Immersion Corp (IMMR) 2005 Q4 法說會逐字稿

Good afternoon. My name is Crystal and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter Immersion investor conference call. [OPERATOR INSTRUCTIONS]

Mr. Viegas, you may begin your conference.

Thank you, Crystal. Good afternoon, ladies and gentlemen, I am pleased to welcome you to this discussion of Immersion's results for the fourth quarter of 2005. With me is Stephen Ambler, Immersion's CFO and Vice President of 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 website at www.immersion.com. A replay of this call will be available until March 7, 2006, by dialing 800-642-1687 and entering confirmation number 2397525. The replay 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 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, our main focus is to achieve revenue growth that leads Immersion to an operating profit. This requires a careful balance of four areas. Ongoing execution of sales and marketing plans in our established businesses to increase revenue. Number two, is selected investment and product and technology development for longer term new growth areas. And, third, control over operating expenses. And finally 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 overall business results for 2005 and the fourth quarter, as well as providing an update on our litigation and the Sony and Electrosource cases.

Overall, Immersion revenue for 2005 grew 2% over 2004 to a total of $24.3 million. The yearly growth was impacted by the 8% revenue decrease in the fourth quarter of 2005 over the fourth quarter last year. Primarily from significantly lower gaming revenues.

Operating expenses for 2005 decreased 22% over 2004 with a 10% decrease in fourth quarter over the comparable quarter last year. Net loss for 2005 decreased 37% over 2004 with a net loss of 3 million in the fourth quarter of 2005. Up 4% compared to the same quarter a year ago due to increased litigation and interest expenses. We finished the quarter with $28.2 million in cash, down from $28.7 million on September 30, 2005.

In 2005, our medical business made a key transition from pursuing additional development contracts to a strategy of selling medical training simulators to hospitals, teaching institutions and corporate accounts. This will position the medical business for growth and profitability, given the increasing acceptance of medical simulators as a training and testing tool. Product revenue for our medical business grew 29% in 2005, and accounted for 84% of the total medical revenue for the year.

In 2006, we are focussed on three growth initiatives for our medical business. The first initiative is to increase international sales of our training simulators. We plan to expand our presence both directly and through distributors to increase market share in the worldwide market for medical training simulators.

The second initiative is to continue developing new products and modifying existing products. In the new-product area we have a major focus to develop additional software modules for our endovascular training simulator currently the fastest growing segment of the medical simulation market.

The third initiative is to pursue alliances within the industry. We believe there are attractive opportunities to enter into business arrangements with industry participants as the market for medical training simulators grows and matures. These three initiatives are designed to increase Immersion medical's market share and grow our medical revenue in one of Immersion's key growth markets.

Turning to gaming, Immersion's 2005 revenue from the gaming business grew 8% compared to 2004. However, the fourth quarter of 2005 was a particularly difficult period for the whole video console industry, including Immersion. A number of companies, including Electronic Arts, THQ, Mad Cats and others, have announced significantly lower than expected fourth quarter gaming related revenues and profits.

We believe the factors leading to the industry down-turn in the fourth quarter and the decrease of Immersion's gaming revenue by 34%, in the fourth quarter of 2005, compared to the same period in 2004, are as follows: Number one, the demand for Microsoft's new XBox 360 far exceeded actual supply worldwide, causing shortages of the XBox 360 products. The shortage led many consumers to postpone purchases of any new console system, as well as games and new peripherals. Immersion's royalty revenue for sales of third-party wired controllers for the new XBox 360, as well as other controllers for the original XBox system, suffered as a result.

And the second reason is the transition to new console systems announced by Sony and Nintendo, has significantly dampened consumer demand for current PS2 and GameCube systems, peripherals and games. According to market research firm NPD group, unit sales of console system accessories fell 30% and revenue declined 37% in December of 2005 compared to December of 2004. Although these industry events are beyond our control, we are taking the actions we can to increase gaming revenue.

In September and October of 2005, we signed license agreements with three new companies. Two of which have contracts from large retailers to supply gaming controllers. Microsoft has indicated they expect the balance of supply and demand for the XBox 360 to occur before the end of June which could also affect our revenue positively. However, we anticipate that consumer response to the timing of the new console introductions will continue to be the dominant factor driving the industry as well as Immersion's gaming revenue. The recently signed license agreement with Electrosource which I will discuss in more detail later, will help bolster Immersion's gaming revenue in 2006.

In our industrial business, revenue in the fourth quarter this year grew 20% compared to the same quarter last year, reversing declining or flat revenue in the first two quarters of the year and leading to approximately 3% growth in 2005 over 2004.

In the automotive business, royalty revenue increased 43% in the fourth quarter of 2005 over the fourth quarter of 2004, as more vehicles shipped with Immersion technology. The 2006 Mercedes S class sedan became available in the United States on February 15th after having been launched last fall in Europe. All of the S class sedans contain a multi-function haptic rotary command controller developed by Immersion licensee, Alps Electric Company, which generates per unit royalty revenue.

