Immersion Corp (IMMR) 2008 Q1 法說會逐字稿

Welcome to the Immersion conference call discussing first quarter 2008 results. The company's release made earlier today, is available from its website at www.Immersion.com. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded Thursday, May 01, 2008. A replay of the call will be accessible until midnight May 8th by dialing 800-642-1687 and entering conference ID number 29315507. International callers should dial 706-645-9291. An archive of this call will also be available on the Immersion website at www.Immersion.com.

I would now like to turn the conference over to Vic Viegas, Chairman of Immersion. Please go ahead, sir.

Thank you, Robin. Good afternoon and thank you for joining us today for this discussion of Immersion's results for the first quarter of 2008. Stephen Ambler, CFO and Vice President of Finance, is with me today. In addition, I am especially pleased to introduce you to Immersion's new President, CEO and newest member of our Board of Directors, Clent Richardson.

Before proceeding with the introduction, please note that the first quarter's earnings release was distributed following the close of market today. A copy 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, in Immersion's SEC filings, and in our Annual Report to shareholders, as well as any factors mentioned during our discussions today.

Over the past five years, the Immersion team and I have invested in markets and technologies that have become significant growth opportunities. We've built and defended a strong intellectual property portfolio, steered the company to its first profitable year as a public company and built a solid financial foundation for the future. Now, as markets increasingly recognize the value of our haptics technology, we are well positioned for substantial growth.

I decided last October, that it was the right time to bring in a new CEO to drive our worldwide growth initiatives, someone with strength in one or more of our target markets and a strong background in sales and marketing. After an extensive search, we hired Clent Richardson, a proven, experienced global sales and marketing leader, who has a successful track record of taking technology companies to greater levels of growth and profitability.

Clent's impressive record includes experience on top-tier global executive teams at Apple, Nortel and T-Mobile. From his early years with GTE, which is now part of Verizon, and with T-Mobile in the UK, and Nortel, he brings very important industry experience in wireless communications. His experience at companies such as Apple and TiVo is also a great fit for Immersion as we build adoption of haptics within the consumer electronics and gaming industries.

Clent has extensive experience creating, developing and growing global developer relations programs to increase both software and hardware adoption. We know that interest in haptics is growing, and I believe Clent's developer relations experience and evangelism skills will further accelerate customer adoption of our products and technologies. Clent has also demonstrated success in aligning and leading large worldwide teams to higher performance, which will be essential as we execute our growth initiatives around the world. It is truly my pleasure to introduce Clent Richardson. Clent?

Thank you, Vic. It's a pleasure and an honor to join you, Stephen and the entire global team at Immersion. It is indeed a distinct privilege to lead Immersion's efforts to accelerate the global adoption of haptics technology, resulting in platforms for additional content, applications and products and further penetration of our chosen markets and industries.

Clearly, the results you and the team have delivered, position the company to both exploit and continue to rigorously defend our patent portfolio, as well as to prudently invest assets to help drive increased shareholder value and customer value.

As I said in the press release issued Thursday afternoon, April 24th, I believe global adoption of haptics technology is nearing a tipping point, and I will work hard with our global team to accelerate our progress and achieve this end.

Over the next several months I will invest my time and focus to meet our global team members face-to-face in their markets, to meet key customers, important partners and industry leaders across the globe, and I will be listening, learning as well as asking a great number of questions, as I prepare to work with the executive leadership team to outline and then solidify our vision, mission, strategy, strategic initiatives and ultimately how we organize and resource to achieve our plans and objectives.

I've been told that my personal style is high-energy, high-impact, and results oriented. Teams I've managed describe my management style as firm, fair and fun. I approach goals and objectives with two things in mind; measure and reward. We measure, track and manage progress against plans and we reward for meeting and exceeding plans and objectives.

And finally, my business philosophy is that I focus on doing a few things well, on achieving best in world status. To that end, three axioms underlie my philosophy. Focus is about saying no. Less is more. And simplicity is really hard to achieve, though always is a goal. And herein is my goal for Immersion, by applying intense and rigorous focus, I will endeavor to lead our team to create, productize and deploy best in class, easy to use, elegant solutions for our key markets and industries around the world.

I look forward to working with you, Vic, as Chairman, and with the rest of the Board, as we move the business forward. Vic, Stephen, over to you for the Q4 2007 (sic) results and then I will close the call. Vic?

