.

Accrued liabilities consisted of the following (in thousands):

9


 
June 30, 2017
 
December 31, 2016
Employee compensation and benefits
$
24,825

 
$
18,584

Accrued interest

 
2,200

Other
11,898

 
8,302

 
$
36,723

 
$
29,086


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Unrealized loss on available-for-sale securities, net of tax
$
(94
)
 
$
(148
)
 
$
(94
)
 
$
(148
)
NOTE 4 – FINANCIAL INSTRUMENTS
The following is a summary of marketable securities at June 30, 2017 and December 31, 2016 (in thousands):
 
 
June 30, 2017
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
43,883

 
$
9

 
$
(57
)
 
$
43,835

Commercial paper
3,744

 

 

 
3,744

Treasury and agency notes and bills
6,000

 

 
(46
)
 
5,954

Money market funds
14,936

 

 

 
14,936

Total available-for-sale securities
$
68,563

 
$
9

 
$
(103
)
 
$
68,469

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
14,936

Short-term investments
 
 
 
 
 
 
53,533

Total marketable securities
 
 
 
 
 
 
$
68,469

 
December 31, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
36,590

 
$
7

 
$
(95
)
 
$
36,502

Commercial paper
5,220

 

 
(4
)
 
5,216

Treasury and agency notes and bills
6,029

 

 
(57
)
 
5,972

Money market funds
14,146

 

 

 
14,146

Total available-for-sale securities
$
61,985

 
$
7

 
$
(156
)
 
$
61,836

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
14,457

Short-term investments
 
 
 
 
 
 
47,379

Total marketable securities
 
 
 
 
 
 
$
61,836

At June 30, 2017 and December 31, 2016 , the Company had $127.9 million and $113.0 million , respectively, in cash, cash equivalents and short-term investments. These balances include $59.5 million and $51.2 million in cash held in operating accounts not included in the tables above at June 30, 2017 and December 31, 2016 , respectively. The Company has $8.5 million in restricted cash which is required to secure bonds against potential damages Broadcom may face as a result of the Company enforcing the injunction granted by the court in Germany. If the injunction is reversed or vacated, all or a portion of the restricted cash could be at risk.  The Company currently estimates this cash will be restricted for longer than 12 months. See Part II, Item 1 " legal Proceedings" for additional information.

10


The gross realized gains and losses on sales of marketable securities were not significant during the three and six months ended June 30, 2017 and 2016 .
Unrealized losses (net of unrealized gains) were $0.1 million , net of tax, as of June 30, 2017 and December 31, 2016. These amounts were related to temporary fluctuations in value of the remaining available-for-sale securities and were due primarily to changes in interest rates and market and credit conditions of the underlying securities. Certain investments with a temporary decline in value are not considered to be other-than-temporarily impaired as of June 30, 2017 because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the three and six months ended June 30, 2017 and 2016 , respectively, the Company did not record any impairment charges related to its marketable securities.
The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at June 30, 2017 and December 31, 2016, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):
 
June 30, 2017
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
$
28,755

 
$
(43
)
 
$
3,810

 
$
(14
)
 
$
32,565

 
$
(57
)
Treasury and agency notes and bills
5,954

 
(46
)
 

 

 
5,954

 
(46
)
Total
$
34,709

 
$
(89
)
 
$
3,810

 
$
(14
)
 
$
38,519

 
$
(103
)
 
December 31, 2016
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
$
14,678

 
$
(44
)
 
$
13,230

 
$
(51
)
 
$
27,908

 
$
(95
)
Commercial paper
5,216

 
(4
)
 

 

 
5,216

 
(4
)
Treasury and agency notes and bills
5,972

 
(57
)
 

 

 
5,972

 
(57
)
Total
$
25,866

 
$
(105
)
 
$
13,230

 
$
(51
)
 
$
39,096

 
$
(156
)

The estimated fair value of marketable securities by contractual maturity at June 30, 2017 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
 
 
Estimated
Fair Value
Due in one year or less
$
38,741

Due in one to two years
15,244

Due in two to three years
14,484

Total
$
68,469

NOTE 5 – FAIR VALUE

The Company follows the authoritative guidance for fair value measurement and the fair value option for financial assets and financial liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

11


Level 1
 
Quoted prices in active markets for identical assets.
Level 2
 
Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3
 
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
When applying fair value principles in the valuation of assets, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We use the fair value of our Level 1 and calculate Level 2 instruments based on the exchange traded price of similar or identical instruments, where available, or based on other observable inputs. There were no significant transfers into or out of Level 1 or Level 2 that occurred between December 31, 2016 and June 30, 2017.
The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of June 30, 2017 (in thousands):
 
 
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Money market funds (1)
$
14,936

 
$
14,936

 
$

 
$

Corporate bonds and notes (2)
43,835

 

 
43,835

 

Treasury and agency notes and bills (2)
5,954

 

 
5,954

 

Commercial paper (2)
3,744

 

 
3,744

 

Total Assets
$
68,469

 
$
14,936

 
$
53,533

 
$

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at June 30, 2017 :
(1)
Reported as cash and cash equivalents.
(2)
Reported as short-term investments.

