DTS, Inc. (NASDAQ:DTSI)
Q4 2015 Earnings Conference Call
March 2, 2016 4:30 PM ET
Geri Weinfeld - Director, Investor Relations
Jon Kirchner - Chairman and Chief Executive Officer
Melvin Flanigan - Executive Vice President, Finance and Chief Financial Officer
Brian Towne - Executive Vice President & President of DTS Asia Pacific
James Goss - Barrington Research
Rob Stone - Cowen & Company
Paul Koster - JPMorgan
Steven Frankel - Dougherty & Company
Eric Wold - B. Riley & Co.
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DTS Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Follow the presentation, the call will be opened for questions. [Operator Instructions] Please note this call is being recorded today. Again, this call is being recorded today, Wednesday, March 2, 2016.
I would now like to turn the call over to Geri Weinfeld of DTS Investor Relations. Geri, please go ahead.
Good afternoon, everyone. Thanks for joining us as we report fourth quarter and fiscal year 2015 financial results. With me on the call today are Jon Kirchner, Chairman and CEO; Mel Flanigan, CFO; and Brian Towne, President, Asia-Pacific.
Before we begin, I would like to provide two reminders. First, today’s discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management’s current expectations and beliefs, and therefore subject to risks, uncertainties and changes in circumstances. Please refer to the Risk Factors section in our SEC filings, including our most recent forms 10-K and 10-Q for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call.
Second, we refer to certain non-GAAP financial measures, which exclude charges for stock-based compensation, amortization of intangibles, acquisition and integration, realignment and certain legal expenses and the related tax effects if any, and impute an estimated 30% effective tax rate on the pre-tax earnings of the company. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website. The recording of this conference call will be available on our Investor Relations website at www.dts.com, an unauthorized recording of this webcast is not permitted.
Now, I’ll turn the call over to Jon.
Thanks, Geri. Fourth quarter revenue and earnings were solid, driven primarily by iBiquity and strong game console production. Although 2015 was a challenging year in some respects. We materially advanced the development of ecosystems and the network-connected markets for our mobile and wireless audio solutions.
In addition, the acquisition of iBiquity has expanded our position in the automotive market, increased the scale and profitability of our business, and strengthened our best-in-class suite of audio solutions, putting us in a very strong position for 2016 and beyond.
Before getting into some of the progress we made during 2015, I want to quickly address some of the challenges we faced last year and provide an update on where things stand. Following the launch of Headphone:X on the Qualcomm chip, we engaged with a number of partners eager to integrate the technology on their flagship phones.
However, we discovered that many of them want Headphone:X on multiple platforms with a greater ability to customize our solutions. As planned, we’ve now expanded the availability of Headphone:X on multiple platforms and have developed customizable implementations of Headphone:X that address these issues. I’ll touch on this again later in the call.
In Play-Fi a number of our brand partners pushed out product launch dates due to technical issues some marketplace confusion caused by new entrants and the availability of certain content service support. However, at year-end, we’re pleased to report that as expected most of these brand partners began selling Play-Fi capable products online and we received extremely strong interest in Play-Fi at CES.
Equally important, we’ve seen some customers abandon competing solutions and return to evaluations of Play-Fi technology. It is clear that in the long run, the wireless audio space is only likely to support a few dominant ecosystems, and we believe Play-Fi will be one of them.
Lastly, we experienced greater than expected softness in Blu-ray and Home AV. These markets are in long-term decline. However, a delay in transition to next-generation technology has also negatively impacted these markets last year. We’re pleased to share that we’ve now seen DTS:X integrated and certified on the two most important AVR IC platforms and several AVR’s and UHD Blu-ray products have begun shipping. While Home AV and Blu-ray represent an ever smaller portion of our business, these products have strategic importance to the industry as launch vehicles for new technology.
Moving on now to the bigger picture. During 2015, we continued to build a larger and better positioned licensing platform to serve the home, mobile, wireless audio, and automotive markets. Specifically, we accomplished the following. In mobile, we signed a 100 million unit contract with the top five smartphone manufacturer and launched Headphone:X on the mobile phones.
In wireless audio, we launched a new Play-Fi app and added more content and more speaker OEMs to the ecosystem. In the cinema and home markets, we launched DTS:X, our next-generation object-based audio solution. We expect this technology to cascade down into many of our other network-connected markets over time.
In automotive, we acquired iBiquity and added HD Radio to our suite of technology solutions. This acquisition and its strategic importance as a platform provider and core feature in the DASH provides us the opportunity to tap into the exciting and fast-growing market for advanced next-generation vehicles, where more compelling infotainment, entertainment, and safety solutions will form the basis of a uniquely different driving experience in the years to come.
