Adeia Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion (presented in thousands, except for percentages and share numbers) should be read in conjunction with our consolidated financial statements and notes thereto. This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC by Xperi Corporation on February 18, 2020, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.xperi.com. Business Overview On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation became the parent company of both Xperi and TiVo. The common stock of both Xperi and TiVo were de-registered after completion of the Mergers. On June 2, 2020, Xperi Holding Corporation’s common stock, par value $0.001 per share, commenced trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “XPER.” Xperi was determined to be the accounting acquirer in the Mergers. As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation. As used herein, the “Company,” “we,” “us” and “our” refer to Xperi when referring to periods prior to June 1, 2020 and Xperi Holding Corporation when referring to periods subsequent to June 1, 2020. Our results of operations include the operations of TiVo after June 1, 2020. For further discussion on the Mergers, refer to “Item 1A. Risk Factors,” and “Note 9 – Business Combination” in the Notes to Consolidated Financial Statements. We are a leading consumer and entertainment product/solutions licensing company and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and patent applications worldwide. We invent, develop, and deliver technologies that enable extraordinary experiences. Xperi technologies, delivered via our brands (DTS, HD Radio, IMAX Enhanced, Invensas, TiVo), and by our subsidiary, Perceive Corporation (“Perceive”), make entertainment more entertaining, and smart devices smarter. Our technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for partners, customers and consumers. We shape how millions of consumers access and experience entertainment content, and our innovations are found in billions of devices and hundreds of millions of interfaces around the globe. Headquartered in Silicon Valley with operations around the world, we have approximately 1,850 employees and over 30 years of operating experience . We are currently contemplating and may pursue, subject to any required regulatory approvals, a separation of our Product business and IP Licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. We are evaluating the optimal timing of the contemplated business separation and currently anticipate that such separation will not be completed earlier than the first half of 2022. COVID-19 Impact Our business and results of operations have been adversely affected by the global COVID-19 pandemic and related events and we expect its impact to continue. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our businesses, and there is no guarantee that we will be able to address its adverse impacts fully or effectively. The impact to date has included periods of significant volatility in various markets and industries. The volatility has had, and we anticipate it will continue to have, an adverse effect on our customers and on our business, financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies. In particular, the automotive market, as well as the broad consumer electronics industries, have been and we anticipate will continue to be impacted by the pandemic and/or other events beyond our control, and further volatility could have an additional negative impact on these industries, customers, and our business. For example, we experienced an approximately 15% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year, and currently expect automotive royalties will remain below previous levels for at least the near-term. In addition, the COVID-19 pandemic and to a lesser extent, U.S. restrictions on trade with certain Chinese customers have and may continue to impact the financial conditions of our customers, who may not be able to satisfy their obligations under our agreements timely or at all. For example, we recorded provisions for credit losses of approximately $2.0 million and $4.3 million in the first and fourth quarters of 2020, respectively, due to the 51 heightened risk of nonpayment on existing accounts receivable as a result of the impaired financial condition and liquidity positions of certain of our customers. In addition, actions by United States federal, state and foreign governments to address the COVID-19 pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, also had a significant adverse effect on the markets in which we conduct our businesses. COVID-19 poses the risk that our workforce, suppliers, and other partners may be prevented from conducting normal business activities for an indefinite period of time, including due to shutdowns or stay-at-home orders that may be requested or mandated by governmental authorities. We also implemented policies to allow our employees to work remotely as a result of the pandemic as we reviewed processes related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The impacts of the COVID-19 pandemic could also cause delays in obtaining new customers and executing renewals and could also impact our business as consumer behavior changes in response to the slowed economic conditions. Furthermore, our ongoing integration efforts following the Mergers may be delayed or interrupted due to the operational challenges and various restrictions and limitations imposed on us as a result of the COVID-19 pandemic, which may adversely affect the success of the integration and anticipated benefits of the Mergers. We have been closely monitoring the COVID-19 pandemic and its impact on our business, including legislation to mitigate the impact of COVID-19 such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was enacted on March 27, 2020. Although a significant portion of our anticipated revenue for 2021 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business, our per-unit and variable fees based revenue will continue to be susceptible to the volatility and potential market downturns induced by the COVID-19 pandemic. Although we are unable to predict the full impact and duration of COVID-19 on our business, we are actively managing our financial expenditures in response to the current uncertainty. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors . Results of Operations Significant events occurred over the past three years that affect the comparability of our financial statements. Key events and their financial impacts include the following: • On November 9, 2020, we entered into a patent license agreement (the “Agreement”) with Comcast Corporation (“Comcast”) and certain of its affiliates. In connection with the Agreement, we resolved all of the outstanding litigation with Comcast. The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Agreement had a significant positive impact on our financial results in 2020. • On June 1, 2020, we completed the Mergers with TiVo, we incurred significant one-time expenses in 2020 such as transaction related costs (e.g. bankers fees, legal fees, consultant fees), lease impairment charges due to facilities consolidation, severance and retention costs (including stock-based compensation expense resulting from the contractually-required acceleration of equity instruments for departing executives). Additionally, our amortization expense increased significantly due to the valuation of TiVo’s intangible assets recorded as a result of the Mergers. • On December 10, 2018, we entered into an agreement with Samsung Electronics, Co., Ltd. (“Samsung”) to settle and dismiss all pending litigation