I would now like to provide a brief summary of Immersion's first quarter results and an update on the investments we've made to grow the business. Stephen will follow with a more detailed financial update.

First, a summary of our first quarter financial results. Our revenue grew 27% in the first quarter, over the same quarter in 2007, to $8.2 million. Our net loss for the first quarter was $2.6 million or $0.08 per share. In the first quarter last year, the large litigation conclusion and patent license sum we recorded, $134.9 million, drove net income to $115.8 million or $3.91 of earnings per diluted share. As of March 31, 2008, we had cash, cash equivalents and short-term investments totaling $140 million.

I'll next describe some of the investments we're making to secure growth across our businesses. In the past few conference calls, we've outlined our strategy for investment and growth. To strike a careful balance between the two, we manage to milestones for hiring and other investments. Over the past few months, we've been intensely focused on adding topnotch people with demonstrated experience, to drive the company's business forward.

In the first quarter, we added 10 sales, business development and marketing people across the businesses. I would like to spend some time describing how these new people will be supporting company-wide growth plans. First the medical business. Over the past few years, we've transformed our medical business from a contract development business model to a product based business model. We built simulation platforms for training procedures within four medical specialties; endovascular, endoscopy, laparoscopy and intravenous access.

In the first quarter, we continued to strengthen the product line, by releasing a new software module for our Lap VR simulator and signing an agreement to market and sell GMVs in site arthro VR arthroscopy simulator in most countries around the world. We also added several sales management, sales and sales support people for the international business, with more hiring planned in order to establish a much stronger global presence. This staffing investment is critical because the medical simulation markets in Europe and Asia are each roughly equivalent to the size of the US market. The right people in the right places will help us capture substantial opportunity for increased revenues.

I would also like to note that for over 10 years, Immersion Medical and its predecessor company, HT Medical, have invested heavily in the development of technology and products for medical simulation training. After a thorough and cautious analysis, we concluded that it was necessary to defend our intellectual property in this growing attractive area of medical simulation. Our lawsuit against two other medical simulation companies, filed April 16th, alleges that each of the defendants' medical simulation products infringe claims in our four US patents owned by Immersion medical, and seeks damages and injunctive relief.

Moving on to our mobility business, the momentum of haptics adoption in mobile phones is noticeably increasing. At two major mobile phone industry events, Mobile World Congress in Barcelona and CTIA in Las Vegas, both Samsung and LG previewed several highly acclaimed new models with our VibeTonz technology. For these new phones, haptics is highlighted as a key feature. Here in the US, the Samsung Instinct from Sprint unveiled at CTIA, which uses our haptics technology, has garnered a lot of media attention.

Another sign of momentum is that for the first time, Samsung and LG, have put their significant marketing strength behind haptics. Both companies launched large scale, high-profile TV and print consumer advertising campaigns in Korea during March and April. Samsung centered its campaign around the "haptic phones" promoting 22 different touch effects in the new touch screen W420 model. LG's campaign for its "touch the wonder" Cyon touch screen phone, features a celebrated Korean actress and model. You can see some of the TV commercials and read news stories about the campaign on the customer news section of our website.

In addition, LG announced higher than predicted unit shipments of mobile phones in the first quarter, citing in particular the success of three VibeTonz enabled models, the [Vu-T] in Europe and the Voyager Advantus in the US. Using this market momentum, our recently hired business development people are making good progress. They are dedicated to influencing carriers to specify the VibeTonz platform in hundreds of millions of phones. We are working with our licensees on more than 70 models currently in the pipeline, with the total projected volume of phone shipping this year ramping rapidly. We also continue to add software development and technical service people in support of our licensees; Nokia, Samsung and LG.

Next, an update on our touch interface products group. Early in the first quarter, we brought in Chuck Joseph as Senior Vice President and General Manager of the group. Chuck has a track record of growing technology businesses across multiple global markets, including five years as Executive Vice President and General Manager at Trimble Navigation. His mission here is to accelerate customer adoption of tactile feedback, primarily for touch screens and touch surfaces. The market opportunity for our tactile feedback technology is substantial. Market research company iSuppli Corporation, predicts that global shipment revenue for leading touch screen technologies will increase to $4.4 billion by the year 2012, up from $2.4 billion in 2006.