The Company also has outstanding debt at June 30, 2017 and December 31, 2016 that is considered a level 2 liability and is measured at fair value on a recurring basis. See Note 8 “ Debt ” for additional information. At June 30, 2017 and December 31, 2016, the fair value of our debt is not materially different than the outstanding principal amount.
The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of December 31, 2016 (in thousands):
 
 
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Money market funds (1)
$
14,146

 
$
14,146

 
$

 
$

Corporate bonds and notes (2)
36,502

 

 
36,502

 

Treasury and agency notes and bills (2)
5,972

 

 
5,972

 

Commercial paper (2)
5,216

 

 
5,216

 

Total Assets
$
61,836

 
$
14,146

 
$
47,690

 
$

 

12


The following footnotes indicate where the noted items were recorded in the Consolidated Balance Sheet at December 31, 2016 :
(1)
Reported as cash and cash equivalents.
(2)
Reported as short-term investments.

NOTE 6 - BUSINESS COMBINATION

On December 1, 2016, the Company completed its acquisition of DTS, pursuant to the Agreement and Plan of Merger, dated as of September 19, 2016. The acquisition was accounted for under the acquisition method of accounting.
Certain amounts of assets and liabilities recorded in the preliminary purchase price allocation are provisional and are subject to certain working capital and other adjustments, which could potentially be material. The Company has not yet obtained all available information necessary to finalize the measurement of all assets and liabilities acquired. In the six months ended June 30, 2017, based on additional information, the Company revised its estimates of unbilled contracts receivable relating to products licensed by DTS prior to the acquisition date of December 1, 2016 which resulted in $3.5 million , net of tax, increase to goodwill.
The Company is still waiting for additional information to finalize the measurement of unbilled contracts receivable. The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to certain acquired tax attributes. In addition, the Company is waiting on information related to certain pre-acquisition income tax filing positions of DTS that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.

NOTE 7 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

The changes to the carrying value of goodwill from January 1, 2017 through June 30, 2017 are reflected below (in thousands):

December 31, 2016
$
382,963

 
 
Purchase price adjustment related to the acquisition of DTS (1)
3,450

 
 
June 30, 2017
$
386,413

 
(2)
(1) This adjustment related to the measurement of unbilled contract receivables which were estimated at the time of acquisition, see Note 6 - " Business Combinations."
(2) Of this amount, approximately $378.7 million is allocated to our Product Licensing reporting unit and approximately $7.7 million is allocated to our Semiconductor and IP Licensing reporting unit.
Identified intangible assets consisted of the following (in thousands):
 

13


 
 
 
June 30, 2017
 
December 31, 2016
 
Average
Life
(Years)
 
Gross
Assets
 
Accumulated
Amortization
 
Net
 
Gross
Assets
 
Accumulated
Amortization
 
Net
Acquired patents / core technology
3-15
 
$
140,744

 
$
(105,589
)
 
$
35,155

 
$
140,744

 
$
(96,896
)
 
$
43,848

Existing technology
5-10
 
204,394

 
(44,385
)
 
160,009

 
203,442

 
(27,315
)
 
176,127

Customer contracts and related relationships
3-9
 
291,769

 
(41,352
)
 
250,417

 
291,769

 
(14,011
)
 
277,758

Trademarks/trade name
4-10
 
40,083

 
(3,624
)
 
36,459

 
40,083

 
(1,138
)
 
38,945

Non-competition agreements
1
 
2,231

 
(1,301
)
 
930

 
2,231

 
(186
)
 
2,045

Total amortizable intangible assets
 
 
679,221

 
(196,251
)
 
482,970

 
678,269

 
(139,546
)
 
538,723

In-process research and development
 
 
2,204

 

 
2,204

 
3,156

 

 
3,156

Total intangible assets
 
 
$
681,425

 
$
(196,251
)
 
$
485,174

 
$
681,425

 
$
(139,546
)
 
$
541,879

Amortization expense for the three months ended June 30, 2017 and 2016 amounted to $28.2 million and $6.1 million , respectively.
Amortization expense for the six months ended June 30, 2017 and 2016 amounted to $56.7 million and $12.1 million , respectively.
As of June 30, 2017 , the estimated future amortization expense of total (amortizable) intangible assets is as follows (in thousands):
2017 (remaining 6 months)
$
55,218

2018
107,586

2019
98,500

2020
86,785

2021
79,123

Thereafter
55,758

 
$
482,970

NOTE 8 - DEBT

On December 1, 2016, in connection with the consummation of the acquisition of DTS, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto.
The Credit Agreement provides for a $600 million seven-year term B loan facility (the “Term B Loan Facility”). The interest rates applicable to loans outstanding under the Credit Agreement with respect to the Term B Loan Facility are (i) until the delivery of financial statements for the first full fiscal quarter ending after December 1, 2016 equal to, at the Company's option, either a base rate plus a margin of 2.25% per annum or LIBOR plus a margin of 3.25% per annum (the “Effective Date Margin”) and (ii) thereafter, (x) the Effective Date Margin or (y) so long as the ratio of consolidated indebtedness of the Company (minus all unrestricted cash and cash equivalents) to consolidated EBITDA (subject to other customary adjustments) is equal to or less than 1.50 to 1.00 , equal to, at the Company's option either a base rate plus a margin of 2.00% per annum or LIBOR plus a margin of 3.00% per annum. Commencing March 31, 2017, the Term B Loan Facility will amortize in equal quarterly installments in aggregate quarterly amounts equal to 0.25% of the original principal amount of the Term B Loan Facility, with the balance payable on the maturity date of the Term B Loan Facility (in each case subject to adjustment for prepayments). The Term B Loan Facility matures on November 30, 2023 .
Upon the closing of the Credit Agreement, the Company borrowed $600 million under the Term B Loan facility. Net proceeds were used on December 1, 2016, together with cash and cash equivalents, to finance the acquisition of DTS.
The obligations under the Credit Agreement are guaranteed by the Company pursuant to the Guaranty (the “Guaranty”), dated December 1, 2016, among the Company, Royal Bank of Canada, as administrative agent, and the other subsidiary guarantors party thereto. The obligations under the Credit Agreement are guaranteed by substantially all of the assets of the Company

