Immersion Corp (IMMR) 2005 Q1 法說會逐字稿

Good afternoon. My name is Tina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Immersion’s First Quarter 2005 Conference Call.

(OPERATOR INSTRUCTIONS.)

Thank you. Mr. Viegas, you may begin your conference.

Thank you, Tina. Good afternoon, ladies and gentlemen. I am pleased to welcome you to this discussion of Immersion’s results for the first quarter of 2005. With me today is Stephen Ambler, Immersion’s CFO and VP of Finance. I will formally introduce Stephen later, before he takes you through our financials and covers a number of other matters.

By now you may have seen this quarter's earnings release that was distributed following the close of market today. If you have not, it is available on our website at www.immersion.com. A replay of the call will be available until April 29th, 2005, by dialing 800-642-1687, and entering confirmation number 2696092. A replay of this call will also be archived and available on our website for one year.

During the course of our comments today, we will be making forward-looking statements. These forward-looking statements reflect management’s current forecast of certain aspects of the Company’s future business. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even abrupt changes.

Our forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Factors that could cause actual results or developments to differ include risk factors listed in today’s news release, in the Company’s SEC filings, and in our annual report to shareholders, as well as those factors mentioned during our discussions today.

Before getting into the details of our performance this quarter, I’d like to make a few remarks about the Company and where we are in our mission to become profitable.

My main focus is to achieve revenue growth that leads Immersion to an operating profit. This requires a careful balance of four areas. The first, ongoing execution of sales and marketing plans in our established businesses to increase revenue; number two, selected investment in product and technology development for longer-term new-growth areas; number three, control over operating expenses; and number four, protection and defense of Immersion’s extensive intellectual property portfolio across all of our businesses.

I want to make one point very clear. My goal is to lead Immersion to profitability through product sales and licensing revenue, regardless of the eventual outcome of our litigation with Sony.

Immersion has many market opportunities and is focusing on those that we believe have the best near-term potential. We continue to invest in medical and mobility because we believe these are our best opportunities to fuel significant growth in the new few years. I will update you on our progress in these markets shortly.

The financing we closed in the fourth quarter allows us to invest in these growth areas, while we expect increased revenues from our base business will help us achieve operating profits.

During today’s call, I will be discussing five major highlights of the first quarter. Number one, overall Immersion’s revenue grew 8% in the first quarter of 2005 over the first quarter last year, while operating expenses decreased by 28%. Number two, our medical product revenues grew 62% over the first quarter of last year.

The third highlight, the addition of new licensees and the strong product sales of current licensees resulted in gaming revenue increasing 52% over the comparable quarter of last year. Number four, the first three Samsung phones with our VibeTonz technology launched in the U.S. and Korea. And number five, the court entered a judgment in favor of Immersion in the Sony patent lawsuit.

I’d now like to give you a high-level financial summary, an update on our businesses, and the status of our litigation with Sony.

Our 2005 first quarter revenue was $5.8 million. We incurred a net loss of $3.1 million, a reduction of just under 50% compared to the comparable quarter a year ago. Litigation expenses related to the Sony lawsuit were under $1 million in the first quarter, which was down from $1.1 million in the fourth quarter of 2004, and $3.2 million in the first quarter of 2004.

We finished the quarter with $26.9 million in cash, up from $25.5 million on December 31, 2004. Revenue for the medical business was $2.2 million in the first quarter, an increase of 11% over the first quarter of 2004.

In the past several conference calls, I have discussed our medical business strategy of focusing on selling training simulator products to hospitals and teaching institutions, versus obtaining new development contracts. The execution of this strategy has resulted in a steady increase in medical product sales.

Comparing quarters, in 2004 versus 2003, product sales increased 18% in the second quarter of 2004, 155% in the third quarter of 2004, and 42% in the fourth quarter of 2004. Now, in first quarter of 2005, product sales increased 62% over the first quarter of 2004.

The increase in medical product sales is the result of our investments over the past year in product development and in sales and marketing. For example, early in the first quarter of 2005, we announced shipment of an upgraded version of the CathSim AccuTouch System for vascular access procedures, one of our five product platforms. As we finish our development contract commitments, we can redeploy resources to accelerate the upgrade and expansion of our other product platforms, including the introduction of new software modules.

In the sales and marketing area, we have added over 15 new channel partners outside the United States over the past year; located in Europe, the Middle East and Asia. We have also invested in additional U.S. direct sales personnel. With this additional geographic sales presence, new marketing programs and tools, such as our ROI model, we are generating more awareness, interest and ultimately sales, of our medical training products. As a long-term effort, we also continue to work with various medical societies for their endorsement of surgical simulation as an essential training and testing tool.

