Immersion Corp (IMMR) 2007 Q1 法說會逐字稿

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Immersion first quarter financial results conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)] Mr. Viegas, you may begin your conference.

Thank you, Stephanie. Good afternoon and thank you for joining us today. I am pleased to welcome you to this discussion of Immersion's results for the first quarter of 2007. With me today is Steven Ambler, 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 website at www.immersion.com. Instructions on how to replay this call are also included in the release.

During the course of our comments today, we will be making forward-looking statements. These forward-looking statements include management's current analysis of certain aspects of Immersion'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 the risk factors mentioned in today's news release and Immersion's SEC filing, and in our annual report to shareholders, as well as any factors mentioned during our discussion today.

During today's call, I will provide a summary of Immersion's first quarter results and a brief business update. Steven will then discuss the accounting treatments of the Sony computer entertainment litigation conclusion and related events, including tax implications and the handling of our long-term customer advance due to our Microsoft agreement. He will also cover our first quarter financials in more detail.

In a few moments, we will address the very significant events that happened in the last few months, including number one, the conclusion of the Sony computer entertainment litigation and the receipt of approximately $100 million in cash as a result of the judgment.

And number two, the federal court affirming the district court's dismissal of the ISLLC claims. And number three, the first profitable quarter for Immersion as a public company. But first, I want to emphasize that we continue to maintain focus on our drive for significant revenue growth and continued and sustainable profitability.

I believe you will see substantial revenue growth over the balance of 2007 as we launch one new platform in our medical business, increase the number of mobile phones shipped with our VibeTonz technology, and launch our lateral actuation-based tactile touch screen product suitable for the kiosk, ATM, and medical and other markets.

The first quarter revenues were $6.4 million, a 6% growth over the same quarter last year. The growth was led by our medical touch interface products, mobility, and gaming businesses offset by a decline in our 3D products group. Net income for the first quarter was $122.4 million compared to a net loss of $2.9 million for the first quarter of 2006.

Diluted EPS were $4.13 for the quarter compared to a $0.12 loss per share for the first quarter of 2006. Cash balance at the end of March 2007 was $137.6 million.

Moving on to our business update, our medical market strategy for achieving significant revenue growth employs three tactics. Number one is develop new and innovative products. Number two, leverage industry alliances, such as Medtronic and Laerdal, and three, expand international sales.

In the second quarter, our medical business will launch an exciting new simulation platform that can address training needs for laparoscopy across multiple disciplines, including general surgery, gynecology, pediatrics, and urology. The new system includes modules to enhance training for performing minimally invasive gallbladder surgery as well as laparoscopic essential skills such as camera navigation, hand coordination, and visual spatial cognition.

Our essential skills module is based on the official fundamentals of laparoscopic surgery, which is approved by the Society of American Gastrointestinal Endoscopic Surgeons, or sometimes referred to as SAGES. This new platform, which integrates our haptics technology, hardware, and software, provides a virtual reality system that supports a broad range of simulations for one of the fastest growing areas of minimally invasive surgery.

Because of shorter patient recovery times and other benefits, as many as 70% of all high volume surgeries in the U.S. are performed using laparoscopic techniques, and the trend is expected to continue.

In the gaming market, revenues increased 18% compared to the first quarter of last year. About 40% of the increase in revenue was due to recognizing licensing revenue from Sony beginning on the effective date of our new agreement with them.

For an overall industry perspective, we look to the NPD Group, a global provider of consumer and retail market research. It reports that third party market share of console game controllers continues to decrease on a year-over-year basis as console manufacturers increase their first party market share.

However, due to new third party licensees added in 2006, our royalties from third party peripheral makers increased this quarter. These royalties continue to be primarily from licensed peripherals for the PS2 and Xbox 360. Looking ahead, Sony has released a firmer update for the PS3 console that allows gamers to use an aftermarket USB connector and a PS2 controller to experience rumble feedback in some PS2 games.

This add-on feature could favorably impact Immersion if it translates to the sales of third party royalty producing PS2 peripherals.

Next, on to our touch interface products business. Revenue grew 17% in the first quarter, compared to the same quarter a year ago as a result of increased product sales and automotive development contract revenue. Our relationship with SMK, which was announced in February of 2006, has resulted in a first royalty payment for a tactile touch screen in an aftermarket car navigation system.

In addition, there are more opportunities with SMK in the pipeline. We are also engaged in development projects with several automotive suppliers. These projects are a direct response to requests for proposals from automakers for haptic systems. The benefits of haptics for automotive controls are becoming more evident throughout the industry. Product experts from Visteon Corporation, a leading global automotive supplier, presented the results of two studies at the 2007 Society of Automotive Engineers World Conference in April.