14


pursuant to the Security Agreement (the “Security Agreement”), dated December 1, 2016, among the Company, Royal Bank of Canada, as collateral agent, and the other pledgors party thereto.
The Credit Agreement contains customary events of default, upon the occurrence of which, after any applicable grace period, the lenders will have the ability to accelerate all outstanding loans thereunder.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of the Company to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, transfer or sell assets and make restricted payments. These covenants are subject to a number of limitations and exceptions set forth in the Credit Agreement. The Company was in compliance with all requirements as of June 30, 2017.
At June 30, 2017, $597 million was outstanding with an interest rate, including the amortization of debt issuance costs, of 4.7% . Interest is payable quarterly. There were also $15.5 million of unamortized debt issuance costs recorded as a reduction of the long-term portion of the debt. Interest expense for the three and six months ended June 30, 2017 was $7.0 million and $ 13.5 million , respectively. Amortized debt issuance costs, which were included in the interest expense, amounted to $0.6 million and $1.2 million for the three and six months ended June 30, 2017, respectively. There were debt principal payments of $1.5 million and $3.0 million during the three and six months ended June 30, 2017, respectively. There were no interest costs in the three and six months ended June 30, 2016 since the debt was incurred in December 2016.
As of June 30, 2017, future minimum principal payments for long-term debt, including the current portion, are summarized as follows (in thousands):
2017 (remaining six months)
$
3,000

2018
6,000

2019
6,000

2020
6,000

2021
6,000

Thereafter
570,000

Total
$
597,000

Additional payments of debt principal must be made in the event of certain working capital conditions as outlined in the Credit Agreement. There are no penalties for these payments. There were no such additional payments made during the three and six months ended June 30, 2017.

NOTE 9 – NET INCOME (LOSS) PER SHARE
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units ("RSUs"). Non-forfeitable dividends are paid on unvested shares of restricted stock. No dividends are accrued or paid on unvested RSUs. As such, shares of restricted stock are considered participating securities under the two-class method of calculating earnings per share. The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and six months ended June 30, 2017 and 2016.

15


The following table sets forth the computation of basic and diluted shares (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Denominator:
 
 
 
 
 
 
 
     Weighted average common shares outstanding
49,477

 
48,853

 
49,264

 
49,412

      Less: shares of restricted stock subject to repurchase
(2
)
 
(17
)
 
(3
)
 
(20
)
Total common shares-basic
49,475

 
48,836

 
49,261

 
49,392

Effect of dilutive securities:
 
 
 
 
 
 
 
     Options


 
234

 


 
222

     Restricted stock awards and units


 
350

 


 
379

Total common shares-diluted
49,475


49,420

 
49,261

 
49,993

 
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards that are subject to repurchase. Diluted net income (loss) per share is computed using the treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted stock awards and units and incremental common shares issuable upon the exercise of stock options, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise and the average unrecognized stock compensation cost during the period.
For the three and six months ended June 30, 2017, there was no difference in the weighted average number of common shares used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. A total 0.7 million and 1.1 million shares subject to stock options and restricted stock awards and units were excluded from the computation of diluted net loss per share for the three and six months ended June 30, 2017, respectively, because including them would have been anti-dilutive.
For the three and six months ended June 30, 2016, in the calculation of net income per share, 0.4 million and 0.1 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.
NOTE 10 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. There were no repurchases during the six months ended June 30, 2017 . The Company has repurchased a total of approximately 10,488,000 shares of common stock, since inception of the plan, at an average price of $27.83 per share for a total cost of $291.8 million . The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of June 30, 2017 , the total remaining amount available for repurchase was $158.2 million . The Company plans to continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans
The 2003 Plan
As of June 30, 2017 , there were approximately 1.1 million shares reserved for future grant under the Company’s 2003 Equity Incentive Plan (the “2003 Plan”).
A summary of the stock option activity is presented below (in thousands, except per share amounts):

16


 
Options Outstanding
 
Number of
Shares Subject to Options
 
Weighted
Average
Exercise
Price Per
Share
Balance at December 31, 2016
1,332

 
$24.41
Options granted

 
Options exercised
(171
)
 
$23.22
Options canceled / forfeited / expired
(40
)
 
$36.49
Balance at June 30, 2017
1,121

 
$24.16
 
 
 
 

Restricted Stock Awards and Units
Information with respect to outstanding restricted stock awards and units as of June 30, 2017 is as follows (in thousands, except per share amounts):
 
Restricted Stock and Restricted Stock Units
 
Number of Shares
Subject to Time-
based Vesting
 
Number of Shares
Subject to
Performance-
based Vesting
 
Total Number
of Shares
 
Weighted Average
Grant Date Fair
Value Per Share
Balance at December 31, 2016
1,696

 
384

 
2,080

 
$
33.91

Awards and units granted
968

 
772

 
1,740

 
$
33.87

Awards and units vested / earned
(459
)
 
(77
)
 
(536
)
 
$
34.17

Awards and units canceled / forfeited
(97
)
 
(89
)
 
(186
)
 
