Immersion Corp (IMMR) 2006 Q1 法說會逐字稿

Good afternoon. My name is April and I will be your conference operator today. At this time I would like to welcome everyone to the Immersion Corporation quarterly results 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. Thank you. I would now like to turn the call over to Mr. Victor Viegas, President and CEO of Immersion Corporation.

Good afternoon, ladies and gentlemen. I am pleased to welcome you to this discussion of Immersion's results for the first quarter of 2006. 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 through May 11th, 2006 by dialing 800 642-1687 and entering confirmation #2397923. 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 mentioned 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. Number one is the execution of sales and marketing plans to increase revenue. Number two is selected investment in product and technology development. Number three is control over operating expenses and number four, protection and defense of our intellectual property portfolio across all of our businesses. During today's call I will be discussion these focus areas and overall business results for the first quarter of 2006 as well as providing an update on our litigation in the Sony case.

Overall Immersion revenue for first quarter of 2006 grew 5% over the same quarter last year to a total of $6 million. The first quarter growth was impacted by the 23% decrease in our gaming revenues, which was consistent with industry performance. Payments received in the first quarter as part of the ElectraSource settlement and license agreements were not recorded as revenue in the quarter. Later in this call Stephen will explain the accounting treatment of the ElectraSource payment as a contra expense on the income statement and he will discuss the new stock based compensation accounting and the impact it had on our first quarter results. Excluding the stock based compensation charge, our net loss for the first quarter of 2006 was $2.2 million or over $900,000 less when compared to $3.1 million the same quarter a year ago when we had no non-cash stock charges. We finished the quarter with $30.9 million in cash, up from $28.2 million on December 31st, 2005.

Our overall medical revenue grew 19% compared to the first quarter last year with a 37% increase in product sales. We expect our medical product revenue to continue to grow as we bring new endovascular and other products to market in 2006 and as the health care industry increasingly accepts medical simulators as an effective training tool.

First quarter gaming revenue decreased 23% compared to the first quarter last year. This past quarter continued to be a difficult period for the whole video console industry. As we covered in last quarter's conference call, we believe the factors leading to the industry slowdown are as follows. Number one is the demand for Microsoft's new Xbox 360 still exceeded supply in the first quarter leading many consumers to postpone purchases of any new console system as well as games and new peripherals. Immersion's royalty revenue on sales of third party controllers for the new Xbox 360 as well as for the original Xbox system suffered as a result. And number two, the transition to new console systems announced by Sony and Nintendo has dampened consumer demand for current PS2 and game cube systems peripherals and games. According to market research firm NPD Group, unit sales of console system accessories fell 17% and revenue declined 14% in the first quarter of 2006 compared to the first quarter of 2005. In addition, Microsoft's current position of selling wireless controllers directly with controlled licensing of third party peripheral makers negatively affects Immersion's gaming revenue.

Although these industry events are beyond our control, we expect they will be the dominant factors in affecting the industry's revenue as well as Immersion's gaming revenue. We expect the ElectraSource ongoing royalty payments to affect our revenue positively during the remainder of 2006. Our touch interface products business consists of touch screen and rotary products for multiple industries including automotive, industrial automation, retail, financial and point of sale as well as our commercial gaming products. Revenue in the first quarter grew 37% compared to the same quarter last year.

I'd like to take a step back and review the significant progress our Touch Interface Products Group has made over the past year. We announced our new tactile feedback system for touch screens at the Society of Information Display Show a year ago in May. By the end of June we were offering customers a demonstration unit on which they could experience and demonstrate tactile feedback on a touch screen LCD monitor using a set of demo applications. In mid-September we signed an agreement with 3M Touch Systems to integrate our components with their touch screens for the casino and bar top amusement markets. In December we announced a license agreement with Volkswagen for use of our TouchSense system. By the end of January 2006 we were selling a hardware and software integration kit that lets OEMs and system integrators use the system in their touch screen user interfaces. In February we licensed the technology to SMK who currently supplies touch screens for navigation systems to automotive OEMs and aftermarket suppliers in Japan where navigation systems are much more common than in the United States. SMK demonstrated their touch screens with Immersion technology at the Society of Automotive Engineers Conference in early April. This past quarter we continued to work closely with 3M Touch Systems and their OEM customers on the integration of our components in the casino gaming machines. We now have a family of actuators and control boards along with the appropriate software that supports touch screen designs from 5 to 23 inches.

In addition to this progress in product development and operations, we launched marketing programs in the first and second quarter targeted at the kiosk and interactive display markets. For example, we promoted the use of our technology to key suppliers and end customers in those markets through direct mail, through public relations efforts aimed at key trade publications and by exhibiting at three trade shows, the Self Service and Kiosk Show in Orlando Florida, the Global Shop also in Orlando, and Kiosk Com in Las Vegas, Nevada. To further our market reach we will be again exhibiting at the Society of Information Display Show in early June, which is attended by representatives of essentially all markets that use touch screens. We are also exhibiting at Telematics Update later this month, a specialized forum on in vehicle communication and information systems. Through these marketing and direct selling efforts we have a growing number of potential customers in the early design phases of evaluating and incorporating our TouchSense System into their products.