The research supports the claim that individuals strongly prefer touch screen implementations that incorporate haptic feedback. Although the revenue potential from the automotive market is large, we carefully select the automotive projects we believe promise the greatest potential, because we know the design to production timeline will generally be three to five years.

In addition to the automotive market, we continue to work closely with 3M Touch Systems to begin selling tactile feedback touch screens for the casino gaming and bar top amusement markets later in 2007. And we believe several more markets will embrace our tactile products and technology for additional applications of touch screen interaction.

Turning to our mobility business, we continue to see strong demand for our tactile touch screen technology in mobile phones. In this application, users receive confirming tactile cues in response to touch screen presses, which helps compensate for glare, noise, small buttons, and distracting environments.

The first touch screen phone released with this capability, the Samsung SCH-W559, generated a great deal of excitement in the press. As an example, BusinessWeek.com wrote, and I quote, "As touch screen technology takes off, so will haptics, a technology that makes a touch screen button feel like a real button."

Strategy Analytics, a global research and consulting firm, predicts that by 2012 as many as 40% of mobile phones could be using some form of touch-sensitive technology, a large potential opportunity for Immersion.

In March, Samsung released the SGH-I718 phone with a VibeTonz-enabled touch screen in China. A similar model is expected to be launched in Europe shortly. In addition, we anticipate that LG will launch their first VibeTonz-enabled phone before the end of the second quarter. We continue to actively engage other leading handset makers in technology and business discussion with the near-term goal of signing additional licensees to increase the number of VibeTonz handsets.

We also are aggressively pursuing other types of mobile devices, such as the fast-growing, personal navigation devices, or PNDs. According to a recent report by [Canalis], the number of PNDs sold worldwide has increased 115% from 7.4 million units in 2005 to over 16 million units in 2006. Navigation products and services with GPS capabilities, which have been hot sellers in Europe for the past two years, are still enjoying tremendous growth there, and are expected to begin growing rapidly in the underpenetrated U.S. market, as well as in China and other parts of Asia.

The Consumer Electronics Association is reporting that nearly one quarter of online consumers plan to purchase a GPS device in the next year. And that 33% of future GPS buyers are interested in owning a mobile phone with GPS capabilities.

Besides helping users navigate on the go, devices with GPS capabilities also help mobile network operators create differentiation and increase profits through delivery of highly personalized location-based services. We are responding to significant interests from PND manufacturers for our tactile touch screen technology, and are working closely with them on technology evaluation.

Wrapping up the business overview, as you may know, two months ago the judgment entered in our lawsuit against Sony Computer Entertainment became final when the litigation concluded at the U.S. Court of Appeals for the Federal Circuit. We also signed a new business agreement to explore, including our TouchSense technology in Sony PlayStation products.

In addition, on April 4, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court's dismissal of ISLLC's claims from the patent litigation. ISLLC's later filed lawsuit on its contract claims is continuing.

In a moment, Steven will discuss the details of the accounting treatment for the payments received from Sony, as well as future payments due. Just to provide a bit of explanation, let me say that the accounting requirements for this type of situation are quite complex, and the decisions on treatment of monies received may not be intuitive.

At a high level, under U.S. GAAP rules, we are required to allocate the present value of payments received or due from Sony between the fair value of elements related to past events and the fair value of elements related to future events.

Elements related to the past are accounted for as litigation conclusions and patent license income, for example, as a contra-operating expense. Elements related to the future are accounted for as revenue on a pro-rata, straightline basis over the capture period of patents licensed, which, in this case, is ten years.

And finally, with regards to the current cash balance on hand, we are in the midst of a strategic review and evaluation of various options. The alternatives include, but are not limited to, buying back Immersion stock, retiring debt, expanding our international presence, and adding complementary new products and technologies. We expect the evaluation of the various options will take three to six months to complete.

I'd now like to turn the call over to Steven to give detail on our financial performance for the quarter. Then he will discuss the accounting treatment of the Sony Computer Entertainment judgment proceeds, compulsory license payments, the new agreement, and related events including tax implications and our long-term customer advance due to our Microsoft agreement. Steven?

Thanks, Vic. For the first quarter of 2007, our revenues were $6.4 million, compared to $6 million in the first quarter of 2006, an increase of 6%. Our net income was $122.4 million or $4.13 profit per diluted share, compared to a loss of $2.9 million, or $0.12 loss per share in the first quarter of 2006.

As a result of the conclusion of the Sony litigation, Immersion realized its first profitable quarter since turning public in 1999. Net income for the first quarter of 2007 includes recognition of one-time litigation conclusion and patent license income of $134.9 million.

I would like to discuss each section of our income statement in order, starting with revenue. Compared to the year ago quarter, we saw growth in revenues from all our businesses with the exception of our 3D business, where we saw a small decline. Looking at each of these in turn, revenues from our medical business, which comprised 41% of total company revenues, grew 2% to $2.7 million, from $2.6 million in the year ago quarter.