Since the last conference call in early November, we signed new license agreements for our touch-sense tactile feedback technology with Volkswagen and SMK. SMK currently supplies touch panels for navigation systems to automotive after-market suppliers and automotive OEM customers in Japan where navigation systems are much more common than in the United States. We now have four licensees of touch sense technology for touch screens in the automotive markets. Volkswagen--they are Volkswagen, SMK, Methode and Alps Electric. Although design-to-production cycles in automotive are very long, three to five years is typical, we are excited by the momentum of our new tactile technology for touch screens in the automotive market.

We are also making significant progress in developing and marketing our new TouchSense products in non-automotive markets. Immersion continues to work closely with 3M Touch Systems to finalize the design and undergo stringent qualification testing of our actuators, electronic controls and software, for the casino gaming and bar-top amusement markets. Under the agreement signed last September, 3M will integrate Immersion's components with its touch screens and market and sell the resulting integrated product to these markets.

We are also aggressively targeting customers across a broad range of additional markets, including kiosks, point of sale and industrial and medical equipment. We recently announced the availability of our hardware and software integration kit that allows OEMs and system integrators to prototype and design products that provide tactile feedback in their touch screen user interfaces, using our components and software. Immersion plans to sell actuators and electronic control boards in production quantities to OEMs and system integrators. Dedicated sales resources have been added to this area recently and marketing programs have begun to promote this solution to these various markets.

In our mobility business, we achieved a major milestone with the introduction in January 2006 of a VibeTonz-enabled mass market GSM mobile phone in Europe, the Samsung E770. This is a milestone on three fronts: First, the phone represents the first GSM implementation of our VibeTonz technology. Previous Samsung models contain--containing our VibeTonz technology in Korea and the US were based on CDMA technology. GSM is by far the dominant technology in the world representing approximately 75% of mobile phone connections worldwide according to Q3 2005 estimates.

A second milestone is the phone's design and target market. Where previous VibeTonz enabled phone models from Samsung were targeted at more specialized audiences, such as youth, gaming and the push to talk business segment. The Samsung E770 is a mass market phone with features including a flip-phone design, MP3 player and 1.3 megapixel camera. The phone's VibeTonz-enabled features include four embedded games, 15 embedded ring tones, various user interface features, such as alerts and the ability to download VibeTonz enabled games.

An additional first for the E770 is that it includes four VibeTonz-enabled games. For the first time, consumers can now experience the power and realism of VibeTonz effects in a variety of mobile games without purchasing a game download.

And, third, the third milestone, the Samsung E770, is the first phone to launch in Europe. To date, Orange has launched the phone in the UK and France and T-mobile has introduced the phone in Germany and the UK. We expect that at least one of the current operators will offer the phone in additional countries and it may be offered by other European operators as well. In addition, the Samsung E770 is being offered for sale at mobile phone retail stores such as phones-for-you, in the UK where consumers may purchase a phone before choosing an operator. The E770 and a similar phone, the E778, are also currently being offered in China and Taiwan and likely other parts of Asia in the near future.

Since October 1st, 2005, we have signed two new agreements with content developers, SkyZone Entertainment and Superscape Limited, and extended existing agreements to new geographies. Superscape group PLC is listed on a London Stock Exchange and describes itself as the world's leading publisher of 3D mobile games. Superscapes mobile games are available for over the air download for more than 40 network operators around the world. Superscape is offering a VibeTonz-enabled game for the Samsung E770, Andretti Racing on Orange's downloadable game service, Orange World. I-play is also preparing downloadable games to launch for the E770 through Orange as well.

In addition to achieving further market penetration of our technology, we continue to advance VibeTonz technology and expand relationships in the industry to facilitate adoption. We have supplied Samsung with new VibeTonz software for multi-media content that is Mpeg 4 compliant. The new software for the handset can play vibration tracks, synchronize to Mpeg 4 songs or video. New software developer tools can be used to add vibration tracks to this type of multi-media file.

We have also expanded relationships with mobile industry suppliers announcing in January a certification program for mobile phone actuators. This program is based on our extensive testing that ensures actuators have the durability and performance characteristics to deliver a quality experience to the user over the probable life of the handset. Four actuator manufacturers currently have actuators certified under the program including Samsung Electromechanics and Sanyo. The program enables handset manufacturers to simplify and speed the selection and integration of actuators into VibeTonz enabled mobile phones.

Before moving on to other topics I'd like to emphasize a significant progress we have made in the mobility business. With the addition of Orange and T-mobile in several European countries, there are now eight operators across three continents with a total of approximately 220 million subscribers who offer GSM or CDMA mobile phones with our VibeTonz technology. Now, I would like to provide an update on our litigation against Sony and Electrosource. First, I am delighted to announce that yesterday Immersion settled its dispute with Electrosource, LLC and signed a confidential settlement agreement and license agreement with Electrosource. Immersion had sued Electrosource which sells and distributes video game controllers under the Pelican brand name for infringement of the 213 and 333 patents on September 24, 2004, in the U.S. District Court for the Northern District of California. In addition to the confidential settlement agreement, Electrosource will have a worldwide license to Immersion's patents for Vibro Tactile devices in the consumer gaming peripheral field of use.