We also are developing a base of system integrators for various industries who can purchase our components and integrate them in the designs for their customers. The result of our market outreach has been a very positive reaction and in appreciation of the value of our technology in improving the touch screen user interface. Immersion's business model, which is to sell a component solution or license the technology as appropriate, has also been well received by potential customers. The OEM design cycle varies by product and industry so I cannot predict exactly when products containing our technology will be launched. However, I am optimistic about the revenue growth potential of touch interface products.

In our mobility business the Samsung E770, a VibeTonz enabled mass market GSM mobile phone was launched in Europe and parts of Asia during the first quarter. The phone is being sold directly by major European operators such as Orange and T-Mobile in France, Germany, the UK, Switzerland and The Netherlands as well as through retailers. A similar phone, the Samsung E778, is being sold in China and Taiwan. Retailers can sell GSM phones and offer customers a choice of operator service plans such as from European operators O2 and KPM. The only importance of the E770 and E778 in extending the reach of VibeTonz technology around the world, the support it has received by major transcending operators such as Orange and T-Mobile represents an important milestone. These operators are actively soliciting and even demanding that their game developers include VibeTonz touch effects in the games they will sell to their subscribers. As a result, we have signed several new game developer license agreements and we plan to release information on new games and services in the second quarter. Since the E770 includes four VibeTonz enabled games embedded in the handset, consumers can now experience the power and realism of VibeTonz effects in a variety of mobile games without purchasing a game download. We believe that people who experience the added dimension and excitement of touch effects in mobile games on their phone will be more inclined to look for the same capability when they choose downloadable games.

At the Consumer Electronics Show in January and at the Cellular Telecommunications and Internet Association Show, also known as CTIA in April, Samsung showed a new 3G CDMA phone for the U.S. that contains Immersion's VibeTonz capability. It's the Samsung SCH A930. This phone is a slim multi-media clamshell design with an MP3 music player, music dedicated keys o the front cover, speakerphone with dual speakers for stereo sound and a 1.3 mega pixel digital camera and camcorder. The phone supports high-speed music on demand and video on demand downloads, memory expansion through a trans flash card, Blue Tooth technology and USB connectivity with a PC. This phone is expected to be launched this quarter by a major U.S. operator and includes seven pre-loaded VibeTonz enabled sounds for use as ringers or message alerts as well as support for playback of VibeTonz effects and downloadable applications. And once again, in advance of this phone's launch we are signing new content developer license agreements as we expect to announce along with new VibeTonz enabled mobile games after the phone launches.

In summary, to date our licensees have shipped over 1 million VibeTonz enabled phones. While this is still a small percentage of the total phones sold, it represents phone shipments made by more than eight operators in North America, Europe and Asia. Further, we are encouraged by the line up of phones expected to be launched in 2006 and beyond like the Samsung A930 and the growing support for our VibeTonz system from over twenty content developers. In addition, we continue to aggressively pursue license agreements with other handset manufacturers.

Now I would like to provide an update on our litigation against Sony. As previously announced, on March 24th, 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 manufacture, use, sale or import into the United States of the infringing Sony Play Station system consisting of the Play Station consoles, dual shock 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. Sony has appealed the $90.7 million award, the injunction and the compulsory license orders to the United States Court of Appeals 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 opening brief in December, 2005. Due to the cross appeal by ISLLC, the Federal Circuit allowed Immersion to file a second substitute brief on March 15th, 2006 responding to both Sony and ISLLC. We expect all briefing for the appeal to be concluded by the end of May, 2006.

In May, 2005 Sony filed in the United States Patent and Trademark Office requests for interparties reexamination of the 333 and the 213 patents. On Immersion's second petition to the PTO based at least on the grounds that a final judgment had already been entered by the United States District Court, the PTO granted Immersion's petition and suspended the interparties reexaminations 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 33 and 213 patents for which reexamination was not requested by Sony previously. The PTO dismissed this request. Sony also filed ex parte reexamination requests of some of the claims in the two patents. The PTO granted the ex parte reexamination only for those claims that were not part of the interparties' re-exam. Recently Sony filed a petition to the PTO requesting merger of the ex parte proceeding and the currently suspended interparties proceeding. Immersion is opposing this fourth 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 included alleged newly discovered evidence of purported prior art attributable to Mr. Craig Thorner, which Sony contended Immersion concealed and withheld. On March 8th, 2006 the Court issued its order denying Sony's motion in its entirety. Sony has appealed the Judge's order to the Federal Circuit. We have filed a motion to dismiss the appeal in part based on the grounds that such orders cannot be appealed. The Federal Circuit has not yet issued a ruling on this motion.

