Immersion Corp (IMMR) 2005 Q3 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the third quarter investor conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

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

Thank you, Melissa.

Good afternoon, ladies and gentlemen. I am pleased to welcome you to this discussion of Immersion's results for the third quarter of 2005. With me today is Stephen Ambler, Immersion's CFO and Vice President Finance.

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 Web site at www.immersion.com.

A replay of this call will be available until November 14, 2005, by calling 800-642-1687 and entering confirmation number 2696101. The replay will also be archived and available on our Web site 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 that 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 any factors mentioned during our discussions today.

As I have discussed in previous conference calls this year, our 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. Second, selected investment and product and technology development for longer term new growth areas.

Third, control over operating expenses and, fourth, protection and defense of Immersion's extensive intellectual property portfolio across all of our businesses. It is worth noting again that my goal is to lead Immersion to profitability through increased product sales and licensing revenue regardless of the eventual outcome of our litigation with Sony.

During today's call I will be discussing business results of the third quarter including, one, overall Immersion's revenue was essentially flat in the third quarter of 2005 over the third quarter last year, while operating expenses decreased by 29%.

Two, we introduced new software modules for our endovascular training simulator reflecting our emphasis on our product sales strategy in our medical simulator business.

Three, we signed an agreement with 3M Touch Systems to bring our tactile Touchscreen technology to the casino gaming and bar-top amusement market.

Four, three more operators, Sprint Nextel, Alltel, and Metro PCS released VibeTonz-enabled mobile phones in the third quarter bringing total to six operators worldwide who have a total of approximately 130 million subscribers that offer mobile phones with our VibeTonz technology.

In the Sony case, Immersion filed its opposition to Sony's Rule 60B motion and Sony filed its opening brief in support of its appeal to the United States Court of Appeals for the Federal Circuit.

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

Our 2005 third quarter revenue was $5.4 million. While I'm not pleased with the lack of revenue growth in the third quarter, the activities during the quarter bode well for future revenue growth.

We incurred a net loss of $4.2 million, a 39% reduction compared to the comparable quarter a year ago. Litigation expenses were $1.5 million in the third quarter of 2005, which were down from $3.8 million in the third quarter of 2004.

We finished the quarter with $28.7 million in cash, down from $29.4 million on June 30th of 2005.

Revenue for our medical business was $2.3 million in the third quarter, a decrease of 15% over the third quarter of 2004. Medical product revenue was 96% of sales this quarter, consistent with strategy of selling training simulators to hospitals, teaching institutions and corporate accounts instead of pursuing development contracts.

Product revenue grew 15% over the third quarter of last year, but not enough to offset the reduction in development contract and royalty revenue.

In mid-October, we introduced two new modules for our endovascular AccuTouch System at the Transcatheter Cardiovascular Therapeutic Scientific Symposium in Washington, D.C. Physicians at the symposium's Medical Simulation Pavilion were able to train on these two new modules, advanced coronary intervention and carotid artery stenting.

Also, preliminary software modules for iliac interventions and renal interventions were demonstrated in Immersion's booth.

Turning now to our gaming business, this quarter's revenue was $1.1 million, an increase of 11% over last year's third quarter revenue. This growth continues to be driven by licensing royalties from increased sales of console gaming peripherals by our third-party supplier licensees including recently signed licensees.

Historically according to data from the NPD Group, a third-party market research company, sales of console peripherals by third-party suppliers increased to approximately 65% market share near the end of the life of a console system. When next generation console systems are released, however, third-party market share declines to 30% or less and then climbs again as the console model ages.

Consequently as a result of anticipated new console introductions over the next year, Immersion's gaming royalty revenue will likely decrease, then increase over the life span of the new consoles.

Microsoft has announced release dates for its new Xbox 360 system of November 22nd in North America, December 2nd in Europe and December 10th in Japan. Microsoft will bundle the new Xbox 360 with the wireless controller.

Some of Immersion licensees, such as Mad Cat, have been licensed to make wired controllers for the new system but to date Microsoft has not authorized any third-party manufacturers to sell wireless controllers.

Under the terms of Microsoft's patent license from Immersion, it does not pay per-unit royalties on Xbox console systems or peripheral sales. Therefore, Immersion does not anticipate receiving any gaming royalty revenue from wireless Xbox 360 controllers unless Microsoft authorizes third-party manufacturers, who are Immersion licensees, to make and sell wireless controllers.

In our industrial business revenue in the third quarter this year was $2 million, up 14% compared to the same quarter last year. Revenue from the non-automotive business was up 7% over third quarter last year.

Sales of 3D products rebounded to more historical levels with a 33% increase over the second quarter of this year. Automotive revenue was up 40% quarter over comparable quarter due to increases in both royalty and development revenue.

An additional royalty stream that began in the third quarter is produced by sales of the new 2006 Mercedes S Class sedan. The car includes a multi-function haptic rotary controller for radio, entertainment and optional navigation, developed by Immersion licensee, Alps Electric Company.

The controller also allows other comfort and convenience settings for driver preference. Standard equipment on all S Class models, the new control system generates per unit royalty payments from Alps.

The S Class was launched in Europe in September and is expected to launch in the U.S. in January at the North American International Auto Show in Detroit. Some U.S. dealers are accepting orders now with expected delivery in the first quarter of 2006.

In addition to this win, we continue to work on a number of automotive development contracts related to our haptic rotary, Touchscreen and touch surface technologies. We also are continuing to support our existing automotive supplier licensees, Alps Electric and [METHO].

A pipeline of opportunities is important for fueling long-term growth because the time from development contracts to design wins to production vehicles can be three to five years.

This past May we announced our new TouchSense haptic technology for Touchscreens which provides tactile queues allowing users to perceive that buttons and release similar to physical buttons. In September, Immersion and 3M Touch Systems signed a supply agreement for the casino gaming and bar-top amusement markets.