Core to this next-generation vehicle vision is how data and technology can be leveraged in a reliable and cost-effective way. This is an opportune time to expand and grow our platform position in the automotive market and we believe the business potential is significant over the long-term.
As we enter 2016, there is a lot we are excited about. We have established Play-Fi technology as one of the leading solutions available in the whole home wireless speaker marketplace. We’ve added a number of the most well-known audio brands to our already robust industry-leading partner roster.
Specifically, Klipsch Group and Rotel Electronics, both providers of premium audio products of selected Play-Fi to be their wireless solution. We also added Amazon Music and iHeartRadio to our content offering, maintaining Play-Fi’s leadership position among open wireless whole-home platforms. We launched new apps for Android and iOS and are working on some very exciting updates that will further differentiate the Play-Fi offering.
At CES, leading satellite TV provider DISH Network demonstrated Play-Fi integration into its networked Hopper DVR. The DISH Music app converts the Hopper into a Play-Fi music zone, allowing users to stream to the Hopper for mobile Play-Fi apps and connect the Hopper to other Play-Fi products. In addition, recently at Mobile World Congress, Acer’s Liquid Jade 2 became the world’s first global smartphone supporting both Play-Fi and Headphone:X technology.
In mobile, last year we significantly grew our base by expanding our partnerships with world leading manufacturers including Acer, Asus, Huawei and Woochi [ph]. In addition, we aggressively worked to adapt the Headphone:X technology to meet customer specific requirements and platform needs.
Today, we’ve launched customizable implementations of Headphone:X on multiple platforms, including Qualcomm and on processors for mobile and x86 for the PC. By supporting Headphone:X and other technologies on multiple platforms, we’re able to expand our potential reach to the majority of the worldwide smartphone market. These new platforms will support our mobile growth strategy going forward.
For example, in 2016, we expect to see an array of DTS technologies on flagship models across all of our existing mobile partner brands. At CES, we announced the expansion of our mobile solutions into the emerging markets through partnerships with leading Indian mobile manufacturers; Micromax, SmarTone, and OBI Mobile. Last week, in our strongest showing yet at Mobile World Congress, a dozen phones from five different manufacturers were displayed with DTS technology.
Shifting to gaming, DTS Headphone:X technology is now recognized as the industry’s most authentic, spatially accurate immersive 3-D sound experience. Today, we’ve successfully licensed Headphone:X, the top gaming headphone brands, including Turtle Beach, Logitech, and Mad Catz, positioning Headphone:X to become the de facto standard for immersive audio technology in the game space.
On the content front, DTS Partner Services now touched geographies across the globe that includes 3DGO!, CinemaNow, M-GO and Starz, Alibaba’s Tmall Box, LeTV, Sainsbury’s Carrefour’s Nolim Films and Primetime. We expect to launch a number of new services in 2016, as the number of DTS capable devices continues to expand. By combining our premium audio with enhanced 4K delivery, many of these services will offer consumers the highest-quality connected entertainment experience possible.
In the cinema and home markets, DTS:X, our newest audio solution delivers a truly immersive experience to viewers. In cinema, 12 movies were released in DTS:X last year. We see strong momentum in this market going into 2016 with four releases in China since the beginning of the year, six Hollywood film commitments so far, and significant screen growth over the current 70 plus screens open or committed to featuring DTS:X.
On the home-video side, a number of major studios have committed to releasing multiple UHD Blu-ray titles featuring a DTS:X soundtrack. This follows the initial launch of DTS:X on Blu-ray with the 2015 releases of top Hollywood films, including Ex Machina, American Ultra, and The Last Witch Hunter.
2016 will be a milestone year, as consumers begin to experience new object-based audio content on DTS:X enabled AVR and soundbar devices. By the end of this year, we expect 60 plus products to support DTS:X across the multitude of brands, product types, and price points. Recent reviewers see DTS:X as a game changer in immersive entertainment. All of these factors support our vision that DTS:X will become a future market standard for next-generation object-based audio.
Lastly, we finished the year with significant achievements in our automotive business. During Q4, we announced that HD Radio technology is now available on an expanded number of 2016 model year General Motors trucks. These trucks join more than 200 models available with factory installed HD Radio receivers.