As noted earlier, ISLLC's appeal of the District Court decision dismissing its claims has been consolidated with Sony's appeal of the judgment and compulsory license. Further, ISLLC filed a lawsuit against Immersion on February 8th, 2006 in the Superior Court of Santa Clara County of California. 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 removed the action to Federal Court and the case has been assigned to Judge Wilkin. Immersion filed cross claims against ISLLC alleging breach of contract and grounds for rescission of the contract as well as other claims. Immersion vigorously disputes ISLLC's allegations and is seeking to defeat them promptly.

In a separate case on March 24th, 2006 Immersion filed a lawsuit against Mr. Craig Thorner in the Superior Court of Santa Clara County seeking damages of at least $150,000 on the grounds that he breached his contract with Immersion by licensing a patent to a third party in contravention of his exclusive license to Immersion. Discovery has already been served on Mr. Thorner and we intend to aggressively prosecute this lawsuit. 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?

Thanks, Victor. As stated in today's earnings release, revenues for the first quarter of 2006 were $6 million compared to $5.8 million in the first quarter of 2005. That's an increase of 5%. Revenues in the first quarter of 2006 exclude a $650,000 payment received in the quarter from ElectraSource pursuant to a licensing and settlement agreement signed with them in February. This sum is shown on our income statement as a contra operating expense.

Before I talk about our revenue in more detail, I'd like to discuss our net loss and how it has been affected by the introduction of FAS 123R. Since January 1st, 2006 we have been required to account for non-cash stock based compensation under FAS 123R whereas prior to that date we were not. Our net loss for the quarter on a GAAP basis, which takes account of the charge, is $2.9 million, equivalent to $0.12 a share, and that compares to $3.1 million or $0.13 loss in the year ago quarter. The non-cash stock based compensation charge expensed in the quarter under FAS 123R is $723,000. That's equivalent to $0.03 loss a share. The 2005 first quarter GAAP loss does not include a charge under FAS 123R. Therefore, to compare the loss on an apples to apples basis with last year, we need to exclude the non-cash stock based compensation charge. On this pro forma basis our loss for the quarter was $2.2 million and that's equal to $0.09 a share and that compares to $3.1 million or $0.13 a share in the year ago quarter. The pro forma loss for the quarter was our lowest quarterly loss since the quarter ended June 30th, 2002. The FAS 123R stock based compensation charge in the quarter of 2006 was $723,000 was expensed within our income statement within the following expense categories; cost of products sold, $19,000; sales and marketing, $286,000; research and development, $129,000; and general and administration, $289,000.

Moving back to revenue, compared to the year ago quarter, we saw growth in revenues from our medical, 3D and touch interface product lines. This growth was partly offset by a decrease in our gaming revenue. Looking at each of these in detail starting with gaming, gaming revenues account for 23% of the quarter's revenues. We mentioned last quarter that product demand for current gaming console and peripheral products was being affected by the transition to next generation console systems. This transition contributed to a reduction of our Q4 gaming revenues compared to the year ago quarter. Unfortunately, this effect has continued through Q1 and we anticipate it will continue through the remainder of the year. Our gaming business revenues were $1.4 million for the quarter, down 23% from the year ago quarter when they were at $1.8 million. As I mentioned earlier, our gaming business revenues for the quarter excluded a $650,000 payment from ElectraSource and that's shown on our income statement as litigation settlement. We are entitled to receive additional payments in future accounting periods under the terms of our agreement with ElectraSource. Under U.S. GAAP litigation settlement payments related to past events cannot be accounted for as revenue while ongoing license payments are accounted for as revenue.

Touch interface products, products and licensing revenues in this business, which comprises revenues from touch screens, touch panels, rotary modules and commercial gaming products, were $846,000 for the quarter equal to 14% of total revenue and that compares to $616,000 in the year ago quarter, an increase of 37%.

Medical, our medical revenues were $2.6 million in the quarter, up 19% from revenues of $2.2 million in the year ago quarter. Medical revenues comprised 43% of our total revenues for the quarter. Of these medical revenues $2.1 million were from product sales, equivalent to 81% of total medical revenues.

3D products, revenues from our 3D products were again steady and totaled $1.2 million in the quarter, up 3% from $1.1 million in the comparable period a year ago. 3D revenues comprised 20% of our total revenues for the quarter. If we analyze our first quarter revenues by category, product sales accounted for 56% of total revenues at $3.4 million compared to 47% of total revenues or $2.7 million in the first quarter a year ago. The majority of the increase was from increased medical product sales.

Royalties from patent and technology licensing represented 32% of total revenues or $1.9 million compared to 43% of total revenues or $2.5 million for the comparable period a year ago. The decrease in royalty revenues was primarily attributed to the softness in the gaming peripherals market. Development contract and other revenues for the quarter represented 12% of revenues or $756,000 and that compares to 19% of total revenues or $606,000 in the first quarter of 2005.