Immersion will supply components for enabling tactile Touchscreens, namely actuators, electronic controls and software, along with reference designs and technical support. 3M will integrate Immersion's components into its touch screens and market and sell the resulting product to manufacturers of casino gaming and bar-top amusement equipment.

The increased market value of the haptic capability will be shared by 3M Touch Systems and Immersion. We are very excited about working closely with 3M Touch Systems, the dominant Touchscreen supplier to the significant industry segment.

In our mobility business there are now six operators worldwide with a total of approximately 130 million subscribers that offer mobile phones with our VibeTonz technology.

Since the last conference call in August, three operators in the United States joined Verizon and SK Telecom and KTF in Korea in offering Immersion's technology in Samsung phones. They are, one, Sprint Nextel, supplying the new Samsung A820 mobile phone.

Two, Metro PCS offering the Samsung M330 mobile phone, and, three, Alltel also offering the Samsung and 330.

In August we announced the license agreement for the VibeTonz system with handset maker SK Teletech, now known as SKY Teletech, after the recent acquisition of a controlling interest by Pantech and Curitel Communications, Inc. The combined company would rank as the number two handset maker for the domestic Korean market for the first half of 2005, ahead of LG Electronics and following the number one ranked, Samsung Electronics.

Pantech and Curitel markets mobile phones in over 50 countries in the world giving the combined company a broader market reach and the potential for increased global market share.

On the content side the availability of VibeTonz-enabled content significantly increased in the U.S. and Korea. We now have mobile games with VibeTonz touch sensations from eight content providers including two of the world's top mobile game publishers, Indiagames and I-play.

Four content developers in Korea have published seven downloadable VibeTonz-enabled mobile games on SKT's GXG gaming Web site. Four VibeTonz-enabled games are offered on Samsung's after market consent service.

Two games have been VibeTonz-enabled by I-play, one of which is now on Verizon's "Get It Now" downloadable service. Two games have been published by a leading mobile game publisher, Indiagames with Verizon and Alltel offering one or both. And three games from Pulse Interactive are offered by Verizon Wireless.

We are working closely with consent developers to help make their mobile games more fun and exciting by adding VibeTonz effects. Using VibeTonz technology, mobile games can include a wide variety of Immersion's touch sensations, such as the smack of bowling ball as it hits the pins.

The staccato of machine gun fire, the blast of explosions, the engine acceleration in a racing game, and clack of train cars as they accelerate down the track. A list of VibeTonz-enabled phones and content is available on www.VibeTonz.com.

With the increase in the number of phones available to a growing subscriber base, we are participating in joint marketing programs with our content developers to raise consumer awareness. You may have seen recently Indiagame's promotions for their mobile game based on the movie, "Serenity", released by Universal Studios in late September.

Our VibeTonz logo was included in print ads which ran in the L.A. weekly, the San Francisco Bay Guardian and the Chicago Reader.

Operators are beginning to promote the Samsung M330 with our VibeTonz technology to the target youth market. Alltel and Samsung announced a sponsorship of a concert tour featuring two free tickets with the purchase of an M330.

The success and proliferation of the Samsung M330 across multiple operators is leading to stronger industry acceptance of our VibeTonz technology and additional design wins in higher volume mainstream mobile phones.

In Korea we formally introduced Immersion and VibeTonz technology to the business, wireless and gaming industry press at an event on October 10th in Seoul. Journalists from major publications attended as did mobile game content providers who demonstrated their VibeTonz-enabled games.

In addition, SK Telecom issued a statement of support for VibeTonz technology by issuing a press release announcing they had added seven new VibeTonz-enabled games to their GXG mobile gaming Web site. The resulting press coverage in Korea from these activities was significant.

Before moving on to other topics, I'd like to emphasize again the significant progress we have made in the mobility business. Although I won't be discussing any further details in this call, we are continuing our efforts to develop additional OEM license agreements to support existing licensees in bringing new phones to market and to establish relationships with new consent developers.

Be assured our efforts are not limited to the U.S. and Korea. We are making excellent progress in Europe and launching a GSM phone in Europe is a near-term goal.

Now, I would like to update you on events relating to the Sony litigation.

To briefly review the status on March 24, 2005, the court entered judgment in Immersion's favor and awarded Immersion a total of $90.7 million in damages and interest. The court issued and subsequently stayed pending appeal a permanent injunction against the manufacturer used, 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 patent.

The court further ordered Sony to pay a compulsory license fee for the duration of the stay of the permanent injunction. Sony filed Notices of Appeal from the District Court judgment and the earlier compulsory license orders to the United States Court of Appeals for the Federal Circuit.

Sony's opening appeal brief was filed on October 21, 2005. Immersion's opposition brief is currently due on December 7, 2005.

The court also awarded Immersion approximately $515,000 in court costs, however, Sony's motion that the court review the cost award and award a lower amount was referred to a Special Master. The parties currently are awaiting decision of the Special Master.

In May of 2005, Sony filed in the United States Patent and Trademark Office requests for interparty's re-examination of the 333 and 213 patents. On July 6, 2005, Immersion filed a petition with the PTO to dismiss, stay or alternatively suspend both of Sony's requests for re-examination, based at least on the grounds that a final judgment has already been entered by United States District Court and that the Patent Office's current interparty re-examination procedures denied due process of law.

The PTO denied this petition. After the PTO ordered the re-examinations on August 17, 2005, Immersion filed a subsequent petition with the PTO requesting that the PTO suspend the re-examinations pending the outcome of Sony's appeal to the Federal Circuit. The PTO has not yet issued a decision on the second petition.

Additionally on July 21, 2005, Sony filed a motion in the District Court before Judge Wilkin seeking relief from the final judgment under Rule 60B of the Federal Rules of Civil Procedure.

