Immersion Corp (IMMR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Immersion quarterly results conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time if you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded Monday, October 27th, 2003. I would now like to turn the conference over to Victor Viegas, President, CEO and CFO of Immersion. Please go ahead, sir.

Thank you, Amy. Good afternoon, ladies and gentlemen. I'm pleased to welcome you to this discussion of our results for the third quarter of 2003. Joining me on today's call is Immersion's vice president and corporate controller Mary Beth Baus, who will talk you through our financials.

By now you should have received a copy of our third quarter earnings news release that was distributed following the close of market today and is also available on our website at www.immersion.com. A replay of today's call may be accessed until October 31, 2003, in the U.S. by dialing (800)633-8284 and entering reservation number 20977312. A replay of this call will also be archived and available at our website for one year.

During the course of our comments today, we will be making forward-looking statements. Our actual results could differ materially from these current expectations. Factors that could cause actual results or developments to differ include risk factors listed in today's news releases, the company's SEC filings, our annual report to shareholders as well as those factors mentioned during our discussion today.

Before Mary Beth reviews the details of our financial performance, I would like to begin by providing you with an overview of the quarter. While Immersion's revenue for the third quarter and our operating loss is disappointing, Immersion is a more stable company with a strengthened balance sheet. We have added significant marketing and sales skills with the hiring of Mike Zuckerman and Mark Belinsky. We have moved past the Markman phase in the litigation against Sony. We have made excellent progress on deliverables associated with the Medtronic contract signed earlier this year . And in addition, we continue to make progress with leading cell phone hand set manufacturers, beginning to earn some modest development revenue from the development of prototypes with haptic features.

Some of the financial and operational highlights of the third quarter include as follows: Our balance sheet has been strengthened by the addition of cash related to the licensing agreement and settlement of patent litigation with Microsoft as well as their equity investment previously announced at the end of July. We ended the quarter with aproximately $27 million in cash.

Our patent infringement litigation with Sony is progressing, and we remain confident in the merits of our case. On October 2, Judge Wilken issued her ruling associated with the Markman hearing that took place in late April. This public document represents the judge's written claim construction order that provides the basis for her instructions for the jury about how they should interpret the facts of the case. The date of the jury trial is currently scheduled for April 12, 2004, and we will continue to provide you with updates as warranted.

In August we delivered enhanced cardiovascular training tools for the Medtronics cardiac rhythm management group. This one of the deliverables under the contract announced earlier this year with Medtronics. These training tools were showcased in a new training program kicked off during the second week of September at Medtronic's European training center in Switzerland. Under revenue recognition rules, Immersion can begin recognizing revenues on these contracts when certain refund provisions expire, a function of meeting a schedule of deliverables under the contract terms. We have made excellent progress meeting the schedule of deliverables and expect that we can begin to recognize the revenues associated with the contracts in the fourth quarter of this year.

Our revenues for the quarter were negatively impacted by delayed product orders for our endoscopy platform, which we had hoped to close and ship by September 30th. A few of these orders have already been received in October, and we expect they will ship in the fourth quarter. Our net loss widened as a result of the revenue decline and higher operating expenses associated with the litigation costs to protect and defend our patent portfolio.

Let me mention a new of the other developments achieved this quarter capable of yielding future benefits. We are excited about our new breakthrough software technology called TouchWare Gaming that automatically enables high quality force feedback for the vast majority of PC games. TouchWare Gaming analyzes a game's sound effects, converts them using sophisticated algorithms, and maps them into appropriate force feedback effects on old and new PC games running on Windows 95 or higher.

In the past five years, the number of installed force feedback gaming peripherals has grown to 4.6 million worldwide. Yet, it is estimated that only 15% of all gamers have force feedback peripherals. Now, gamers have an additional and compelling reason to buy products made by Immersion's licensing partners including Microsoft and Logictech. TouchWare Gaming software fundamentally changes the gaming experience by enabling players to enjoy force feedback in PC games.

We also announced three new agreements during of the quarter, two in the gaming space and one in our 3D business segment. Elite Interactive joined Immersion's growing base of licensees for video game console peripherals by integrating Immersion's haptic technology in its new X-Calibur and Katana game pad controllers for the X-Box and the Playstation 2 respectively.