Medical product sales grew 17% over the year ago quarter and comprised 93% of medical revenues in the quarter. The gaming business revenues increased 18%, from $1.4 million in the year ago quarter to $1.7 million in the first quarter of 2007. Gaming revenues accounted for 26% of total revenues, and included $107,000 of license revenues from Sony.

Our touch interface product revenues grew 17% to $992,000 from $846,000 in the year ago quarter. Revenues from touch interface products, which are comprised of touch screen components, rotary modules, and commercial gaming products, accounted for 16% of the total.

Revenues from our 3D business represented 15% of the quarter's total revenues, a total of $991,000, down from $1.2 million in the year ago quarter.

Our mobility revenues totaled $111,000 for the quarter, compared to zero a year ago. Mobility revenues comprised 2% of the quarter's total revenues.

Analyzing our first quarter revenues by category, total product sale revenues accounted for 56% of total revenue, unchanged from the first quarter a year ago, with 69% coming from medical and 27% from 3D.

Royalties from patent and technology licensing represented 34% of total revenue, 2% higher than a year ago, with the growth attributable to our gaming business.

Development contract and other revenue for the quarter represented 10% of total revenue, or $613,000, compared to 12% of total revenue, or $756,000 in the first quarter of 2006.

For the quarter, our gross margin was 76%, compared to 78% in the first quarter of 2006. This reduction is as a result of a sales mix change.

First quarter 2007 operating expenses prior to litigation conclusions and patent license income totaled $8.8 million compared to $7.8 million in the year ago quarter. Operating expenses include $614,000 of non-cash stock-based compensation charges, compared to $704,000 in the year ago period.

Litigation costs included within operating expenses were $836,000 in the quarter, compared to $832,000 in the comparable period. Excluding non-cash stock-based compensation charges and litigation costs, operating expenses were $7.3 million, compared to $6.3 million in the year ago period, as a result of increased research and developments expenditure as well as increased legal and accounting costs within general and administration.

Litigation conclusions and patent license income totaled $134.9 million in the quarter, compared to $650,000 in the year ago period. The $134.9 million is made up of two amounts. $119.9 million from the Sony litigation conclusion and patent license, which I will talk more about in a minute, and $15 million from the release of our long-term customer advance from Microsoft, which occurred as a result of Immersion's determination that the conclusion of its litigation with Sony does not trigger any payment obligations under the Microsoft agreement.

In March, we concluded our patent litigation with Sony. As a result, we executed on the judgment and received the amount of $97.3 million in late March, and we retained compulsory license fees of $30.6 million previously received, as well as $1.8 million interest earned thereon.

We also entered into a new business agreement with Sony, effective March 19, 2007. Under the new agreement, we received 12 quarterly payments of $1.875 million each between the 31st of March 2007 and December 31st, 2009. We received the first of these payments prior to the end of March. These sums total $152.2 million.

Under U.S. GAAP rules, we are required to allocate $149.9 million, the present value of these cash flows, between the fair value of elements related to past events and the fair value of elements related to future events.

Elements related to the past are accounted for as litigation conclusions and patent license income, which is a contra-operating expense. Elements related to the future are accounted for as revenue on a pro-rata straightlined basis over the capture period of patents license, which in this case is ten years.

We employed third party financial advisors to establish the fair values of each element. This valuation resulted in $119.9 million being attributed to the past, and this is the sum that appears in litigation conclusions and patent licenses income this quarter.

The sum related to the future totals $30 million. And this sum will be accounted for as revenue on a straightlined basis over the next ten years. Which, to put it another way, means that we will account for $0.75 million in revenue each quarter concerning, from Q2 onwards for the next ten years. Because our new agreement with Sony became effective on March 19, 2007, $107,000 of this revenue is included in gaming revenues in Q1.

The difference between the total transaction sum of $152.2 million and its present value of $149.9 million will be accounted for as interest income over the next three years, as each of the 12 quarterly payments of $1.875 million from Sony falls due. This accretion of interest, which totals $2.3 million, is not accounted for on a straightline basis, but increases over the three years as each quarter passes. For example, in the second quarter of 2007, we will record approximately $40,000 of accreted interest, while in Q4 2009, the last period of this accretion, we will record approximately $360,000 of accreted interest.

Interest and other income expense totaled a net expense of $45,000 for the quarter, compared to a net expense of $304,000 in the comparable quarter. Prior to mid-March, any interest received on compulsory license receipts from Sony had not been accounted for as interest received, but had been accounted for as long-term deferred revenue because there was a risk of potential repayment.