The grounds include alleged newly discovered evidence of purported prior art attributable to Mr. Craig Thorner which Sony contends Immersion concealed and withheld. Mr. Thorner is a named inventor on three patents that Sony urged as a basis for patent invalidity during the trial.

On August 9, 2005, the Court reopened discovery until October 1, 2005, limited to the issues raised in Sony's motion. During the months of September and October, the parties engaged in discovery including depositions of Mr. Thorner and other witnesses.

On October 12, 2005, Immersion filed its opposition to Sony's motion and submitted evidence reflecting what Immersion learned. Immersion's opposition papers, which are available from the Court's pacer electronic filing system, articulate in detail Immersion's position on why Sony can not meet the high burden for relief under Rule 60B.

Immersion's papers also set forth Immersion's rebuttal to Sony's allegations, including why the testimony Sony has offered to the court is false, and without credibility. Sony filed its reply on October 26, 2005.

In accordance with Judge Wilkin's order of August 9, 2005, the Court will notify the parties if it decides to hear oral argument on the motion. Otherwise, the matter will be taken under submission on the papers.

In another related matter, Immersion filed a lawsuit on September 24, 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 name. The court rescheduled the trial date to October 10, 2006. The parties continue to proceed with pretrial proceedings.

And, finally, at part of Immersion's settlement with Microsoft, on July 25, 2003, Immersion provided Microsoft with sublicense rights to pursue certain license arrangements directly with certain game platform vendors including Sony, which if consummated would result in payments to Immersion. Microsoft sublicense rights under that agreement expired on July 25, 2005, without any grant being given by Microsoft to any game platform vendor, including Sony.

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

Thank you, Vic.

As stated in today's earnings release, revenues for the third quarter of 2005 were essentially flat compared to the third quarter of 2004. Specifically, revenues were $5.4 million in the third quarter of 2005 compared to 5.5 million in the third quarter of 2004, a reduction of 1%.

The revenue results of each of our businesses in the third quarter of 2005 were as follows.

Gaming business revenues were $1.1 million, the equivalent to 21% of total revenues versus $1 million in the comparable quarter of 2004. Gaming revenues grew 11% over the third quarter of last year, driven by increased royalty and licensing revenues on console gaming peripheral products.

It should be noted that this growth is less than we have seen in recent quarters and we can attribute this to the start of the expected slow down ahead of the next generation console introductions later this year and next year.

Industrial business revenues were $2 million in the third quarter of 2005 versus $1.7 million in the comparable quarter of 2004. Automotive revenues comprised $540,000 of the $2 million revenues for the quarter, a 40% increase over the comparable quarter of 2004.

3D and other industrial revenues, which had been soft over the last two quarters and [inaudible] comparable 2004 revenues regained some strength in the quarter increasing 7% over the prior year quarter.

Medical business revenues were $2.3 million, down 15% from $2.7 million in the comparable quarter of 2004.

Medical product revenues continue to grow compared to 2004. Medical product revenues were $2.2 million in the third quarter of 2005, equivalent to 96% of total medical revenues compared to $1.9 million in the third quarter of 2004, an increase of 15% year-on-year.

Medical development contract revenue was $84,000 for the third quarter of 2005 compared to $408,000 in the third quarter of 2004, reflecting the change in emphasis within our business away from development contract business towards product sales.

Mobility business revenues were minimal in Q3 2005. We continued to seed the market and we do not anticipate the mobility revenues will provide any significant contributions to total revenues until late 2006 at the earliest.

Analyzing our third quarter revenue by category, product sales accounted for 63% of total revenues at $3.4 million compared to 60% of total revenue, or $3.3 million in the third quarter a year ago.

Royalties from patent and technology licensing represented 27% of total revenue, or $1.5 million as compared to 28% of total revenue, or $1.5 million for the comparable period a year ago.

Development contract revenue for the quarter represented 10% of total revenues, or $538,000 compared to 12% of total revenue, or $653,000 in the third quarter of 2004.

For the quarter our gross margin was $3.6 million. The same as the third quarter of 2004. In both quarters the gross margin was 67%.

This margin is lower than recent quarters where we had higher margin royalty and development contract revenue. That is in line with expectations based on the mix of revenues in this quarter.

Third quarter 2005 operating expenses were $7.5 million compared to $10.5 million in the comparable quarter of 2004, a decrease of 29%.

Excluding litigation expenses, operating expenses decreased to $6 million in the third quarter of 2005 from $6.7 million in the year-ago comparative. The decrease was across all overhead expense categories and reflects our continued efforts to keep costs under control.

Litigation costs in the quarter were $1.5 million compared to $3.8 million in the comparable period a year ago. Although litigation costs dropped significantly from a year ago, they were up considerably higher when compared to the first and second quarters of this year due to increased litigation activity during the quarter.

Litigation expense remains a significant expense and we anticipate that this will continue until such time as the Sony and related litigation is concluded. In addition, the quarterly level of litigation expense will remain lumpy for the foreseeable future, and the level of expense each quarter will be determined by the level of litigation activity during the quarter.

Net loss was $4.2 million, or $0.17 a share compared to a net loss of $6.9 million, or $0.29 a share for the comparable quarter of 2004.

As of September 30, 2005 we have 24.2 million shares of common stock outstanding. On the 30th of September 2005 we have cash and cash equivalents of $28.7 million compared to $29.4 million as at June 30, 2005, and $25.5 million as at 31st of December 2004.

There was no change in the period related to our long-term convertible debt which is due in December 2009.

During the quarter, we received approximately $3.4 million from Sony pursuant to the court order for a compulsory license. This relates to the period April 1, 2005, through June the 30th, 2005. This sum has been accounted for as a long-term deferred revenue.