Electrosource will make royalty payments to Immersion based on sales by Electrosource of Vibro Tactile game pads, steering wheels and other game controllers for dedicated gaming consoles, such as the Sony Playstation and Playstation 2, the Nintendo GameCube and Microsoft XBox and XBox 360. And in addition, Electrosource will pay Immersion certain other monies. The dismissal of the lawsuit should occur shortly.

In the Sony matter, 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, use, sale or import into the United States of the infringing Sony Playstation System consisting of the Playstation consoles, dual shot controllers and the 47 games found by the jury to infringe Immersion's patents. The court further ordered Sony to pay a compulsory license fee for the duration of the stay of the permanent injunction. Pursuant to which Sony has made quarterly payments to Immersion. The court also awarded Immersion approximately $515,000 in court costs. Sony disputed the court costs award and the court referred it to a special master. Proceedings remain under way for the special master to finalize the amount of cost that ultimately will be awarded.

In May of 2005, Sony filed in the United States Patent and Trademark Office requests for interparties' reexamination of the 333 and 213 patents. On Immersion's second petition to the PTO, based at least on the grounds that a final judgment has already been entered by United States District Court, the PTO granted Immersion's petition and suspended the interparties reexamination pending the resolution of Sony's appeal from the litigation. Thereafter, Sony filed a third petition requesting permission to file an additional interparties' reexamination of the claims of the 333 and 213 patents for which reexamine--reexamination was not requested by Sony previously. Immersion opposed this petition. The PTO has not yet issued a decision on Sony's petition. On the same day, Sony filed ex parte reexamination requests on the two patents. No action has taken place with regards to these requests.

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 included alleged newly-discovered evidence of purported prior art attributable to Mr. Craig Thorner which Sony contends Immersion concealed and withheld. During the months of September and October 2005, the parties engaged in discovery. Immersion's opposition papers, which are available from the court's pacer electronic filing system articulate in detail Immersion's position on why the testimony Sony has offered to the court is false and without credibility. And why Sony can not meet the high burden for relief under Rule 60B.

On January 20th, 2006, a hearing on Sony's motion was held before Judge Wilkin. The court has not yet issued a decision. Sony has appealed the 90.7 million award, the injunction and the compulsory license orders to the United States Court of Appeal for the Federal Circuit.. Sony's opening appeal brief was filed on October 21st, 2005. ISLLC, a third party, that asserted claims against Sony and Immersion, which Judge Wilkin dismissed, also appealed to the Federal Circuit. ISLLC, filed its brief in December 2005. Due to the cross-appeal by ISLLC, the Federal Circuit allowed Immersion to file a substitute brief on February 17th, 2006 responding to both Sony and ISLLC. We expect all briefing for the appeal to be concluded by the end of March 2006.

In addition to ISLLC's appeal of the District Court decision dismissing its claims, ISLLC filed a lawsuit against Immersion on February 8th, 2006, in the Superior Court of Santa Clara County. ISLLC's complaint seeks a share of Immersion's judgment and recovery against Sony as well as a share of the Microsoft settlement proceeds previously received by Immersion, and generally restates the claims already adjudicated in District Court. Immersion vigorously disputes these harassing allegations and will seek to defeat them expeditiously.

Finally, I'm very pleased to announce the addition of Ms. Emily Liggetts' to the Immersion's Board of Directors. Effective February 27th, 2006. A press release issued earlier today gave the details regarding her background, so I won't repeat them. But Emily has a track record of profitably growing global technology businesses. She is a particularly good fit for Immersion with her technical background in industry experience in two of our key growth areas. Mobility and touch-screen.

In addition, she has a broad business background having held sales, business development, strategic planning, marketing and operations management positions with extensive international experience. I am delighted to add such a high caliber person, whose leadership, experience and talent, will compliment and strengthen Immersion's Board of Directors. Emily will be a great resource in helping guide all our growth initiatives and we're very pleased to have her on the Board. 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 fourth quarter of 2005 were $6.9 million, compared to $7.4 million in the fourth quarter of 2004, for reduction of 8%. Gaming revenues were down approximately $1 million in the quarter, compared to the previous year, and this was the primary cause of the overall reduction. We saw increases in fourth quarter year-over-year revenues from our automotive, industrial and mobility businesses and we also saw a small decline in revenue from our medical business.

Looking at each of these businesses in detail, our gaming business revenues were $1.7 million from the quarter, compared to $2.7 million in the comparable quarter of 2004. Gaming revenues accounted for 25% of total Company revenues for the quarter. Most of our gaming revenues were derived from sales of third party's peripherals by our licensees and nearly all of these licensees experienced reduced sales of their console peripheral products. That resulted in reduced royalties earned by the Company in the quarter compared to the year ago quarter.