HD Radio penetration continues to increase and by our count represented about 37% of new cars sold in the U.S. in 2015. Today, HD Radio was well represented as a standard feature among the higher-end of the automotive segment, as well as in premium infotainment systems and more moderately priced vehicles. Over time, we expect greater penetration as we move down brand product lines and as the implementation costs of HD Radio based solutions come down.
One of the things we’re most excited about is the opportunity across sell a larger base of technology into the evolving global automotive market. We believe, we are well-positioned in the DASH to help our partners deliver greater innovation to the end vehicle experience. Our teams have already begun to engage customers with strong positive feedback.
One thing to note here is that it takes a few years to see the results of successful business and technical development efforts pull through, given the lag time between product design wins and the eventual shipment of those vehicles in future model years. We believe our long-term outlook in automotive is quite positive.
With that, I’ll turn the call over to Mel to review the financial results and our outlook for 2016.
Thanks, Jon. Good afternoon, everyone. For the fourth quarter, revenue were $39.2 million, up a 11% from $35.2 million last year. Growth in Q4 was primarily driven by $4.6 million in revenue from HD Radio and stronger than expected game console production. For the year, revenues were $138.2 million, down 4% from $143.9 million in the prior year. Excluding recoveries, 2015 revenues were $132.7 million, up 2% from $130.6 million in 2014.
Network connected revenues were up 3% for both the quarter and the year Network connected revenue was slightly more than 40% of total revenues in Q4, and more than 45% of total revenue for the year. The primary driver for growth in the Network-connected category was mobile, which was up 50% for the quarter, and up 20% for the full-year.
The increase in mobile was due to the expansion of several mobile contracts throughout the year. TV was essentially flat for the quarter and up 6% for the year. PC was down 6% for the quarter in line with market declines and down 18% for the year, due to a tough comp dating back to Q1.
Blu-ray revenue was up 3% for the quarter, driven by game console production and down 10% for the year. Blu-ray represented a little over 20% of total revenue for both periods. Home AV was down 17% for the quarter and down 9% for the full-year, and represented approximately 10% of total revenue for both periods. Auto was up a 103% for the quarter and up 21% for the year, driven by the iBiquity acquisition. Auto represented approximately 20% of total revenue in Q4.
Non-GAAP operating expenses for the quarter were $30 million, up 18% from $25.4 million last year. Operating expenses included $6.8 million in iBiquity operating cost. Non-GAAP SG&A for the quarter was $19 million, including Q4 expenses from iBiquity, up 19% from $16 million a year ago.
Non-GAAP R&D was $11 million also including expenses from iBiquity in Q4, up 18% from $9.4 million last year. Note that both operating income and net income were adversely impacted by the need to recognize a full quarter of iBiquity expenses with only partial revenue recognition. Using a simplified 30% tax rate, we estimate that this reduced the EPS by approximately $0.12 per share for both the quarter and the year.
And as a reminder, while we’re only able to recognize a portion of the revenue in our P&L, we’ve received all of the cash associated with iBiquity’s third quarter production. Non-GAAP operating income in Q4 was $7.4 million, or 19% of revenue, down from $9.1 million in last year’s fourth quarter. Non-GAAP net income for the quarter was $4.2 million, or $0.23 per diluted share, down from $6.2 million, or $0.34 in 2014.
For the full-year, non-GAAP operating expenses were $102.9 million, up slightly from $102.4 million last year. Non-GAAP operating income for the full-year was $32.5 million, down from $39.3 million last year. Non-GAAP operating margins came in at 23% in 2015 versus 27% last year. Non-GAAP net income for the year was $21.2 million, or $1.17 per diluted share, down from $27.2 million, or $1.55 per diluted share in 2014.
During 2015, we generated $4.2 million in cash flow from operations, which included the impact of $19.3 million payment in October of certain iBiquity employee incentive liabilities assumed by DTS. This liability was funded within the $172 million purchase price paid for iBiquity, but under the accounting rules it must be presented as an operating cash outflow rather than as part of the cash paid for the acquisition.
Turning to the balance sheet. We closed the year with cash, cash equivalents and short-term investments totaling $61.9 million and $158 million in debt. During the year, we repurchased 600,000 shares of DTS common stock, and have about 1 million shares remaining under our current repurchase authorization.
Before discussing our outlook, I’d like to touch on a few things that I think are worth nothing. Following the acquisition of iBiquity, we’ve been hard at work integrating the business. We’ve made significant progress realizing operational and financial synergies, as we strategically position our licensing platform for the future.