$
29.39

Balance at June 30, 2017
2,108

 
990

 
3,098

 
$
34.11


Performance Awards and Units
Performance awards and units may be granted to employees or consultants based upon, among other things, the contributions, responsibilities and other compensation of the particular employee or consultant. The value and the vesting of such performance awards and units are generally linked to one or more performance goals or other specific performance goals determined by the Company, in each case on a specified date or dates or over any period or periods determined by the Company, and range from zero to 100 percent of the grant.
Employee Stock Purchase Plans
As of June 30, 2017 , there were approximately 563,002 shares reserved for grant under the Company’s 2003 Employee Stock Purchase Plan (the “ESPP”) and the International Employee Stock Purchase Plan (the “International ESPP”), collectively.
NOTE 11 – STOCK-BASED COMPENSATION EXPENSE
The effect of recording stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 is as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Research, development and other related costs
$
3,437

 
$
1,487

 
$
6,134

 
$
2,870

Selling, general and administrative
5,087

 
2,441

 
9,451

 
4,698

Total stock-based compensation expense
8,524

 
3,928

 
15,585

 
7,568

Tax effect on stock-based compensation expense
(2,359
)
 
(1,106
)
 
(4,379
)
 
(2,116
)
Net effect on net income (loss)
$
6,165

 
$
2,822

 
$
11,206

 
$
5,452



17


Stock-based compensation expense categorized by various equity components for the three and six months ended June 30, 2017 and 2016 is summarized in the table below (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Employee stock options
$
586

 
$
501

 
$
1,231

 
$
1,010

Restricted stock awards and units
7,301

 
3,220

 
13,287

 
6,152

Employee stock purchase plan
637

 
207

 
1,067

 
406

Total stock-based compensation expense
$
8,524

 
$
3,928

 
$
15,585

 
$
7,568

There were no options granted in the three and six months ended June 30, 2017 and 2016.
ESPP grants occur in February and August. The following assumptions were used to value the ESPP shares for these grants:
 
 
 
 
 
 
February 2017
 
February 2016
 
Expected life (years)
 
2.0

 
2.0

 
Risk-free interest rate
 
1.2
%
 
0.8
%
 
Dividend yield
 
2.0
%
 
2.4
%
 
Expected volatility
 
28.3
%
 
30.0
%
 

NOTE 12 – INCOME TAXES

For the three months ended June 30, 2017, the Company recorded an income tax provision of $26.6 million , and for the six months ended June 30, 2017, the Company recorded an income tax benefit of $8.7 million . The income tax provision of $26.6 million for the three months ended June 30, 2017 was primarily related to a decrease in our estimated annual effective tax rate applied to actual year-to-date losses incurred that resulted in a reduction of actual tax benefit as compared to the prior quarter. The decrease in the annual effective tax rate, as compared to the prior quarter, is due to a change in the jurisdictional mix of income and level of forecasted profitability. The income tax benefit of $8.7 million for the six months ended June 30, 2017 was primarily related to losses generated in the U.S. and foreign operations offset by foreign withholding tax liability. The provision for income taxes for the three months and six months ended June 30, 2016 was $11.5 million and $20.3 million , respectively. The provision for income taxes for the three months and six months ended June 30, 2016 was primarily related to foreign withholding taxes and tax liability generated from U.S. and foreign operations. The income tax benefit for the six months ended June 30, 2017 as compared to the income tax provision during the same period in the prior year is largely attributable to losses generated from U.S. and foreign operations. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter.

As of June 30, 2017, unrecognized tax benefits were $30.5 million (which is included in long-term deferred tax and other long-term liabilities on the Condensed Consolidated Balance Sheet), of which $24.0 million would affect the effective tax rate if recognized. As of June 30, 2016, unrecognized tax benefits were $3.2 million (which is included in long-term deferred tax and other liabilities on the Condensed Consolidated Balance Sheet), of which $2.4 million would affect the effective tax rate if recognized. At this time, the Company is unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. The increase in unrecognized tax benefits as compared to the same period in the prior year is largely due to the acquisition of DTS in 2016.

It is the Company's policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three and six months ended June 30, 2017 and June 30, 2016 the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. As of June 30, 2017 and December 31, 2016, the Company had accrued $0.5 million and $0.5 million , respectively, of interest and penalties related to unrecognized tax benefits.
At June 30, 2017, the Company's 2012 through 2016 tax years were open and subject to potential examination in one, or more, material jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but not yet

18


utilized in a year that is closed under the statute of limitations may also be subject to examination. The Company is currently under examination by the Internal Revenue Service for tax year 2014. The Company does not have any information as a result of the ongoing examination that would give rise to a change in position around any new or existing unrecognized tax benefits. The Company completed the California Franchise Tax Board examination related to its 2011 and 2012 tax returns which resulted in minimal changes to its statement of operations. The Company is not currently under foreign income tax examination.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2029. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. There were no material changes to our future minimum lease payments during the three and six months ended June 30, 2017. Rent expense for the three months ended June 30, 2017 and 2016 amounted to $1.5 million and $0.5 million , respectively. Rent expense for the six months ended June 30, 2017 and 2016 amounted to $3.1 million and $1.1 million , respectively.
Contingencies
At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company is currently unable to predict the final outcome of lawsuits to which it is a party and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. An adverse decision in any of these proceedings could significantly harm the Company’s business and consolidated financial position, results of operations or 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.
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. Tessera, Inc.’s opening brief is due August 14, 2017, and Toshiba’s answering brief is due September 13, 2017. A hearing for oral argument has not yet been scheduled.

Other Litigation Matters
The Company and its subsidiaries are involved in litigation matters and claims in the normal course of business. In the past, the Company and its subsidiaries have litigated to enforce their respective patents and other intellectual property rights, to enforce the terms of license agreements, to protect trade secrets, to determine the validity and scope of the proprietary rights of others and to defend itself or its customers against claims of infringement or invalidity. The Company expects it or its subsidiaries will be involved in similar legal proceedings in the future, including proceedings regarding infringement of its patents, and proceedings to ensure proper and full payment of royalties by licensees under the terms of its license agreements.