Industrial including automotive business revenues were $2.3 million in the quarter--in the fourth quarter of 2005. That's up 20% over the $1.9 million of revenue in the comparable quarter of 2004. Automotive revenues were just under $600,000 for the quarter. Equal to 9% of total revenue. While non-automotive revenues totaled $1.7 million and were equal to 24% of total revenue. Automotive revenues grew 7% over the comparable quarter of 2004 on the back of recently signed license agreements and the launch of the Mercedes S class. Other industrial revenues grew 25% over the comparable period of 2004 with contributions from all products, including 3D capture and touch-screen products.

Medical business revenues were $2.7 million in the fourth quarter compared to $2.9 million in the comparable quarter of 2004, a reduction of 7%. Medical revenues comprised 39% of our total revenues for the quarter. We continue to transition our medical business away from development contract work and toward product sales. Product sales revenues were $2 .1 million in the quarter and 8% increase compared to the comparable quarter of 2004.

Mobility business revenues were $200,000 for the quarter, which is equivalent to 3% of total revenues. Mobility revenues were bolstered by revenue recognizable upon completion of development work from one of our OEM customers.

Analyzing the fourth quarter revenue by category, product sales accounted for 50% of total revenue at $3.4 million, compared to 41% total revenue or $3.1 million in the fourth quarter a year ago. Royalties for patent and technology licensing represented 38% of total revenues, or $2.6 million, compared to 47% of total revenues or $3.5 million for the comparable period a year ago. Development contract revenue for the quarter represented 12% of total revenues, or $823,000, compared to 12% of total revenues, or $872,000 in the fourth quarter of 2004.

For the quarter, our gross margin was $5.2 million or 76%, compared to $5.8 million or 78% in the fourth quarter of 2004. Fourth quarter 2005 operating expenses were $7.9 million. Compared to $8.8 million in the comparable quarter of 2004, a decrease of 10%. Excluding litigation expenses operating expenses decreased 14% to $6.6 million in the fourth quarter of 2005, from $7.6 million in the year ago comparative period. The decrease was across all overhead expense categories and reflects our continued efforts to keep our costs under control.

Litigation costs in the quarter were $1.3 million compared to $1.1 million in the comparable period a year ago. Litigation remains a significant expense and we anticipate that that--that this will continue until such time as the Sony and related litigation is concluded. In addition, the level of Sony litigation quarterly expenses will remain lumpy for the foreseeable future with a level of expense each quarter determined by the level of litigation activity that takes place during the quarter.

Net loss for the quarter was $3. million, or $0.12 per share compared to a net loss of $2.9 million or $0.12 a share for the comparable quarter of 2004. As of December 31, 2005, we had 24.4 million shares of common stock outstanding. On December 31st, 2005, we also had cash and cash equivalence of $28.2 million compared to $28.7 million as of September the 30th, 2005. And $25.5 million as of December 31, 2004. There was no change in the period related to our long-term convertible debt which is due in December 2009.

During the fourth quarter we received payments of approximately $2.3 million from Sony pursuant to the Court's order for compulsory license. This payment relates to a three-month period from July the 1st, 2005, through September 30th, 2005. In mid-February 2006, we received a further payment of $5.1 million from Sony, for the period of October the 1st, 2005, through December 31st, 2005. The payment received in the fourth quarter has been accounted for as long-term deferred revenue. As for the first quarter payment that will be reflected on the--in the upcoming Q1 '06 balance sheet. I'd like to remind you that as of January 1, 2006, the Company will account for stock-based compensation as an expense under FAS123R. Our profarmer expense for the fourth quarter of 2005 was $1.2 million. On December 31st, 2005, we had 133 employees in total.

Just as a reminder you can automatically be kept informed of Immersion's news releases, SEC's filings, financial calander and stock quotes by subscribing to the e-mail alert service within the investor relations section of our website. This concludes my review of the financial results and other matters and I'll now 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 confident in our position in the appeal process.

One last note I would like to say that it is always gratifying to receive market and press recognition of our efforts. I am pleased that Forbes.com included haptics and Immersion in its February lifestyle feature article entitled quote "10 things that will change the way we live" end quote. The article says Forbes chose to feature things that may not yet be in widespread use, but that are coming up fast, inventions and technologies that are already proven and economically feasible. The article names haptics as one of the top 10 and describes it as subtly making inroads into everyday life in the form of vibrating phones, game controllers and force feedback controls in cars. We certainly believe that haptics has a bright future and great potential and we are working hard to make it a part of everyday life for the benefit of the consumer, our customers and our shareholders. Crystal please open the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Kevin Hunt with Thomas Weisel.