Recognizing the larger go-forward scale of our business, we reorganized under a structure that will provide greater focus and specialized product management and development resources in five key market verticals; professional, home, mobile, wireless audio and automotive. This should help us further improve our already industry-leading customer support capabilities and drive greater growth as we operate in a fast-moving and highly dynamic marketplace.
As you may remember from our November call through integration efforts, we expected to realize certain cost synergies. We’re pleased to report that as our integration efforts come to a close, we expect to realize more than $15 million in synergies on an annualized basis. Based on the plan we put in place, some of these benefits began as of January 1, others will be recognized after Q1, and a small percentage of these savings will be realized in Q3 to ensure smooth transitions in certain areas. We also have good news to report with respect to taxes.
In valuing iBiquity’s business for a number of reasons, we did not place any material value on their substantial accumulated net operating losses. However, in October, we initiated an exhaustive evaluation of the acquired NOLs and to-date have identified more than $50 million that can be used to reduce cash taxes payable over the next several years, the cash savings of more than $18 million.
In addition, we’re evaluating certain tax planning strategies which – by which we may significantly increase our NOL utilization, work that should be completed by midyear. I should note that the NOL based tax assets will be booked through purchase accounting and that will not impact our go-forward effective tax rate. One way to think about it is that they effectively make the purchase price even more attractive, while also meaningfully reducing our cash tax burden for many years to come.
Moving on to our outlook, we expect revenues for 2016 to be in the range of $180 million to $190 million. Our growth will be driven by increased penetration of HD Radio in cars, additional Play-Fi SKUs, the new mobile phones and tablets shipping with DTS solutions. As a result of the iBiquity acquisition, we now expect automotive to represent a little less than 40% of revenue. Network-connected markets to account for approximately 35%, Blu-ray to be under 15%, and Home AV to be less than 10% of revenue in 2016.
We expect non-GAAP operating margins in the low to mid-30s and non-GAAP EPS in the range of $2.10 to $2.25 per diluted share. We expect both our GAAP and non-GAAP tax rate to be approximately 30% in 2016. In 2015, we expect stock-based compensation expense to be in the range of $0.52 to $0.53 per diluted share net of tax and amortization of intangibles to be in the range of $0.87 to $0.89.
On a GAAP basis, we expect operating margins of approximately 10% to 15% and diluted EPS in the range of $0.70 to $0.85 on an estimated 18 million weighted average shares outstanding.
With that, I’ll turn the call back over to Jon.
Thanks, Mel. As we look out over 2016 and beyond, we believe our prospects are exciting and our goal unchanged to deliver a personalized immersive and compelling experience across all forms of entertainment in cinema, home, wireless audio, mobile and now automotive. We look forward to sharing more news with you throughout 2016.
With that, I’ll turn the call over to the operator for questions.
[Operator Instructions] And we’ll take our first question from Jim Goss with Barrington Research. Please go ahead.
Thanks. I’ve got a couple. First, you’ve – we’re talking about theatrical as somewhat bigger component than it has been recently. Are you saying that as a potential monetization opportunity, or is it still more of a brand building exercise at this stage, at least?
Jim, it’s more strategic in nature and certainly more about building broader ecosystems around the technology. We don’t see it as a primary monetary contributor as we look out over the next 12 to 24 months.
Is there a way to make it a little bit more important and further, if say, if theater has decided to have either your solution or even Dolby Atmos. Is there an opportunity for you to be in the other auditoriums within the theater without some conflict?
Certainly, I mean, one of the advantages of DTS:X in cinemas is that, it’s a platform that’s been built to be flexible and scalable for different size houses using different speaker arrays, while maximizing the benefits of object based audio. So, the fact that you may see competitive systems coexist within existing cinema plexus is fully expected and already has occurred.
What we believe over time, however, is that the sheer flexibility and cost-effectiveness of the DTS:X solution will provide a long-term roadmap for exhibitors worldwide, which should allow us to continue to build momentum in that market. But, again, we think has strategic importance to us as we continue to work downstream in areas that we are monetizing more actively as entertainment gets delivered into the home and then automobile devices and in vehicles and so forth.
I suppose along the way there may be opportunities for greater monetization. But at this point, we’re heavily focused on our – executing our strategy, which has to do with positioning DTS:X in the professional space and working with theater partners to really maximize their experience that they can deliver inside theaters and having consumers become more familiar with DTS:X brand. So the downstream, it becomes a must have feature on all kinds of devices.
Okay. And I may have asked you this before maybe I didn’t quite understand the nuance. But with HD radio, I’m wondering if the – and automobiles sound quality can be further enhanced by combining some of the DTS surround sound technologies with HD’s higher bit rate in digital delivery. Are there – are they sort of separate parts sort of in the way that maybe some of the HDR can improve the number of pixels soft of an audio version of that?
