Immersion Corp (IMMR) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. The Immersion Corporation third quarter conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Alex Wellins of the Blueshirt Group. Please go ahead.

Thank you for joining us on today's call. 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 filings, and in our annual report to shareholders, as well as any factors mentioned during our discussions today. With that said, I'll turn the call over to Clent Richardson. Clent?

Thanks, Alex. And I would like to thank everyone for joining us on today's call. Immersion posted record revenue of $10.1 million in the third quarter of 2008. This is not only the highest revenue total in our company's history, but also the first time that Immersion's quarterly revenue has exceeded the $10 million mark. Today's call marks six months or two full quarters as Immersion's CEO. While I believe that our third quarter results demonstrate solid execution by our team and reasonably good performance, they are taking place amidst a broader landscape of financial turmoil that is dramatically impacting the public markets.

During today's call, we will discuss recent progress and detailed steps we are taking to accelerate the growth rate and predictability of our business. I want to be both detailed and clear with our investors that we are making important transitions, transitions that will have an impact-- meaningful impact on Immersion's business, both short and long-term.

Immersion is the world leader in haptics technology. Haptics is a word that many people are not familiar with, but one that is very easy to understand. Haptics technology improves the user experience by applying force or vibration. Haptics technology can be applied to almost any application, from cell phones to ATM machines and gaming devices to medical simulators. I was attracted to Immersion for one simple and powerful reason, that Immersion's technology is the future of user experience in digital devices. The implications of that statement, that Immersion's technology is the future of user experience in digital devices, are indeed profound and manifold.

It correctly states that our potential market is both enormous and global. To capture that opportunity, we must operate in an increased level of activity and with a higher, greater sense of urgency. We must simplify our business, we must be customer-focused and partner-friendly. And as we have, we will aggressively leverage the world's most comprehensive portfolio of patented haptics technology to capitalize on unmistakable market trends towards touch interfaces. Put quite simply, our technology is applicable anywhere, anywhere there is a touch-user interface. The user experience in products that don't use Immersion's technology falls far short of what it could be and ought to be.

During Q3, we executed against these objectives while posting record revenue. We concluded two important legal disputes that cleared the decks and freed up management's time and energy to focus on execution. We are now able to move beyond these matters, enabling us to return our focus on ramping the business. We made meaningful progress in building the executive team and adding key hires who share my passion and vision to implement Immersion's technology globally and pervasively.

We signed new licensees of our technology and won a number of important new designs and design wins in exciting growth areas. We fully understand that the recent market fluctuations have caused investors to be uneasy. Valuations of public companies have been considerably impacted across the board, and we are no exception. That said, I will note that Immersion is well-fortified to withstand the turbulence of today's economy. Our balance sheet is an area of strength for our company. It is both clean and debt-free.

In fact, as of October 1st, Immersion had more than $98 million in cash and short-term investments, which equates to approximately $3.41 per share. We have a diversified business that spans multiple verticals and geographies, and is therefore better insulated than many against economic instability. Our record revenue in Q3 results demonstrates that as a whole, our business is stable and growing.

That being said, I am not at all satisfied with our current growth rate or bottom-line results. We have received good news regarding new licensees and other positive developments in our business that we have not been able to announce due to confidentiality agreements. We understand that we have been quiet, and that has not helped the perceptions or our progress of our company. That is all changing.

In 2009, planning includes investing in our businesses for additional growth, with a clear path to predictable, achievable and sustainable profitability. We will have a strategic and tactical plan in place designed to cross the threshold into profitability, then deliver profits and create long-lasting shareholder value. I will now ask our CFO, Stephen Ambler, to review our Q3 financials. After that, I will provide you with details on our progress during the quarter and some thoughts on our business outlook before taking your questions. With that, Stephen?

Thanks, Clent. As Clent mentioned in his opening remarks, Immersions' revenues of $10.1 million for the third quarter of 2008 were a new quarterly record, and revenues exceeded $10 million for the first time in our history. Total revenues increased approximately 3% over the comparable period last year. We are very pleased to have settled two pieces of litigation during the quarter, Microsoft and ISLLC. I will discuss our results with and without the impacts of these settlements, as they impact our financials.