Hi, thank you. I had a couple of questions. The first one is on the gaming market. Just kind of wondering what your sort of expectation would be for that market as 2006 progresses. So, we're likely to see continues kind of year-over-year declines in the first half and maybe start to turn to positive year-over-year growth again in the second half, and how much of that kind of depends on what Sony does and so forth?

Well, I think clearly we have some upsides that we expect to capitalize on. Namely, the recent Electrosource license agreement will be revenue generating throughout 2006. In addition, we have recently signed three new licensees in the gaming field, who have customers that includes substantial retailers. So we feel that we've added to the base of business.

In terms of the overall industry in the market, it's very difficult for us to predict the timing of launches and the announcements by various console manufacturers. The ability to fill orders kind of all has an influence on the after-market in a place where we generate the majority of our gaming revenues. So difficult to predict. But I would say that early part of the year it may be difficult to predict and possibly slightly weaker than in the past, and then I'd expect it to recover at the end of the year. However, again, layer on top of that statement the additional revenues from these three licensees plus Electrosource.

Okay, and how much of that is dependent on like the PlayStation 3. Will that have a similar disruption you think, if that ever comes out this year?

Well,I think we're seeing that disruption now. The knowledge that it will be coming available at some point and it's--we sure don't know when, but it is obviously intended to be released sometime this year. That announcement I think from the industry information we have is probably put a small--a damper on the consumer buying behavior, so they deferred their buying decisions because the-- they're waiting for these new consoles to launch. So we really have no information on when that product might launch.

Okay. Couple other things. First on the touch screens, is that still targeted for, say, like a Q4, where you may start to see revenue and then like really '07 when you see the bigger ramp?

Well there's--so the key market for us right now is the casino gaming and bar-top amusement and our relationship with 3M. We've completed the design of our products and we're going through, as I mentioned before, stringent testing. We expect to have that product available and ready for market late this year. We intend it to be available for the fourth quarter. The other markets, namely the kiosk market, point of sale, we believe we'll have products available sooner than that and we hope to generate--begin generating revenue possibly as early as the third quarter of this year. Clearly if you're looking for the, the regular run rate or the growth in the opportunity, it will most likely be in 2007 where we should get a full-year sale from all these markets.

Okay. And then a couple of legal questions. I missed you said this ISLLC, what is that exactly? Is that some organization connected to Sony?

No, they are not connected to Sony. They're a separate entity. They have asserted rights in the settlement proceeds that we have with Microsoft and they've asked the judge to integrate them into the lawsuit that we currently have with Sony. It appears that they would like to gain or earn some percentage of whatever proceeds that may come out of that lawsuit or settlement.

What is that organization? I mean, what's their basis for claiming that, I guess?

It's something based--it's based on an existing contract that we have with ISLLC for a field of use that's unrelated to the current activities with Sony or with Microsoft. They are taking an aggressive position and redefining the terms in light of their own interests.

Okay. And then just to kind of summarize all the stuff you seem to be saying there. So at this point Sony has like the 60B ruling still kind of outstanding and then they have their other appeal with the highest court, which you said is, briefs I guess, the end of March and then I assume at some point that'll maybe go to a hearing. Is that pretty much the two primary kind of things we're waiting for here?

Yes, I've got a third. So the first is the appeal which we expect to be brief by the end of March. We hope to have a hearing at the appeal level sometime this summer and we'd like to think that a decision could be made by the appeal court sometime later this year. The second area is the 60B you mentioned which hearing took place in January 20th, and the judge is still not yet decided that particular motion. And then the third effort is, Sony has filed a numerous reexamination request with the PTO, the one that they initially filed has been suspended. The other actions that they've taken have not yet been decided by the PTO.

Sorry, one last thing. Is it possible then they could go to one of these international courts beyond, if they lost all of these other attempts here?

I'm not sure that there's any action in the international court. Our lawsuit and our patents are specifically addressing the U.S. market, and so our lawsuit and our claims so far have been limited to the United States.

Okay. Thanks a lot, Vic.

Thank you, Kevin.

Your next question comes from the line of [Mark McMahon] with Wachovia Securities.

Hi, Mark.

How you doing?

Good.

I have a couple quick questions here. Regarding your phone licensee contracts, do you have any up-front licensing fees or is it all just based on a percentage of phones sold and, games downloaded?

There is two typical ways that we generate revenue. One is either an up-front license fee or some development fees for the integration of our technology onto their phones. And so that's one form of revenue. And the second form would be a per-phone royalty fee for the inclusion of our technology.

And what do you primarily have with Samsung and some of the other major players.

Well we have two agreements in place, one with Samsung which includes a license fee/development fee, as well as a per-unit fee for phone ship. So we have both forms of revenue from Samsung. And on SKT they have not yet launched a phone but I believe the same is true; that they have a license fee/development fee obligation as well as the per-unit phone fee.

Okay. And do you still expect to see those revenues start ramping before the end of this year?