Turning now to our gaming business, this quarter’s revenue was $1.8 million, an increase of 52% over last year’s first quarter revenue. This growth continues to be driven by licensing royalties from increased sales of console gaming peripherals by our licensees. In addition, since January 1st of this year, we have announced five new license agreements; Gemini Industries, a division of Phillips Electronics; Griffin International Companies; Joytech; Hip Interactive; and Radica.

In the industrial business, specifically the automotive market, we are focusing on applications for our Haptic Rotary touch-screen and touch-surface technologies. We are now engaged in both ongoing and new development projects signed in the first quarter for several automotive OEMs and their suppliers. In the 3D digitizing part of our industrial business, we started shipping four new models in our MicroScribe product line. This product extension targets new markets and applications that have higher accuracy needs.

We signed seven new channel partners for our 3D business in the first quarter, mostly in Europe and Asia. Over the last six months, we have added several people to our direct sales force to manage channel efforts and target OEMs worldwide, providing new sales presence in Europe, China, and North America.

In our mobility business, our success depends on forming relationships with technology suppliers, and establishing multiple ecosystems that are comprised of the following; a particular wireless operator; a handset manufacturer who builds the VibeTonz-enabled phone for that specific operator’s network; and VibeTonz-enabled content supplied by one or more of our content partners.

We’ve announced technology supplier partnerships with QUALCOMM and Symbian. These relationships help us simplify and speed integration of our products onto these technology platforms. Our QUALCOMM relationship has also included True Brew certification for a VibeTonz Brew extension, that allows downloadable content to play on VibeTonz-enabled mobile phones, and to track developer royalty obligations to Immersion.

On the ecosystems front, we are focused on three major markets; the U.S., Korea, and Europe. In the past two weeks, we reached major milestones in the U.S. and Korea with the commercial launch of three new VibeTonz-enabled mobile phones developed for leading operators, with content available today and more expected soon. For all of these phones, because of their design and target market, games are a significant part of the appeal.

Let me share some current statistics and projected growth rates with you to put mobile gaming into perspective. According to the 2005 Mobile Game Report from Informa Telecoms & Media, worldwide mobile gaming revenue is on track to grow from $1.3 billion in 2004 to over $11 billion in 2010. And just as Immersion technology has played a significant role in console and PC gaming, we anticipate it will have a significant impact on mobile gaming as well.

Korea, in particular, is a very advanced market for mobile games, accounting for 14% of global sales. SKT and KTF, the number one and two operators in Korea, which I will be talking about more, currently each derive about 10% of their total content revenue from gaming.

As I said, the leading operator in Korea is SK Telecom, or SKT, with over 18 million subscribers. SKT has announced that they are offering the VibeTonz-enabled Samsung SCH-g100 mobile phone to their subscribers. This new advanced entertainment phone, aimed at the gaming market, used an innovative design that allows phone use in portrait mode and game play in landscape mode. The phone has our VibeTonz software embedded, and has mixed graphics capability that displays both 2D and 3D images simultaneously. The phone has a large, high-resolution color display, 1.3 mega-pixel camera, and stereo speakers.

SKT has announced plans to make a substantial investment in mobile gaming. They launched a website with 16 downloadable games, and announced that they would release approximately 70 games in the first half of 2005, pouring more than 10 billion Korean Won, or approximately 10 million US dollars, into a new 3D game service. We are working with content developers to create VibeTonz-enabled games for this g100 phone.

The number two operator in Korea, KTF, with over 11 million subscribers, began selling the VibeTonz-enabled Samsung SPH-g1000 mobile phone, similar to the g100, for the 3D game market. To support the growing interest in mobile game play in Korea, KTF created a game service web portal with 11 games, and announced they will introduce 100 more by year-end.

We’re very encouraged by our success in Korea, and the mobility team continues to drive hard into this important market. During the first quarter, we added a business development person dedicated to augmenting our sales and partnership efforts in the Korean market.

In the U.S., Verizon Wireless launched a youth-oriented VibeTonz-enabled mobile phone on April 21st; the Samsung SCH-n330. This phone, available to their approximately 42 million U.S. subscribers, launched with pre-loaded VibeTonz-enabled content, with additional VibeTonz-enabled games and ring tones available for download on Verizon’s online service, Get It Now. This CDMA phone with the QUALCOMM chipset, uses the Brew system for downloadable content and tracking of developer royalty obligations to Immersion.

Earlier today, we announced content license agreements with American Greetings Interactive, a media subsidiary of American Greetings Corporation; with Pulse Interactive; and, with Indiagames. We are especially excited about the downloadable content available now, and soon to be available for the n330, including 50 of AG Interactive’s best-selling ring tones that range from hip-hop and Latin favorites to Billboard Chart toppers.

Pulse Interactive has enabled their top three selling games with VibeTonz effects, and they are Highway Racer, Snake Mayhem, and City Auto. Indiagames is expected to enhance three of their most popular games with VibeTonz effects; Buffy the Vampire Slayer, Bruce Lee, and Predator.