matters. In conjunction with the settlement, Samsung entered into a new patent license agreement with us. The settlement had a material impact on our financial results in 2018. Revenue We generate our revenue from the following principal activities. License Agreements We operate in two business segments. In our Product segment, we license our audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. In our IP Licensing segment, we license (i) our media patent portfolios (“Media IP licensing”) to multichannel video programming distributors (MVPDs), OTT video service providers, consumer electronics manufacturers, social media, and other new media companies and (ii) our semiconductor technologies and associated patent portfolios (“Semiconductor IP licensing”) to memory, sensors, RF component, and foundry companies. We license our technologies and portfolios under three revenue models: (i) fixed-fee Media IP licensing, (ii) fixed-fee or minimum guarantee Semiconductor IP or Product licensing, and (iii) per-unit or per-subscriber royalty licenses. Fixed-fee Media IP licensing 52 Our long-term fixed-fee Media IP licensing agreements provide our customers with the rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. We treat these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement. At times, we enter into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units or for an unlimited number of subscribers over a future period for a fixed fee. In these arrangements, we allocate the transaction price between the release for past patent infringement claims and the future license. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term. Fixed-fee or minimum guarantee Semiconductor IP or Product licensing We enter into Product or Semiconductor IP licenses that have fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate our technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For both fixed fee and minimum guarantee agreements for Semiconductor IP or Product licensing, we recognize the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license. If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, we also consider the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, we treat a portion of the payments as a significant financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. We actively monitor and enforce our IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize our intellectual property without a license. As a result of these activities, we may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or from legal judgments in a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. We recognize revenue from recoveries when a binding agreement has been executed and we conclude collection under that agreement is likely. Per-unit or per-subscriber royalty licenses We recognize revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently reported by the licensee, which is generally in the month or quarter following usage or shipment. We generally recognize revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers and memory, sensors, RF component, and foundry companies. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities shipped by customers, which could have a material impact on the amount of revenue we report on a quarterly basis. Arrangements with Multiple System Operators for the TiVo Service Our arrangements with multiple system operators (MSOs) typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service. We have two types of arrangements with MSOs that include technology deployment and engineering services. In instances where we host the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed 53 recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is recognized. We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, we receive license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. We recognize revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognize revenue from fixed fee licenses ratably over the license period. In arrangements where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, we recognize revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. We generally recognize revenue from license fees for the TiVo service that the Company does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties. Subscription Services Subscription services revenue primarily consists of fees to provide customers with access to one or more of our hosted products such as the iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. We generally receive per-subscriber per-month fees for the iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. We generally receive a monthly or quarterly fee from our metadata or analytics licenses for the right to use the metadata or access our analytics platform and to receive regular updates. Revenue from our metadata and analytics service is recognized ratably over the subscription period. TiVo-enabled DVRs and non-DVRs and related TiVo Service We sell TiVo-enabled DVRs and non-DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs and non-DVRs through a limited number of retailers. After the initial subscription period, all customers have various pricing options when they renew their subscription. The transaction price allocated to the DVR is recognized as revenue upon shipment to the customer and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenue from lifetime subscriptions is recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. We periodically reassess the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from our estimates, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time. 54 The following table presents our historical operating results for the periods indicated as a percentage of revenue: Years ended December 31, 2020 2019 2018 Revenue: Licensing, services and software 98 % 100 % 100 % Hardware 2 — — Total revenue 100 100 100 Operating expenses: Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets 6 3 3 Cost of hardware revenue, excluding depreciation and amortization of intangible assets 2 — — Research, development and other related costs 22 40 26 Selling, general and administrative 28 42 30 Depreciation expense 2 2 2 Amortization expense 18 36 27 Litigation expense 2 2 6 Total operating expenses 80 125 94 Operating income (loss) 20 (25 ) 6 Interest expense (4 ) (8 ) (6 ) Other income and expense, net — 3 2 Loss on debt extinguishment (1 ) — — Income (loss) before taxes 15 (30 ) 2 Provision for (benefit from) income taxes (1 ) (7 ) 2 Net income (loss) 16 % (23 )% (0 )% The following table sets forth our revenue by year (in thousands, except for percentages): Years Ended December 31, 2020 vs. 2019 2020 2019 2018 Increase % Change Total revenue $ 892,020 $ 280,067 $ 406,133 $ 611,953 219 % The $612.0 million or 219% increase in total revenue for the year ended December 31, 2020, compared to the prior year, was primarily due to the inclusion of revenue from TiVo operations following the Mergers, which included revenue from the patent license agreement with Comcast as discussed below, and Semiconductor IP agreements executed during the first two quarters of 2020. These increases in revenue were partially offset by a decrease in per-unit royalty revenue from existing licensing agreements. On November 9, 2020, we entered into a patent license agreement (the “Agreement”) with Comcast and we resolved all of the outstanding litigation with Comcast. The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Agreement provided for an initial payment by Comcast upon execution and provides for ongoing payments through the remainder of the Agreement. In connection with the Agreement, we recorded revenue for past royalties in the fourth quarter of 2020 and expect to recognize revenue from the prospective license into 2031. Cost of Licensing, Services and Software Revenue, E xcluding Depreciation and Amortization of Intangible Assets Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, maintenance costs and an allocation of facilities costs, as well as service center and other expenses related to providing the TiVo Service, non-recurring engineering (“NRE”) services and our metadata offering. Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, for the year ended December 31, 2020 was $57.3 million, as compared to $8.1 million for the year ended December 31, 2019, an increase of $49.2 million. The increase was primarily due to the inclusion of $49.0 million of TiVo expenses since the Mergers. 55 We anticipate cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2021 when compared to 2020 due to including a full year of TiVo operations in our consolidated results . Cost of Hardware Revenue, E xcluding Depreciation and Amortization of Intangible Assets Cost of hardware revenue, excluding depreciation and amortization of intangible assets, includes all product-related costs associated primarily with TiVo-enabled devices, including third-party manufacturing costs, employee-related costs, warranty costs, order fulfillment costs, certain licensing costs, and an allocation of facilities costs. Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the year ended December 31, 2020 was $21.1 million, as compared to $0.3 million for the year ended December 31, 2019, an increase of $20.8 million. The increase was primarily due to the inclusion of $20.0 million of TiVo expenses since the Mergers. We anticipate cost of hardware revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2021 when compared to 2020 primarily due to including a full year of TiVo operations in our consolidated results as well as expected growth in sales of hardware products. Research, Development and Other Related Costs Research, development and other related costs (“R&D expense”) are comprised primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, materials, supplies, equipment depreciation and an allocation of facilities costs. All research, development and other related costs are expensed as incurred. R&D expense for the year ended December 31, 2020 was $195.2 million as compared to $110.9 million for the year ended December 31, 2019, an increase of $84.3 million. The increase was due to the inclusion of $76.2 million of post-merger TiVo R&D expenses in 2020, increased headcount and personnel costs in Perceive, an internal startup that focuses on delivering edge-based inference solutions, and severance charges incurred in connection with consolidating and optimizing post-merger operations. We believe that a significant level of R&D expense will be required for us to remain competitive in the future. We also anticipate that R&D expense will increase in 2021 when compared to 2020 due primarily to including a full year of TiVo operations in our consolidated results. Selling, General and Administrative Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items. Selling, general and administrative expenses for the year ended December 31, 2020 were $245.4 million, as compared to $117.7 million for the year ended December 31, 2019, an increase of $127.7 million. The increase was due principally to the inclusion of $92.8 million of TiVo expenses, an increase in merger related transaction costs of $24.8 million, post-merger severance and retention costs of $14.3 million, and $4.8 million in costs associated with the contemplated separation of our business, partially offset by a reduction in travel and entertainment expenses. We anticipate selling, general and administrative expenses will increase in 2021 when compared to 2020 due to including a full year of TiVo operations in our consolidated results. Depreciation Expense 56 Depreciation expense was $17.9 million for the year ended December 31, 2020, as compared to $6.7 million for the year ended December 31, 2019, an increase of $11.2 million. The increase was primarily attributable to depreciation expense on TiVo fixed assets added since the Mergers. We anticipate depreciation expense will continue to increase in 2021 as compared to 2020 as a result of incurring the full year effect of TiVo’s assets after the Mergers. Amortization Expense Amortization expense for the year ended December 31, 2020 was $156.8 million, as compared to $99.9 million for the year ended December 31, 2019, an increase of $56.9 million. The increase was primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020, partially offset by certain intangible assets becoming fully amortized over the past twelve months. As a result of the Mergers, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $878.0 million in intangible assets which will be amortized over the next several years. See “Note 10 - Goodwill and Identified Intangible Assets” in the Notes to Consolidated Financial Statements for additional information . Litigation Expense Litigation expense for the year ended December 31, 2020 was $20.8 million, as compared to $5.1 million for the year ended December 31, 2019, an increase of $15.7 million. The increase was primarily due to inclusion of post-merger TiVo litigation expenses and increased case activity in 2020. In 2019 and 2020, prior to the Mergers, TiVo’s litigation expense was significantly higher than Xperi’s litigation expense in the same periods. We expect that litigation expense will continue to be a material portion of our operating expenses. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase . Stock-based Compensation Expense The following table sets forth our stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 (in thousands): Years Ended December 31, 2020 2019 2018 Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets $ 781 $ — $ — Research, development and other related costs 13,592 14,643 13,168 Selling, general and administrative 24,762 16,911 17,843 Total stock-based compensation expense $ 39,135 $ 31,554 $ 31,011 Stock-based compensation awards include restricted stock awards and units, employee stock plan purchases and employee stock options. The increase in stock-based compensation for the year ended December 31, 2020, compared to the prior year, was primarily a result of including incremental expense of $5.8 million from assumed TiVo stock awards and expenses from new, post-merger grants to legacy TiVo employees in 2020 as well as increases in restricted stock awards and units as a result of the Mergers. Interest Expense Interest expense for the year ended December 31, 2020 was $37.9 million, as compared to $23.4 million for the year ended December 31, 2019. The increase in interest expense was primarily a result of a higher average debt balance as compared to 57 2019 as we entered into a new term loan of $1,050 million on June 1, 2020 to refinance the indebtedness of the combined companies in connection with the Mergers. We anticipate interest expense will increase in 2021 when compared to 2020 as a result of a full year of the higher debt balance and amortization of debt discount and issuance costs. Other Income and Expense, Net Other income and expense, net, for the year ended December 31, 2020 was $4.5 million, as compared to $9.0 million for the year ended December 31, 2019. Other income was lower in the current year principally due to a decrease in interest income from financing components from revenue contracts, and secondarily from a decline in interest income from our short-term investments. Loss on Debt