19


The existing and any future legal actions may harm the Company’s business. For example, legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to the Company, or to challenge the validity and enforceability of patents owned by the Company’s subsidiaries or the scope of license agreements with the Company’s subsidiaries, and could significantly damage the Company’s relationship with such licensee or strategic partner and, as a result, prevent the adoption of the Company’s other technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of licensees or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations with them and cause the Company to lose royalty revenue.

The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal, and financial resources from the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from others, limit the value of the Company’s licensed technology or otherwise negatively impact the Company’s stock price or its business and consolidated financial position, results of operations or cash flows.
NOTE 14 – SEGMENT AND GEOGRAPHIC INFORMATION
In connection with the acquisition of DTS, the Company re-evaluated its reportable segments. The Company concluded that it has 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 the Company’s 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, including the Company's DTS and FotoNation subsidiaries, licenses its technologies and intellectual property related to audio, digital radio and imaging solutions under the brands DTS, HD Radio and FotoNation. The Product Licensing solutions typically include the delivery of software or hardware based solutions, combined with various other intellectual property, including know how, patents, trademarks, and copyrights. Product Licensing represents revenue derived primarily from the consumer electronics market and related applications servicing the home, automotive and mobile segments.

The Semiconductor and IP Licensing segment develops and licenses semiconductor technologies and IP to manufacturers, foundries, subcontract assemblers and others.  The segment includes revenue generated from the technology and IP portfolios of Tessera, Inc. Invensas and Invensas Bonding Technologies, Inc. (formally Ziptronix, Inc.). Tessera, Inc. pioneered chip-scale packaging solutions. Invensas develops advanced semiconductor packaging and 3D interconnect solutions, including wafer bonding solutions, for applications such as smartphones, tablets, laptops, PCs, data centers and automobiles. The Company expands its technology and IP offerings in this segment through a combination of internal R&D and acquisitions.  The Company also provides engineering services to customers in the form of technology demonstrations and technology transfers to assist their evaluation and adoption of the Company's technologies.

The Company does 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 is none to report. The Company does not allocate other income and expense to reportable segments. 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 the Company’s segment revenue, operating expenses and operating income (loss) for the three and six months ended June 30, 2017 and 2016 (in thousands):


20


 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
$
44,960

 
$
57,648

 
$
84,514

 
$
107,782

Product licensing segment
46,362

 
9,372

 
74,063

 
19,215

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
21,374

 
18,922

 
44,137

 
38,399

Product licensing segment
42,619

 
2,780

 
85,801

 
6,031

Unallocated operating expenses (1)
39,829

 
10,364

 
87,447

 
20,651

Total operating expenses
103,822

 
32,066

 
217,385

 
65,081

Operating income (loss):

 
 
 
 
 
 
Semiconductor and IP licensing segment
23,586

 
38,726

 
40,377

 
69,383

Product licensing segment
3,743

 
6,592

 
(11,738
)
 
13,184

Unallocated operating expenses (1)
(39,829
)
 
(10,364
)
 
(87,447
)
 
(20,651
)
Total operating income (loss)
$
(12,500
)
 
$
34,954

 
$
(58,808
)
 
$
61,916


(1) Unallocated operating expenses consist primarily of general and administrative expenses, such as administration, human resources, finance, information technology, corporation development and procurement. These expenses are not allocated because it is not practical to do so.
A significant portion of the Company’s revenue is derived from licensees headquartered outside of the U.S., principally in Asia, and it is expected that this revenue will continue to account for a significant portion of total revenue in future periods. The table below lists the geographic revenue for the periods indicated (in thousands):
 
 
Three Months Ended,
 
Six Months Ended,
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
U.S.
$
33,680

 
37
%
 
$
26,148

 
39
%
 
$
67,086

 
42
%
 
$
54,809

 
43
%
Korea
14,103

 
15

 
23,600

 
35

 
20,990

 
13

 
37,421

 
30

Taiwan
8,226

 
9

 
13,192

 
20

 
16,217

 
10

 
20,391

 
16

Japan
20,169

 
22

 
834

 
1

 
34,059

 
22

 
4,511

 
4

Other
15,144

 
17

 
3,246

 
5

 
20,225

 
13

 
9,865

 
7

 
$
91,322

 
100
%
 
$
67,020

 
100
%
 
$
158,577

 
100
%
 
$
126,997

 
100
%
For the three months ended June 30, 2017 and 2016, there were three and four customers, respectively, in each period that each accounted for 10% or more of total revenue. For the six months ended June 30, 2017 and 2016, there were three customers in each period that each accounted for 10% or more of total revenue.
NOTE 15 - SUBSEQUENT EVENTS

On July 21, 2017, the Board declared a cash dividend of $0.20 per share of common stock, payable on September 8, 2017 for the stockholders of record at the close of business on August 18, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2016 found in the Form 10-K.