All of these companies produce content for multiple mobile phone platforms, and distribute content to many of the world’s largest mobile operators. They are capable of proliferating VibeTonz-enabled content as new phones are launched with our technology.

With the launch of our first ecosystems involving leading U.S. and Korean mobile service operators, Samsung handsets and several significant content partners, Immersion has firmly made its mark on the mobility market. We are focused on expanding our opportunities in these markets, and on continuing efforts to launch similar ecosystems in Europe. In fact, early in the first quarter, we hired a European-based business development person. We remain very encouraged by the mobility market opportunity and view it as one of the next growth catalysts for Immersion.

Now, let me update you on events relating to the Sony litigation. We announced on September 21, 2004 that, after trial, the jury returned a verdict favorable to Immersion in our patent infringement suit against Sony Computer Entertainment, Inc., and Sony Computer Entertainment of America, Inc., both referred to here as “Sony.” The jury found that Sony infringed all the asserted claims, 16 in total, of 2 Immersion patents and that those claims were valid. The jury also awarded Immersion damages in the amount of $82 million on sales of infringing consoles, controllers and games for the period of August, 2001 through June 30th, 2004.

On January 5th and 6th, 2005, Judge Wilken of the U.S. District Court for the Northern District of California, held a bench trial on Sony’s allegations that one of the patents asserted was not enforceable due to alleged inequitable conduct during the prosecution of the patent.

On March 24th, 2005, the court resolved this issue, entering a written order finding in favor of Immersion. And Judge Wilken also entered judgment in Immersion’s favor and awarded Immersion the $82 million in past damages, plus pre-judgment interest in the amount of $8.7 million for a total of $90.7 million. Immersion was also awarded its courts costs, as is customary in these cases. Court costs do not include attorneys’ fees.

Additionally, the court issued a permanent injunction against the manufacture, use, sale, or import into the United States of the infringing Sony PlayStation System consisting of the PlayStation consoles, dual shock controllers, and the 47 games found by the jury to infringe Immersion’s patents. The court stayed the permanent injunction pending appeal to the United States Court of Appeals for the Federal Circuit.

The court further ordered Sony to pay a compulsory license fee at the rate of 1.37% for the duration of the stay of the permanent injunction, at the same rate and conditions as previously awarded in its interim January 10th, 2005 and February 9th, 2005 orders. The 1.37% compulsory license rate is equivalent to the ratio of the damages awarded by the jury to the sales of infringing consoles, controllers and games presented at trial.

Sony made a payment of approximately $7 million to Immersion pursuant to those orders on February 15th, 2005, for the July 1st, 2004 through December 31st, 2004 period. Sony appealed these orders to the United States Court of Appeals for the Federal Circuit, and subsequently made a motion to stay payment of the compulsory license until the appeal is decided.

On April 7th, 2005, the Court of Appeals denied Sony’s motion to stay on procedural grounds. Immersion also moved to dismiss Sony’s appeal on the grounds that a separate appeal from the interim orders was not proper once the court entered judgment. The Federal Circuit has not yet decided this motion and no date has been set yet for a hearing on Sony’s appeal of the interim order, should it proceed.

Sony also has filed with Judge Wilken further motions seeking judgment as a matter of law, or for a new trial. These motions are currently set for hearing May 13th, 2005. Immersion expects that, when these motions are resolved, Sony will appeal the judgment to the United States Court of Appeals for the Federal Circuit. Sony also may post a bond or other security with the court to stay the obligation to immediately pay the amount of the judgment while appeals are pending.

Sony has brought a separate motion asking Judge Wilken to stay enforcement of the judgment without Sony having to post any security or, in the alternative, to allow Sony to deposit funds into an escrow account in lieu of posting a bond.

In a matter related to the Sony lawsuit, on March 24th, 2005, the court entered an order dismissing certain of the claims brought by Internet Services, LLC against Immersion, with prejudice, and certain claims without prejudice. Internet Services, LLC has filed a notice of appeal of these orders with the United States Court of Appeals for the Federal Circuit.

In another related matter, Immersion filed a lawsuit on September 24th, 2004, in the U.S. District Court for the Northern District of California against Electro Source, LLC, which sells and distributes video game controllers under the Pelican brand. The lawsuit alleges that Electro Source infringes the same two patients held valid and infringed in the lawsuit against Sony.

On October 14th, 2004, Electro Source filed an answer to the complaint, denying the material allegations and asserting against Immersion counterclaims seeking a judicial declaration that the asserted patents are invalid, unenforceable, and not infringed.

This lawsuit also is before Judge Wilken as a related case to the Sony litigation. A case management conference was held January 28th, 2005, and a court-ordered private mediation session occurred on April 7th, 2005. The court scheduling order in the case set a trial date for June 5th, 2006. The parties are in the process of conducting discovery.