Immersion also broadened its geographic scope in Asia by signing a new gaming licensee in China and expanding its agreement with in a licensee in Taiwan. Both are third party manufacturers, so they have the capability to promote force feedback technology to gaming retailers who don't have their own manufacturing facilities. And in 3D Immersion is working with Fisher/Unitech, adding Immersion's MicroScribe G2 digitizing solutions to the products Fisher/Unitech resells to 3D designers and mechanical design engineers throughout North America.

In the cell phone area, we are continuing to target and aggressively pursue new markets for our haptic technology where we believe we can offer an increasing array of distinctive features to that market. During the quarter we earned some modest development revenue from handset manufacturers for whom we have developed haptically enabled cell phone prototypes. These prototypes reflect our success in improving the force effects, making our technology more miniaturized, less expensive wireless with lower power consumption and available in a form that can fit into a cell phone. We are pleased with the response that we have received thus far and continue to view the cell phone PDA market as one of the next growth catalysts for Immersion.

Earlier this month, we made important additions to our management team that strengthens our sales and marketing organization. Two appointments are particularly important for Immersion as demand for our technology accelerates and we expand our business in current and new markets. Michael Zuckerman was a been appointed senior vice president of marketing, and Mark Belinsky has been appointed vice president of market strategy. Mike is a 25-year industry veteran who was previously with Verity and Sensar, and Mark was previously with Macrovision in the E-Licensing and Digital Rights Management Software areas. And before that, he was with Electronic Marketplace Systems.

Before turning the call over to Mary Beth, I would like to mention that we now own 201 patents in our worldwide intellectual property portfolio. I will now turn the call over to Mary Beth, who will review our financial performance for the quarter. Mary Beth?

Thanks, Vic. Let me begin by briefly reviewing each of our four businesses.

Although revenues from our medical business declined sequentially quarter-to-quarter 26% and year-over-year 35% due primarily to some medical product sales slipping from the third quarter to the fourth quarter, we anticipate significant improvement from our medical business in the fourth quarter of 2003. As Vic mentioned, we are deferring certain license and contract development revenue streams associated with Medtronic until certain contract milestones are achieved, which we believe will occur in the fourth quarter of this year. Revenue will be recognized under the contract based on the cost to cost percentage of completion accounting method. As a result, we expect the medical business will be profitable for the full year 2003.

Revenues from our 3D and professional group increased both on a year-over-year basis by 4% and on a quarter-over-quarter sequential basis by 7%, primarily as a result of higher sales of 3D products such as our MicroScribe G2 desktop digitizer. Similarly, revenues from our consumer computing and entertainment area also improved sequentially on a quarter-over-quarter basis by 4% and a year-over-year by 11%, primarily as a result of higher royalties. We anticipate further improvement over the next three months as a result of the seasonal trends associated with the holiday shopping season and an increase in new product offerings previously announced by some our licensees. Our automotive business revenues during the third quarter were higher than both the prior quarter by 112% and the corresponding period in 2002 by 62% because of increases in all three sources of revenue for automotive control devices: royalties, product sales and development funding.

Moving on to the income statement, as stated earlier in today's earnings release, our revenues for the third quarter of 2003 were $4.1 million, compared to revenues of $4.5 million in the third quarter of 2002. I'll talk about the revenue breakout in just a moment. On a GAAP basis net loss was $5.2 million or 26 cents per share compared to a net loss of $4.4 million or 22 cents per share for the third quarter of 2002. This quarter's net loss includes noncash charges for amortization of stock based compensation and intangible assets totaling $609,000 which reduced earnings by aproximately 3 cents per share. This compares to noncash charges of $748,000 attributable to noncash amortization for stock based compensation and intangible assets that reduced earnings by 4 cents per share for the same quarter last year.

Revenue breakouts for this year's third quarter and compared to the third quarter 2002 are as follows: royalties from technology licensing in the third quarter represented 22% of the total revenue at $905,000 compared to $878,000 in the corresponding quarter last year. This improvement is primarily attributable to higher royalties associated with sales of computer gaming peripherals and automotive control devices. Product sales accounted for 51% of total revenue at $2.1 million compared to $2.6 million in the third quarter of last year. The decrease is mostly related to timing issues associated with the sales of medical simulation products. Development contract revenues for the quarter represented 27% of total revenue or $1.1 million compared to $987,000 in the third quarter of 2002. Development contract revenues were higher primarily due to development contracts with automobile manufacturers.