Extinguishment In connection with the Mergers, we refinanced the indebtedness of the combined Company, and recognized a loss on early debt extinguishment of $8.3 million in 2020. We did not incur a loss on early debt extinguishment in 2019 or 2018. Provision for (benefit from) Income Taxes For the year ended December 31, 2020, we recorded an income tax benefit of $7.9 million on a pretax income of $135.9 million, which resulted in an effective tax rate of (5.8)%. The income tax benefit of $7.9 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, eligible deductions from foreign-derived intangible income (“FDII”), releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, deductibility of certain transaction expenses, and unrealized foreign exchange gains from the prior period South Korea refund claim, partially offset by tax expense from operating income, withholding taxes, shortfalls from stock-based compensation, and certain non-deductible expenses. For the year ended December 31, 2019, we recorded an income tax benefit of $19.0 million on a pretax loss of $83.1 million, which resulted in an effective tax rate of 22.9%. The income tax benefit for the year ended December 31, 2019 was primarily related to tax benefit from operating losses, tax credits, the release of valuation allowance on certain deferred tax assets related to tax credits, and eligible deductions from FDII, offset by an increase in valuation allowance against deferred tax assets primarily related to capitalized research expenses, foreign withholding taxes, non-deductible stock-based compensation and certain non-deductible expenses. During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on court rulings in South Korea and other business factors. These previously-withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the 2019 refund claim and a planned refund claim for 2020, we recorded $123.0 million and $65.2 million as a noncurrent income tax receivable at December 31, 2020 and 2019, respectively, $62.3 million and $48.2 million as a noncurrent income tax payable at December 31, 2020 and 2019, respectively, and $36.7 million and $17.0 million as a reduction in deferred tax assets at December 31, 2020 and 2019, respectively. 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. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset reversing deferred tax liabilities as of December 31, 2020. We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the federal valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the factors present when reevaluating both positive and negative evidence. 58 Segment Operating Results In connection with the Mergers, we re-evaluated our reportable segments. We concluded that we have two reportable segments: (1) Product and (2) IP Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments. Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in accordance with the authoritative guidance on segment reporting. The Product segment consists primarily of licensing our internally-developed audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. Audio, digital radio, imaging solutions and edge-based machine learning include the delivery of software and/or hardware-based solutions to our consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners. UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices like the Stream 4K, Personalized Content Discovery, enriched Metadata, viewership data and advertising. The IP Licensing segment consists primarily of licensing our innovations to leading companies in the media and semiconductor industries. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some of our industry-leading technologies and proven know-how. In media, our licensees include multichannel video programming distributors, OTT video service providers, consumer electronics manufacturers, social media and other new media companies. In semiconductor, our licensees include memory, sensors, RF component, and foundry companies. We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments. The following table sets forth our segment revenue, operating expenses and operating income (loss) for the years ended December 31, 2020, 2019 and 2018 (in thousands): Years Ended December 31, 2020 2019 2018 Revenue: Product segment $ 376,101 $ 198,124 $ 218,349 IP Licensing segment 515,919 81,943 187,784 Total revenue 892,020 280,067 406,133 Operating expenses: Product segment 351,913 186,562 185,370 IP Licensing segment 113,363 44,542 74,002 Unallocated operating expenses (1) 249,117 117,671 122,781 Total operating expenses 714,393 348,775 382,153 Operating income (loss): Product segment 24,188 11,562 32,979 IP Licensing segment 402,556 37,401 113,782 Unallocated operating expenses (1) (249,117 ) (117,671 ) (122,781 ) Total operating income (loss) $ 177,627 $ (68,708 ) $ 23,980 (1) Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, such as administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of our business segments. For year ended December 31, 2020, the unallocated operating expenses were $249.1 million compared to $117.7 million for the year ended December 31, 2019. The increase of $131.4 million was due primarily to the inclusion of TiVo expenses, one-time merger related transaction costs, post-merger severance and retention costs, and costs associated with the contemplated separation of our business. 59 The revenue and operating income (loss) amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. Of our $ 847.0 million in goodwill at December 31, 20 20 , approximately $ 523.8 million is allocated to our Product segment and approximately $ 323. 2 million is allocated to our IP Licensing segment . Product Segment Years Ended December 31, 2020 2019 2018 (in thousands) Total revenue $ 376,101 $ 198,124 $ 218,349 Operating expenses: Total cost of revenue 77,895 8,461 13,291 Research, development and other related costs 160,025 83,043 78,497 Litigation 2,864 1,656 — Depreciation 12,896 5,328 5,038 Amortization 98,233 88,074 88,544 Total operating expenses (1) 351,913 186,562 185,370 Total operating income (loss) $ 24,188 $ 11,562 $ 32,979 (1) Excludes operating expenses which are not allocated on a segment basis. The increase in revenue in 2020, as compared to 2019, was primarily attributable to the inclusion of TiVo revenue since the Mergers and higher minimum guarantee (“MG”) revenue due to the timing and duration of MG contracts up for renewal and executed during 2020, partially offset by a decrease in per-unit royalty revenue from existing licensing arrangements driven primarily by the COVID-19 impact. The increase in operating expenses in 2020, as compared to 2019, was primarily due to the inclusion of TiVo Product expenses, increased headcount and personnel costs in Perceive, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months. We expect R&D expense will continue to be significant in this segment as we develop new products and solutions, and as we include a full year of R&D expenses from TiVo operations in 2021. Operating income for the years ended December 31, 2020 and 2019 was $24.2 million and $11.6 million, respectively, which represented an increase of $12.6 million, for the reasons stated above. IP Licensing Segment Years Ended December 31, 2020 2019 2018 (in thousands) Total revenue $ 515,919 $ 81,943 $ 187,784 Operating expenses: Total cost of revenue 462 — — Research, development and other related costs 35,129 27,807 26,359 Litigation 17,891 3,471 26,099 Depreciation 1,288 1,393 1,638 Amortization 58,593 11,871 19,906 Total operating expenses (1) 113,363 44,542 74,002 Total operating income $ 402,556 $ 37,401 $ 113,782 (1) Excludes operating expenses which are not allocated on a segment basis. 