With that, I will now introduce our new CFO and VP of Finance, Stephen Ambler. I’d like to explain that establishing a separate CFO position allows me to spend more time with customers and potential investors, and to focus on strategy and business development. In addition, the separation of CFO and CEO duties better fits with our corporate governance principles. With the ever increasing financial reporting requirements due to new FASB rules and Sarbanes-Oxley requirements, I’m very happy to have Stephen onboard.

Stephen joined Immersion on February 28th and is responsible for finance, operations, and human resources. He brings significant expertise in finance, leasing -- licensing, and investor relations, both in private and public companies. He has a depth of experience in financial management, processes, systems, compliance, and reporting, and his experienced in the entertainment and mobility markets will support our major initiative and growing activity level in mobility.

While Stephen has been onboard for only a short period, he has already had a positive influence on contract negotiations, investor communications, and cost control initiatives.

I’d now like to turn the call over to him to cover a number of topics, including a review of our financial performance for the quarter. Stephen?

Thanks, Vic. It’s great to be onboard.

As stated in today’s earnings release, revenues for the first quarter of 2005 were $5.8 million, compared to $5.4 million in the first quarter of 2004, an 8% increase. Our revenue and income for the quarter excludes approximately $7 million received from Sony in February, 2005 for a payment made pursuant to the court’s order for a compulsory license for the period July 1, 2004 to December 31, 2004, inclusive.

Some of you may be asking why we do not account for the funds received from Sony as revenue or income. The Financial Accounting Standards Board, or FASB Statement Number Five, requires that all contingent gains -- of which this is one -- to not be accounted for as income until all contingencies related to the gain are eliminated.

The sums received are considered contingent gains as they are subject to appeal and, therefore, may need to be returned to Sony. Accordingly, we have accounted for the payment as long-term deferred revenue. The sums, and any other sums paid or awarded to the company, including the $82 million damages and interest thereon of $8.7 million, will not be accounted for as income until such time as the legal actions are finally resolved.

The revenue results from each of our businesses are as follows. Revenue from our medical business in the first quarter of 2005 was $2.2 million versus $2 million in the comparable quarter of 2004. As Vic mentioned earlier, our medical revenues are transitioning from development contract revenues to product sales revenues, and we expect this transition will lead to continued revenue growth in future quarters.

Revenue from our industrial group decreased 23% versus the first quarter of last year. Our industrial group includes our automotive business, as well as our 3D and professional businesses. We undertook less development contract work in the first quarter of 2005 compared to the first quarter of 2004. We are currently engaged in new development projects with several automotive OEMs and their suppliers, and we are shipping new products within our 3D business.

Revenues from gaming grew 52% over the first quarter of last year, driven by increased royalty and licensing revenue from our licensees on both PC and console gaming peripheral products, and the addition of new licensees.

Royalties from patent and technology licensing in the first quarter of this year represented 43% of total revenue, or $2.5 million, as compared to 34% of total revenues, or $1.8 million, for the same quarter last year. This significant royalty and license revenue growth was driven mainly by increased royalties from our gaming business.

Product sales, due to strength in medical, accounted for 47% of total revenue at %2.7 million, compared to 46% of total revenues, or $2.4 million in the first quarter a year ago.

Development contract revenue for the quarter represented 10% of total revenues, or $605,000, compared to 20% of total revenues, or $1.1 million in the first quarter of 2004.

Gross margins were $4.4 million in the first quarter of 2005, equal to 76%, which is comparable with 77% for the first quarter of 2004.

First quarter 2005 operating expenses, excluding restructuring charges, was $7 million, compared to $9.7 million in the comparable quarter of 2004.

In February, we announced we had completed a reduction in workforce equal to approximately 10% of our staff in order to better align resources to our future business needs and reduce our ongoing costs. At March 31, 2005, we had 128 full-time employees, compared to 139 on December 31, 2004.

We also stated on the February call that we anticipated reducing litigation expenses, and that we were aiming to reduce our operating expenses by 30% compared to a year ago. Litigation expenses in the first quarter of 2005 were down 77% compared to the year ago. Ignoring the one-time restructuring costs of $185,000 -- which is shown as a separate line item on the face of our income statement -- we actually achieved a 28% reduction in operating expenses.

So, on a GAAP basis, net loss after tax was $3.1 million, or $0.13 a share, compared to a net loss of $6.2 million, or $0.30 a share for the first quarter of 2004. As of March 31, 2005 we had 23.9 million shares of common stock outstanding.

On March 31, 2005, we had cash and cash equivalents of $26.9 million compared to $25.5 million as of December 31, 2004. Our balance sheet remains strong and we are continuing to invest in our base of business.

In December, 2004, FASB 123-R, accounting for share-based payments was released, with an implementation date of June 15, 2005. Two weeks ago, the implementation date was put back six months, and Immersion will not now have to account for share-based payments as an expense until Q1 in Fiscal 2006.