This Quarterly 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

21


to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly 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 integration of the DTS business, 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 Quarterly 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 II, Item 1A of this Quarterly 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 Quarterly 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 Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Corporate Information

Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. Our telephone number is (408) 321-6000. We maintain a 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 Corporation, the Xperi Corporation logo, Tessera, the Tessera logo, DTS, the DTS logo, FotoNation, the FotoNation logo, Invensas, the Invensas logo, DigitalAperture, FaceTools, FacePower, FotoSavvy, IrisCam, LifeFocus, xFD, FD, DFD, TFD, QFD, BVA, ZiBond, DBI, DTS‑ HD , DTS Sound, DTS Studio Sound, DTS Virtual:X, DTS Neural Surround, 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 Quarterly Report, the “Company,” “we,” “us” and “our” refer to Xperi Corporation, which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.
Business Overview

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

We license our innovative technologies and inventions to global electronic device manufacturing companies who, in turn, integrate the technologies into their own enterprise, consumer electronics and semiconductor products. Our technologies and solutions are widely proliferated. 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 smartphone market. Our semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips. Key end-markets enabled by Xperi's technology solutions include mobile, home, datacenter and automotive.


22


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 and shares of the combined company traded on the NASDAQ market under Tessera’s ticker symbol TSRA. 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.

Results of Operations
Under the generally accepted accounting principles regarding business combinations, we were unable to record $7.3 million and $38.6 million in revenue in the three and six months ended June 30, 2017, that would have been recognized by DTS if not for the acquisition. If allowed, this revenue would have had a significant impact on the operating results as described below.
Revenue
Our revenue is generated primarily from royalty and license fees. Royalty and license fees are generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenue prior to obtaining these reports from the licensees, we generally recognize royalty revenue on a one quarter lag. 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 derive fair value of each element 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 timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; (e) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers and (f) 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 harm our results of operations.

In the past, we have engaged in litigation and arbitration proceedings 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.
The following table presents our historical operating results for the periods indicated as a percentage of revenue:

 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Revenue:
 
 
 
 
 
 
 
 
Royalty and license fees
100
 %
 
100
%
 
100
 %
 
100
%
 
Total revenue
100

 
100

 
100

 
100

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
1

 

 
2

 

 
Research, development and other related costs
29

 
15

 
33

 
16

 
Selling, general and administrative
36

 
17

 
47

 
18

 
Amortization expense
31

 
9

 
36

 
9

 
Litigation expense
9

 
8

 
11

 
9

 
Total operating expenses
106

 
49

 
129

 
52

 
Operating income (loss)
(6
)
 
51

 
(29
)
 
48

 
Interest expense
8

 

 
9

 

 
Other income and expense, net

 
1

 

 
1

 
Income (loss) before taxes
(14
)
 
52

 
(38
)
 
49

 
Provision for (benefit from) income taxes
29

 
17

 
(6
)
 
16

 
Net income (loss)
(43
)%
 
35
%
 
(32
)%
 
33
%
 

23



Our royalty and license fees were as follows (in thousands, except for percentages):
 
 
Three Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
91,322

 
$
67,020

 
$
24,302

 
36
%
 
 
 
 
 
 
 
 

The $24.3 million or 36% increase in revenue was due to our acquisition of DTS in December 2016, offset by reductions in licensing revenue from a significant expired agreement as well as seasonality in revenue timing from certain licenses. Minimum guarantee fees from DTS licensees for contracts entered into prior to the December 1, 2016 acquisition were not recorded as revenue during the three months ended June 30, 2017, as under business combination accounting guidance the earnings process was deemed to have been completed prior to the acquisition.
 
 
Six Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
158,577

 
$
126,997

 
$
31,580

 
25
%
 
 
 
 
 
 
 
 

The $31.6 million or 25% increase in revenue was due to our acquisition of DTS in December 2016, offset by reductions in licensing revenue from a significant expired agreement as well as seasonality in revenue timing from certain licenses. 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 during the six months ended June 30, 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 consists of royalties paid to third parties and direct compensation and related expenses to provide non-recurring engineering services ("NRE").

Cost of revenue for the three months ended June 30, 2017 was $1.3 million, as compared to $0.1 million for the three months ended June 30, 2016. Cost of revenue for the six months ended June 30, 2017 was $2.7 million, as compared to $0.1 million for the six months ended June 30, 2016. The increases were a result of royalties paid to third parties in connection with audio revenue from the acquired DTS business in the first and second quarters of 2017.

We anticipate these expenses will continue to increase when compared to 2016 due to 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 consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of audio and image enhancement technologies, chip-scale and multi-chip packaging, circuitry design, 3D-IC architectures, wafer-level packaging technology, bonding technologies and machine learning. All research, development and other related costs are expensed as incurred.
Research, development and other related costs for the three months ended June 30, 2017 were $26.3 million, as compared to $10.3 million for the three months ended June 30, 2016 , an increase of $16.0 million or 155%. The increase was primarily related to a $10.8 million increase in personnel related expenses, a $2.0 million increase in stock based compensation and a

24


$1.3 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.
Research, development and other related costs for the six months ended June 30, 2017 were $52.3 million, as compared to $20.4 million for the six months ended June 30, 2016 , an increase of $31.9 million or 157%. The increase was primarily related to a $22.1 million increase in personnel related expenses, a $3.3 million increase in stock based compensation and a $2.5 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.
We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.
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 three months ended June 30, 2017 were $33.0 million, as compared to $11.2 million for the three months ended June 30, 2016 , an increase of $21.8 million or 196%. The increase was primarily attributable to an increase of $11.0 million in personnel related expenses, a $3.3 million increase in outside services, a $2.6 million increase in stock based compensation and a $1.2 million increase in depreciation. 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 $1.9 million due primarily to expenditures associated with a trade show and marketing initiatives in Q2 2017.
Selling, general and administrative expenses for the six months ended June 30, 2017 were $74.2 million, as compared to $22.3 million for the six months ended June 30, 2016 , an increase of $51.9 million or 233%. The increase was primarily attributable to an increase of $23.4 million in personnel related expenses, an $8.5 million increase in outside services, a $4.8 million increase in stock based compensation, a $3.0 million increase in facilities and a $2.5 million increase in depreciation. 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 $6.6 million due primarily to two product marketing conferences related to the acquired DTS audio business, one-time expenses related to the branding of our new company name, and marketing initiatives and campaigns we undertook in the first half of 2017.