For the 12-month ending June 30, 2005, we've received payments and earned interest on those payments of approximately, or totaling $14.3 million under this arrangement.

I would like to remind you that effective first of January 2006 the Company will account for stock-based compensation as an expense under the FASB 123R. [inaudible] expense for the third quarter of 2005 was $1.3 million.

On 30th of September 2005, we had 127 employees compared to 131 on June the 30th, 2005.

In the third quarter we attended and presented at the Value Rich Financial Expo in New York on September the 14th and 15th. We will also be presenting at the AeA Classic Financial Conference in San Diego tomorrow afternoon and Wednesday morning. So if you're attending both that conference, we look forward to meeting you there.

Just as a reminder, you can automatically be kept informed of Immersion's news releases, SEC filings, financial calendar and stock quotes by subscribing to the e-mail alert service within the Investor Relations section of our Web site.

This concludes my review of the financial results and other matters. And I'll turn 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 in 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 remain confidant in our position in the appeals process.

Melissa, please open the call up for questions.

[OPERATOR INSTRUCTIONS]

We'll pause for just a moment to compile the Q&A roster. Your first question comes from Kevin Hunt, Thomas Weisel.

Thank you. I had a few questions.

First on the gaming revenue you talked about it being down already ahead of some of these product launches. Should we expect that's going to continue to kind of trend down?

And then kind of related to that, what should we expect from that Sony payment that you're getting currently, you know, the 3.4 you noted. Should that be coming down pretty substantially over the next quarters ahead of their product launch? And I had a couple of follow-ups.

Okay. Let's see. I think the gaming revenue was actually up when you compare it to the third quarter of a year ago, but we are expecting that since we're at the tail end of this current version of the gaming consoles, that as the new consoles are introduced, the majority of the revenues will be coming from first parties and not from our third-party licensees.

We still expect our fourth quarter to be seasonally high as it has always been so we expect a significant ramp-up in fourth quarter revenue. But I think as a genera trend we're expecting that as these consoles are launched that our third-party providers, controllers, our licensees, that the revenue we receive from them will decrease over the next couple of quarters, actually probably the next year, before it begins to ramp back up again. So that's with regards to the controllers.

On the Sony payment, we don't really have a good feel for what the royalty amounts will be. It really will depend on what their sales are and the timing of the launch of their new product. And it will also be determined by whether the new product is covered under the current court compulsory order.

Okay. A couple other things, too.

In terms of the legal expense you mentioned it was 1.5 million. Based on what you know now on the legal front, should that be going up in Q4 or should it be kind of about the same?

And then my last question was regarding the Touchscreen, you know, announcement you had this past quarter, any kind of help you can give us on when you might start getting revenue from that? It seems like it sounds like it's going to be primarily more license revenue again, perhaps.

Any kind of way you can help us understand kind of what the dynamics, like how much, what the opportunity could be for that? I mean could it be 10 million a year in revenue or a million a year? Any kind of more color you can give us there?

Okay. So the million and a half that we spent in the third quarter a good portion of that had to do with the 60B motion and activities related to that. There are really three basic attacks that Sony is making, one on the appeals front, second on the PTO, and then the third is the 60B.

We think that the fourth quarter will have probably similar type of activity on those three fronts and I would expect similar expenses, although really predicting what the litigation expenses will be on a quarterly basis, as Stephen said, it will be lumpy and it's hard to predict, but it's hard to believe that that effort will reduce significantly any time soon.

With regards to the opportunity on the Touchscreen technology, we're very excited, especially to be working with the industry leader like 3M, and so as we speak, our respective engineering teams have been working together, meeting with their launch partners. These are the key leaders in the casino gaming marketplace.

I'll just list a few of them here for you but it's IGT, Aristocrat, WMS, Bally and Atronics. Those are probably the five key customers for 3M in this marketplace.

So we're currently working with these various groups on new games and new content that will take advantage of our Touchscreen technology and we think that we'll have products in the marketplace the latter half of '06, probably in the fourth quarter. So we're expecting to generate some revenue from that in the fourth quarter.

In terms of the size of the market, the casino gaming and bar-top market, we're talking hundreds of thousands of units up to potentially a million units a year. So the market is substantial.

The price of a Touchscreen coupled with an LCD or a monitor is somewhere in the 500 to $1,000 per device range, and we would then be adding a price premium for the haptic feature, and the way that we are working with 3M, is that we are providing components to this ultimate solution. 3M is also providing Touchscreen components and capability. And together we'll bring this product to market and share the profits from the haptic Touchscreen technology.

So it really is not following a royalty model. It's a hybrid royalty/product sale model.

So you're essentially splitting that premium that you'd get over the, actually on the whole thousand, you're splitting the premium you would get over a normal Touchscreen?

We're sharing. That's right. We're sharing the premium.

All right. Thanks.

And then let me just add to that, also, that in addition to the gaming market we're also looking and are having some success selling demo systems and starting to work with partners in the kiosk and point of sale marketplace.

This market is actually larger when combined. It's probably a million units or more per year. So we believe that's another attractive market for our haptic Touchscreen technology.

Okay. Thanks.

Thank you, Kevin.

Your next question comes from Danny Bills, private investor.

Good afternoon, Vic. How are you doing today?

Fine, thank you.

I got a quick question in regard to Touchscreen. Is vending machine any possibility at all?

Yes, absolutely. You know, there's a couple of things that the Touchscreen offers to the customer. One is the programming flexibility. So you can program remotely the content. You could even program pricing, product descriptions and what not. So the program flexibility's really valuable in vending machines.

The maintenance and repair problems that these companies have with mechanical buttons and knobs is really a problem. And we believe you reduce the effort and the problems associated with these mechanical buttons.