From January, 2006, Immersion will incur a variable expense each quarter related to stock option grants and stock issued under the Company’s Employee Share Purchase Plan. This expense will vary depending on such factors as Immersion’s own stock price, employee turnover rate, and size of grants issued. Some of these factors are completely out of our control. In the last two years, our stock compensation expense has ranged from $950,000 to $2.05 million per quarter. We anticipate that the level of expense to be incurred in Q1 2006 will be within that range.

In March we filed our 10K with the SEC. The 10K includes financial statements for the year ended December 31, 2004. Our auditors gave us clean opinions on both the financial statements, and our documented assessment of whether the Company maintained effective internal controls over its financial reporting as of December 31, 2004; which, put another way, means we are Sarbanes-Oxley 404 compliant.

The requirement for audits of management assessment of the effectiveness of internal controls under the Sarbanes-Oxley act are still being phased in. Immersion did not actually have to have its control assessment audited until it filed its Fiscal 2006 financial statements. However, we are of the opinion that it is in the best interest of our shareholders to demonstrate that we maintain good controls, so we chose to have the assessment performed on Fiscal 2004 financial statements. Meeting the requirements and achieving a clean opinion is a great achievement for a small company. Management will endeavor to maintain this standard as we move forward.

By choosing to continually be assessed, we now subject our quarterly results to the same reporting standards. Accordingly, to ensure our quarterly earnings are prepared to the highest reporting standards, we will -- starting in the June quarter -- be releasing financial earnings later than has historically been the case. It is now our intention to release our financial earnings near the time we file our quarterly or annual reports with the SEC. It is also our intention to file our SEC reports ahead of the latest date required by the SEC. We will be updating our website in due course with the anticipated quarterly earnings release dates.

Now, that concludes the review of our financial results and some other matters, and I’ll return the call back to Vic.

Thanks, Stephen.

In closing, I want to reiterate that my goal is to generate the revenue growth that will lead Immersion to profitability. We are carefully investing our growth opportunities, and are making significant progress in executing our business strategies. We are continuing our efforts to prevail in the Sony litigation, and we remain confident in our position in the anticipated appeals process.

Tina, would you please open the call for questions.

++ q-and-a

(OPERATOR INSTRUCTIONS.) [Bruce Hall].

Very good conference call. You really covered a lot of bases. A lot of questions I was going to ask were answered. But, there’s still quite a few I’d like to see if you’d comment on.

Since the beginning of the year, you mentioned you signed five licensing agreements. I was wondering, number one, do you get any upfront payments from any of the companies that are now becoming licensees? Do any of these companies pay anything against where they might have been infringing in the past? And how high are these royalty payments? That’s the first question.

Sure. Bruce, as you can appreciate, I’m not able to give the details of these license agreements. But, I can say that the new agreements, which include Gemini, Griffin, Joytech, Hip, and Radica, each of these companies generate tens of millions of dollars in worldwide revenues from the sale of Haptic controllers. And each of these agreements do include amounts for past shipments of these products and, obviously, ongoing continuing royalties for future sales.

I can say that this builds a stronger base of our gaming business, but the specifics of the amounts paid, rates going forward, and the details, I’m just not able to go into the specifics.

Great, but you talk about tens of millions and yet our revenues grow by $100,000 at a time each quarter. So, how come it’s not translating into higher dollar amounts?

I believe the most recent quarter the revenue was up 60-something percent. And obviously, these are recent agreements, probably within the last three or four months. So, the bulk of the revenues from these companies have yet to be seen. And as we move throughout the year, closer to the seasonal strength of the holiday selling season, we’d expect that to be a bigger and more meaningful -- more meaningful number.

In the past, we talked about a relationship we had with ALPS in the automotive area, and we haven’t heard much about that in recent quarters. I know BMW has the iDrive in the 600 series. I was wondering -- in the past, we talked of Volkswagen and Rolls Royce. Are there any companies that are possible -- will possibly introduce models using the iDrive?

Those companies continue to sell and ship products that include our technology. ALPS continues to invest in the technology and develop solutions for their customers. I believe they have at least one automotive manufacturer releasing a vehicle this year that will have our technology, and I know they’re working on a number of other opportunities.

Likewise, we are working with a number of OEMs and other Tier I suppliers. Some of those efforts are generating revenues, development revenues, today. We anticipate that these relationships will hopefully yield products that are included in vehicles that are shipping in the future.

I’m not really able to give a lot of details because these are ALPS customers, or unnamed vehicles that will be shipping. But, we feel very confident in the automotive business and continue to gain great progress there.

I have about a half a dozen more questions, but if someone else wants to go ahead of me--.

Well, let’s do that, Bruce, and then I’d be happy to take anything else you have a little later on.

Excellent.

[Eric Vanswall].

You have any guess as to what quarter we will finally be breakeven? You have any present growth rates?