Third quarter 2003 operating expenses were $7.1 million compared to $5.2 million in the third quarter of 2002. The higher operating expenses are primarily due to the legal expenses associated with the patent infringement litigation. Gross margins were 71% in the third quarter of 2003 compared to 64% for the third quarter of 2002 due in part to the higher contributions from royalties and development contracts in the revenue mix. Interest and other income and expense net was nearly $1.4 million lower in the third quarter of 2003 compared with the corresponding quarter of 2002 when there were charges of $1.2 million related to the writeoff of an equity investment in a privately held company.

Additionally this quarter, we recorded accretion and dividend expense on the Series A redeemable convertible preferred stock in the amount of $417,000. Pursuant to our agreement with Microsoft, the Series A redeemable convertible preferred stock can be redeemed at the request of Microsoft for two times the accretive value on or after July 25th, 2006. We are recording the accretion on a straight line basis over the three year period.

During the quarter ended September 30, 2003, we recorded $339,000 related to accretion. Holders of Series A redeemable convertible preferred stock are entitled to cumulative dividends at a rate of 7% per annum. Dividends are payable in cash or stock semiannually in arrears on July 25th and January 25th of each year. During the third quarter of 2003, we accrued $78,000 for dividends payable on our Series A redeemable convertible preferred stock.

Our head count at the end of the third quarter totaled 127, little change from the 131 employees at the end of the second quarter of this year. On the balance sheet, our cash and cash equivalents increased significantly to $26.9 million at September 30, 2003 as a result of the receipt in late July of $26 million from Microsoft related to the agreements that Vic spoke about earlier.

There are two additional items on our balance sheet to note this quarter as a result of the agreements entered into with Microsoft in late July. The $20 million license fee paid by Microsoft and recorded under Long Term Liabilities and Deferred Revenue, as well as the $6.4 million in Series A redeemable convertible preferred stock. While we have not finished the review of the revenue recognition on the license fee paid by Microsoft, we do believe that future events and contingencies will require deferral of the license fee revenue until such future events or contingencies occur. The future events and contingencies which cause deferral include the redemption provisions of the Series A redeemable convertible preferred stock as well as certain payment obligations under the sub license agreement.

This concludes the review of our financial results, and I will now turn the call back over to Vic who will make some closing comments before opening the call to questions. Vic.

Thanks, Mary Beth. We are well positioned to deliver growth and improve financial performance going forward as a result of initiatives already undertaken and others that will be implemented in the near future. We're seeking to penetrate the best long term opportunities for our pioneering haptic technology, and our focus is on those markets promising the greatest financial return.

Before discussing questions that you may have let me mention that we remain interested in meeting with current and potential institutional investors wanting to know more about Immersion, We will be presenting at the SIDLER Investor Conference in Newport Beach on November 6th. If you are interested in scheduling a followup call or would be interested in meeting with us, please notify Pierre Hersh at CALT ROSEN and Company by calling 415-397-2686. I will now turn the call back to Amy to have her handle your questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by a four on your telephone. You will hear a three tone prompt to acknowledge the request. If you would like to withdraw your request, please enter one followed by the three. If you are using a speaker phone, lift your hand set before entering your request. One moment for the first question. The first question comes from the line of Joe Arsenio with Arsenio and Associates. Please state your question.

Hi, Vic, how are you.

Hello, Joe.

It is the balance sheet I want to talk about and really the -- some of the things that are on it. Specifically, the way you're handling the deferred license fee and the long-term liability. You have got in that category $24.3 million. I guess $20 million of that is deferred revenue, is that correct or could you just segment the 24 into its components?

Right, sure. The deferred revenue is made up of a number of different customer payments.

Okay.

And the one that you mentioned is Microsoft which would be $20 million. There are in addition to Microsoft there have been payments made in the past by ALPS as well as Medtronic as well as other smaller companies, so these are payments made in advance of recognizing the revenue due either future contingencies or additional deliverables or efforts on our part.

Now, does that constitute the entire $24.3 million or is some other portion a typical liability that isn't deferred revenue?

Well, if you look at the -- if you look at the current portion, deferred revenue and customer advances, it is about $5.1 million. In addition you have got the long-term liabilities and deferred revenue of another 24, so there is roughly $29.5 million, and all of it is related to the advances paid by customers or deferred revenue.