Chuck is in the process of building global marketing sales and customer support organizations and launching new product platforms in response to the growing interest we're receiving. The experience he's had with developing major OEM account relationships and technology licensing partnerships, will help us capture the opportunities before us. The immediate targets being four high-volume global industries; automotive, consumer electronics, machine control and office automation.

Now an update on our gaming and 3D group. Recently we brought Leslie Mulligan onboard as Vice President and General Manager of our gaming and 3D group. Leslie has held general management and senior business development divisions at WindRiver Corporation, Quantum and Raychem. We also added a business development person dedicated to our gaming business, who is focused on expanding the base of our business beyond just PC and console gaming.

We are in the initial stages of exploring opportunities for long-term growth in other entertainment areas such as toys, social networking and other types of gaming devices. The return of our technology to the PS3 in April, by way of the new Sony DualShock 3 controller, was enthusiastically received by the gaming community. The positive reaction to the news was another indication of the value gamers place on our force feedback technology. Also in April, our third party peripheral licensee, Logitech, launched a new Driving Force GT steering wheel for the PS3, specifically built for the newly released Grand Tourismo 5 Pro Log racing game. The wheel is also compatible with PS2 driving games such as Grand Tourismo 3 and 4.

I'll now turn the call over to Stephen, to give detail on our financial performance for the quarter and our investor relations activities. Stephen?

Thanks, Vic. For the first quarter of 2008, our revenues were $8.2 million compared to $6.4 million for the first quarter of 2007, an increase of 27%. Our net loss for the quarter was $2.6 million or $0.08 per share, compared to net income of $115.8 million or $3.91 of earnings per diluted share in the first quarter of 2007, which is when we accounted for our litigation conclusion on patent license with Sony.

I would like to discuss each section of our income statement in order, starting with revenue. Looking at each of these businesses in turn, revenues from our medical business, which comprised 37% of total company revenues for the quarter, were $3 million compared to $2.7 million in the year-ago quarter. That's an increase of 13%.

Revenues from our console and PC gaming business, which comprised 24% of total company revenues for the quarter, were $2.0 million compared to $1.7 million in the year-ago quarter, an increase of 20%. Our touch interface product revenues fell 12% compared to a year ago and totaled $870,000, compared to $992,000 in the year-ago quarter. Revenue from touch interface products accounted for 11% of the total revenues for the quarter.

Revenues from our 3D products were up 24% to $1.2 million from $991,000 in the year-ago quarter. Revenues from 3D products accounted for 15% of the total revenues for the quarter. Finally, our mobility revenues totaled $1.1 million for the quarter compared to $111,000 a year ago. That's a significant increase. Mobility revenues comprised 13% of the quarter's total revenues.

Analyzing our first quarter revenues by category, first quarter total product sales grew 7% compared to the first quarter of 2007, and represented 47% of revenue for the quarter, compared to 56% in the year-ago period. 64% of product sale revenues came from our medical business, 31% came from our 3D business and 5% came from our touch interface products business.

Royalties from patent and technology licensing grew 57% over the comparable period in 2007, and represented 43% of total revenues for the quarter, up from 34% in the year-ago quarter. Gaming, mobility and touch interface products, all saw growth in licensing revenues. Development, contract and other revenue grew 38% compared to the comparable period a year ago and comprised 10% of total revenue. Medical comprised 65% of this revenue, with the majority of the remainder coming from our mobility business.

For the quarter, our gross margin was 74% compared to 76% in the first quarter of 2007. This decrease was attributable to additional reserves for obsolescence on older products made in the period.

First quarter 2008 operating expenses, pre-litigation conclusions, totaled $11.2 million compared to $8.8 million in the year-ago quarter. This increase was due to investments in staffing, primarily within our sales and marketing teams, increased product development and increased legal and other outside professional service costs. Litigation costs totaled $1 million for the quarter compared to $836,000 in the year-ago period.

Our headcount on March 31, 2008, totaled 164 staff compared to 141 on March 31, 2007.

In mid-2007, Microsoft sued us in the District Court for the Western District of Washington State, alleging that we were in breach of our contract with them, and that they were entitled to a share of the judgment monies and other sums we received from Sony. We believe we do not owe them any sums, and continue to vigorously dispute their claims. The parties are currently conducting discovery and taking depositions. The trial is currently scheduled for October the 14th, 2008.