For the quarter our gross margin was $4.7 million or 78% and that compares to $4.4 million or 76% in the first quarter of 2005. Despite reduced royalty income our margins improved, primarily as a result of more profitable medical product sales.

First quarter 2006 operating expenses prior to the offset of litigation settlement but after taking account of $704,000 of non cash stock based compensation charges, were $7.8 million. Excluding these stock based compensation charges operating expenses were $7.1 million, which compares to $7.0 million in the year ago period. Litigation costs included within operating expenses were $832,000 in the quarter compared to $742,000 in the comparative period. Thus, excluding litigation costs we were able to keep our operating expenses flat while growing our revenues by 5%. Litigation remains a significant expense and we anticipate that this will continue until such time as the Sony and related litigations are concluded. In addition, the level of Sony litigation quarterly expense will remain lumpy for the foreseeable future with the level expensed each quarter determined by the level of litigation activity taking place during the quarter.

Moving on to the balance sheet, on March 31st, 2006 we had cash and cash equivalents of $30.9 compared to $28.2 million at December 31st, 2005. There was no change in the period related to our long-term convertible debt, which is due December 2009. In mid-February 2006 we received $5.1 million from Sony under the terms of their compulsory license and that was for the period October 1st, 2005 through December 31st of 2005. As with previous payments, this sum is accounted for as long-term deferred revenue.

As of March 31st, 2006 we had 24.5 million shares of common stock outstanding and we also had 135 employees. We will be attending and presenting at the Cowen sponsored investor conference at the SID International Symposium in San Francisco on June 6th and also at the Value Rich Small Cap Financial Expo in Las Vegas on October 25th and 26th so if you're planning to attend either of these we look forward to meeting you there. We also have our Annual Shareholder Meeting coming up on the 7th of June in Santa Clara, California. Shareholders should be receiving the proxy and Annual Report soon. We hope you will be able to attend these meetings, as we will be demonstrating the leading applications of our haptic technology after we have conducted the business part of the meeting. If you are attending, we look forward to seeing you there. Details and links to all these events can be seen on our Web site. If you'd like to be kept automatically informed of Immersion's news releases, SEC's filings, financial calendar, stock quotes, you can subscribe to the e-mail alert service within the Investor Relations section of our Web site. Our Web address is www.immersion.com. Victor?

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 our 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. April, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Kevin Hunt with Thomas Weisel Partners.

I had a couple of questions. First one is regarding the gaming market. Can you-- actually I guess two parts to that, one on the ElectraSource, can you maybe give us any stance of what-- if that's going to be a sizable license agreement going forward? And it sounds like you said, Stephen, that you will recognize that as revenue I guess starting next quarter. And the second part of the gaming question would just be if you could give us any updates on these new platforms that you referred to, specifically Sony Play Station 3 during the quarter? I think officially you kind of pushed out the launch of that so can you give an update as to when you might expect that would occur? And than also on Nintendo what kind of the timing is of their next platform?

Sure, so with regards to ElectraSource there were two key aspects to the agreement. One was the resolution for past shipments and the settlement feature there is what Stephen referred to as we're recording that as a settlement contra operating expense line item. The other part of the settlement was a license agreement for the ongoing sales of products and since this is a confidential agreement and the plans for ElectraSource are not communicated, it wouldn't really be appropriate for us to go into any of the details of how big a license this might be or how much revenue it could generate. Clearly ElectraSource is a major player in the third party supplier peripherals and we expect them to be a significant customer of ours as we go forward. The revenues from those ongoing sales of products would be recorded as royalty revenue. The second part of your question with regards to the PS3 and any updates there, we don't have any information other than what's publicly available so I think the latest I've seen is that the intended launch is later this year and again, we don't know anything more than what's in the Press. With regards to Nintendo I think the same is true, no information from us in terms of when that might occur so I really can't help you out on those two.

Okay and then I had two expense questions on gross margin. You mentioned obviously your license revenue piece kind of declined as a percent. To me you could go into more detail of why you got that increase in your operating-- or I'm sorry, in your gross margin. I mean you kind of mentioned there was a medical side but can you go into more detail on that? And the second question is on the other operating expenses, they're lower than last [inaudible] or so it looks like a really job of controlling those. I don't know if you can discuss any kind of initiatives there that's keeping those down.

Okay, I'll give you my answer and I'll let Stephen if he'd like but on the gross margin I think, as Stephen mentioned, the majority of the margin improvement came from the sale of medical products. Now medical products are made up of kind of two categories. One is the hardware platform and the other is the software or application modules so depending on the mix of sales, if we sell more application modules our margins could improve. Secondly, the hardware costs we have had for sometime now a conscious effort to reduce our hardware costs, our bill and material costs, and so we've been working hard with our engineers and our suppliers to reduce those costs and we're starting to see some of that effort pay off. So I would say the majority of the margin, and you correctly stated with our gaming revenue down and our royalty revenue down it's difficult to improve margins but we did, and the majority of that improvement came from medical product sales.