The accuracy of your input, your navigation we think's better especially for older, younger people and people just like the interactive experience. So I think there's a lot more you can do with Touchscreens in vending machines and other types of point of sale devices. So we think there's a lot of excitement there and we believe it's a big opportunity.

Okay. My second question is in regards to the Sony litigation. Maybe you can clarify something for us shareholders.

I assume you guys have no idea if PlayStation 3 infringed on your patent. Let's assume that Sony comes out with PlayStation 3. Do we still have to go through the whole process of a new lawsuit against Sony or is there anything else you can do about it?

Well, Danny, as you know, we're not aware of what the PS3 capability is today. So in terms of whether it might infringe the two patents ensued or any of our other 500 issued or pending patents is speculation. We just don't know.

I'm sorry, go ahead.

So we just don't know as we sit here today.

In terms of what might occur at some later date, I'd hate to speculate, but I guess I actually wrote myself a note on this particular point, and I think it's important to note, I believe what Judge Wilkin wrote in her order when she entered the permanent injunction, I believe she stated that absent evidence from Sony, that it has redesigned its products so as to avoid the systems and methods found by the jury to infringe, the court declines to revise the scope of its injunction based on the introduction of new games and the decline in popularity of the accused games.

So I believe she was referring to the products as the consoles, the controllers and the games that were found by the jury to infringe, not necessarily the part number or the specific product description, but the basic product category. So depending on what capability these new products have and how they're achieved we will definitely take a long, hard look at those products.

And my last question, have you guys considered asking for--asking the judge for sanction against Sony or even asking to lift the stay of injunction? Is that a possibility?

Danny, I think you asked that one question about lifting the stay, it's something we have considered and have chosen not to pursue at this time. Other actions that we may take in the future, I just can't speculate on right now.

Thank you so much for your help, Vic.

You're welcome. Thank you.

Your next question comes from Joe Arsenio, Arsenio Capital Management.

Hi, Vic.

Hi, Joe.

My question is, the first one's pretty simple. The payments that are coming from Sony are showing up in--are going directly to the balance sheet, they don't go through the P&L. Is that correct?

That's right. They show up as deferred revenue.

And cash.

That's right.

Okay. Then do you have any, again about Sony and the litigation, do you have any idea as to, it seems like there are three bones or three points of litigation or three venues of litigation that are currently in place at this point that you describe. Is that correct?

As we sit here today, it's become a conference call, are the three I'm aware of, yes. 60B, the PTO and the appeals.

Okay. Now, those are all running concurrently in their respective venues?

That's right.

Is it conceivable that all three would be resolved within the coming 12 months? Or is that unlikely?

Well, let's take each one.

In the 60B, I believe all of the materials that the judge is requested has been provided. I think she said in her order that she could rule on the submission of papers.

So if she were to ask for a hearing or further evidence, then this could delay, but this would be simply looking at whether or not she should consider this issue.

Let's not forget the fact that she's not yet even agreed that she would consider the 60B motion. The activity from Sony and Immersion is simply for her to decide whether there's anything of merit here that would warrant further review.

So at this stage, we believe she's in a position to make a decision and we believe the right decision would be to deny the 60B motion.

With regards to the second issue on PTO re-exam, it's most likely that the PTO could issue a ruling, a first-office action, if you will, let's say over the next couple of quarters, it's possible, And depending on what that ruling is, it could be contested and it would most likely take on additional discussions with the PTO, and that's a process that could last longer than a year, really, to fully resolve itself.

And that leads us to the third and final area which is the appeals and the connection I draw between the appeals and the PTO would be that if the appeals court decides in Immersion's favor on the appeal, then I believe that that would exhaust or terminate the PTO activity. So that could bring to a close the PTO actions.

But the Appeals Court could take, you said, within 12 months, it's possible that the Appeals Court could make a determination within the six months. If they decided in Immersion's favor, then it would probably be sent back to the lower court for the injunction to be applied and monies to be transacted.

If the Appeals Court found something in error in the lower court's ruling, then they may remand some aspect of the case back to the lower court. So that could take some time as well.

How long has it been on appeal?

I believe the June 16th was when the original appeal was filed.

I see. Okay.

And then the final point on all of this is in the event that somehow we are able to work our way through these three issues, and it sounds like you're part-way through at least a couple of them, and you remain victorious, then what happens to the money on the balance sheet? Does the deferred revenue then go through the books as revenue and obviously also income? And then I assume you get the other monies that are indicated in the original case. Is that correct?

So it would sort of be a double whammy, you'd get your jury settlement, that's the money that you haven't been paid, plus you'd be able to book the money that you already have. Is that correct?

I believe so. Let me just clarify.

So the damages awarded by the jury through the June of '04 assuming that we'd reached, all the issues had been resolved in Immersion's favor, then we would record that in the period of receipt as income. I believe it would be "Other" income, because of the nature. There would be interest that was awarded by the judge and that would also be recorded as income.

And then the payments made in the compulsory license up to that point would similarly be taken off the balance sheet in deferred revenue and recorded as income, again, probably "Other" income. And those payments would be subject to a payment obligation that we would have to Microsoft.

So there would be some amount of monies paid to Microsoft based on the receipt of those monies and the recording of those monies is income on our income statement. And then there would be an injunction in place until such time as Sony were granted a license.

Okay. Great. Thank you very much.

Thanks, Joe.

Your next--

Just on that, I mean, the payment potential to Microsoft depends whether it's settled out of court or whether it's actually an award of the court.

That's right. So that's another distinction on any payment that may be owed to Microsoft.

Melissa, you want to go to the next question?

Your next question comes from Benjamin Montgomery, private investor.

Hi, Vic. Thanks for taking my call.

I was wondering if you guys have talked at all about the tax implications should the award from Sony come through as we're thinking it might. Is that all taxable income to Immersion, then, or how is that treated?