60 The increase in revenue in 2020 , as compared to 2019, was primarily attributable to inclusion of post-merger TiVo IP Licensing revenue including past royalt ies revenue from Comcast as discussed in “Results of O perations , ” and secondarily Semiconductor IP agreements executed during 2020, partially offset by a decrease in revenue from other Semiconductor IP license agreements . The increase in operating expenses in 2020, as compared to 2019, was primarily due to the inclusion of TiVo IP Licensing expenses, including significant amortization of intangible assets recorded as a result of the Mergers, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months. In 2019 and in 2020, prior to the Mergers, TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same periods. We expect that litigation expense will continue to be a material portion of our operating expenses and may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings , and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Operating income for the years ended December 31, 2020 and 2019 was $402.6 million and $37.4 million, respectively, which represented an increase of $365.2 million, for the reasons stated above. Liquidity and Capital Resources December 31, (in thousands, except for percentages) 2020 2019 2018 Cash and cash equivalents $ 170,188 $ 74,551 $ 113,625 Short-term investments 86,947 46,926 40,739 Total cash, cash equivalents and short-term investments $ 257,135 $ 121,477 $ 154,364 Percentage of total assets 10 % 12 % 12 % Years Ended December 31, 2020 2019 2018 Net cash from operating activities $ 427,603 $ 169,253 $ 135,133 Net cash from investing activities $ 17,840 $ (19,143 ) $ 11,432 Net cash from financing activities $ (351,136 ) $ (189,184 ) $ (171,200 ) Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments. Cash, cash equivalents and short-term investments were $257.1 million at December 31, 2020, an increase of $135.6 million from $121.5 million at December 31, 2019. This increase resulted primarily from $427.6 million in cash generated from operations, $1,010.3 million in net long-term debt proceeds received and $117.4 million in cash acquired from TiVo as a result of the Mergers, which was partially offset by $1,254.9 million in repayment of combined legacy indebtedness and the 2020 Term B Loan Facility, $80.6 million in repurchases of common stock, $50.9 million in purchases of intangible assets and $30.8 million in dividends paid. Cash and cash equivalents totaled $170.2 million at December 31, 2020, an increase of $95.6 million from $74.6 million at December 31, 2019. Cash flows provided by operations were $427.6 million for the year ended December 31, 2020, primarily due to our net income of $143.8 million, non-cash items of depreciation of $17.9 million, amortization of intangible assets of $156.8 million, stock-based compensation expense of $39.1 million and loss on debt extinguishment of $8.3 million, plus $76.8 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $34.7 million in deferred income taxes. Cash flows provided by operations were $169.3 million for the year ended December 31, 2019, primarily due to our net loss of $64.0 million, non-cash items of depreciation of $6.7 million, amortization of intangible assets of $99.9 million and stock-based compensation expense of $31.6 million, plus $131.0 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $38.6 million in deferred income taxes. Net cash provided by investing activities was $17.8 million for the year ended December 31, 2020, primarily related to net cash acquired in the Mergers of $117.4 million and maturities and sales of securities of $35.9 million, partially offset by purchases of short-term investments of $77.2 million, purchases of intangible assets of $50.9 million and capital expenditures of $7.4 million. 61 Net cash used in investing activities was $19.1 million for the year ended December 31, 2019, primarily related to the purchases of short-term available-for-sales securities of $40.0 million, $8.8 million in capital expenditures and patent acquisition of $4.5 million, partially offset by maturities and sales of securities of $34.1 million. Net cash used in financing activities was $351.1 million for the year ended December 31, 2020 principally due to $1,254.9 million in repayment of indebtedness, $80.6 million in repurchases of common stock and $30.8 million in dividends paid, partially offset by $1,010.3 million in net long-term debt proceeds and $4.9 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash used in financing activities was $189.2 million for the year ended December 31, 2019 principally due to $150.0 million in partial pay-down of debt principal, $39.5 million in dividends paid and $4.5 million in repurchases of common stock, partially offset by $6.0 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income or loss. We did not recognize a provision for credit loss expense related to our AFS debt securities in 2020. For 2019 and 2018, we did not record any impairment charges related to our AFS debt securities. In the third quarter of 2018, we initiated an equity position in Onkyo Corporation (“Onkyo”), a publicly traded company listed on the JASDAQ market of the Tokyo Stock Exchange. Under Topic 321, we measure equity securities with readily determinable market value at fair value and recognize any changes in fair value in net income (loss). In July 2019, we sold approximately 2.8 million shares of Onkyo stock, for which a realized gain of $0.9 million was recognized for the year ended December 31, 2019. In June 2020, we sold the remaining 4.2 million shares of Onkyo stock, for which a realized loss of $0.7 million was recognized for the year ended December 31, 2020. There were no sales of the Onkyo investment in 2018, during which period an unrealized loss of $2.2 million was recognized. On December 1, 2016, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”) which provided for a $600.0 million seven-year term B loan facility. The Term B Loan Facility was scheduled to mature on November 30, 2023. During 2019 we made three voluntary principal payments totaling $150.0 million, and upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement. In addition, upon consummation of the Mergers on June 1, 2020, we repaid $734.6 million of assumed TiVo debt with the proceeds from a new borrowing of $1,050 million discussed below. On June 1, 2020, in connection with the consummation of the Mergers, we entered into a Credit Agreement (the “2020 Credit Agreement”) by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. The 2020 Credit Agreement provides for a five-year senior secured term loan B facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility is equal to, at our option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum. Commencing on September 30, 2020, the 2020 Term B Loan Facility will amortize in quarterly installments equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 62 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments). The 2020 Term B Loan Facility will mature on June 1, 2025. Upon the closing of the 2020 Credit Agreement, we borrowed $1,050 million under the 2020 Term B Loan Facility. Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned Term B Loan Facility with RBC. We commenced repaying quarterly installments under the 2020 Term B Loan Facility in the third quarter of 2020. The agreement permits prepayment of principal without penalty and on December 31, 2020 , w e elected to make a voluntary principal payment of $150.0 million. At December 31, 2020, $873.8 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt discount and issuance costs, of 5.1%. Interest is payable monthly. Under the existing loan agreements, we have future minimum principal payments for our debt of $52.5 million annually through 2022, then $72.2 million and $78.8 million in 2023 and 2024, respectively, with the remaining principal balance due in 2025. We are obligated to pay a portion of excess cash flow on an annual basis beginning March 31, 2022 based on certain ratios and our excess cash flow generated for the immediately preceding fiscal year as well as for any litigation settlements subsequent to the Mergers. The voluntary principal payment described above may be offset against any obligated payments due as of March 31, 2022. The 2020 Term B Loan Facility contains customary covenants, and as of December 31, 2020 we were in full compliance with such covenants . In August 2007, Xperi’s Board of Directors authorized a plan to repurchase Xperi’s outstanding shares of common stock dependent on market conditions, share price and other factors. This authorization was terminated upon closing of the Mergers. On June 12, 2020, our Board of Directors authorized a new stock repurchase program (the “new plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, stock price and other factors. Since the inception of the new plan, and through December 31, 2020, we have repurchased approximately 4.9 million shares of common stock for a total cost of $70.1 million at an average price of $14.25 per share. During the three months ended December 31, 2020, our repurchases totaled $20.0 million. As of December 31, 2020, the total remaining amount available for repurchase was $79.9 million. We may continue to execute authorized repurchases from time to time under the new plan. In 2020, we paid quarterly dividends of $0.20 per share in each of March and May and quarterly dividends of $0.05 per share in each of September and December. In 2019 and 2018, we paid quarterly dividends of $0.20 per share in each of March, June, September and December. From 2018 through 2020, we generated approximately $732 million of cash flows from operating activities. While we expect to continue to generate cash flows from operating activities for 2021, the COVID-19 pandemic presents significant uncertainties to the level of such cash flows as compared to prior years. Additionally, integration of the two legacy businesses post-merger and transaction costs relating to the contemplated separation of the two businesses will impact operating cash flow for 2021. We have taken actions to manage cash flows by reducing discretionary spending and other variable costs, delaying employee hiring, and closely monitoring receivables and payables. We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and investments currently available, will be sufficient to fund our operations, debt service, dividends, stock repurchases and acquisition needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such equity financing will be on terms satisfactory to us and not dilutive to our then-current stockholders or that debt financing will not impose significant restrictions on the operation of our businesses. Contractual Obligations Our contractual obligations as of December 31, 2020 were as follows (in thousands): Payments Due by Period Total 2021 2022-2023 2024-2025 Thereafter Long-term debt (1) $ 873,798 $ 52,548 $ 124,688 $ 696,562 $ — Interest on long-term debt (2) 137,669 35,405 64,077 38,187 — Purchase obligations (3) 149,417 41,291 48,275 18,990 40,861 Operating lease obligations (4) 96,341 21,825 35,196 30,354 8,966 Total $ 1,257,225 $ 151,069 $ 272,236 $ 784,093 $ 49,827 63 (1) Under the debt agreement, additional principal cash payments must be made on an annual basis beginning March 31, 2022 based on certain leverage ratios and excess cash flow generated for the immediately preceding fiscal year. See “Note 11 – Debt” for additional detail. (2) Under the debt agreement, our debt bears a variable interest rate. Interest on the long-term debt is presented based on the interest rate in effect as of December 31, 2020. See “Note 11 – Debt” for additional detail. (3) Amounts primarily represent future fixed and non-cancellable cash payments associated with purchase obligations to service providers, including the payments due within the next 12 months. Purchase orders for goods and services that are cancellable upon notice and without significant penalties are not included in the amounts above. (4) Operating leases are presented on a gross basis. We have agreements to receive payments of approximately $32.1 million under subleases through 2026. Refer to “Note 8 – Leases” for additional detail. Additionally, under certain contractual agreements, we may be obligated to make certain contingent or variable payments over an estimated period of approximately four years if certain conditions are met or milestones are achieved. See “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail. As of December 31, 2020, we had accrued $94.4 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $2.5 million of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refund of $123.0 million, net of interest income and foreign exchange loss, then $62.3 million of unrecognized tax benefit would be payable to the U.S. tax authorities. These amounts, which are included in our financial statements, have not been included in the table above. Off-Balance Sheet Arrangements As of December 31, 2020, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill and intangible assets, the valuation and recognition of stock-based compensation expense, the valuation of investments, business combinations, recognition and measurement of deferred income tax assets and liabilities, the assessment of unrecognized tax benefits, and others. Actual results could differ from those estimates, and material effects on our operating results and financial position may result. We believe the following accounting policies and estimates are most critical to the understanding of our consolidated financial statements. See “Note 2 - Summary of Significant Accounting Policies ” and “Note 4 - Revenue ” of the Notes to Consolidated Financial Statements for a full description of our accounting policies. Revenue recognition General Revenue is recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services, which may include various combinations of goods and services which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of sales taxes collected from customers which are subsequently remitted to governmental authorities. In situations where foreign withholding taxes are withheld by our licensee, revenue is recognized gross of withholding taxes that are remitted directly by the licensee to a local tax authority. Arrangements with Multiple Performance Obligations Some of our contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are separately accounted for if they are distinct. In an arrangement with multiple performance 64 obligations, the transaction price is allocated among the separate performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. When observable prices are not available, stand-alone selling price for separate performance obligations is based on the cost-plus-margin approach, considering overall pricing objectives. The allocation of transaction price among performance obligations in a contract may impact the amount and timing of revenue recognized in the Consolidated Statements of Operations during a given period. Variable Consideration When a contract with a customer includes a variable transaction price, an estimate of the consideration which we expect to be entitled to for