I see. And none would be considered a liability that wasn't deferred revenue?

That is correct. And I also believe that none of those moneys paid are refundable under any -- under any circumstances.

Okay. Just one more question on this. In the basic presentation you mentioned that the $20 million from Microsoft that is deferred license would not be booked as revenue immediately because of various contingencies that would have to be satisfied. When do you think those contingencies will be satisfied?

Well, there are quite a few different contingencies that we need to deal with, I mentioned the -- in the convertible preferred stock investment agreement there are certain redemption provisions depending on the passage of time. I believe in 2006 Microsoft has the ability to redeem those shares at a two times multiple. In addition, if we were to do things such as sell off a large portion of our patent portfolio, sell the company or various other unforeseen events, that there would be the obligation to redeem some of that investment as well.

Secondly, associated with the license agreement and other agreements that we entered into with Microsoft, namely, a sub license agreement, they have certain rights under our patent portfolio that would require, in essence necessitate, a payment either on the part of Immersion or on the part of Microsoft, and so those are tied to future rights that they may license or certain future events that may occur and again not having those events occur at this time, we feel the appropriate way to treat this payment is treat it as a liability as deferred revenue and not record the revenue until some of these other events occur.

Okay, thank you very much.

Thanks, Joe.

Ladies and gentlemen, as a reminder to register for a question please press the one followed by the four on your telephone at this time. Our next question comes from the line of Kurt Mayor with Lehman Brothers. Please proceed with your question.

Hi, Vic. You mentioned the last conference call the expectation of being cash flow positive in Q4. Are you still expecting that event?

When we look at the fourth quarter, there are a couple of events that will affect cash, cash flow. One of that will be a directors and officers liability insurance. That payment would need to be made. There is also the issue of the timing of recognizing revenue and the receipt of moneys from Medtronic under the set of their contract. I believe that when you look at our internal forecast for the quarter, we are assuming a slight cash consumption, something under a million dollars for the fourth quarter.

Okay. And relative to the TouchWare downloading of the software, I know this it is has been a very short period of time but can you give us a sense of what the demand has been on that?

So you're referring to TouchWare Gaming?

Yes.

This is the technology that allows you to convert the sound files into haptic files automatically.

Yes.

So a purchaser of a gaming peripheral with our technology can download the software for $29.95, and with that download is able then to experience haptic events in virtually all of the games that have been produced or are being produced as we go forward. At this point we have been offering a free 30-day trial available on our website. I believe the number of downloads at this point on the free trial version is something in the neighborhood of 700 downloads. It has only been up for a few days. This morning we actually took the website live with an e-commerce site so that for first time the people can download a full version, not just the trial version and use this in the gaming experience.

In addition, we are speaking with a number of of our licensing partners who have shown an interest in providing certain marketing opportunities to us such as inbox coupons or bundling the technology with the sale of their hardware gaming peripherals. And we also expect to take the same type of technology and extend it into other platforms such as game console platform and it would be applicable to the cell phone platform which would enable gaming, a much enriched gaming experience in the cell phone as we move forward. So TouchWare Gaming really represents a broad range of opportunities for Immersion.

Thanks. As a followup question, my recollection is that Tokyo Auto Show was last week is that correct?

Yeah, I believe it is going on started late last week and continues this week. I think it actually goes through November 5th.

Okay. And have we had any either prototypes or concept vehicles that have been introduced using your technology?

I'm not aware of the goings on at the Tokyo Auto Show, and we are still speaking with our partners trying to determine what they are showing and what kind of concept cars they might be displaying. I can tell you that at the Frankfurt Auto Show, which as you know was the second week of September, BMW demonstrated the iDrive and the M5, and we had four major automotive suppliers showing our active haptic control technology, and as a result of those presentations at the Frankfurt Auto Show, we are engaged with quite a few OEMs on new development programs and discussions about follow-on activity.

That is good news. There was something in the "New York Times" in the not too distant past that was my recollection it was an advertisement for Harmon International and it was specifically highlighting the iDrive technology, and to my understanding that was technology that came through ALPS on its BMW. Can you explain to me the difference between Harmon differ versus ALPS and Siemens in this arena?