That's the cart before the horse a little bit. We've got a lot of work ahead of us, but I believe that the damages would be taxable income and I also believe that given our past NOLs and various R&D credits, that we may have a chance to offset some of that from a tax obligation standpoint.

Yes, I'd agree with that as well. We got some large net operating losses, some of which can be offset on an annual basis, but not all. So if we've got that as revenue, we won't have enough net operating losses immediately to cover it, so certainly some of it would be taxable in the year.

I'd also, Benjamin, might add, that the compulsory payments that have been made to date, we have been accruing and paying taxes on that because those are cash receipts that are taxable. The bulk of the taxable amounts are offset by these credits and net operating losses.

So that's already been considered on our tax returns. I guess the amount that has not yet been considered is the damage award in terms of the taxability.

Just one other question. Do you think that the revenues from the Touchscreen and mobility are going to offset the decline that you're going to experience from the downturn in gaming revenues from the change in the consoles?

It's still a question, an open question on my mind, how much of a decline in revenue we'll experience from the gaming side. We're still forecasting a solid 2006 from our third-party licensees, because they do continue to sell the games on the PC platform.

There are multiple platforms that they pay royalties on, not all of which are being new platforms being launched, so there could be a hybrid of existing platforms that we're being paid on. PC platform will continue to be paid. They'll launch new products.

So we still believe there's solid revenue opportunities on the gaming side, although we are trying to highlight that given the timing in the new product launches, there will be most likely a decrease in the revenue growth and possibly a decrease in the overall revenue.

Separate from that, on the Touchscreen revenue we do believe we're generating revenue from that space today, and we believe that will accelerate as we find new design wins. We expect those design wins in Q1, Q2 in various industrial markets, but it will be Q4 before I believe we'll be generating substantial revenues from Touchscreen in the casino gaming and bar-top market.

The mobility space we're currently generating revenue albeit not significant revenue from the service and the installation effort from Immersion with our partners. We believe that that revenue will continue to grow with more phones on the market next year, our revenue will grow.

But as Stephen said, we're not expecting revenues from the mobility business to be significant or substantial until late next year at the earliest.

And what do you expect the time frame to be before Microsoft will actually start allowing for licenses of the wireless controllers? Is that two quarters or do they like to have a period of time where they get revenue from their own equipment, or how does that work?

I can't honestly tell you. I understand what their timing is or their strategy is. Only know that that is something that we've learned in discussing with Microsoft and our licensees, but we don't really have an opinion or any insight into how long that might last and why they do that.

One final question. In reading the pacer documents, it seems like there's some fairly shady things going on. Is there any evidence that you're aware of, of any criminal activity in any of that shenanigans?

I think I'm just going to let the pacer documents speak for themselves. The evidence that we uncovered, the majority of the evidence is in those documents, and I don't want to be in a position to characterize it any other way.

Okay. Great. Thank you very much.

You're welcome.

Your next question comes from Richard Logan, private investor.

Good afternoon, Vic. How are you doing?

Fine, thanks, Richard.

Given the fact that the revenues were rather flat compared year-over-year, is it your gut feeling maybe that due to the fact that you've got the ongoing litigation with Sony still unresolved that that's having a detrimental effect to creating better revenues?

I don't think so. I'm, as I said, I'm very disappointed.

I think you can point to, you know, one clear fact, the royalty and development revenue from our medical business is down about 700,000 over Q3 of last year. We're looking to replace that through increased product sales.

We're looking at extending our international distribution capability, adding new products, and looking to pick up some more development work where it's profitable and where it makes sense. So I don't think, in fact, I guess I would say the opposite, that the discussions we're having with significant parties, you know, the 3M relationship, the new carriers that we're signing up in the mobility space people like Immersion technology.

I don't believe that the litigation has slowed down or gotten in the way of any of our business discussions. We see a lot of great opportunities. But we had a tough third quarter. There is no denying that.

I think as any mentioned last quarter, we took quick actions on the 3D side, our industrial business, we grew the sales staff last quarter, extended the product line, improved our distribution capability by adding 20 distributors, so we saw rebound in that space.

The third quarter, we began to see some softness on the medical revenue. We tried hard to close other revenue generating arrangements and at the end of the day we came up flat.

We're looking forward to a good fourth quarter. We think there will be a nice solid growth on the gaming side as it usually happens. We see great things for the medical in the fourth quarter.

And we're seeing, you know, the other sectors, the automotive business with the Mercedes S Class shipping, the Touchscreen revenue that we're getting from some demo sales. We're seeing revenue growth from all areas and we think we'll rebound. We'll grow our fourth quarter substantially and we'll get past this flat period.

Thanks. Can I ask one last question?

Sure.

Are you in a position to comment on what your gut feeling is on how this is going to be resolved in the end? Do you, obviously people in the investment world are going to speculate one way or another as to whether maybe Sony might purchase or buy out Immersion, would you be in favor of that, or is that something that you're not in a position to comment on? Or what--are you able to give me any gut feeling about that?

Sure. I hate to speculate on that topic. I guess what I would say is, as I've said in the past, we feel very confident in our position.

We've been, I think, very professional in how we've handled ourselves in the whole process, we are a licensing company. And our patent portfolio and the inventions of our engineers are very important for us to preserve those rights, so we have taken a very strong position.

But we do feel confident in our case, we feel confident in our efforts under the 60B and in the appeals process. However, with all that said, we would welcome Sony as a licensee or a partner in any capacity.

So I believe it's going to require a diligent, thoughtful effort throughout litigation, but at the end of the day we would welcome an opportunity for the two companies to work together in any capacity, and I wouldn't want to speculate on whether that's licensing or any other type of relationship.

Okay. Thank you.

You're welcome.

Your next question comes from John Donahue, private investor.

