The first firmware update is mostly bug fixes and not related to sound quality. So it's safe to update.
As for tuning the settings to suit a specific Headphone or IEM, I would say it boils down to personal preferences ultimately. As in some prefer to use Equalizer but some prefer not. Some of us are purist and don't believe in any DSP and rather stick to Direct Source Settings.
But here's my advice or opinions on the Settings:
Gain Settings:
Use Low Gain if you prefer a more laid back sound for your easy to drive iems
Use High Gain if you are running a harder to drive headphones and/or if you prefer a more aggressive sound signature for any of your iems.
DSEE HX AI:
This function is much improved on the ZX507 as compared to previous implentation found on Sony wireless headphones or older walkmans.
The improvement over previous implentation is that it sounds so much less Artificial. It adds much more noticable soundstage height and improves the seperation of musical elements(singer, audience, drums, piano, violin). I felt that DSEE HX effect is more effective with Sony branded earphone maybe it is sony house sound related.
Enable DSEE HX if you feel that Sony DSP can enhance your listening experience or if you use Sony branded headphones/iems.
Disable DSEE HX if you find that it is not compatible to your iem/headphone sound signature or if you are a sonic purist that don't believe in Sony's sound altering DSP or if you think it sounds like artificial crap.
DC Phase Linearizer:
here's my breakdown:
Type A: impact feeling of Bass notes hits more aggressive(thuddy), more upfront in presentation
Type B: impact feeling of Bass notes hits more laid-back(boomy), more background presentation
As for Low, Standard and High:
Low: Sub bass stands out more
Standard: Mid bass stands out more
High: Bass regions(sub-bass, mid bass, upper bass) gets aggregated and presented as mostly one bass note.
I think for bass heads, the best sounding is Type A Low. As this is the most aggressive on the subbass and slams harder.
Type A standard I feel is the most balanced interms of working well with most genres and also offering a good bass feeling.
for listener of jazz or vocals should try Type B Low or Type B standard. Type B makes vocals stand out more.
Vinyl Processor:
This is a tricky one.
I think this DSP effect is harder to nail down in terms of how one prefers the changes offered by the different modes. But I think I would say you can switch off Vinyl Processor and your zx507 will still sound great.
@Whitigir DMPZ1 review does explain the effects very well.
Dynamic Normalizer:
Don't use this function for music listening. Podcast or audiobooks, this function can be useful.