Well, 2005 we generated a couple $100,000 primarily from the development efforts that I mentioned. As we move into 2006, there'll still be a combination of development efforts for porting our technology on to these phones, as well as the phones that are in the market and those that will be launched, we will be generating per-unit fees for those phones as well.

I guess what I'm getting at is, do you expect it to become at least more than a blip on your--on your revenue growth this year, or do you think as you sign more and more carriers it's going to be something--become something that you consider significant next year? Or do you think it becomes significant this year?

I think it has the potential to be significant in 2006. It will depend on other OEMs that we sign, the success of the phones that are launched in the marketplace. I think, as I mentioned before, the first four models that had been launched were targeted at niche markets, gaming-oriented youth markets. And the most recent launch the E770 where it is being sold in a number of countries in Europe, as well as China and Taiwan, that's targeted a much broader audience and a larger market. So we think the next round of phones will continue to be targeted at large markets, and the revenue that we derive in '06 really will be a function of the success of those phones, the new phones that will be launched by SKT and Samsung as well as any relationships that we might be able to enter into with other OEMS during the year.

Okay, and on the 3M agreement, I would assume that 3M, entering into this agreement with you, did so because there seems to have been some interest in adding or incorporating your technology into the slot machine, [inaudible] gaming market. Have there been any expressions of interest from the casinos prior to obviously six months from now, the release of your first games?

Well, we've been promoting this technology for awhile, even before we entered into the agreement with 3M. I believe that 3M saw some success and some real interest from their customers and from not only the casino market, but other markets, and that we engaged them in these discussions. They clearly were the best partner for us to take the product to market. They have since presented in prototype and demo form the technology to all of their key customers. We've been involved in many of those meetings, the feedback is very positive. And, in fact, today many of those customers are working on new products, new games and new ways to use the haptic capability. So they're going to take advantage of the products that should be available later this year.

So do you believe that once it does become available in the marketplace that you will have orders ready to go? Like do you anticipate some of these potential casinos anticipating that this--that this new touch-sense-enabled slot machine is something that they are going to want to incorporate in their hotels as soon as it becomes available in the marketplace?

The feedback we have so far is that everybody views this as a very positive trend and a way for them to gain and retain customers in market share. People like it. They enjoy the engaging aspects of the technology. So we have haven't heard anybody complain or say that they didn't like it. They all like it, whether they place orders, how big the orders, whether they retrofit their casinos, those are questions to be answered. But we believe the product would be available late this year and our hope is that we could deploy it quickly.

Two more questions, if you don't mind. One is, Apple unveiled today a new iTune--I'm sorry an iPod, that was kind of interesting, but you mentioned something on the call that sort of--iPods keep coming out every 6 months with new one to keep reeling in new consumers. But you mentioned that your VibeTonz enables sort of a sync with music on, I forget which phone you mentioned. Why have you--have you guys considered considering that you have a member of the Board of Directors that is also in product development over at Apple, about talking to them or any of the other, manufacturers about enabling VibeTonz onto, any of these devices?

I think that the music that you're referring to is the ring tones.

Yes, I say VibeTonz. I'm sorry, I'm using the wrong term. But what you just described thinking onto I forget which phone you were referring to, that said that it was JPEG 4 enabled.

So we--I think we said a few things. We said that we're synced up with MPEG 4, we have that capability, and our technology also syncs with ring tones and I believe it's majority of the phones that have been launched with VibeTonz. We have that capability in the market. The real question is why haven't we launched more products with Apple. I'll highlight the fact that we have in the past worked with Apple and their operating system includes Immersion haptic code and license rights, so that the MAC-OS will actually play various gaming peripherals with Immersion's haptic capability. So we do have a relationship with them.

As you mentioned, Jon Rubinstein, whose on our Board, has been in a very senior position at Apple for some number of years. I believe recently he's announced his retirement. However, over the years, we've had a good close relationship with Apple. We've shown them lots of technologies. We've shown them the type of touch-screen technology that could be used on an iPod. But at this stage I can't say that anything has been announced or development or that there's an impending product that might be launched.

iPod I'm using just because it gets the most press, but why not any of the other MP3 players out there? Have you had discussions or is this not a focus at this time? You're focusing on gaming, mobile, cars, automotive, medical and this is not a focus at this point? Or--

No, we have presented and we've talked to the key providers of that type of technology. We haven't had success at this stage in convincing them to put our technology in these consumer devices. But the area of consumer devices and controls, user interfaces, continues to be a focus of Immersion. It's just that some of the devices that you're referring to, we haven't had any concluded negotiations and relationships.

Lastly--

We'll keep trying, but at this stage it hasn't become a priority for these potential customers.

Okay. And, lastly, on the automotive sector, do you have at your availability are you able to release the amount of models and cars shipped that have incorporated your technology, versus say, you mentioned the Mercedes coming out now, and future models. Do you have any projections on how many cars are going to--were on the market last year versus will be on the market this year that incorporate your tech--obviously we don't know how many people are going to buy the cars but I'm sure they have internal projections that are perhaps not confidential?