But Jim, here’s how I would encourage you to think about it. Regardless of how content gets to the vehicle, once that content is in the vehicle and decoded, there is an opportunity for DTS’s other technologies to enhance the presentation of that content inside the vehicle. And so, we fully expect and are already engaged with automotive partners around how you can better leverage the suite of DTS technologies along with the HD Radio implementation. So I think that’s one of the things we’re clearly excited about.
Today, there are already vehicles that have both DTS and HD Radio technologies integrated. But the question is how we do that more strategically over time to deliver a far more compelling in automotive experience? And I think one of the things is because of the position that we have in the DASH and the HD Radio team’s long history of engagement with automotive partners, we have an opportunity to define that roadmap and really become a more essential ingredient in the automotive experience going forward.
Particularly, as you think about autonomous vehicles and whatnot, how they will begin to change the opportunity for more immersive entertainment experiences in the vehicles, as you no longer have to focus on perhaps controlling the vehicle and can simply maximize the time and experience, while you’re in it.
Okay. So that can present another monetization opportunity by having say a premium version that you could command higher royalty rates then?
Okay. Thank you very much.
Our next question comes from Rob Stone with Cowen & Company.
Hi, guys. I have a couple of questions. First, on iBiquity, I’m wondering if you mentioned the strength in the quarter was mainly from that and also higher game console production. I’m curious how were the revenues from iBiquity relative to what you were expecting, and whether you could provide us a sense of what the pro forma full core of results would have been – hadn’t been the accounting treatment of the acquisition? That’s the first one, and I have a couple of others.
Hey, Rob, it’s Mel. So, I think when we talked in November, we talked about the fact that our experience in acquisitions and licensing business has been that with the sort of quarter lag rev rec polices that you don’t – you’re likely to lose a big chunk of the revenue from a financial reporting perspective.
As it turned out, iBiquity had more monthly contract than we had originally anticipated, so we’re able to book more of the revenue than we had thought at the outset, so that was all good. I think, as it relates to their gross revenues, absent the accounting treatment relative to expectations, I think they were pretty much spot on and are trending in a favorable way.
With respect to pro forma financials, we haven’t calculated that. I wouldn’t want to throw numbers out there that we haven’t embedded. And it’s kind of not all that important. Clearly, it would have been better. We were 3 million in the whole in the quarter with respect to the HD Radio operations, as opposed to showing profitability for the quarter. So certainly a multimillion dollar swing to the negative, driven solely by accounting treatments.
Sure. My next question is about gross margins, they’ve been running, say, pretty close to 99% or 98% for the last four quarters or so, and then dipped down to 95.5%. I’m going to guess that might have been on the seasonal strength in Play-Fi, but were there any other mixed effects worth noting?
So HD Radio does have some COGS that we haven’t encountered before. So they have most of I think is outbound royalties paying for certain technologies that we inherited with the acquisitions. So as we look forward to 2016, I think we would anticipate given the significance of HD Radio to our overall business. With an Envision, a couple of point decline in non-GAAP gross margins for 2016 relative to where we were for 2015.
Okay. That’s very helpful. And so Play-Fi module is not a material contributor so far to the blended gross margin?
Not really particularly material at the moment. I think, clearly, if that business continues to grow, there’s a cost settlement to that. And when I think of a couple of points next year includes both the impact of HD Radio and continued growth in Play-Fi.
And I think a point in part is that yes, they’ll flip down a little bit. But we’re not talking about 10 point swings here, we’re talking about two or three points.
Sure. And finally on the operating expenses, you mentioned some – better than originally anticipated synergies and with that affect kicking in right away. And I was wondering if you could provide anymore color on sort of the run rate of operating expenses seasonally through the year? Should we expect, for instance,and then impacted by the synergies, should we be expecting a downtick in the first quarter and then growth in line with revenues through the year? Any light you can shed on the pattern would be helpful? Thanks.
Yes, so the quarterly operating expenses, I would think of them in terms of the high-20s per quarter, the exception actually being Q1 for two reasons, one, as we have our two largest trade shows in the first quarter; and the second is that, as we mentioned in the prepared remarks, the synergies that we are affecting a while a good junk of them went into place on the January 1 effectively. There are a number of transitional elements that will be winding down throughout Q1 and then a little bit struggling into Q2. But – so that all that said, the first quarter OpEx is certainly going to be north of $30 million.