With the conclusion of litigation, we are now able to account for interest on funds held as interest income without restriction. The interest previously received on compulsory license payments totaling $1.8 million is included and accounted for within the $152.2 million that I detailed earlier.

We anticipate interest income prior to interest expense and other expense will approximate $1.7 million in Q2. Our tax expense for the quarter totals $8.5 million, compared to $102,000 in the comparable quarter a year ago. This is an effective tax rate of 6.5%. During the quarter, we were able to utilize the majority of our tax net operating losses from prior periods against sums received from Sony.

Moving to the balance sheet. On March 31, 2007 we had cash and cash equivalents totaling $137.6 million, up from $32 million on December 31, 2006. There was no change in the period related to our long-term convertible debt, which is due in December 2009.

Our accounts receivable at March 31, 2007 totaled $3.3 million, compared to $5.2 million at December 31, 2006. Our day's sales outstanding, or DSO on March 31, 2007 was 46. As of March 31, 2007, we had 25.9 million shares of common stock outstanding, and we also had 141 employees. Vic?

Thanks, Steven. In closing, we have momentum in our key businesses, medical, mobility, and touch interface products. And we have a base of business with significant growth potential. We now also have the financial base to use as a springboard to accelerate our growth. Although I'm not yet in the position to give financial guidance for the future, we are focused on sustained profitability and look forward to a good second quarter. Stephanie, please open the call for questions.

(OPERATOR INSTRUCTIONS)] Your first question comes from Mark Argento from Craig Hallum.

Hi, Mark.

Hey, Vic and Steven. A couple questions for you. First off, in terms of the new platform or new product you're launching in the medical category, could you talk about the partners you're using to launch that product? Are you working with Laerdal? Who are you working with to get that product out there? And what are the ASPs of that product? Is it similar to some of the other devices or machines that you've had out there? And I'll just leave it at that and then follow up with a couple more.

Okay. So we are very excited about this new platform, the Lap VR. It's a product that we've developed internally, and we are working with our own sales force and our retailer channel, which includes Laerdal. So we would expect to have them help us in the sales effort in certain territories.

The ASPs, as you referred to, are similar to our other platform. I believe that it would run in the neighborhood of 100 to $150,000 per unit depending on the modules included, as this is one of those platforms that has lots of flexibility and lots of different capabilities. So depending on the software or content modules included, I think you could be north of $150,000. But we are excited about it, and we expect to launch that in Q2.

Could you talk a little bit about the relationship with, I think you said SMK, and they have integrated your technology into an aftermarket NAV system. Can you talk a little bit about what this device looks like and what kind of unit potential there is there?

Sure. SMK is a very high quality provider of tactile -- I should say of touch screens. They're in Japan. I believe they are the largest supplier of touch screens to the automotive market. And our relationship with them incorporates our technology with their touch screens, and the combined benefits and capabilities are significant. So the first product that they're launching here is in the aftermarket for the automotive market. In terms of the models, the volume, expectation, I don't have those details. Those really would be confidential and something SMK really is in a position to drive.

But we do believe that this product should be significant. We believe that additional models and products in the automotive as well as other markets and their relationship with SMK is a significant one, and it's one that we think will help grow our revenue significantly.

So does SMK build units for branded consumer products companies, or do they actually have their own brands? Do you know?

I do not believe they sell under their own brand. I don't know all the details, but I think that they private label and sell into the OEM channel.

Okay. And then in regards to -- just so I better understand the go forward impact to the income statement from the Sony settlement. Steven, you said going forward that you're going to realize about $750,000 a quarter in terms of the amortized ten year license deal with Sony. And then basically an escalating interest payment over the next three years. Is that essentially it? Is there anything else that we should be paying attention to there?

No, that's essentially it on the basic part of the agreement. As you just said, it's $750,000 each quarter for the next ten years, and the interest increases reasonably straightline-ish over that three year period. So the interest finishes at December 31, 2009.

All right. And then lastly, in regards to the opportunity and the products you're working on with 3M. How close are we to actually having -- 3M actually having orders in hand in terms of having some end market demand for that product? Are they taking orders yet, or is it still in the sales cycle? I just want to be able to know the timing of that so we can better quantify the opportunity for this year.

So we have products that are coming off the production line, and they're being used for sales purposes. In terms of actual orders, I believe Q2 is their planned launch period. So I think you'll see orders being collected in Q2, hopefully with delivery in Q3. So we know that they're following up on a lot of interest, and many of their key accounts are starting to have those discussions.

Great. Thank you.

Thanks, Mark.

Thanks.

(OPERATOR INSTRUCTIONS)] Your next question comes from Benjamin [Bayed], private investor.

Hi, Benjamin.