Breakeven in terms of profitability?

Yes, sir.

Okay. You know, the strategy really is to continue to grow our revenues from our existing businesses. This quarter, we had 8% overall growth, but we had what I believe are meaningful growth in medical product sales and gaming.

We’re also launching new technologies this quarter. You’ve seen the launch of the VibeTonz for mobile phones, new phones hitting the market. We expect to have touch-panel technologies in the market sometime over the next few quarters. We need to keep managing our expenses this quarter through cost controls and expense reductions. We cut that by, I think, about 28%.

So, all of these influence a breakeven point. And at this stage, depending on the timing and the mix of our revenue, you’re looking at a breakeven range of anywhere from $8 to $10 million. When we get there, I’m not able to predict a specific quarter. We’re working hard to accelerate the business as fast as we can. But, at this stage, I really can’t predict which quarter will be profitable.

We were, on the other hand, cash flow positive during this most recent quarter. And unfortunately, without being able to record the Sony compulsory licenses revenue, we’re not able to have that impact our P&L. But, it does improve our balance sheet and increased our cash balance.

[Tim Stottenberg].

Hi, Vic. Good conference so far.

Of the 11 estimated billion that you say goes to mobile gaming, what does that equate to in revenue for Immersion?

Well, it'll obviously depend on how fast we get phones in the market and content playing on those phones. We're currently generating cents per phone. Some of the early launch partners are getting favorable rates. But these agreements are relatively short-term in duration. And we think that, as the market shows success of the phones, we believe that the later licensees will be paying a higher rate per phone.

We also are excited about the agreements we've recently entered into with the carriers and with developers, where we will be getting cents per download of content in many cases. So, the combination of payments for phones and the payment for the content really gives us a chance to leverage this capability into significant revenues.

That sounds good. And let me see here. Can you explain your options that you give your employees a little bit more?

Sure, I'd be happy to. We currently have outstanding approximately 7.9 million options. We typically grant options to new employees when they join the company. We also have an annual option program, where we grant a small amount of options to existing employees on an annual basis. Each of these options have a four-year vesting schedule. There's a [cliff vest] after the first year and then, each month thereafter, there's additional vesting so that they're fully vested over four years.

As Stephen mentioned earlier, the FAS-123 costs of granting options is going to start hitting our P&L. I think we, along with other companies, are looking at ways to incent employees, and will most likely reduce the number of options granted to new employees. But, it's something that we're looking at to try to minimize the cost, and yet retain and bring in new talented people.

Okay. I understand.

These 7.9 million options, by the way, they have exercise prices that range from a low of below a dollar all the way up beyond, I think, $30. So, not all of those are in the money, but they are outstanding.

Can I add that, actually, about 3 million of them are under water at the moment. And there's about 3.7 million on vested options out there at this time.

(OPERATOR INSTRUCTIONS.) [Kurt Meyer].

Hi, Vic. Quite frankly, the more that you've been talking, the better things have been sounding. You just mentioned a minute ago to Tim's question that you are now in discussion with carriers and developers, and that you have had some degree of success in getting them to essentially pay you for the downloading of content. I know that was something that you had looked to do for quite some time. How hard was it to get that? Because it was my best guess that that wasn't going to happen.

Well, it will definitely happen, Kurt, and it has happened. Obviously, the launch partners, early adopters, early partners that are working with us, they're receiving favorable terms. And in our mobility business, it's key that we get phones in the market, and what will drive that will be real compelling content. And so it's a chick and an egg. We need to get content in the market to drive demand for phones; we need phones in the market to drive content.

But, you know, I have to tell you that I've always really enjoyed and appreciated Immersion's Haptic technology, but I absolutely love the VibeTonz technology. I own the n330. I spent this weekend using the phone, downloading some games and ring tones. I had my kids play with it. Showed it to friends. They showed it to their friends. And it's a hands-down winner. It really adds a lot to the phone.

From the minute you turn the phone on, you get that confirming power up vibration. If you get a drop signal -- and it happened to me once -- I heard the vibrating motor shut me down, and so I knew immediately that I had a dropped call. The music, the games. It's just -- it really gives you a sense of quality. It makes the content fun. And I really do believe that this is going to be a gotta-have feature. It's something that you really need.

So, as we get that message out, and as people really experience this -- and I don't know if you're experienced, but if you go down to Verizon, the sales people are excited about the new feature. So, when you get through that energy and excitement, you know, we really believe this is going to be a big business and, yes, we will be paid on the content.

Just as an aside, I did call the Verizon guy about three hours ago in Marin Country here. Ad he said, sure, we've got them and there's a very large number of people that have been coming in and asking for them without any advertising going on. So, that was interesting to hear.

I know it's a very short time frame, a week in the U.S., maybe two weeks in Korea. Do you have any feedback from Samsung as far as what the response has been on a bigger picture basis?