Hi, Vic.

Hi, John.

If I can just get away from the Sony thing back into my mobility world.

Sure.

Minimal revenues this year, how do you, can you give little bit more color on the industry as it's evolving with the end user over in Korea with the product over there? Any type of feedback?

And if you can give a little more color into when that market may mature a little bit more, because I'm, you know, I'm quite surprised that it will be minimal revenues, I just thought maybe it may have kicked in, in the middle of the year.

And my final part of the question is, have we established our relationships with Motorola and Nokia to help us in our marketing, you know, the content, push that thing along?

Sure. Well, let's see, let's start with the Korean market. We've licensed the number one and number two domestic OEMs to the Korean market. We had a nice press kick-off in early October. It was very well attended.

We have the two largest carriers there both promoting VibeTonz capability and new content and overwhelming support from the content developers. So in Korea, a very advanced market for VibeTonz technology, we're seeing terrific interest and great take-up.

When I say significant revenue, let me maybe clarify, you know, hundreds of thousands of dollars is something that we can do, and it's something that we have been doing from the mobility market. But, you know, to get into the million dollars and above, that's what I would consider to be substantial.

So let me maybe--it might be helpful if I kind of walk you through just a few of the strategic efforts that we've begun. Initially it was to launch the mobile phone, our first phone with a major OEM, obviously the M330 with Samsung did that.

The next thing was to build awareness among the other OEMs, other carriers and content developers, and I'm happy to report this quarter we're up to two OEMs, 6 carriers, major carriers, and two dozen or more developers. So that's kind of the next step and that's the step we're currently in.

The next step really is to add new mainstream models and OEMs to build a broader base of installed VibeTonz-enabled phones. And we believe we're approaching that stage right now, where you will begin seeing mainstream phones, flip phones, low-priced phones with cameras and all the other features that are commonly attractive to today's consumer, you'll see VibeTonz in those phone models and you'll see them in other markets including Europe.

So we believe that that broadening base of installed units will help us and our carriers, our OEM's and our development partners to then kick off and invest in joint marketing programs. And you're just starting to see some of that, but I think you'll see a lot more of that as we move forward.

So we have marketing programs, channel programs, and others to educate consumers about the value of VibeTonz capability. That's the phase that I believe we're about to enter into.

We then think that that phase will open up and attract the kinds of other partners that will really help us accelerate adoption. So those are infrastructure providers, people who provide components, chipsets, operating systems, you know, all the people that provide some capability into this industry.

When that happens, we think then we'll be in a position to broadly, you know, and pervasively deploy our technology. Instead of working model by model, we will have a built-in capability among lots of infrastructure capability, let's say, so we believe that will be the next step.

And then the final step is with a broadly deployed technology and a substantial installed base, we believe the content capabilities will grow and the combination of those two factors will allow us to grow a very substantial business and that's not in the millions but tens of millions of dollars.

So that might give you a little bit of an insight into the way we're growing this market opportunity from where we are today to where we believe we need to be.

One follow-up, if I may. What are we doing with our Qualcomm relationship? Anything new on that front? That's a pretty exciting relationship.

Yes, it is. We continue to work closely with them to ensure that they're aware of our advances, not only in the technology but in our relationships.

They would be one of the partners that I just described by embedding our technology and their chipsets. It would allow very broad deployment of technology into many, many more handsets, and it would supplement our sales efforts substantially.

So those are the kinds of things we'd like to work with them on. I think they're going to need to see more success in the market, more volume and activity, more relationships, but they're well aware of our progress to date and we would love to take that relationship to the next level.

So our product will be in the 3G rollouts as they occur next year?

Right now we're in the CDMA we're working hard on the GSM that we think will happen very soon. The 3G, I can't honestly tell you where we are with that project.

Okay. Thank you.

You're welcome.

Your next question comes from Mark Cobash, Vista Quest.

Hi, Mark.

Hi, Vic, how are you, sir?

Fine, thanks.

Most of the questions I was about to ask were just asked by the prior questioner, but can you possibly go and Apple surprised a lot of Wall Street with its earnings capability, mainly because they misjudged the iTunes capacity regarding the balance sheets of Apple. I feel strongly you have an equally sexy, if you will, type of revenue stream that can be applied with the installed base of those VibeTonz enabled phones. Could you go over the model a little bit for us, please?

Sure. I just described a little bit about how we plan to grow the business, especially the installed base.

I was referring to actually how the dollars circulate around the technology and end up on your balance sheets.

Got it. Okay.

As I said in the past, we generate cents per phone. And as we grow the number of phones and we grow the market adoption rates, I believe those cents per phones will grow. Will grow substantially.

I think I said in the past, I don't believe we're going to be able to get more than a dollar, maybe even $0.50 per phone. It will just depend on how much capability we can incorporate in the phone.

Right now, we're incorporating VibeTonz to enable games, the user interface, ring tones, and other types of capability. We believe that we can also help improve the browser and online access with haptic capability.

We believe that we can also add haptic Touchscreens to mobile screens and PDAs. So there's lots of ways for us to add haptic capabilities into a mobile device and those are things that we're still working on and hoping to deploy.

But as I said, cents per phone and then we believe a percent of the download revenue from downloadable content, whether that's games, whether it's transaction-based types of activities, whether it's download ring tones.

So I think right now we're still trying to build a base of business. It's cents per phone. It's cents per download and when you add it up with substantial installed base we think it's a big business.

Me, too. At that type of, those revenue drivers I'd begin to vibrate. Thanks so much.

Thanks, Mark.

Looking forward to the fourth quarter.

Thank you, Mark.

Your next question comes from Mike Mahon, Wachovia Securities.

Hi, Mike.

It's actually Mark McMahon.

Mark. How are you, Mark?

Good. I've actually spoken to Stephen once on the phone before.