I will do my best. Harmon as I understate it is aggregator of a lot of automotive content and they have a very high-end technology offering that includes GPS, navigation systems, communication systems. The ability to interact with the Internet, receive faxing capabilities, a very rich set of applications, and they bring this solution to the OEM suppliers as a platform. The ALPS effort in this area would be providing a controller, and BMW -- BMW calls it the iDrive controller, but it would be enabling controller that would allow you to effectively operate within the rich content environment. So I think we would be considered very complementary to what Harmon is doing as an enabling controller for a broader set of functionality in these vehicles.

Okay. Thank you.

Ladies and gentlemen, as a reminder to register for a question press the one followed by the four on your telephone at this time. Our next question comes from the line of Chris Wagner with Lehman Brothers. Please proceed with your question.

Yes, Vic, you mentioned earlier in the call. I don't want to put words in your mouth but some progress with regards to the Sony litigation, and is that because of the release of Judge Wilkin's report on the Markman hearing or other developments?

Primarily the results of Judge Wilkins's ruling but also that was a significant event and up until that point we had had a number of meetings scheduled through the court mandated mediation process and we had a number of sessions scheduled and cancelled with Sony. And subsequent to to the ruling being issued, the Court has asked us to get together one more time. And so we are currently scheduled for a mediation session later this week.

Okay. Any reason to believe that they might actually stick with the meeting as opposed to cancelling it like they have in the past? I know it is an unfair question, but --

Is it is not really possible to tell. It is an important part of the process and we will definitely be there and we hope that Sony is as well.

Okay. Thank you.

Our next question comes from the line of Harlan Crossman, a private investor. Please proceed with your question. Pardon me, Mr. Crossman, your line is now open, please proceed with your question.

Can you hear me? Hello?

Yes.

I'm sorry. I was having a little trouble with my phone. You recently hired two marketing people. Obviously, the company feels there are at least sufficient inquiries to obtain the services of these two marketing people, and if so what areas are they going to be look at as far as increasing product sales or just the services of Immersion?

Okay. Thanks, Harlan, for the question. Let me start with Mike first. As you you know, Mike has a terrific background and has spent the last couple of weeks really integrating himself into the marketing team and learning more about our technology. He has also begun to take responsibility for quite a few vertical marketing initiatives, and I will elaborate a little bit. In the medical space for example Mike along with the other medical personnel has begun marketing programs such as formalizing user groups, working to support the certification efforts and driving to push the medical business further towards the mainstream market. A couple of programs that are underway already include lobbying efforts, a return on investment analysis, and preparation of some tools that will help in that creation of the ROY analysis and also helping to reengage the medical advisory panel. These are people who are quite influential in the medical field and we believe will have the ability to help influence, drive us to the mainstream market. So those are a few of the things that Mike is start on in the first few weeks on board.

Mark and worked together back at Macrovision in the late 90s, and Mark has one of the best licensing minds around that I'm aware of. Very high energy level and he has the ability to develop and execute on various licensing business models. Which as you can appreciate, working in various markets requires skill and a licensing area as well as understanding of the appropriate business models. So these have become even more important skills as our technology offerings and the market opportunities significantly expand. So, what I really am looking for Mark to do is to help us evaluate new markets, I'll expect that he will help us evolve the appropriate markets -- excuse me, the appropriate business models and help us develop early stage partnerships and licensing arrangement.

So you are not necessarily just going towards like medical schools in order to get the software in there?

Well, that would be one part of our business, the medical side. And I touched on some of the marketing initiatives that Mike and some of the other people at our [INAUDIBLE] operation are working on and it would include teaching hospitals, community colleges and quite a few other areas where we believe we have got a great opportunity to grow that business. But separate from just those initiatives, Mike will also be working on marketing programs in the balance of our business, namely, areas such as the cell phone space, gaming and in some of our industrial and automotive areas. Mark as well is looking at ways to take the haptic technology and expand them beyond the current market and actually look into new markets that we feel haptic technology is just about ready for those opportunities.

Okay. I sure appreciate it, thank you, Vic.

Thank you.

Once again, ladies and gentlemen, to register for a question, please press one followed by four on your telephone at this time. I'm showing no further questions at this time. Gentlemen, please continue with your presentation or any closing remark.

Thank you, Amy, I appreciate you continue the interest in Immersion and we urge you to follow our progress during the fourth quarter that we are currently in. And we look forward to speaking with you in February of '04 when we will be releasing the fourth quarter results. And again, I thank you for your interest and support. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.