We incurred non-cash stock based compensation charges of $963,000 in the quarter, of which $943,000 were included in operating expenses. This compares to $634,000 in the year-ago period, of which $614,000 were included in operating expenses.

Interest and other income expense totaled $1.5 million income for the quarter. In the first quarter of 2007, interest and other income expense comprised a net expense of $45,000. During the quarter, we accounted for a tax benefit of $1 million. In the comparable period a year ago, our tax charge was $15.1 million.

As I said earlier, our loss for the quarter was $0.08 per share. The shares outstanding, used in the calculation were 30.5 million shares.

Moving to the balance sheet, on March 31, 2008, we had cash, cash equivalents and short-term investments totaling $140 million, up from $138.1 million on December 31, 2007. The company does not hold any auction rate or mortgage-backed securities. The yield on investments held has dropped over the last quarter and is currently at around 3%.

Our accounts receivable on the 31st of March, 2008, totaled $3.3 million compared to $5.5 million on December 31, 2007. Our days sales outstanding or DSO, on March 31, 2008, was 37 days. As of March 31, 2008, we had 30.5 million shares of common stock outstanding.

Our stock buyback program has been in effect since March the 4th, 2008. Between that date and today, we did not buy back any stock, as the conditions we set in the period under the terms of our 10B5 plan were not met.

Our Investor Relations outreach activities during the next three months include attending and presenting at the Craig-Hallum Institution of Investor Conference in Minneapolis on May 20th, and at the Cowen Technology Conference in New York on May 29th. Both of these events will be opportunities to meet Clent. In addition, on June the 4th, we will be holding our annual shareholders meeting in Santa Clara, California, and as usual, it will be an opportunity to meet our Management team and use some of our technologies firsthand. Clent?

Thank you, Stephen and thank you, Vic, for your warm welcome and support. I'm truly excited to be joining Immersion at this time, with the aim of taking our products and technology to the next level of adoption and proliferation, and in so doing, deliver more value to our customers and shareholders.

New consumer products that create a great intuitive user experienced can attain a large competitive edge. Immersion holds the keys to unlocking the powerful sense of touch in the user experience for electronic products of all kinds. Our job is to make haptics an imperative in the user interface and to help our customers around the world implement it quickly into their new products. And in doing so, grow revenue, increase shareholder value and make sure Immersion is a great place for great people to work. It's both a challenge and a great opportunity for me and the Immersion team to combine our products, intellectual property and strong financial base as a springboard for accelerated growth.

In the next several months, I will be acutely listening, learning and watching during my meetings and conversations with customers, employees and industry leaders, to gain their insights on our growth initiatives and how we can best capture our significant upside potential in our growing markets.

I look forward to sharing the results of those findings in our next earnings conference call. Robin, please open the call for questions.

(OPERATOR INSTRUCTIONS) Jeff Schreiner with Capstone Investments.

The first question I had related to the discussion with regards to the expansion of the medical business into the Europe and Asia regions. Could you tell us a little bit about the regulations in those regions that relate to medical simulation training, as opposed to how the regulations are set here in the US?

You bet. Jeff, thank you very, very much. I'm going to ask Vic to take that, since he was the operating executive for the most recent quarter. Vic?

Sure. Jeff, in Europe, as you may know, there's been considerable legislation and activities to limit the use of animals and cadavers in various different training programs. And so, that marketplace appears to us to be very receptive to simulator based training. We have been operating through distribution channels there, but are rapidly increasing the feet on the street, in terms of sales and sales support, and so we expect that to be a very vital and growing opportunity for us. It's a large market and one we think that we can capture great market share.

Okay. So would you say medical -- just to follow-up, would you say medical is really where you're seeing the majority of the headcount increases at this time, where the company's trying to focus its spending?

No. I'd say it's actually across the board. We've added, as I mentioned earlier, a new person to run our gaming business, and they're actively pursuing numerous opportunities within the PC and the console gaming space, as well as these new areas, such as toys and interactive social networking kind of applications.

In addition, we've been strengthening the executive team by bringing on Leslie Mulligan and Chuck Joseph, as General Managers running their respective groups, and below them a number of new product management talent is being added that are knowledgeable in the industry and are able to quickly focus the development efforts in the sales team at those opportunities that are very right for us. So, those are just a couple of positions, but if you look, it's really across the board, as well as a concerted effort in growing the international sales force for our medical business.

Mark Argento of Craig-Hallum Capital.