No, I don't have any qualitative -- I mean, obviously, I can tell you the excitement from the product managers. I can tell you that there's enthusiasm from new product managers that want this feature in their new phones as they launch. I can't really tell you that there's been -- from a financial standpoint, what the numbers are.

I can also tell you that the excitement generated by this capability, Verizon had our sales force come in and train the Verizon retail staff on how to promote the capability. And that just does -- that kind of visibility is rare to get at a large company like Verizon.

So, if you look at some of the qualitative measures, we're very excited. It, as you know, has taken some time to get these phones launched, but now that they're out there, we've very pleased with the experience.

Have you seen any change in attitude for other carriers or other handset OEMs that have been saying, okay, you've been telling us about this for the last 6 to 12 months. But now that it's actually out there and there's at least some feedback, either internal or external, is that changing the negotiating position, or have you seen any material change from those other carriers or vendors?

Absolutely. When the technology's in the phone, it becomes a competitive advantage for Samsung. And that's something that every phone manufacturer will need to take a look at. Watching the take-up from the content side has the carriers very excited about building out and expanding their gaming business.

The fact that you've got phones in the market that confirm we've passed all of the quality inspections of these fabulous companies is a great milestone to our technical staff and to our sales force who are involved in the mobile business. So, if you look at it from a number of perspectives, the validation of phones in the market really has stepped up the interest from the people who have not yet taken on this new opportunity, this new capability.

Great. Let me change horses on you. And I know I've got a bunch of questions, but I'll try to get through them.

On the touch-panel side of the equation, you mentioned that you have some more development contracts with not only ALPS vendors or suppliers, if you will, but also some of the other car companies.

And then to Eric's question, when he was talking or asking the question about breakeven, when do we get there, you mentioned there will be touch-panels in the next few quarters. That took me by surprise, because it was my best guess that if I was going to go out and actually buy a car, that was a late '06 potentially even '07 event for a potential touch-screen or touch navigation type of device. Did I misunderstand your answer to Eric, or is the touch-panel answer that you said in the next couple of quarters -- which in my world is two to three quarters away -- are those non-automobile related applications?

I think there is some confusion. So, I was responding to the automotive business in particular. And I know or I believe that ALPS has some of their products that will be included in cars that will be shipping this year. So, I'm referring primarily to the rotary technology and capability.

Got it.

In terms of the Haptic touch-panel, we do have a lot of interest from the automotive sector, as well as non-automotive applications. Applications -- for example kiosks, voting booths, you know, point of sale types of applications.

We will have available demonstration systems here in the next -- within the next quarter. We'll have development kits probably the quarter after that. We're already generating some revenue from the automotive and from the non-automotive sector on developing new capability with the Haptic touch-panel.

So, that's a separate issue. Haptic touch-panel is a new market for us to go after. It has applicability in the automotive sector and others, and it's one that we think will be another growth catalyst. It's still a little premature to talk about where you'll see it and exactly what the embodiment will look like, but it's clear that, in our early introduction of this capability, there's a lot of interest that we're generating from it.

Okay. Just an FYI. It's my understanding that the car -- and I've seen this now in two or three completely unrelated places -- that's coming out is the next generation Mercedes S-class, which I think rolls out late this year in Europe, and then some time in the first quarter of next year in the United States.

So, I appreciate your time and I'll let other folks step in here.

Bruce Hall.

Vic, again, it's Bruce. On February 3rd of this year, Microsoft filed a 13-G, that they no longer owned Immersion stock. Do you know how they disposed of their holdings and where it wound up?

I do not know of where they sold the shares, but I do believe that they currently do not own shares in Immersion.

I see. On our board is a fellow from Apple Computer, a high ranking official there, yet we do no business with them. They've been very successful, of course, with the iPod. Do you see any developments happening with them in the near term or in the long-term?

Well, we actually do work with Apple on some areas. In particular, we've added Haptic capability to their operating system. So, they're computer systems can play Haptic-enabled games and that's something that we work with them on. Other opportunities, at this stage, I'm just not able to really talk about any efforts that we have with them.

And one last question regarding Sony. It's two parts. Do you think their PlayStation III is infringing on any of our patents? And the second part of the question is, they have tremendous worldwide sales of the Play Station II. Do you expect to try to get them, through litigation, to pay for infringing on our patents on the worldwide basis?

Bruce, with regards to PS3, we haven't seen the product, and I believe there have been a number of events or places that the PS3 was supposed to be disclosed or shown. I'm not aware that that actually took place. So, until we see the product and analyze, we have no comment on the PS3.

In terms of worldwide sales, I guess I would answer that by saying that we very consciously included in this litigation two U.S. patents. It's those patents that are being decided in court, and it's the basis our litigation. We need to resolve those first before we look at other patents or other territories. But at this stage, our dispute with them is currently limited to the U.S. sales right now.