On the operating expenses, as I mentioned, there are four key components to our march to profitability and the second one I believe-- or it's the third one. Third one is the control of operating expenses. We're very conscious of operating expenses. We have brought some new people on board in areas, primarily in the sales and marketing for some new products that we believe have tremendous upside, so we're going to continue to invest where we see the future potential. In other areas through attrition and other kinds of conscious decisions we are trying to keep a lid on operating expenses and keep those to a minimum so we're consciously trying to cut costs and keep those expenses down as we move towards our intended goal of profitability. Stephen?

Yes, there really wasn't any significant one area that the operating expenses varied from a year ago so they are pretty well in check across the board. There's no real changes in any particular grouping at all. And I agree with everything that Victor said about the revenues on the medical side and margins.

[Andrew Suroppa] with Tier One Research.

I have a lot of respect for the accomplishments of your Chairman when he was over at Apple and I just wanted to ask a question about his move from full time to part time over at Apple, if his role within Immersion has any impact influence before or after as a result of that decision of his.

Not that I'm aware of. John is a very engaged member of our Board. We get a lot of really good insight from him. We run product ideas by him in particular because of his background and experience so he's been a terrific asset for Immersion and I can't say that I've seen any impact of his changing position at Apple.

The other question, on Motorola's recent patent filing I know you guys have a huge pile of your own patents obviously, but the latest one that they filed last week relates to similar functionality. Since I'm newer to looking at the patent side of this sector, is this one of the first or is this one of many patents filed that look a little bit similar to what you have?

Well, I'm not aware of the specific patent that you're referring to. The field of haptic technology is an active one. We have-- I believe we're now over 600 patents either issued or pending but there are other companies investing in the space. I'm not sure exactly what their patent covers but given our patent portfolio and our technical capabilities, we have what we believe outstanding technology and good ideas that we do take advantage with the Patent Office so that particular patent I'm not aware of but it wouldn't surprise me.

And any reason to think that the touch screen technology that you talked about in the casino gaming sector would not apply say to mobile phones or hand held devices?

Well, there is the same benefits in being able to improve the user interface whether it's a large touch screen or a small touch screen on a PDA or a mobile device, so the same value is there. The technology to accomplish those two different applications can be different. The form factor may not support the same technology. I think, as I mentioned in a previous call, the obvious ways to create the haptic effect we've worked hard at perfecting that for devices. We now have product screen sizes from 5 inches up to 23 inches. We also have technology that we've begun demonstrating that can actuate a very small screen so the same benefits apply. The product that we would offer would probably be slightly different but we are active in both areas.

Okay so someone like an Apple with an iPod was to make the entire device be a screen and put the track wheel within the screen, is there a role you can play to help them accomplish that?

Absolutely. There's a number of different things that could be done. We could add haptics to the navigation panel. We could add haptics to the screen. Whatever the user interface is haptics I believe will make that user interface better.

Very exciting. Thanks, gentlemen.

[Mark McMann] with Wachovia Securities.

I've got a couple questions, one or two follow-ups. The first that I wasn't quite sure if you were-- how your answer regarding the Nintendo Revolution that you didn't understand as to when the launch was going to take place or whether or not in these next generation controllers that they're putting out may possibly use some form of your technology because I've read an article where the description of the controllers sounded very similar to the four features that you guys offer.

I think the answer to both is we don't have much information to go by. What we know is what's written in the trade press in terms of what their launch plans are and what their feature set could or should be and I've probably read some of the same articles. I believe that they talk about some form of vibration or haptic technology but what they do to achieve that and IP that might cover it isn't something that we know much about at this stage until we have a chance to see it. I can say as I have in the past, we do not currently have a relationship with Nintendo and we anxiously await the launch of that product.

Also on the 360 you mentioned earlier that Microsoft has some sort of a-- and I wasn't quite clear, some sort of exclusive third-party licensing agreement in regards to the controllers. Does that affect in any way how your settlement was worded whereas in that you guys are able to derive your revenue from third parties instead of from the actual set top box and controllers that are shipped together?

Well, so Mark, to answer your question the licensing process or the strategy from Microsoft is not something we're terribly familiar with. Historically with the Xbox they have allowed numerous third party suppliers to supply peripherals, game pads, joysticks, steering wheels, so you had quite a few companies providing these products into the retail space. When they launched the Xbox 360 it appears from our revenue and also from trade information, it appears that the majority of those controllers are being provided by Microsoft. So if you look, I think the most recent data I have says that in the fourth quarter of 2005 they provided over 90% of the controllers used on Xbox 360 and, again, this is all public information through the trade. But in the most recent quarter their percentage is lower and they have made available rights to some third parties to provide products so we're starting to see a positive trend where potentially our licensee will have access to and be able to produce peripherals for the Xbox 360 but it appears that the control of those rights is something that Microsoft is obviously in control of. It's their platform.