Clent, it's nice to have you onboard, and look forward to hopefully making a mark on this company pretty quickly. A couple of questions though in regards to -- I know a lot of new initiatives going on, a lot of build-out of the sales and marketing staff. Can you talk a little bit about how you look at each market opportunity? And it looks like we're going to be in a period of reinvestment here for the next couple of quarters or investment, I should say, in the next couple of quarters, and just talk about how you look at your return on your investment, in terms of your sales and marketing staff and kind of give us a little bit of an idea of how much spend we're going to see occur here before we could expect to see a return on that?

Sure, you bet, Mark. Thanks for your well wishes and I look forward to working with you and the rest of the team. Simply put, this is a conclusion of day four, officially inside, and so I've had the opportunity to talk to virtually every employee in the company around the world. My first day in San Jose, that evening our Korea team and Asia Pacific team, the next morning Europe and people across the continent there, and certainly here in Gaithersburg with our medical team. And then tomorrow I'm off to Montreal to spend time with that operation.

You're asking very specific questions that I'm not going to be able to answer today, but I can give you some philosophical thoughts, relative to business development, sales and marketing. We have very specific milestones that we use to assess and address how we want to grow the business, where we think our most important opportunities are, both short-term and long-term, strategically. And we will continue to deploy when and where we feel it's appropriate that we'll get the best lift, the most profitable lift and something also that will sustain a long-term and growing business. And over the next three months, I will be able to answer more precisely some of your questions.

But we do have a very specific plan, an operating plan and it is quite prudent. This company has a history of being conservative in the way we make some of our investments, and I think we're right on the right track making these business development sales and marketing investments now to stimulate our growth across all of our lines of business. And with that, Vic, I don't know if there's more color that you'd like to add?

Yes, absolutely. So Mark, I think as you remember, last year we invested heavily, the Board, outside consultants and a strong grouping of our executive staff. A lot of market research, a lot of analysis went into developing a strategic plan. That plan was based around very real opportunities, very near-term design wins and partnerships that we should be working towards. That strategic plan then turned into a budget. The budget is something that has milestones and metrics that we can measure, as Clent had stated in his portion of the script. We're working hard to measure performance and then reward that performance. So the result we have for each business unit, in addition to more than a dozen different milestones that are being tracked by each grouping. And as a result of those metrics, we're able to then invest.

So, to give you examples, we have a number of new licensees. We have a number of design opportunities that we're pursuing and as those increase, then we're bringing in the people to support that business. There's always the challenge of investing in people and resources before the revenue materializes, but given the growth opportunities that we believe exist, we're going to front-end load some of that effort and I think so far during 2008, we're hitting those milestones and we're quite excited and are looking forward to substantial growth 2008 over 2007, and we're seeing very real results from the people we've been bringing onboard.

Robert Scannell with Tradewinds.

This question is for Stephen. Stephen, you indicated that no stock had been repurchased because conditions of the 10B5 plan were not met, so could you comment on which specific conditions haven't been met, and if possible, when we expect those will be met?

The quick answer is, no, I can't. It's not something we're going to go into. We do continue to monitor and manage those conditions though as we move forward. But I can't go into the details.

(OPERATOR INSTRUCTIONS) Robert [Katz] with [Invest] International.

Hi, Vic and Stephen, welcome Clent. I have a question about the touch screens, key outs and gaming opportunity, as well as the automotive market and how you see those unfolding?

You bet. Vic, you want to answer that?

Sure. The casino gaming relationship we have with 3M is going quite well. We're continuing to qualify the products as they're produced, and moving towards acceptance by 3M and integration into their customers' products. We expect at the end of the year, G2E to be able to demonstrate a number of new products and so there's a lot of excitement still involved in the casino gaming.

And then that, obviously, can also percolate into other applications including office equipment, consumer devices, PNDs, and that's where we're starting to see some real exciting interest in the automotive sector as well as these PND products. So, the value proposition is clear and the delivery mechanism is what's being developed and finalized and we expect to see a number of these in the market by the end of this year.

That's revenues starting Q1 '09 or Q4 '08?

No, I believe 2008, is when we're expecting a number of these products to hit the market.

Okay. And in the automotive market you also have the dial. How is that going? I'm starting to see that in more cars, or different models.