We anticipate selling, general and administrative expenses will remain higher than in the prior year due to the acquisition of DTS. While marketing expenses will remain higher in 2017 compared to 2016, we anticipate marketing expenses will decrease during the remainder of 2017 since the remaining conferences will have lower costs than those attended in the first and second quarters and the additional branding expenses are non-recurring.
Amortization Expense
Amortization expense for the three months ended June 30, 2017 was $28.2 million, as compared to $6.1 million for the three months ended June 30, 2016 , an increase of $22.1 million. This increase was primarily attributable to intangible assets recorded in connection with the DTS acquisition and the purchase of certain other intangible assets in the fourth quarter of 2016.
Amortization expense for the six months ended June 30, 2017 was $56.7 million, as compared to $12.1 million for the six months ended June 30, 2016 , an increase of $44.6 million. This increase was primarily attributable to intangible assets recorded in connection with the DTS acquisition and the purchase of certain other intangible assets in the fourth quarter of 2016.

With the acquisition of DTS, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $479 million in intangible assets which will be amortized over the next several years. See Note 7 " Goodwill and Identified Intangible Assets" in the notes to the financial statements for additional information.
Litigation Expense

25


Litigation expense for the three months ended June 30, 2017 was $8.2 million, as compared to $5.3 million for the three months ended June 30, 2016 , an increase of $2.9 million, or 57%. This increase is primarily related to our ongoing legal proceedings with Broadcom and planning activities for potential future litigation.
Litigation expense for the six months ended June 30, 2017 was $18.2 million, as compared to $11.8 million for the six months ended June 30, 2016 , an increase of $6.4 million, or 54%. This increase is primarily related to our ongoing legal proceedings with Broadcom and planning activities for potential future 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 II, Item 1 – Legal Proceeding s, 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 three and six months ended June 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended,
Six Months Ended,
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Research, development and other related costs
$
3,437

 
$
1,487

 
$
6,134

 
$
2,870

Selling, general and administrative
5,087

 
2,441

 
9,451

 
4,698

Total stock-based compensation expense
$
8,524

 
$
3,928

 
$
15,585

 
$
7,568

Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases. For the three months ended June 30, 2017, stock-based compensation expense was $8.5 million, of which $0.6 million related to employee stock options, $7.3 million related to restricted stock awards and units and $0.6 million related to employee stock plan purchases. For the three months ended June 30, 2016, stock-based compensation expense was $3.9 million, of which $0.5 million related to employee stock options, $3.2 million related to restricted stock awards and units and $0.2 million related to employee stock plan purchases. The increase in stock-based compensation for the three months ended June 30, 2017, resulted primarily from increased awards issued and headcount due to our acquisition of DTS.
For the six months ended June 30, 2017, stock-based compensation expense was $15.6 million, of which $1.2 million related to employee stock options, $13.3 million related to restricted stock awards and units and $1.1 million related to employee stock plan purchases. For the six months ended June 30, 2016, stock-based compensation expense was $7.6 million, of which $1.0 million related to employee stock options, $6.2 million related to restricted stock awards and units and $0.4 million related to employee stock plan purchases. The increase in stock-based compensation for the six months ended June 30, 2017, resulted primarily from increased awards issued and headcount due to our acquisition of DTS.
Interest Expense
Interest expense for the three and six months ended June 30, 2017 was $7.0 million and $13.5 million, respectively. There was no interest expense in the three and six months ended June 30, 2016 since the related debt was incurred in December 2016.
Other Income and Expense, Net
Other income and expense, net for the three months ended June 30, 2017 was $0.2 million, as compared to $0.8 million for the three months ended June 30, 2016 . Other income and expense, net for the six months ended June 30, 2017 was $0.3 million, as compared to $1.6 million for the six months ended June 30, 2016 . Other income was higher in the prior year due to interest income earned on higher cash and investment balances.

26


Provision for (benefit from) Income Taxes

For the three months ended June 30, 2017, the Company recorded an income tax provision of $26.6 million, and for the six months ended June 30, 2017, the Company recorded an income tax benefit of $8.7 million. The income tax provision of $26.6 million for the three months ended June 30, 2017 was primarily related to a decrease in our estimated annual effective tax rate applied to actual year-to-date losses incurred that resulted in a reduction of actual tax benefit as compared to the prior quarter. The income tax benefit of $8.7 million for the six months ended June 30, 2017 was primarily related to losses generated in the U.S. and foreign operations offset by foreign withholding tax liability. The provision for income taxes for the three months and six months ended June 30, 2016 was $11.5 million and $20.3 million, respectively. The provision for income taxes for the three months and six months ended June 30, 2016 was primarily related to foreign withholding taxes and tax liability generated from U.S. and foreign operations. The income tax benefit for the six months ended June 30, 2017 as compared to the income tax provision during the same period in the prior year is largely attributable to losses generated from U.S. and foreign operations. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. As such, we determined that no valuation allowance is required on the majority of our U.S. federal deferred tax assets. In the future, we may release valuation allowance and recognize deferred state tax assets or deferred tax assets of other foreign subsidiaries depending on achieving profitability in relevant jurisdictions. 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 still 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. Adjustments could be required in the future if we conclude that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance could have the effect of increasing the income tax provision in the statement of operations in the period the valuation allowance is provided.