And in regards to the $650,000 settlement you just booked this past quarter, did any revenue come through to revenue or was it the whole thing was the $650,000 in the litigation clause.

During the first quarter it was entirely the settlement in the contra expense. There was no revenue recorded. The royalty reporting requires some time and so depending on shipment and royalty reporting obligations, then we would have the information to record revenue. It's likely that in Q2 we will begin recording revenue from ElectraSource sales of license products.

Will that go back to the beginning of the period in which your settlement began or did the 650 cover anything that might have been sold in the first quarter of this year?

That's a detail that I think is probably confidential so I'd rather not answer that.

Okay and finally-- I don't want to take up too much of you time but in regards to your phones I was a little unclear. It's been real quiet for the last say two months in terms of press release action out of you fellas and it sounds to me like you've got a number of phones that are going to be coming on line in the next few months, perhaps as early as-- if I understood you correctly-- in the next maybe couple weeks before the end of the quarter. What can we expect? About how many phones do you guys expect to be launched and how many units do you think will be sold under those different phones if you have any estimates?

It may be quiet from a press release standpoint but it's clearly not quiet in the market. If you're familiar-- I don't have the exact number but there have been dozens and dozens of articles written. The excitement about the success of the 770 through the launch by Orange and T-Mobile, the customer response, the increased developers that we've signed up. We've been very active and there's a lot of momentum being built so I would say more now than ever before there's a lot of buzz going on in the industry so I'm really pleased about that. In terms of press releases and announceable events, we didn't have many in the quarter I believe but that's because there weren't significant events that we felt we wanted to communicate through a press release but the activity going on in the market is very vibrant.

I didn't mean to be critical. I meant in terms of had heard no interest in terms of new phones, new products of that nature and that's why I guess I wasn't fully clear when you were describing some new phones that were going to be hitting the market in the next perhaps few weeks. If you could tell me or explain a little bit more about the number of phones, perhaps units that could be hitting the marketplace with your technology in it?

Sure and I didn't take it in a negative light. I just took that as an opportunity to maybe get on the soapbox and tell you that we're really excited about what's going on in the industry. People in the industry see the success that we're having. In terms of the launch plans, the number of phones and the expected volume, obviously that 's confidential. It's in many cases things we don't even know ourselves. It's really going to be up to Samsung and Pantech, our other OEM, in terms of what they want to launch. We have been busy porting our technology on many different models so we know what the lineup looks like but when they hit the market and how successful they are in the marketplace, that requires speculation that I'm just not in a position to be able to give you.

Okay I thought earlier you had mentioned some specific phones that you're expecting to be launched with your technology I the near term.

Yes I did and that was a result of the phone being shown I think at CTIA show not that long ago. It's the A930 I believe and that is a very mainstream phone with a lot of advanced technology including video and MP3 sound and when you look at the combination of this advanced technology on a 3G platform with our haptic technology, it's a really compelling experience. It really adds a lot to the user interface and to the experience.

And when is that launch?

Well, they demonstrated I believe at CTIA but I don't know they've announced the actual launch plans. We know it's soon but we don't know the specific timing.

Okay but with all this buzz generation and interest do you guys still expect that the phone licensing revenue is going to start increasing noticeable in the coming quarters, coming months?

Well, the revenue from phones being sold obviously will increase coming from a small base that's probably meaningless to talk about percentage but we expect that the revenue from phones being sold will continue to grow and become at some point meaningful. The key really has always been to sign more OEMs and to get more phones in the market. I don't have much update there other than to say that we are very active with all of the OEMs and we're working hard to try to get more phones on the market and more OEMs signed up to provide the capability.

Mark, a private investor.

I enjoy when you're on that soapbox. I hope you don't mind me saying so. The question regarding the E3 Trade Show, what type of representation will Immersion have at that Trade Show taking place within the next week and a half?

I don't believe we'll have a formal representation. We don't have a booth. We will have quite a few employees there and we have quite a few people in the industry that will be there as well that are anxious to see what's demonstrated by not only Sony and others but also by our licensees to see more about the technology and the exciting line up of products for 2006.

Speaking of the third party licensee with regard to Microsoft for an example, let's say electronic arts develops the Madden NFL football game 2007, would you receive revenue from Madden through the format of the Xbox but not from Microsoft?

The Microsoft agreement was a fixed payment that they made for continuing rights and so we do not collect ongoing revenues from the sale of Microsoft branded products. So an EA game that would play on the Microsoft platform is not a game that we're currently receiving revenue from.