Benjamin Montgomery.

Thank you very much for the information you're providing on this call. It's been extremely helpful. And I just have a few questions that I'd like to ask to kind of clarify a few of the things that you've said.

First of all, with regard to the breakeven point, did you state that the revenue for breakeven is somewhere on the order of $8 to $10 million per quarter?

I believe that is the amount. And again, it would depend on the mix of revenue. Product sales, obviously, have corresponding cost of goods sold. So, if there are royalties, there's a higher margin on royalties. Depending on the mix of the revenue, depending on the timing of expenses, that's approximately the right level.

Sure. My second question is, back in reference to the litigation pending with Sony. Are you guys noticing any weakness in their knees at all with regard to your conversations towards settlement?

That's an interesting way to put it. Benjamin, I -- you know, we've had a number of discussions with them directly, we've had discussions between our respective attorneys. And about the only thing I can say is that those discussions have not yielded a resolution to our problem. We remain hopeful. We still, obviously, have a lot of respect for Sony in a lot of ways. We'd love to have them as a licensee and a partner, and we hope for that day to come soon.

But, until the licensing terms are reasonable, and until we're satisfied with the proposed -- or the type of settlement terms that would be worthy, then we're prepared to go as far as this thing needs to go through appeals. So, I'd say we're optimistic for a favorable outcome, but we're prepared for the worst.

Sure. And finally, in a reference to your use of the phone over the weekend, I'm still trying to figure out what we could think of in terms of a reasonable revenue model for these phones being sold. So, if we looked at your use of the phone this weekend, how much of that -- how much would've come to Immersion in terms of revenue based on your use of that phone?

Yes, I'm probably not going to be able to give you the kind of guidance that you're looking for to build out a model. I can say from a kind of -- maybe from a 10,000 foot level, I'm a very big advocate of this capability and I'm probably not a heavy technology user. I'm not an early adopter, put it that way. I really liked the experience.

In fact, if there was a negative -- it was interesting. I was reluctant to download new games unless I knew it was Vibe-enabled. And I think there's a day when consumers are going to want to know if the game or the ring tone has the vibration capability, because it does add a lot to the experience.

I'm looking at 2005. Obviously, there are more phones in development. We expect more phones to get into the market before the end of the year. But, the speed of rolling those phones out, moving these into higher volume phones with basic, general capabilities, these tend to be targeted at the gaming. The first three phones are targeted at the gaming market.

So, as these migrate into larger volume models, I don't know that you're going to see a significant revenue flow from the activities on '05. We're building the base of business. We're building the relationships and the ecosystems. This is really about growing a substantial business, depending on adoption rates, in 2006 and clearly 2007. And once we prove this capability, then we really do believe that the market will get behind and see the value and that this will be a very large opportunity for Immersion.

Who actually builds the component, the vibrating component?

We're currently using -- I should say our OEM partners are using off-the-shelf actuators. And so, these are the standard pager motors. They include cylinder motors, pancake motors, linear motors, there's a number of types. But these are pretty much standard, off-the-shelf parts. And what we do is we add a little to the control circuitry, a nominal amount. And that, again, is pretty standard off-the-shelf equipment. And then we provide our software. And then, obviously, we deploy our tools to the content side, and that combination creates the compelling effects.

[Richard Bounot].

This is a great call. You've got a lot of callers, a lot of questions, huh?

Yeah, I'm happy to do what I can to help answer them.

That's great. Regarding Sony, has there been any recent direct communication to settle?

Richard, as I said, there's been prior discussions. I really can't confirm or deny, talk at all about any current -- any discussions.

Okay. What about Nintendo? Is there a Game Cube infringement there, and has that been scrutinized any further?

We -- to my knowledge, we've not yet performed an exhaustive analysis on the Nintendo products. They're currently not a licensee, so I really can't speculate as to what activities are ongoing, what we might do. I think at this stage, they're not a licensee and we haven't really done the analysis to determine that.

Tim Stottenberg.

Hello. This is Tim again. I'm looking for some end-of-year guidance for 2005, as far as like last year goes and your current sales, the way they're, I guess, proceeding. Do you see Immersion with their general revenue of $30 million or so for the 2005 without Sony's payments?

Tim, I'm currently not giving guidance. I can say that we continue to expect revenue to grow quarter-over-quarter. We're seeing strength in the base business, so I expect revenues to grow. Whether we get to $30 million, you know, we have targets that we'd like to hit and we'd be very happy with those numbers. But, what the actual number is in the outlook, is something I just can't provide guidance at this time.

At this time, there are no further questions.

Okay. Well, I sure appreciate everyone's interest, and all the questions have been good. And hopefully, I've given some information that makes this clear to you. I thank you for your participation, and we appreciate your continued interest in Immersion. Thank you and good afternoon.

This concludes today's Immersion First Quarter conference call. You may now disconnect.