Hi. Thanks for taking my call and the outline that you've given us. I have a couple of questions which are a little bit unrelated. The first of which is, I'm wondering if you can give us any clarity on the scope of the license arrangement with Sony with regard to the PlayStation 3. Is the PlayStation 3 licensed with respect to the new advanced haptic capabilities, or does that just cover the PlayStation 2 and the implementation of the dual shot controller type vibration?

I think I can answer your question. It might be a little bit [complete]. So bear with me, if you will. So the products that were litigated in the Sony lawsuit included the PS1 and PS2 systems as well as 47 [gain]. So those were the litigated products.

The judgment, which included the compulsory license, covered the sale of those litigated rods through the time that the judgment was final and non-appealable. And the monies owed for this judgment, including interest, was 129, almost $130 million. And it has been paid by Sony. So that covers the litigated products.

In addition, Immersion and Sony entered into the separate business agreement, and that covers the litigated products that were shipped after the effective date of the agreement, which was March 19, 2007, plus certain non-litigated products, which include those products through, and including the PS3. So the patent license that we provided to them does include the PS3, and that is covered by a fixed payment by them of $22.5 million, which is to be paid quarterly over three years, as Steven alluded to.

And then finally, sales of gaming products beyond the PS3 -- so this is successor products to the PS3 platform -- that have haptic technology, if it's covered by our IP portfolio, would be covered under the separate business agreement and would require a new substantial one-time license payment plus per-unit royalties.

So there's really three components. One is the litigated products, which were dealt with through the judgment and has been satisfied separately. There were these additional products that include the PS3 covered by this separate license for the $22.5 million. And finally, we have in place a mechanism if there's follow-on products for the PS3, those would be captured with additional payments, including license fees plus per-unit royalties.

Does that last portion include the newer advanced haptics, or do they get that as part of the $22 million license agreement?

So the agreement that we have, really, is a patent license and does not include any know-how or any advanced technology. So if Sony were to be interested in our particular implementation, or know-how, or advanced capabilities, then we obviously have significant products and technologies there, including developer tools and next generation gaming technology. Those would all be subject to a separate agreement, a separate payment structure, it would be a completely different deal.

Now, the next question I have with regard to the incoming revenue or payments to Immersion. We've got the $1.875 million per quarter that's part of that $22 million license agreement, we have the $0.75 million that is being recognized over that ten year period of time, so about $2.5 million. And if you take the remaining $100 million plus in cash that we have, the interest on that should generate -- if it just sat in the bank, somewhere on the order of $1 million to $1.5 million per quarter. Do those funds push us into a position of consistent profitability?

I would expect profitable quarters in 2007. As you know, our revenue typically grows throughout the year. So while I won't be in a position to forecast the specific quarters I think we're confident that we will be having profitable quarters. But it is possible that we may be close, but in a small loss position for one or more of those quarters.

Can I maybe just clarify. I think you had just about everything right, but there's really two ways to look at this. One is cash flow. That's the monies either received or to be received and includes the judgment amount plus the compulsory license and interest, as well as the $22 million that's to be paid over the three years. That cash flow, I think, adds up to about $152 million.

Now, the way we treat that in terms of our P&L, as Steven has said, about 119 I think flows through this quarter, and then we will be booking some amount per quarter this -- $750,000 per quarter over the next ten years. So I want to make sure that we're not double counting cash. So there's the cash flow, and then there's separately how we report the cash flow.

But that $0.75 million, million per quarter is not part of that $119 million, is that correct?

That's correct. So to look at it another way, you had the $1.875, you've got 12 of those. That's the $22.5 million, that's cash flow coming in the future. And there's over $129 million of cash flow previously received. All that adds up to 152. So going forward, you've got $119.9 that's recorded in this Q1 period that we just released.

You've got $100,000 in revenue in that period. You've got $29.9 million going out in future periods, which is, as we just said, $750,000 a quarter. And then you've got $2.3 million in interest over the next three years. I want to make it very clear that that $1.875 is not going to be accounted for as revenue. It's a cash flow number, it's not a revenue number.

Okay. Well, thank you very much.

Thank you.

Your next question comes from Mark [Kebash], private investor.

Hi, Mark.

Hi, how are you doing today?

Doing fine, thank you.

Great. I enjoyed the quarter so far. I've got a question regarding our Internet site. It states the interview that took place with Mr. Jim Goldman when he interviewed Mark Belinsky regarding the Nokia possibility of Motorola coming on this year with the handsets and VibeTonz. Might that come anytime soon?

So let me answer the first part. I think he was misquoted. I believe that we've talked about -- in the past, we've performed some development work for both Nokia and for Motorola. They were the ideal customers for this technology. We regularly talked to them. But in terms of our ability to enter into a license agreement, is not something that we can comment on or predict, or give you any insight into.

I think Mark was talking about the types of customers that would be ideal candidates, the people that we've talked to. And in that discussion, I think, the editor or the writer suggested that there was an eminent deal that was about to happen.