I'm new to the Company, new to the story, and I'm just getting involved I'm trying to get my hands around sort of your revenue model and you just cleared up a little bit on the phone. But two follow-up questions.

One, I wasn't quite clear on how the relationship with 3M is. I was clear on the split sharing agreement, but I wasn't quite sure on the price and the volume that you typically would expect off a deal like this and it sounds like it wouldn't be really generating much until the end of next year.

And then a follow-up on the litigation with Sony and the settlement with Microsoft. Have you gone after or considered going after other gaming companies such as Nintendo who might be infringing? If no, why not?

With regards to Nintendo, I think as I said in the past, we have really not performed any exhaustive analysis on the Nintendo products. We, before we either conduct or conclude those types of tests, we would want to be very careful about how we managed and how we moved forward with those efforts.

So at this stage no activity with Nintendo and I can't really communicate or talk much about anything about what we might do or what we're intending to do. So at this stage, we're focused as a small company with 127 employees, we're focused on getting profitability and to succeed in the litigation with Sony. So that's where our efforts are right now.

In terms of the 3M relationship, 3M is the by far the industry leader in this market space, casino gaming and bar-top amusement market. I don't want to disclose, divulge any confidential information so I have to be careful, but the market there is in hundreds of thousands of units per year.

I think as I mentioned, if you look at the product that we would be incorporated into, you would have a monitor, an LCD or a monitor, but a display of some sort, and then that would be coupled with a Touchscreen, which is provided by 3M, and then we would add our haptic capability, which is, it's accomplished through the use of actuator sensors, software and some firmware. So we would be bringing some component and materials to the relationship.

That combined product is selling today for in the neighborhood of 500 to $1,000. And the question will be how much of a premium can 3M get for the sale of their Touchscreen with the Immersion TouchSense technology or capability.

So we think it's substantial. It's substantially larger than the royalty model. And that's why we've decided to pursue the business in this type of model.

But I think that gives you some idea of the kinds of potential dollars that we could be looking at.

Well, if given the flatness of the third quarter, looking forward, the phone business seems like that could be a monster amount of revenue generating a year or two years out and this obviously from what you just discussed seems like if it's hundreds off thousands in a premium could be substantial as well.

But going forward fourth quarter of this year, first quarter of next year, if the path to profitability is based on near-term growth, what catalyst do you see right now half-way through the fourth quarter that's going to get you there. Considering 7.4 or 7.5 last year in the fourth quarter, do you see right now a burst in growth that's taking place today, you know, for next quarter that's going to get you to where, you know, you say you're going to be in the near-term?

The answer is yes. If you look historically our fourth quarter has always been our best quarter. It's shown dramatic growth over the third quarter.

The kinds of things that typically occur are the gaming revenues grow substantially in the fourth quarter, because that's when the lion's share of products are placed, sold and reported to Immersion. So we continue to see that revenue growing substantially in the fourth quarter.

In addition to that, the actions that we've taken with the 3D business, as I had mentioned, adding sales people, growing the channel by 20 people, and adding to the group two new products, the MicroScribe and the wireless CyberGlove, those things allowed us to rebound in Q3, and we believe we should have a strong fourth quarter from that group, as well.

In the automotive space, the launch of the Mercedes S Class, we're seeing revenue already from that in the third quarter from the European sales, and we expect to see that grow substantially in addition to the other development efforts that are currently underway with our other development partners.

On the mobility space, we continue to see it grow and we've got some service and development revenues that will come in, in the fourth quarter, but not substantial as I mentioned before.

And on the medical side, we have already begun efforts to improve on the international distribution front, added new products and we've already begun discussions and are looking at the potential for some new development work and some new product sales with some new customers. So we think we'll see a good strong medical quarter, as well.

So when you add it all up, to me, I think I'm comfortable saying it should show a substantial growth in the fourth quarter. We should see substantial revenue growth in the fourth quarter.

Would you attribute that to quarter-over-quarter substantial revenue growth or year-over-year substantial revenue growth?

I'm looking for quarter-over-quarter and year-over-year.

Okay. So look to see 7.4 beat and then perhaps in first quarter definitely, you know, the 5.7 beat in the first quarter.

That's what we're looking to do.

Okay. Thank you very much.

Thank you.

Your next question comes from Mark Silver, HTWN Investors.

Hi, Vic, how are you? Fine, thanks.

I think I'm the third or fourth Mark in a row, but-- All been good questions.

Mine may come in, I don't know if you would consider this forward guidance or what, but your stated objective is to achieve profitability without Sony, yet in this discussion it seems like a lot of the big revenue and income generators are out there maybe fourth quarter, first quarter, of '07. Do you think there's any realistic chance of obtaining your goal during 2006?

2006?

Yes. I'm assuming that's a cell phone.

Okay. I--is there--there's always a chance. But I would say that in part you're right that the opportunities we're chasing are substantial and take time. If anything in this business, I've learned that things take longer than we'd like, longer than we would really expect.

What I'm looking at in terms of 2006 revenue, internal forecasts and expectations, it will be difficult to get profitable for the full year given the investments we're making on the litigation side and given the time that it will take to get Touchscreens launched, mobile phones on the market, and so on. It will be difficult to be profitable for the full year of 2006.

That's not to say we may not have a quarter of profitability, although I've not been very accurate in the past when trying to predict quarterly profits.

So is it possible? Yes. Are we working hard to try to achieve it? Absolutely.

But being realistic, as I sit here today it would be difficult for the full year, although it might be possible for at least one quarter to be profitable.

Melissa, I think we're ready for the next question.

At this time there are no further questions.

Okay. Well, I think I'll go ahead and close. Thank you very much for participating on today's call and as always we appreciate your continued interest in Immersion. Thank you and good afternoon.

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