Okay. That’s helpful. Thanks.
And our next question comes from Paul Koster with JPMorgan. One moment.
Operator. We can take the next question.
Hello, can you hear me?
Yes. Go ahead Paul.
Oh, thanks, sorry about that. Not on top of my audio technology here, I apologize. So, Mel, just going back to the synergies for a second, the run rate against, which were to apply the $50 million, can you just – I just want to make sure I’m sure is the GAAP operating expenses as of the fourth quarter or when exactly?
So really it’s closer to the non-GAAP. So the GAAP operating expenses in Q4 have a whole bunch of noise in them…
…related to acquisition and integration related expenses to the tune of I want to say north of $16 million or $17 million. So if you look at non-GAAP, one way to think of it is that the basic business will overall be in a run rate in the $115 million to $120 million range with a few million added to the low end of that just to get you through Q1 and into Q2.
Right, got it. Thank you. Now, the other thing is, you’ve got a lot of irons and a lot of fires. I know they’re all using the same core technology, but the end market is so different. If we sort of look out two to three years from now, what do you think the business mix is going to look like perhaps that’s one for Jon?
Well, I think in general, Paul, as we’ve said, we’re seeing the greatest growth opportunities in automotive. We believe our wireless audio will be certainly a larger contributor and mobile being pretty important. So we’re decreasing our exposure, if you will to optical media in general, which is a very small part of our business today, and we see the Home segment even with continued TV growth.
But looking at the relative fall off of things like small volumes of AV Receivers, as well as home theater and a box type systems that in the end, home will continue to decrease in favor of these other markets. So I think we’ve got a plan that’s well positioned to tap the areas that are truly growing, and I think we’ll see declining exposure to some of the stuff we’ve done historically.
But I mean my last question is Play-Fi, so obviously very interesting. How much visibility do you have into the unit driven growth there? I mean how many quarters out can you see?
Hi, Paul, it’s Brian. We by contract typically requires 16 week advance PO prior to module delivery, which is pretty standard. You will see it sometimes a little faster than that, but that’s generally where the visibility is. First-half of the year you’re coming off of the holiday sale season people are doing resets at retail and those things. So this really starts to pickup when you get to the back-half when most of, I think, as we all know particular in North America the consumer electronic sales happen.
I would say Paul that comparatively given some of the issues faced last year as brand partners were trying to work through, let’s call it, the initial implementations of Play-Fi. We’re through a lot of that and therefore we’re pretty excited about just kind of the growing brand roster, as well as the opportunity to have these products exposed to a greater degree of retail. And as that happens, naturally we expect volumes to increase as Brian said, as we move into your prime selling seasons particularly in the back-half of the year.
Very good. Thank you.
And we’ll take the next question from Steven Frankel with Dougherty.
Good afternoon. So follow-ups more on Play-Fi. You mentioned that there are players out there that are abandoning their proprietary approaches and moving towards Play-Fi. Have you signed any of those people yet or those who are signing us we’d expect to see as we go through the year?
So I would – I’d clarify a little bit when – I don’t think we specified in the comments whether somebody’s in-house solution, or it was an outside third-party solution. And I don’t think we’re going to comment specifically on who is winning and losing. We have not signed new deals that we’re prepared to talk about. But I think as you get in the latter part of the year, you’ll see them come through.
So clearly, we’re working it. The team is working it and we’re very happy with CES and very happy with some of the demonstrations, particularly by DISH, would takes us in a new direction. So, a couple of that with the announcement of the Acer phone and that will go worldwide with Play-Fi actually is drivers, not an app. They’re visible milestones and progress on the ecosystem.
It’s really Steve about driving the network effect here, and we are beginning to see some lift from that particularly some of the noise in the broader marketplace begins to settle down and people realize which solutions are working and which ones are challenged.
Yes. I would remind, Jon, I would remind people the number of companies, in particular, integrated circuit companies who said they were going to compete in this space. A number of which if you go back and look at history, so far have failed to ship anything material in the retail. As we said last quarter, our solution is proven. It’s proven at consumer’s homes and it works.
Okay. And kind of a high-level question. There’s a lot of talk about Apple and maybe others switching to Digital I/O for headphones? What if anything does that do to your post processing opportunity on handsets?
It doesn’t affect it, what so ever.
Okay. And Headphone:X with this change in approach to more componentized or customizable solution, are the ASPs that you’re realizing in 2016 and maybe into 2017, if you can see that far in line with what you thought or did that customization put some pressure on where ASPs are going to follow?