Okay. Thanks for that clarity. Speaking of the VibeTonz model, which I really enjoy, it is similar to Apple in manner -- and correct me if I'm not wrong -- in the fact that Apple's able to sell a hardware device, resell someone else's music source, and collect a fee in the middle. Our process would be, we're embedded into a hardware device, i.e. the handsets, we're able to provide unique haptic field vibrations. And we would charge, or be paid an income from that field from the software games providers and the developers that create new and unique fields that can be pegged to inbound phone calls or other type of mechanisms. Is that right?

The models I think are similar. We provide technology that goes into the handset, we're paid for that technology and those rights. And then separately we have a suite of very powerful developer tools that allow the developer to put the haptic capabilities into games or into ring tones or any other content. Could be messaging, could be all kinds of other types of application. And we do charge them a royalty for the incorporation of the haptics into the content. So yes, the model is one where we're paid on a little bit from the hardware and soft, and a little bit from the use of the tools and the content.

On the individual download basis, or pre-install basis.

That's what our current model suggests, yes.

Throughout the Internet, you can find Samsung with a very unique P700, I think it is, phone which has a sliding screen that mentioned a touch screen that we might be involved with. Is that accurate?

You know, there's so many different models out there that I'm kind of looking through the list here. There's quite a few new models that are being launched. They have announced that the 3G show in Barcelona recently, they did announce quite a few new models. And those models all take advantage of the VibeTonz enabled tactile touch screen.

So the design trend appears to be eliminating many mechanical buttons and replacing those with a touch screen. And as the press recognizes, and obviously anyone who uses these touch screens, adding the tactile capability so that you know that you're pushing a button or you're inputting data is a real valuable tool. That specific model, I can't honestly tell you. I know that that's one we're incorporated in. But there's so many having been launched, announced, and then in queue to be launched, it could possibly include the VibeTonz technology.

All right. Last question for now. The fact that we have been infusing such an enormous amount of cash comparatively, through our prior balance sheet, will that not offer us some flexibility in how the medical devices are sold or leased? Or can we not be our own bank and provide long-term lease arrangements and accelerate the unit sales by that means?

That's one alternative that I'm considering, yes. So making sure that the resellers are funded and having adequate inventory levels, leasing programs. There are quite a few different choices that are now available to us, so that would be one item that, yes, we're considering as part of the strategic review. And I hope to be able to communicate most, if not all of our plans at the next conference call.

I misstated, I said last question. One more, and I apologize for hogging it. You said that your revenues are going to be pretty significant growth this calendar year, I think, to paraphrase you. Can you define which division within the company you believe would have the biggest percentage growth?

Percentage is difficult because some of our businesses are more mature than others. I think if you're looking at revenue growth, we believe that the medical business with the new product platform, we believe there's significant orders in house already, if you will. So we're seeing a strong remainder of the year from the medical side.

On the cell phone side, it's a very small revenue base. We think we can dramatically increase the number of cell phones. We also hope to have significant revenue growth coming from the P&D market. So these are navigation systems that would also benefit from the VibeTonz technology and enabling touch screens.

Later in the year, as 3M launches their casino gaming products, we'd expect to begin selling our lateral actuation kits. So we'll generate revenue from there. We see a rebound on the 3D side as well, and there's still a lot more in terms of automotive development work that we can perform. So I believe every business will grow, and I believe, in terms of percentage is probably less meaningful, but I think in terms of dollar amount, I'm seeing growth from all businesses.

Thank you so much. Great job, guys.

Thanks, Mark.

We have no further questions at this time.

Okay. Thanks, Stephanie. Thank you very much for your participation in today's call. We appreciate the continued interest in, and support of Immersion. Thank you and good afternoon.

Mr. Viegas? I'm sorry. You have a follow-up questions by Mr. Mark Kabesh:

I figure I'll pull you back on that soap box there, seeing the fact no one else is asking. A question pertaining to the screen side in the cell phones in the future. The fact that our VibeTonz provide unique haptics feedback on a single location with a single finger on that screen. Is there any correlation with regards to the amount of the benefit that we could offer to the end user by one touch as opposed to -- it is a one touch vibration field, is it not? You touch with two fingers, it nullifies, correct?

No, not necessarily. The vibration patterns that we use there can be varied. You can have a wide array of strengths and effects and fields. So the vibration capabilities are quite immense. But we provide a tactile confirmation on a finger press. It could be one finger, it could be two or more fingers. We're not limited. It's simply what's the input recognition within the device. If the input device recognizes a single finger press, we can add a haptic confirmation to that. If it's a multiple finger press, we can also add multiple haptic confirming effects.

So it could complement the multi-touch interface that Apple's considering using on their IPhone.

It could, yes.