I think the short answer is no, I don't have that information for you. What I can tell you is that we've been included in the BMW 6 series and 7 series as a standard feature. We've also been included in the 3 and 5 series as an optional feature. If you choose navigation you would--you would also get the Immersion haptic technology. And recently we've been included in the Mercedes S class as well as the Volkswagen [Phaeton]. So those are the models.

In terms of the units shipped looking at 2006, I would expect that the units shipped would increase because we only had a partial year in 2005 of the Mercedes S class, whereas in 2006 we should have a full-year for all the models that I just mentioned. But in terms of specific numbers by model, forecasted unit volume, so on, I don't have that information.

Will you guys provide any guidance now or later this year about what you guys expect in terms of revenue growth, perhaps, profitability. I know you goal stated in the beginning of every conference call is to become profitable, regardless irregardless of the Sony lawsuit. But is there any anticipation of being able to give sort of more color on the street about what you guys expect to do for the full-year?

I would love to be in that position and I guarantee you we will be in that position but in 2006, I can't commit to providing guidance. So I'm just not yet ready to provide guidance.

Well thank you very much.

Thank you, Mark.

Bye-bye.

Your next question comes from the line of [Eric Vanswal].

Hi, Eric.

Vic. Would you comment about your sale of stock. Many shareholders view that as a lack of faith in the Company. I'd like some comments from you on that.

Sure. I--the majority of my equity interest in Immersion comes through the form of stock options, and many of those options were granted when I joined the Company in 1999. Immersion's options typically have a 10-year expiration. So many of those options will begin expiring in a few years. So as a result of that, I decided to take a look at and kind of do some personal financial planning, and I believe late last year I think I sold something in the neighborhood of 16,000 shares, but I have granted to me well over a million options. So I have a substantial interest in the success of Immersion. But it just had to do with timing, some tax--year-end tax planning and looking at the expiration dates knowing that I need to exercise options at some point in the future before they expire.

Fine. Can you post on the website the Sony and Immersion pacer documents?

I cannot. Those are actually available via Pacer and they charge a fee. So we're precluded from doing that. I could--I believe I could give you the link.

I know the link but it is tough to get in there and it seems to me since they're public documents as a shareholder favor you could post at least your documents and certainly Sony's, too on the site for us to read directly.

Right. So the advice that I've been given is not to do that because that's something the court takes control of.

Last quarter you were made a prediction that this quarter would be better than it turned out to be. What's your prediction for quarter number one of this year?

I believe I made a prediction for in response to a question I gave a prediction on Q4 and Q1. I was wrong about Q4. Primarily because the gaming sector declined by, I think, over $1 million. We expected some softness but not to that degree. So my prediction was wrong. My prediction for Q1 and going forward I'm better off not giving a prediction. It's just not-- not appropriate.

In regards to 3M, are we just providing software or are we providing any hardware for them?

We are providing them a few things. One, we're providing them with hardware, so there will be actuators and various other hardware elements. We are integrating our technology into a control board that 3M has, so we will be porting our technology onto a single board as opposed to having two separate boards. And we're providing them with software and software tools.

Thank you, Vic. Keep up the good work.

Thanks, Eric.

Your next question comes from the line of [Mark Cobash], Vista Quest.

Hi, Mark.

How are you sir?

Fine, thank you.

Great, I enjoyed following the Company throughout the time. This is a couple-fold questions. Regards to your statement with 3M and it's rigorous testing, that touch screens are going through currently, is there any different type of technology that could be deployed with like the PDAs and some of these more sophisticated phones in which have touch screens, or is it the same type of technology?

Well, there's at least three or four types of technologies that I would be aware of. One would simply be taking today's PDAs or cell phones and synchronizing commands over the display with the VibeTonz technology that's already integrated. In other words, take advantage of the motor in the cell phone, and use that to create a touch screen effect. That would be one way. Another way would be the type of technology that we're working with, 3M, which is using actuators to vibrate the screen in a very controlled fashion.

A third way would be the use of [PIASO] technology so it would be activated based on electric current, if you will, and we have that technology available. And then the fourth way could be through the use of speakers or voice coils that could be used and we have a lot of technology in IP in all four areas actually. So we're well aware of the basic ways to actuate a screen, whether it's a small screen on a cell phone or PDA or 19-inch screen that might be used in the casino gaming market.

So in essence a lot of the potential R&D that would have to take place has been incurred already regarding those markets?

That's right.

Okay. And the battery consumption on utilizing the devices for the touch screens, is it anything unusual?

Well, so right now the prime application that we're focussed on with 3M would be the casino and bar-top market as well as kiosks and point of sale. Those for the most part are don't have a limited power supply. So they would be fully powered and there would be no issue with batteries.