Okay with regards to the medical division, which I say kudos to all in support of that effort. I think it's widely untapped and I can't wait for a greater market penetration. What would you say our current market penetration is within that area or competition within that area and how much growth is there left in the industry?

Well, I guess a lot of it depends on how you define the industry. When you look at haptic enabled simulation systems, we believe we have well over two-thirds of the marketplace. The systems sold that are in our particular area we think we have that kind of penetration. There are some competitors. Some of those competitors are not licensed and we continue to have discussions with them about that. We-- if you were to define the market much broader as any type of training device, obviously our penetration would be much smaller. In terms of kind of the market size-- and I agree, we expect significant growth in this space. If you're looking just at the market size, worldwide I think there are over 15,000 locations that would be prime targets for the use of our simulation technology. These are places like medical schools, teaching hospitals, other teaching institutions like junior colleges and other locations and other hospitals. So if you add those up, 15,000 locations, each one could buy multiple devices so you get to a substantial number, which is what we're working hard to try to penetrate. But we have a lot of growth potential because the market is large so in terms of competition, there are a few people out there. We obviously think we compete favorably on feature set capability and we do continue to talk to them about IP issues.

Speaking of growth, I'm impressed with the increased number of patents, up to 600. I really like that. Thanks for all the hard work. Two more last questions-- one, the TouchSense touch screens product in which 3M is involved with in placing in the gaming industry, can you define how the revenue is recognized? Is it anything similar to the model of VibeTonz, for instance?

No it is different than the VibeTonz model. The revenue model with our touch screen technology is one where we provide a set of components. Our solution requires actuators and a control board or software and firmware to be delivered in some form. Now that can be a separate board or it could be integrated into an existing control board so with 3M we will be providing them with actuators and provide them with software and firm ware. We then-- they would then promote and sell that product to their customers and then we would share in the revenue of the haptic feature. So typically they would sell a touch screen and there's an established sales price for that. They will get a premium for the haptic capability and we will share in that premium.

So it's fair to say the larger the touch screen, the larger the share for us? Not larger share-- I'm sorry, the larger revenue?

That would be the assumption that we have. Yes.

Okay with regards to the automobile industry, in the past our revenue stream was pretty much derived from the I drive type if product. Is it right to assume that on each current and future car manufactured within our own world of licensees we could anticipate touch screens being included in that and also the controllers on the dash board itself?

Well there are a number of things that we can bring into the automotive market and those include rotary controls. They also include touch screens. I mentioned earlier our recent license agreement with SMK a supplier of navigations systems to the auto industry. We also licensed our technology to Volkswagen. We've also made the technology or licensed the technology to Mehtode, another supplier. So multiple parties have rights to integrate our technology into vehicles as well as Immersion works directly with first party OEMs, par companies, and we can bring that technology in touch surface, touch screen, rotary controls in a number of different ways.

Excellent. And last night I was fortunate enough to be with [Mr. Mark Clark] of the airline ride.org and he sends his best and he's doing well in case you were wondering.

I was wondering. That's a very worthwhile cause. I thought it was a great project.

Yes I was thrilled to be with him. He's a super charged and he's on his last leg and he sends his best.

Thank you for the update.

And one last tidbit-- I'm sorry to hog the time so much. Is there any way you could discuss any changes that have taken place with regards to Sony and the negotiations of the past quarter, just recently past versus prior quarters?

Well, I communicated the status of the legal activities. The 60B was denied in its entirety. The PTO has suspended the interparties' request and there are multiple petitions being made. Specifically in terms of my dialogue or communications with Sony, I would say there's been no change.

Okay thank you very much and again, great work and I'm looking forward to many more conference calls.

Benjamin Montgomery, a private investor.

I just want to congratulate you guys on the progress you've made in the last quarter and I just have a couple of quick questions. The first of those is focused on the Play Station 3. I recently read an article that suggested by one of the Sony representatives that the Play Station 3 will be fully backwards compatible and I'm just wondering if you guys know anything about the potential for that to be infringing on any of our technology?

Well that statement alone doesn't give me too much of an indication. There are different definitions of complete backwards compatibility. I'm not sure if this individual has the latest information. I'm not sure what is actually shipping in the final product so there are a lot of uncertainties. If fully compatible means it plays the old games in the exact same experience with the exact same technology, then we would be very interested in seeing that device and taking a look at it.

The next question that I have is with regard to the TouchSense technology. Have you guys gotten any kind of assessment as to the size of that market in terms of potential revenue in dollars. How big do you think that market is?

I'm assuming that's the TouchSense with our haptic touch screen technology?

Yes.

I do have some industry data that I'm happy to share with you. The market looks like it's a couple of million units. If you look at gaming devices, kiosks, industrial controls, medical control panels from devices, point of sale, home automation, depending on how you define the market, these are all 100,000 plus each and the numbers get quite substantial. Obviously each market, each application, the size of the screen, the pricing could all be substantially different so it's hard to say what the total addressable market would be. But we know there's a large number of touch panels out in the marketplace that are sold each year and we're working hard to try to penetrate and get design wins in each of these markets but it's a large market.