Furthering that, on a touch screen, if I were to hit the number one, could it provide a unique feeling compared to number 2, 3, 4, all the way to 0?

Yes, it could. In fact, one of the demos that we do is we call it a sampler, and every button feels different. And you can vary the duration, the strength. There's a lot of variability between the effects that you can create. At some point, people run out of the ability to differentiate between these effects in these fields, because they're inputting data quickly. So there's advantages of giving somebody a pleasing effect that they're comfortable with, or differentiating it between different functions or applications. So we take into consideration those as part of the design and implementation.

And in the future, I'd love to see the tremendous convergence with regards to these hand held portable telephone communication devices. With that, do you feel that the game environment is going to migrate over to the United States and provide a greater -- I use the term, "the razor blade handle" for us in our business model. I'm sorry, razor blade itself.

Mark, I'm a little confused. When you talk about the gaming market?

A lot of these phones are offering multi functions. Some of them in Korea provide great screen space and interface tools to become a good gaming platform to compete against devices like the PS2.

Absolutely. Yes, you're correct.

With those type of devices, when they migrate here to the United States of America, if they do, do you foresee the partners... At our current Internet site, our partners do not list companies that have -- like Electronic Arts. In our model for the hand-held devices versus the console model, would not Electronic Arts be a direct licensee of us?

They would be somebody that could add the haptic technology to their games, and those games can be played on these mobile phone devices. So I think, yes. The industry's expecting these mobile phones to become a more multipurpose consumer appliance device, and you could provide GPS, MP3 music, gaming, and haptics. And in particular Immersion's VibeTonz technology enhances all of those applications. Ring tones, games. Messaging. MP3 music. So that's exactly where the industry's headed, and that's why we're excited about the market potential.

But the model slightly differs than the console TV game. Correct? We don't receive any income from Electronic Arts.

That's right. So yes, on the console, typically we're paid by the third party peripheral supplier. However, the payments from Microsoft and Sony do cover the incorporation of the content or games on those platforms.

All right. Truly, the last question. The advanced haptics. Can a third party license that technology now without working with the hardware console itself? Let me start again. Can Electronic Arts and Logitech work together to provide the third generation haptics?

Yes, that's possible.

Great. Thanks again, guys.

Thanks, Mark.

Thank you.

Stephanie? Any other questions?

Yes, sir. You have a question from Alec Raymond, [Impact] Research.

Hi, Alec.

How are you?

Fine, thanks.

Congratulations. A lot of exciting things going on. Looking at sort of the basic hand-held touch screen type of device, how do you [count] the percent per phone that you might get -- how do you see the actual costs, additional costs someone to implement that in their phone?

Well, the typical phone has an on-board actuator, which already provides some very basic vibrations. So the actuator exists and is already part of the [balm]. In addition, we drive that actuator slightly differently, as a result we need some control circuitry that does increase the balm cost in addition to our royalty. When you start looking at launching these products in volume, and Samsung is benefiting themselves, they're getting, let's say, more precise and higher quality actuators. They're able to integrate some of this capability into their chip sets that they're using. So more and more of the balm costs is being reduced by the infrastructure providing the [naveling] technology. So we believe there's a point at high volume where the cost to implement the VibeTonz technology is virtually equal to our royalty. So the cost would be zero.

So I guess the sort of follow on from that, it seems to be [inaudible] touch screens themselves become more ubiquitous. Is there any reason why your penetration rate in these devices shouldn't become just incredibly high, because the cost of adding it is so little.

Well, we'd like to think so, yes. So that's where we're headed, and that's why we're excited. There's a high volume market, a clear value proposition, and a lot of interest in using the technology. Not just in the touch screens, but also in the gaming and ring tone and other applications.

Each OEM, each company has their own set of priorities and issues. Sometimes we're high on the list, and sometimes we're not as high on the list. So it still requires a great deal of sales effort on our part, but I think we're feeling confident that we're in the right path of these design trends.

That's great. One follow up question. Medical, it sounded like on the last call you were obviously very upbeat about medical. But you sort of said hey, look, it grew extremely fast the year before, and now you've sort of added this new platform. Are you sort of thinking now medical actually can grow as fast as last year, or is that pushing it a little bit too much? Does this new platform change you view of how fast medical can grow this year?

I don't think we're in a position just yet to make that kind of prediction. Last year, I think, as you remember, the medical group, 47% for the full year. If you look, we had an outstanding fourth quarter and a lot of revenue that we were able to book in the fourth quarter. You'll notice in Q1 our development projects were down on a comparison basis. So if you're comparing development work, Q1 of this year was lower, I think, by about $300k, by a lot, compared to Q1 of last year. But the product sales were up 17%. So you're still seeing good, solid growth in the business.