Segment Operating Results
In connection with the acquisition of DTS, we re-evaluated our reportable segments. We concluded that we have two reportable segments: (1) Semiconductor and IP Licensing and (2) Product Licensing. Quarterly results for the first and second quarters of 2016 have been recast to conform with this segment presentation. 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 the Company’s 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 licenses technologies related to audio, digital radio, and imaging solutions under the brands DTS, HD Radio and FotoNation. Our Product Licensing solutions 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 the consumer electronics market and related applications servicing the home, automotive and mobile segments.
The Semiconductor and IP Licensing segment develops and licenses semiconductor technologies and intellectual property (IP) to semiconductor manufacturers, foundries, subcontract assemblers and others.  This segment includes revenue generated from technology transfer agreements and licenses to our IP. We have a deep history of developing and monetizing next-generation technologies, including chip-scale packaging solutions and low-temperature wafer bonding solutions. Today, we are actively developing 3D semiconductor packaging, interconnect and bonding solutions for products such as smartphones, tablets, laptops, PCs, and data centers. We expand technology and IP offerings through a combination of internal R&D and acquisitions.  We also provide engineering services to our customers in the form of technology demonstrations and technology transfers to assist their evaluation and adoption of our technologies.

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

27


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 segments’ revenue, operating expenses and operating income (loss) (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
$
44,960

 
$
57,648

 
$
84,514

 
$
107,782

Product licensing segment
46,362

 
9,372

 
74,063

 
19,215

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
21,374

 
18,922

 
44,137

 
38,399

Product licensing segment
42,619

 
2,780

 
85,801

 
6,031

Unallocated operating expenses (1)
39,829

 
10,364

 
87,447

 
20,651

Total operating expenses
103,822

 
32,066

 
217,385

 
65,081

Operating income (loss):
 
 
 
 

 
 
Semiconductor and IP licensing segment
23,586

 
38,726

 
40,377

 
69,383

Product licensing segment
3,743

 
6,592

 
(11,738
)
 
13,184

Unallocated operating expenses (1)
(39,829
)
 
(10,364
)
 
(87,447
)
 
(20,651
)
Total operating income (loss)
$
(12,500
)
 
$
34,954

 
$
(58,808
)
 
$
61,916


(1) Unallocated operating expenses consist primarily of general and administrative expenses, such as administration, human resources, finance, information technology, corporation development and procurement. These expenses are not allocated because it is not practical to do so.
The revenue and operating income amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. Of our $386.4 million in goodwill at June 30, 2017, approximately $378.7 million is allocated to our Product Licensing reporting unit and approximately $7.7 million is allocated to our Semiconductor and IP Licensing reporting unit.
For the three months ended June 30, 2017, the unallocated expenses were $39.8 million compared to $10.4 million for the three months ended June 30, 2016. The increase of $29.4 million was primarily attributable to higher general and administrative personnel expenses that resulted from the acquisition of DTS.
For the six months ended June 30, 2017, the unallocated expenses were $87.4 million compared to $20.7 million for the six months ended June 30, 2016. The increase of $66.7 million was primarily attributable to higher general and administrative personnel expenses that resulted from the acquisition of DTS.

Product Licensing Segment
 

28



 
Three Months Ended
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Revenue:
 
 
 
 
 
 
 
 
Royalty and license fees
$
46,362

 
$
9,372

 
$
74,063

 
$
19,215

 
Total revenue
46,362

 
9,372

 
74,063

 
19,215

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
1,303

 
52

 
2,703

 
139

 
Research, development and other related costs
18,710

 
2,479

 
37,757

 
5,423

 
Litigation
30

 

 
30

 

 
Amortization
22,576

 
249

 
45,311

 
469

 
Total operating expenses
42,619

 
2,780

 
85,801

 
6,031

 
Total operating income (loss)
$
3,743

 
$
6,592

 
$
(11,738
)
 
$
13,184

 


Under generally accepted accounting principles regarding business combinations, we were unable to record customer billings totaling $7.3 million and $38.6 million as revenue in the Product Licensing segment during the three and six months ended June 30, 2017, respectively. If allowed, this revenue would have had a significant impact on the operating results as described below.
Product Licensing revenue for the three months ended June 30, 2017 was $46.4 million as compared to $9.4 million for the three months ended June 30, 2016, an increase of $37.0 million. Product Licensing revenue for the six months ended June 30, 2017 was $74.1 million as compared to $19.2 million for the six months ended June 30, 2016, an increase of $54.9 million. The increase was due to revenue from licenses added through the DTS acquisition. We anticipate Product Licensing revenue for the remainder of 2017 to be higher than revenue for 2016 due principally to the DTS acquisition.
Operating expenses for the three months ended June 30, 2017 were $42.6 million and consisted of cost of revenue of $1.3 million, research, development and other related costs of $18.7 million and amortization costs of $22.6 million. The increase of $39.8 million in total operating expenses as compared to $2.8 million for the three months ended June 30, 2016 was due to the acquisition of DTS. Operating expenses for the six months ended June 30, 2017 were $85.8 million and consisted of cost of revenue of $2.7 million, research, development and other related costs of $37.8 million and amortization costs of $45.3 million. The increase of $79.8 million in total operating expenses as compared to $6.0 million for the six months ended June 30, 2016 was due to the acquisition of DTS. The increases were largely related to personnel-related costs including salary and benefits and stock based compensation from the increased headcount, as well as amort