And that couple million, does that include all those sub segments or is that just the gaming area or--?

That would be the entire list I just gave you so there's the gaming, kiosks, industrial controls, obviously home and office automation, things like copiers and printers and other things could also benefit, so those are some large markets.

Great. Well, it certainly sounds exciting. Thank you very much.

[Eric Danswol], a private investor.

Two questions, one in regards to the 65 days of silence with no PR releases from the Company yet you're saying there's a lot of industry buzz. Could you provide then links to the industry buzz on the Web site so us poor investors would know what the buzz is?

Sure, if you go to our Web site and follow through some of the links you'll be able to see those. Many of those articles are posted or at least the links to the articles are posted.

Okay my second question is when you were talking about ElectraSource you used the phrase accounting periods. What exactly is an accounting period? Are they accounting quarterly, yearly or what?

Well, again, it's a confidential agreement, so I have to be very careful, but we have some of our license agreements monthly reporting, some are quarterly. Typically in the gaming field, as we've said I think in the past, the reports typically show up at least 30 to 45 days in arrears of the quarter, so we may not get a royalty report from a licensee-- let's say the fourth calendar quarter of the year. We may not have that data in time for our fourth quarter, so instead we record that when we receive it, typically in the middle of the first quarter. So we're usually one quarter in arrears because of the reporting obligations.

Your last question comes from the line of Curt Mayer, Lehman Brothers.

A couple of questions, one of them specifically on kiosks, do you have any touch kiosks in the market at this point in time and if the answer is yes, what is the response from the users or the individuals that put those into the market?

I'm not aware of any kiosks in particular, but part of our marketing strategy, getting the message out, has been to sell and provide demonstration systems, as well as integration kits, so I am aware of numerous touch screens around the world that are being demonstrated and tested by various parties of their customers and the feedback from that so far, at least at my level what I'm hearing is positive, but I really don't have very specific data. I can't really tell you only because these are trade secrets from our potential partners. They're integrating into their product. They're doing limited user studies and based on those studies then they'll decide, or not decide, to move forward in the development program.

Thanks. Relative to the card business, can you give us any updates on the status of any development contracts with any of the OEMs out there?

We have a number of programs with suppliers, tier one and tier two suppliers, as well as OEMs, but I'm not able to give you a status of how far along they are or what the nature of the development effort is.

And the last question, which I can guess what the answer is, but I'll throw it out there anyway, in the Wall Street Journal a couple of days ago there was a very interesting article talking about Disney hooking-up with Pantech that are the Korean licensee that we have to come out with a cell phone specifically for children and teenagers. It doesn't take too much to really think that that would be a very, very attractive market for VibeTonz and needless to say with a Disney logo on it or a Disney backing it would probably be a pretty big splash. Are you aware whether or not TouchSense or VibeTonz would be involved in that effort?

I am not aware, no.

Well, appreciate the time and look forward to the next couple of quarter, which should be very enlightening.

Your next question comes from the line of [Lee Butefor] who is a private investor.

I've just got a couple of very quick follow-up questions from previous callers. First having to do with cell phones and VibeTonz, are you at this point experiencing or recording any download revenues? You know, VibeTonz download revenues.

I believe the answer is--

Yes, we recorded some revenues last year and we're continuing to record revenue this year.

You are, okay. And is there some relationship that you can talk about between the number of installed phones that you have in the market and the growth rate of that download experience?

That's something that we're actively working to get more visibility. We try hard to take a look at that and look for growing trends. One of the difficulties is the data comes from numerous different sources, so the data that we get from the OEM may be units sold into distribution, but not necessarily units sold into the market place.

I see.

Obviously the downloads, it would be from a customer. So it's vital information for us. We really try hard to get better visibility. I can't give you a quantitative response. Qualitatively, the new phones that are targeted at more of a mass market are doing very well. We're happy with the success. We believe Samsung's happy and we continue to see new phones in the queue, but in terms of the download and revenue or ARPU, average revenue per user, that's something we're actively trying to get more information on.

So you're still experimenting a bit with some that and the information is yet to come?

That's right.

Second follow-up, when you mentioned over in the kiosk market, you talked about 2 million units for the market. Is that an annual 2 million units or is that an aggregate cumulative?

That would be an annual.

Good.

But, sorry, I want to be careful here. I mean some of those markets-- and I'd have to say the home automation is a very large market and those may require very small screens, so depending on how you calculate-- but each of the other markets they almost all are hundreds of thousands of units, one, two or three hundred thousand units per year per each of those major categories.

That was my point, to make sure we understood we understood that this was not a cumulative measure, but in fact it was an annual measure.

That's right.

At this time there are no further questions.

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 conference call. You may now disconnect.