For the type of devices that you're referring to, and we have--we have actually developed that technology, we've built prototypes and we know it quite well, it does have some usage of the battery life, and for us to create a true commercial marketable product, we would have to deal with the battery consumption. We've done it before with VibeTonz technology and I'm certain our engineers have ideas on how to minimizes the power consumption for a touch-screen. But I don't believe that's something we've actually solved at this point.

And lastly Microsoft is coming out with their [Oragamie] product line, later on this week I believe it is, and it utilizes-- in essence I believe a touch menu system for their PDAs. Do they currently--would that--if they were to use your technology, does that--is it covered with their existing licensing agreement with you? Or that be above and beyond?

Any Microsoft branded product would be covered under our license agreement. The particular technology you're talking about I don't believe it came from Immersion, but it may be something that Microsoft's working on. It could either be a touch screen technology that does not provide a haptic effect, or it could include haptics. Either way it would be covered under the current license agreement with Microsoft.

And can you refresh my memory, that current license agreement with Microsoft, would it generate a royalty income?

It would not. For anything covered under the license, which would include any Microsoft-branded product, they would not pay us on an ongoing basis or a per-unit basis. The $20 million that they paid us in July of '04 was a fully-paid license.

All righty, thank you very much, Vic, keep up the great work.

Thanks, Mark.

Your next question comes from the line of [Richard Logan].

Hi, Richard.

Good afternoon, Vic. How are you doing?

Fine, thank you.

I'm wonder if you're at liberty to disclose any possible negotiations with any of the other major automobile manufacturers? In terms of landing of a nice deal with incorporating the haptics into their vehicles?

Well, the answer really is no. We now are working with quite a few different OEMs or suppliers, namely recently SMK is a terrific supplier, along with Methode and Alps. We also have dealt directly with Volkswagen and BMW. And what we're trying to do, is enable our suppliers, our licensing suppliers, enable people like Methode and Alps and SNK, to promote the technology and work with their OEM customers which really include all the major accounts throughout the world. They can call on more accounts more efficiently than we can. So we support them. We continue to work directly with OEMs but in terms of announcing a new OEM, I'm not at liberty to discuss that.

Okay. Can you give me a ballpark idea of what the technology adds in cost to a vehicle?

That's a really difficult question. Many vehicles already have microprocessors and many of the electronics that are required to drive our technology. So depending on the vehicle, the application, whether we're talking about a rotary controller or a touch screen, depending on how they want to use it, what they have already on board, it's a pretty wide range. I could imagine that it could be as cheap as, $25 or possibly could be even cheaper if you go with the very small, inexpensive rotary control knob, which we've done before, and we've seen in demonstration cars. So the product costs could be very low, but it could also be substantial if it's integrated in a full infotainment systems that is driving multi functions, it could be much more significant. It's just too broad a range. I'm sorry I can't help you any more than that, Richard.

I understand, so it sounds like from what I heard here on the conference call that you don't anticipate anything significantly impacting the revenue stream until at least the latter part of 2006. So more than likely, unless something significantly develops with Sony, during the interim, we're probably going to maintain, I guess, a stalemate from where we are at this point in time most likely, right? Maybe I shouldn't put it that way, but for lack of maybe a--I guess I am still anticipating a homerun but possibly isn't going to happen until 2007.

Well, Richard, I'll try to help you a little bit. But, I'm very optimistic for '06. If I were to take each of the markets, take the gaming market, for example, Electrosource who is now earned their position among the top two or three third-party providers of gaming peripherals, at least in the United States, Electrosource will be paying us a license beginning January 1. We also have three other licensees with two of which have existing accounts and customers, those retailers actually directed these companies to Immersion. We took a license. So we know that they have products ready for the market. So those are two areas that could add substantial growth to the gaming sector.

The mobility space we have at least half a dozen more phones in development, that we'd expect to launch. We haven't begun to see the volume from the E770 in terms of its launch in various countries. We haven't yet seen a launch from SKT which we believe will occur this year. And we do have some optimism that we will be able to attract some other OEMs and have them launch phones this year, and those agreements could include license fees, development fees, so it could have an impact on '06.

The new markets, as you referred to, 3M, that's probably a late in the year type product launch in revenue generator, but we haven't talked about the medical space, which we talked about expanding internationally. We already have plans under way and we're seeing good order growth internationally for medical simulators. We have some new products that we're finishing up and we'll be launching on the Endovascular line. So we think those will have revenue opportunities in the '06.

And then in the industrial side the automotive Mercedes is launched February 15th, so we'll start seeing, we think substantially royalty reports on the sales of Mercedes S class. So when I add it all up I feel like not only do we have a very bright near-term, but a very bright long-term outlook on what we're doing and how we can move to be profitable.

Sounds good. Thank you for your help.

Okay. Thank you, Richard.

Bye-bye.

At this time there are no further questions.

Okay. Well, thank you very much for your participation on today's call. We always appreciate your continued interest in Immersion. Thank you and good afternoon.

This concludes today's fourth quarter Immersion investor conference call. [OPERATOR INSTRUCTIONS]