We were transitioning away from an older laparoscopy product and so we do have some visibility in Q2, we know it's going to be strong, and we see a strong conclusion to the year. So I think you're going to see good growth. Whether it's as good as the prior year's growth, it's just too early to predict yet.

All right. Thanks.

Thank you, Alec.

Your next question comes from Chris Little, private investor.

Hi, Victor, Steven. I have a couple questions for you guys. I think the last quarter question was brought up in terms of how can some of this newly acquired money be spent. And I think one of the things that was mentioned was acquisitions. My question is, if you guys were to do any type of acquiring of companies, what type of companies would you target? Would they be sort of competitors that have complementary IP? Can you give us some color to those type of companies that you might be interested in acquiring?

I think what I said, and I really do believe, I don't believe acquisitions is a big part of our current strategy plan. In terms of competition, there are relatively few companies. There's probably no company doing the types of things we're doing in the markets we're in.

There are isolated cases in the 3D area or in other areas where there are small pockets of companies that might be doing something close to what we're doing. But in general, I don't think this is a case of trying to consolidate the industry, because we have such a substantial presence in terms of IP and in terms of sales coverage. So acquisitions, while I think it's something that we are considering, I would think it would be more along the lines of complementary technology, what kinds of technology would be better utilized with the advantages of our haptic technology. So that would be one area.

There could be -- I'm not yet aware of IP out there that might be advantageous to acquire. There could be distribution channels that might make sense in some markets. So these are just some of the things we're thinking about, and I think the appropriate approach here is to weigh these options against other alternatives and other ideas so that we don't go off and start executing against a partial strategy.

But I'd like to just say I don't believe the acquisition strategy is a large part of our future. I think the organic growth potential within our own company is tremendous. So for me, I think it's just a matter of execution. Making sure we take advantage of the opportunities that already exist.

Fair enough, thank you. My next question is in relation to the handset manufacturers. I'm really impressed with the products that Samsung has been deploying that actually have VibeTonz technology. You have 700 and the W-559. I was kind of disappointed with respect to LG. Now, I know Immersion has a licensing agreement with LG, and I know that LG is on a course of deploying touch screen phones. But yet, I don't see the same type of adoption with VibeTonz as I've seen with Samsung. Is it just a matter of LG is still warming up to the technology, or can you give us any color on that?

That's a tough one. LG, I think has taken longer than we had hoped, but we're not in the position to tell them what to do and when to do it, so we consider them an extremely good partner, and we know the products that they're working on and the implementations are high quality. So we're excited about the market potential.

In terms of launching the technology, it takes time to introduce to the product groups and integrate yourself in their design cycle and design times. Sometimes you miss the window, sometimes you need to be in earlier. It's something that's just taken us a little longer than we would have expected. But I can't tell you that I could put my finger on that. I do think you'll be pleased with their products as they launch, but I can't tell you why Samsung seems to be a more aggressive supplier of the VibeTonz technology.

That's fine. Thank you. And my final question is with respect to Nintendo. I believe that the official stance is that well, we'll conclude the litigation matters with Sony and then once we're at that stage, we'll start looking at Nintendo. Can you comment to any activity on this front?

Well, I think what we said was we wanted to wait until they had launched a product that -- at one point all we had to go on was the press reports of haptics in their Wii product. They have launched the product, it does have haptics, they are not a licensee.

I'd say that from my perspective, it's one of my strategic goals is to work with Nintendo and help them use our technology in their products. I think our technology could improve their products, and we'd love to work with them. So that's about all I really have to say about Nintendo. A high quality company, and we'd love to work with them.

So have we evaluated whether or not they infringe on Immersion's patents?

I really can't get into anything related to litigation or strategy. But as I said, it's one of my strategic objectives to work with Nintendo.

Excellent. Thank you very much Steven, and Vic.

Thanks, Chris.

Your next question comes from the line of Andy Schroepfer, Tier 1 Research.

Hi, Andy.

Hi. Thanks for doing great work as always. I have one question for you on the Microsoft determination that you don't need to give them back the [$15] million. Is that something that needs to be reviewed, and/or have you indicated that to Microsoft before this disclosure? Just trying to make sure that there's no repercussions or retaliations toward your determination.

Yes. We've done sufficient work internally to determine that we do not owe Microsoft any monies as a result of the Sony resolution. We've communicated that to Microsoft. I believe it's safe to say they have a different opinion. And so without having access to the documents, it's probably difficult for them to really evaluate their position. But I think it's important to note that yes, they're aware, and yes, they do disagree. And we'll just see how things go.

Okay. Thanks a lot.

Thank you.

At this time, you have no further questions.

Okay. Thank you, Stephanie, and thank you for your attention and participation today. Thank you, good bye.

This concludes today's Immersion first quarter financial results conference call. You may now disconnect.