Right. There's a lineup of cars that probably have not yet been announced, but we're aware of will be hitting the market sometime in 2008 and in 2009. So the rotary knob technology that we've brought to the market is definitely having success. It's being combined with touch screens, as well as touch surfaces, and being brought to the full compliment of controls and dials on the dashboard. So, not much we can announce, talk about at this stage, but we are having continued success at the supplier level and then with the OEMs directly.

And how should we think about that in terms of dollars per knob or per car?

Well, it depends on the volumes, it depends on the commitments. You know, we're moving towards the day where there will be multiple devices in a vehicle, so as you're well aware, control panel, the touchpad surface and rotary knob might be sold or priced as a module. And so depending on how many devices, how many cars, that royalty rate can change. I think we've talked in the past -- we were talking about a couple of dollars and higher, depending on volume.

And I don't think you gave guidance or at least can you reiterate what guidance would be for the upcoming quarter or year?

It's been our policy in the past not to provide guidance and we're not going to be changing that policy, at least in the foreseeable future.

Okay. Well thank you very much and good luck.

Thank you very much. I look forward to meeting you.

Michael [Camps] with Imperial Capital.

Clent, first I wanted to congratulate you on your appointment. I know you're just getting your feet wet the last few days. And Vic, I certainly wanted to thank you for your tenure there. It's been quite a long road over the past few years and Immersion has changed quite a bit. You know, Clent, I've been looking at your background and I see you've had quite a deep level of expertise in mobile and consumer electronics. And recently, the CTIA show, there were a number of design win announcements. Can you talk a little about the opportunities that you see in mobile for Immersion, just relative to kind of your experience and where you expect to start focusing some of your efforts?

Sure. And I'm going to be talking necessarily and understandably, Michael, at a bit of a high level here. But without doubt, the way we're able to bring consumer electronics to life, both in VibeTonz, as well as in touch interface and on screens, is obvious. And we believe, even the coolest, hippest, most powerful brand phones in the world, without haptics technology can be enhanced and improved with haptics. And so you can bet well and you could well appreciate that we're going to be working our rolodex and working our relationships and existing relationships. We've been in contact with for years here at Immersion, before my arrival, to continue to deploy and expand our penetration, both in the touch space, as well as in VibeTonz. So that's about all I think I'm going to say at this point, but there clearly is a remarkable opportunity.

And another adjacent market that we're going to spend a little time investigating, is in the area of education and special needs, where people may not have full sight, they may not have an ability to hear, and so vibrating handsets, as an example, give them the power to use mobile devices in a way that they would not normally be able to use. And so, that of course is not only helping the world, but we think fills a very, very important need. And in these markets, in the past, organizations have been able to command premiums for helping deliver specified solutions there. So, we're certainly going to explore that as well and we think that that would play into the mobility space.

Great, terrific. And then one thing I also wanted to ask, is if you guys can provide an update on Nokia, the progress that you've seen there, and if you're expecting to have them launch some phones later in the year or at the turn of the year? Just any kind of color would be very helpful. Thanks.

You bet. Vic, would you like to comment?

Sure. Michael, we continue to invest in resources in Finland to support what is a very strong and growing relationship with Nokia. We're working on multiple implementations and most importantly, I think as we said before, our primary goal is to have broad adoption of this technology across their Series 60 line. We believe that's something that will happen here shortly, and we think that they are going to be launching phones with the capability, we're hoping by later this year, 2008. But it's something out of our control. All we can do is work hard at the relationship and make sure that the experience is as good as possible and we see very bright future with Nokia as a strong partner.

Okay, terrific. And then switching gears on the medical side, can you talk a little about the progress on the international channels? I think in the past you've discussed bringing that to a higher level and I'm just curious if you can give some numbers in terms of the mix at this point or your expectations for the growth in the channel?

I'll take a first pass and then ask Vic if he'd like to comment. We are starting from the top down in the way we're staffing our international and we've added VP level and Senior VP -- not Senior VP, but very senior type of VP people to help us run our international sales efforts. And we're building out those teams in important countries where we have and need relationships, and where we've seen both low-hanging fruit, but also tremendous long-term sustainable growth for the business. And we will continue on that march for the foreseeable future until we're well staffed according to plan. Vic, is there more that you'd like to add in terms of mix or other?