transferring the promised goods or services is made at contract inception. Depending on the terms of the contract, variable consideration is estimated using either the expected value approach or the most likely value approach. Under either approach to estimating variable consideration, the estimate considers all information (historical, current and forecast) that is reasonably available at contract inception. The amount of variable consideration is estimated at contract inception and updated as additional information becomes available. The estimate of variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Subsequent changes in the transaction price resulting from changes in the estimate of variable consideration are allocated to the performance obligations in the contract on the same basis as at contract inception. Certain payments to licensees, retailers and distributors, such as market development funds and revenue shares, are treated as a reduction of the transaction price, and therefore a reduction to revenue, unless the payment is in exchange for a distinct good or service that the licensee, retailer or distributor transfers to us. When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of IP, or when a license of IP is the predominant item to which the variable consideration relates, revenue is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied. Nature of Goods and Services We generate our revenue from the following principal activities. License Agreements We operate in two business segments. In our Product segment, we license our audio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. In our IP Licensing segment, we license (i) our media patent portfolios (“Media IP licensing”) to multichannel video programming distributors, OTT video service providers, social media, consumer electronics manufacturers, and other providers of video experiences across various platforms, and (ii) our semiconductor technologies and associated patent portfolios (“Semiconductor IP licensing”) to memory, sensors, RF component, and foundry companies. We license our technologies and portfolios under three revenue models: (i) fixed-fee Media IP licensing, (ii) fixed-fee or minimum guarantee Semiconductor IP or Product licensing, and (iii) per-unit or per-subscriber royalty licenses. Fixed-fee Media IP licensing Our long-term fixed-fee Media IP licensing agreements provide our customers with the rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. We treat these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement. At times, we enter into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units or for an unlimited number of subscribers over a future period for a fixed fee. In these arrangements, we allocate the transaction price between the release for past patent infringement claims and the future license. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term. Fixed-fee or minimum guarantee Semiconductor IP or Product licensing 65 We enter into Product or Semiconductor IP licenses that have fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate our technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For both fixed fee and minimum guarantee agreements for Semiconductor IP or Product licensing, we recognize the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license. If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, we also consider the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, we treat a portion of the payments as a significant financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. We actively monitor and enforce our IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize our intellectual property without a license. As a result of these activities, we may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or from legal judgments in a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. We recognize revenue from recoveries when a binding agreement has been executed and we conclude collection under that agreement is likely. Per-unit or per-subscriber royalty licenses We recognize revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently reported by the licensee, which is generally in the month or quarter following usage or shipment. We generally recognize revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers and memory, sensors, RF component, and foundry companies. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate customer sales or production, which could have a material impact on the amount of revenue we report on a quarterly basis. Arrangements with Multiple System Operators for the TiVo Service Our arrangements with multiple system operators (“MSOs”) typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service. We have two types of arrangements with MSOs that include technology deployment and engineering services. In instances where we host the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is recognized. We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, we receive license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. We recognize revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognize revenue from fixed fee licenses ratably over the license period. In arrangements where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, we recognize revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. We 66 generally recognize revenue from license fees for the TiVo service that the Company does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties. Subscription Services Subscription services revenue primarily consists of fees to provide customers with access to one or more of our hosted products such as the iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. We generally receive per-subscriber per-month fees for the iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. We generally receive a monthly or quarterly fee from our metadata or analytics licenses for the right to use the metadata or access our analytics platform and to receive regular updates. Revenue from our metadata and analytics service is recognized ratably over the subscription period. TiVo-enabled DVRs and non-DVRs, including TiVo Stream 4K, and related TiVo Service We sell TiVo-enabled DVRs and non-DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs and non-DVRs through a limited number of retailers. After the initial subscription period for a DVR, all customers have various pricing options when they renew their subscription. The transaction price allocated to the DVR and non-DVR is recognized as revenue upon shipment to the customer and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenue from lifetime subscriptions is recognized ratably over the estimated useful life of the DVR or non-DVR associated with the subscription. The estimated useful life for a DVR and non-DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. We periodically reassess the estimated useful life of DVRs and non-DVRs. When the actual useful life of a DVR or a non-DVR materially differs from our estimates, the estimated useful life of the DVR or non-DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time. Significant Judgments Determining whether promises to transfer multiple goods and services in contracts with customers are considered distinct performance obligations that should be accounted for separately requires significant judgment, including related to the level of integration and interdependency between the performance obligations. In addition, judgment is necessary to allocate the transaction price to the distinct performance obligations, including whether there is a discount or significant financing component to