Totally in line with what we expected. The value prop is clear. People want it. They just wanted in forms that they can more easily implement and/or customize for their own purposes. So, as you know, the market from a differentiation perspective is hypercompetitive. And so one of our original – the original implementation of Headphone:X, Headphone:X technology made it more common across different brands and devices, because there was one single effectively UI and interface for it and some of the feedback we got was, hey, we really want us to look a little different, we love the functionality. But we want ours to look different than the guys down the street, and we’ve largely address that challenge, I think in a positive way that should ultimately enhance our position and on relative basis maintain pricing discipline around the product in general.
Great. And how many mobile Headphone:X implementations are shipping today and how many of you think will have shipping by the end of the year?
I think, how many have been announced or how many are shipping, I think that’s the question?
Sure, sure. Yes, I think from a number in the market place today, Steve I want to say, it’s handful. By the end of the year substantially more than that, but the exact number of models will depend on exact partner timing. So I’m not going to give you numbers simply, because as we know the market is pretty fluid. I can tell you that in some cases we’ve had customers tell us on the back of what we’ve done with the modification of the underlying code that they are originally talking about one handset model and now they’re talking about not a quite few more.
So I’ll have to see how that map multiplies over the course of the year. But I would expect to see a lot of it visibly in the second-half largely just based on the availability of these solutions as such towards the end of the year and whatnot the people are intersecting product roadmaps that relate to product largely, as you move more into the second-half of the year.
And I would add, Jon. I think we’ll have more visibility when we talk again in May, it will be right before Computex in Taiwan, which we expect to be the next big sort of product announcements. There maybe some between now and then, but the big bulk of our customers looks like that’s the next show they are targeting. And I would add that you’ll see it not just on handsets, but you’ll see a number of tablets also using the technology.
Great. And last question, Mel could you repeat for me the non-GAAP OpEx guidance for the year?
Yes. So think in terms of $115 million to $120 million a year – for the year or maybe I put it in different way upward 20s quarterly with Q1 being in the lower 30s.
And kind of 200 basis point step down in gross margin that will be pretty much consistent throughout the year?
Yes, it should be. I mean it’s – I don’t have the quarterly progression of gross margin at my fingertips. But I think with the adding on of HD Radio and it’s full at the 100% level, that should start day one.
Okay, great. Thanks.
[Operator Instructions] We’ll go next to Eric Wold with B. Riley.
Thanks. A couple of questions, I guess. One is follow-up on the last question on Headphone-X, I know you’re kind of hesitant to talk about lot of the implementations, given some things haven’t been announced and there might be some fluidity in timing and number of devices. But as you try to get a sense of kind of how you work that into your guidance given some of the issues last year. You’re kind of – how we think about the level of conservatism or just accounting for that risk and guidance, given launches to come in the back-half of the year that may have some moving dynamics around them?
Hi, Eric, it’s Brian. I would tell you a good portion of what we’re modeling within the mobile space is actually tied to minimum guarantee deals that we have inked. Now the question then is by model and platform, because there are number of different technology solutions. I think, but which ones are going to have Headphone:X or a different subset of technologies, that’s why that’s some of the moving around that happens and why we’re not going to give specific here’s what’s launching. But a good portion of the revenue is actually locked down as we mentioned in prepared remarks we recently signed a deal for 100 million units over specified amount of time.
Okay. And then shifting to iBiquity, I’m not trying to get you guys to commit to anything beyond 2016. But given the early planning and meaningful visibility you think we have in our business, given that you’re involved in models multi-year out. Is there anyway you can kind of just give a – I’m not trying to get too specific, but bigger picture, kind of sense of the visibility of that business over the next few years in terms of potential penetration ramp number of models anything that would give us sense of kind of how that business is kind of primed at this point to grow over the next couple of years?
Eric, I would say a couple of things. First, today, we already do business with all 36 automotive brands sold in the United States. And as we look out, yes, we do have solid visibility in many cases into the number or into the various models that we expect the technology will flow into.
What we don’t know in some of these cases is just what is the relative market share going to be amongst those vehicles. And so we’re highly confident that the progression of HD Radio over the next three to five years is going to be increasing penetration. The question of how you translate that exactly into the number of vehicles being sold a little bit harder to do, because A, we’re years out on that and secondly, we don’t have – naturally have any control over what our partners are shipping.
And it’s something I think we model very – we try to model pretty carefully over time. I would tell you that as a team that at the required HD Radio, we’ve been very pleased with the level of detail and modeling and kind of, let’s call it forecasting around what’s expected in the near-term.