I think that's pretty good. I think, Michael, these types of sales require senior level salespeople and people who have contacts, connections with medical device companies as well as hospitals and other teaching institutions. So, the kind of people that we're bringing on have years of experience in their relevant territories and we're already in the process of bidding on contracts and receiving purchase orders. So, we're seeing -- you know, someone asked earlier about measurement and reward. Here's an area where immediately hiring in the neighborhood of 5 to 10 people, we're going to see dramatic increase in the revenues that they bring and it's not long-term, it's very near-term, and we hold great expectation for increased revenues here in the next three quarters.

Great, terrific. Well thank you very much, and Clent, look forward to meeting you hopefully in the not too distant future.

I look forward to it, too, Michael. Thanks for following Immersion.

Jeff Schreiner with Capstone Investments.

Gentlemen, just a couple of follow-ups. What I wanted to ask, Stephen, last year you saw kind of a sequential decline in the gross margin from Q1 to Q2. Is that something to do with any seasonality in the business? Should we expect a similar trend as we move into the second quarter here?

It depends. The mixes of the businesses are very different. You've got a number of businesses, for example, mobility business, our gaming business, where we have nearly 100% gross margin. And then you've got other businesses with our product sale businesses that have lower margins. And the mixes between the businesses differs quarter on quarter, so you will get a variation in the gross margin quarter-on-quarter as a result of that.

This quarter our gross margin was 74%, but we did effectively provide for obsolescence on all products that equaled about 1.5 to 2% of gross margin. So you take that out the equation, it would have been 76%. We've been in this range of 73 to 78% pretty well consistently over the last two to three years. And as time goes on, as we do grow some of these businesses, we actually expect that percentage to rise. But, specifically for Q2, it will depend on the mix of sales by the various groups. Some of these businesses are a little bit lumpy. They're not always going to be sequential quarter-on-quarter growth.

Okay. Another question just in terms of kind of getting us headed in the right direction here. How do you look at the tax rate now for calendar year '08 and calendar year '09? Do you still have NOLs that you're able to use throughout both years?

We have about $3 million worth of NOLs that we can use from the past. Our tax rate is currently in the range -- well, for this quarter it was 28%, and it's going to be around 28 to 35%. As you saw this quarter, we actually made a loss in the quarter and we were able to take the loss that we incurred and actually utilize that taxable loss against our taxable profit last year. So, we get a 28% negative return on that in effect. When we make a profit it will go the other way, it'd be 28% the other way.

Okay, fair enough. That's all for now, gentlemen. Thank you very much.

Mark Kabbash with EquityGroups.com.

Congratulations. Hi, Stephen, hey Vic. I'm thrilled to have you onboard there, Clent, I think you're going to do wonders with the company. Question regarding the S60 operating system by the Nokia. I found that LG and Samsung are utilizing that operating system. First, can I call it an operating system, is that fair?

I believe it's -- I'm not technically confident of this answer, but I can say that I know that the series 60 is a standard that's embraced by a number of different OEMs and vendors.

Can we utilize the VibeTonz software solution to be uploaded onto that platform without any hardware actuators installed then take control of the existing vibration capabilities?

No, the current implementation requires some hardware elements, a standard off the shelf actuator, but there is some control technology that needs to be in the hardware in order to drive the motor in a way that provides the robustness of the VibeTonz technology. So, if a phone does not have that when it's initially launched, then it's not able to be software downloadable.

Got it. Thank you. A couple of quarters ago, we put a press release out regarding the portable GPS unit that's being sold and marketed around Korea. Is there any plans on having that come to our shores?

There are a number of different vendors that we're working with. As you may know, a fair number of the providers of navigation control systems are in Taiwan and we're working closely and have some design work going on. So we hope to have some PNDs in all the major markets, but it will just depend on the relationships and the timing of the product launches.

Sounds good. Last question, pertaining to the cars and the haptics controllers that we're having to come out later this year, is it possibly that is new OEM manufacturers on top of the ones that we already have or is it the ones that have been disclosed at our website?

I believe the model that I'm aware of comes out from a new automotive manufacturer.

Thanks so much and again, congratulations to the entire team and the family of Immersion. I think we're going to have a wonderful next couple of quarters.

Thanks for your support, Mark.

Robert Katz with Invest International.

I have a follow-up on my questioning on the gaming side of the market. Now that Sony's brought haptics back to its platform, do you think the aftermarket for haptic will grow for the company year-over-year, and will that drive more seasonality in recognition of royalties from that line of the business, that we used to see back I guess a few years back?