be allocated based on the relative stand-alone selling price of the various performance obligations. Significant judgment is required to determine the stand-alone selling price for each distinct performance obligation when an observable price is not available. In instances where stand-alone selling price is not directly observable, such as when we do not sell the good or service separately, the stand-alone selling price is determined using a range of inputs that includes market conditions and other observable inputs. More than one stand-alone selling price may exist for individual goods and services due to the stratification of those goods and services, considering attributes such as the size of the customer and geographic region. Due to the nature of the work required to be performed on some performance obligations, significant judgment may be required to determine the transaction price. It is common for our license agreements to contain provisions that can either increase or decrease the transaction price. These variable amounts are generally estimated based on usage. In addition to estimating variable consideration, significant judgment is necessary to identify forms of variable consideration, determine whether the variable consideration relates to a sales-based or usage-based royalty of intellectual property and determine whether, and when to include estimates of variable consideration in the transaction price. For certain licensees, royalty revenue is generated based on a licensee’s production or shipment of licensed products incorporating our intellectual property, technologies or software. Licensees with a per-unit or per-subscriber arrangement pay a per-unit royalty for each product manufactured or sold, or for each subscriber, as set forth in its license agreement. Licensees generally report manufacturing, sales or subscriber information in the month or quarter subsequent to when the production, shipment or subscription activity takes place. We estimate the royalties earned each quarter based on our forecast of manufacturing and sales activity by our licensees in that quarter. Any differences between actual royalties owed by a licensee and our estimates are recognized when the licensee’s royalty report is received. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities manufactured, shipped or subscribed by licensees, which could have a material impact on the amount of revenue recognized. 67 Some hardware products are sold with a right of return and, in certain circumstances, credits or incentives may be provided to customers or resellers at the time of sale. Such credits and incentives are accounted for as variable consideration and recognized as a reduction to revenue. Estimates of returns, credits and incentives are made at contract inception and updated each reporting period. In contracts where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of software, or where we provide non-recurring engineering (“NRE”) services, we recognize revenue as progress toward completion occurs using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Significant judgment is required to estimate the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement. We evaluate our estimates, inputs and assumptions related to revenue recognition on an ongoing basis. The use of different estimates, inputs or assumptions may materially affect the reported amounts of assets and liabilities as of the date of the financial statements and the results of operations for the reporting period. Business combinations The fair value valuation of assets acquired and liabilities assumed in a Business combination under ASC 805 requires management to make significant estimates and assumptions. Critical estimates in determining the fair value of certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, and acquired developed technologies and patents; competitive trends and market comparables; brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio; and discount rates. For additional information, refer to “Note 9 – Business Combination ” of the Notes to Consolidated Financial Statements. Valuation of goodwill and intangible assets We make judgments about the recoverability of intangible assets whenever events or changes in circumstances indicate that impairment may exist. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. Such changes could result in impairment charges or higher amortization expense in future periods, which could have a significant impact on our operating results and financial condition. We perform an annual review of the valuation of goodwill in the fourth quarter, or more often if indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows, useful lives, and fair market values of our reporting units and assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management estimates and judgment. Should conditions be different from management’s last assessment, significant impairments of goodwill may be required, which would adversely affect our operating results. Stock-based compensation expense Stock-based compensation is measured at the grant date based on the estimated fair value of the award and is recognized as expense on a straight-line basis, net of estimated forfeitures, over the requisite service or performance period. We use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units (“RSUs”), and performance stock units (“PSUs”) that are based on company-designated performance targets. A Monte Carlo simulation is used to estimate the fair value of restricted stock units subject to market conditions with expected volatility estimated using the historical volatility of our common stock. We use the Black-Scholes-Merton option-pricing formula to estimate the fair value of stock options and employee stock purchase plan ("ESPP") shares. The Black-Scholes-Merton option-pricing formula uses complex and subjective inputs, including the expected life of the options, stock price volatility, dividends and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on our stock’s market-based historical 68 volatility. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and canceled. If our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what we have recorded in the current period. See “ Note 1 4 - Stock-Based Compensation Expense ” of the Notes to Consolidated Financial Statements for additional detail. Accounting for income taxes We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits and deductions, and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely on a more-likely-than-not basis, we must increase our provision for income taxes by recording a valuation allowance against our deferred tax assets. Should there be a change in our ability to recover our deferred tax assets, our provision for income taxes would fluctuate in the period of the change. We account for uncertain tax positions in accordance with authoritative guidance related to income taxes. The calculation of our unrecognized tax benefits involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not assuming the tax authorities have full knowledge of all relevant information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits are less than the expected ultimate settlement. Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the years ended December 31, 2020, 2019 and 2018, we did not recognize any significant penalties or interest related to unrecognized tax benefits. See “Note 15 - Income Taxes ” of the Notes to Consolidated Financial Statements for additional detail. Recent Accounting Pronouncements See “Note 3 – Recent Accounting Pronouncements ” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.