And I think we’ll be able to continue to leverage and build on that over time as we collectively have a different bases of experience and more insight into what’s happening in the industry. So unfortunately there’s probably not a lot I can tell you a couple years out other than we expect to expand our footprint within all of the brands sold in the U.S. We simultaneously are working on expanding the HD Radio footprint specifically in North America and Canada and Mexico where today there is limited volume being sold amongst the number of those brands.
And beyond that we are seeking to extend into hybrid radio solutions that begin to factor in the mobile business specifically in different parts of the world. So there’s a bigger play to talk about over time. But for certain strategic and competitive reasons, we’re not going to get into some of that detail at this point except to say that we think it’s a great business and we look – really look forward to building it over the next few years?
No, that’s helpful, Jon. I can understand kind of the unknown factor of the market shares and unit sales as you go out a couple years. Is there a way to kind of gauge or at least relate, if you think about how many models you are on now, how many models you expect to be in the coming years? I’m not looking for those numbers, but kind of what’s the ratio of just later model years, the same models you are on now? So you are on the Acura 2015 now. You will be on the 2018 version versus a new model that hasn’t even been launched yet. I guess, just kind of – I think that would help gauge kind of visibility, and you’ve kind of you know market share is now relatively?
Well, I think, again, maybe said differently. The – I would say the success rate at renewing and expanding contracts with brand partners is extremely high, if you look over the last few years amongst the HD Radio. So I think the anticipation would be, as these brands roll their new model years, we’re certainly going to be a part of that. I think then the follow-on question is, as you move out of the premium priced segment into the more mid-priced segment and you’re simultaneously working on more effective cost implementations of the technology on various ICs that are going to be coming forward in the automotive space in the next couple years.
How can we further expand implementation into some of your lower – some of the lower priced vehicles in these various – within these various brands. So, again, I think we have a high degree of confidence of around increasing penetration. The question of how to we make that more visible for you three or four years out. At this point, I’m not sure we’re prepared to provide you any data. But over time we may be able to find a way to provide some color or more information that might help you get a better picture around it.
Thank you. And just final question, now there is a small change. But with the improved outlook for synergies from where you were thinking previously, what’s causing the – you might have mentioned before, but what’s causing the 5% drop in the EPS guidance range versus what you previously gave on the Q3 call with the revenue guidance unchanged?
Well, I think it’s really just related to timing of the realization of those synergies. So, again, the goal of doing this activity would not necessarily just to cut costs, but obviously you’re trying to put together a business that can thrive going forward. And so we found and we found in the past that making sure that you’re smoothing transitions in important areas is worth a lot more than saving an extra million or two in the short-term, so that’s the of what that follow up.
Okay. Thank you, guys.
And we take a follow-up from Jim Goss with Barrington Research.
Thanks. Just one other thing, I was curious to the extent that you created a relationship with Turtle Beach, which not only has the headphones, but also has some similar or competitive technology, would something like that be a viable acquisition target for you? And maybe not even that, but that sort of thing where it would get you into some of the hardware applications, or would that be a terrible idea and you would rather stay totally in the technology and software side of it?
First, Jim, let me address. The – I think the technology maybe referring to in turtle Beach’s case is actually not competitive with some of the things we do, being I believe that relates to bean former technology…
…over that broader genre. As we look ahead strategically, obviously where we’re always looking and routinely get presented with opportunities, as it relates to different parts of the audio delivery spectrum, as to whether we want a licensed partner or potentially acquire them. So we’ll continue to stay on that path. It’s something we do pretty actively year in, and year out. And we’ll see where the opportunities line and where we think the greatest strategic benefit can be created.
More broadly as a hardware related solutions, I mean I think one of the things that is beautiful about our model is being IP centric software delivery is highly attractive, as you particularly generate scale. That and thus our strategic interest is not seeking out hardware-based plays. But that being said there are strategic reasons to do various things in our 20 some-year history, we’ve been in and out of the hardware business in different ways.
And looking ahead, if there’s a compelling reason to take a look at our hardware component for something, obviously, we do it, but we do it with very, very careful filters, because fundamentally our primary interest is in – is extending the platform that we have, because it is wildly financially attractive and it also is a business obviously we know deeply inside and out.
Hey, good to hear. Thank you.
And it appears we have no further questions. I’ll return the floor to our presenters for any closing remarks.
Thank you, operator. We look forward to speaking to you all again on the next conference call. Have a good day.
And this does conclude today’s program. Thanks for your participation. You may now disconnect. Have a great day.
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