Robert, this is Clent. I've got reasonably deep experience in the game space, and that is an area we are going to take a good hard look at. I will leave it to Vic, if he wants to comment on the existing business today. But the nuance of what you've asked is if we're able to crack that, particularly as other platforms continue to deploy, that could be a very, very interesting licensing model for us. And so, I don't think I'm prepared to put a forecast out here, but we are going to take a good hard look at that and see if there's an opportunity, short-term or even long-term, to address that. Vic?

Well, Robert, as you know, the platform vendors, Sony and Microsoft have slightly modified their licensing strategy with regards to third parties. That's what's had a negative influence on our revenue. So, I believe we're seeing some new products that will be launched, and so I would expect to see growth over the 2007 year from the gaming business, but it's too early to tell and it's also not something we're in control of. It really depends on the relationships between the platform vendor and the third parties. But we're ready to support and help in any way we can.

Are there platforms that are more open? I know Microsoft is a big closed environment. Is Sony a little more open than the Microsoft environment with third parties or aftermarket vendors?

I think you're going to see the trend going to more closed over time, so that they can protect the overall user experience and I'm not seeing anything that would lead me to contradict that statement. Vic?

Nope, that's the answer I'd give.

And it's going to continue to probably go more and more in that direction, and so our job is to try to have a good swift passport and help both ends of those relationships.

And should we look for any more settlements from I guess some of the vendors that haven't settled with you yet?

We're not able to comment on ongoing litigation, but I think we've disclosed everything that we've got out currently in defense of our patents and I don't think we're able to talk about anything that's not announced at this point.

Thank you and good luck.

(OPERATOR INSTRUCTIONS) Alec Berman with AMPAC Research.

Welcome aboard, Clent. Question about kind of the mobile handset opportunity. I think you talked in the past before about any of the opportunities for sort of ancillary revenues other than just per handset, in terms of opportunities, you know, gaming, things like that, where you could drive extra revenues. Any more thinking on that and maybe Clent's perspective on that as far as how you really actualize that opportunity so you can really make this whole handset thing a much bigger opportunity than it might appear to be?

Sure. Well, certainly the opportunity is huge. Let's make no mistake about it. And I don't need to talk about the infrastructure of hanging telephone lines versus turning cell phones on. And that is a trend that will continue to grow exponentially and we believe that that is a real vibrant market for us.

That said, you know, there's three or four different business models, royalty models, licensing models and revenue models that are possible there. And there's the obvious one of per handset, there's the obvious one of kind of doing content side, there's an obvious one of trying to do a hybrid of both, there's a platform play, you know, you've got carriers, you've got handsets and you've got users. And so, we're going to work to do what's absolutely best for the shareholders and the best for our business.

And unless Vic has more to add to that, I think we're in study mode right now, but we also have a lot of dialog going on and I'm smiling. You can't see that here, but I'm smiling, because this feels like it's a sweet spot of an opportunity and one of the areas we're going to put intense and rigorous focus on.

The only thing I would add to that would just be that our goal here is to get a large installed base. We need to get a lot of phones in the market, we want to move quickly to do that and we do not want to put up any impediments or barriers. So, our first goal is to get this broadly adopted as a standard. And I really do recommend that you take a look at some of the ads that are going on in Korea, because it's a dogfight for market share over there and the differentiating features how they recognize the value of haptics. So, I think they've recognized without haptics the phone does not have the intuitive user interface that people want. So, I think you'll see a step-up in the marketing efforts from our OEM partners, but our first goal here is to get a large installed base.

Just a follow-on piece to that, Eric. I would just say without question, Korea is the most technologically advanced telecom market on the planet. It has been for years, it continues to be. And kind of what happens there begins to happen around the world. And so, to Vic's point, I think that's a great barometer of things to come.

Actually, I was just there a few weeks ago and did see some of what you're talking about. So, good luck.

We are nearing our hour. If there's one more question we will take it, otherwise we will close.

At this time there are no further questions. I would now like to turn the call back over to Mr. Viegas.

Very good. Vic, thank you very much. Stephen, thank you very much. And thank all of you for your participation on today's call. We appreciate your continued interest in and support of Immersion. Thank you and good afternoon. We'll talk to you in three months.

This does conclude today's conference call. You may now disconnect.