Looking at a breakdown of revenues across our various business lines, revenues from medical of $3.2 million represented 32% of total revenues, and were down 39% relative to the same quarter last year. As Clent will discuss in a few minutes, this decline was as a result in a short fall in US sales, while international sales and our global opportunity grew sharply during the quarter. We see very strong opportunities for our medical solutions globally.

Revenues from touch-interface products accounted for 10% of total revenues, and were roughly flat with the year-ago period at approximately $1 million. Non-automotive revenue from our touch-interface products business grew 12% compared to last year. Mobility revenues of $1.6 million represented 16% of total revenues, and grew sharply during Q3. They were up 70% over the year-ago period. Revenues from our console and PC gaming business, which comprised 31% of total company revenues, were $3.1 million, an increase of over 90% year-over-year. Revenues from gaming included one-time previously deferred revenues from ISLLC totaling $1.1 million. Revenues from 3D products accounted for 12% of our total revenues, and were up 16% from the same period last year at $1.2 million.

In analyzing our third-quarter revenues by category, total product sales revenues decreased 12% compared to the third quarter of 2007, on the back of lower medical revenues and represented 47% of revenue. 67% of product sale revenues came from our medical business, 25% came from our 3D business, and 8% came from our touch-interface products business. Patent technology licensing and royalty revenues showed robust growth up 64% over the comparable period in 2007, and represented 47% of total revenue. All three lines of business under the touch umbrella of our company, meaning gaming, mobility and touch-interface products saw growth in licensing revenues compared to a year ago.

65% of licensing and royalty revenues came from our gaming business, 25% came from our mobility business, and 10% came from our touch-interface products business. Development contracts and other revenues fell 62% compared to the same period a year ago, reflecting our continued efforts to move away from development work and concentrate our focus on product sales and licensing. Development work comprised 6% of total revenue. Mobility comprised 71% of this revenue, while the majority of the remainder came from our touch-interface products business.

We continue to make good progress in expanding our international revenues. For the quarter, international revenues grew 112% year-over-year to $5.6 million. That represented 56% of total revenues. We are seeing significant opportunities for Immersion products on a global basis, and you will see a continued focus on international activities as we seek to capture additional revenue.

Gross margins for the third quarter were 71%, compared to 74% in the third quarter of 2007. Gross margins were down because of lower-than-anticipated revenues from our medical business due to economic conditions, and that resulted in poorer economies of scale.

Total operating expenses were $33.2 million in the third quarter of 2008, and included the impact of a one-time $20.75 million payment related to our settlement with Microsoft, as well as non-cash stock charges of $1 million. Including in the litigation item, total operating expenses were $12.4 million. This compares with operating expenses of $8.3 million in the year-ago quarter, which included non-cash stock charges of $699,000.

This increase in operating expenses 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 $1.2 million, compared to $300,000 in the year-ago period. Total head count at the end of September was 176, compared to 169 in the preceding quarter and 150 in the third quarter of last year.

Interest and other income totaled $988,000 for the quarter, compared to $1.6 million in the year-ago period. Interest income has dropped significantly in line with interest rate declines over the last year. I will note that Immersion has an extremely stable low-risk investment policy, which we believe is appropriately prudent, especially given current market conditions.

The Microsoft settlement has resulted in a significant increase in our tax loss for the year. Some of this loss can be offset against taxes paid in prior periods, but the majority cannot, as we have now maxed out our utilization. We assessed our ability to utilize these deferred-tax assets in the immediate and foreseeable accounting periods, and concluded that such utilization was uncertain. Accordingly, we have provided a valuation allowance against these balances, as required by GAAP, resulting in an income tax expense of $7.3 million for the quarter.

After accounting for this income tax effect and the one-time Microsoft settlement of $20.75 million, our net loss for the quarter was $32.3 million, or $1.10 per share. Excluding the one-time expense and related tax matters, net loss would have been $4.3 million, or $0.15 per share. This compares to net income of $490,000, or $0.02 per diluted share in the third quarter of 2007.

Immersion's balance sheet is a real strength to the Company. During the quarter, we used $7.2 million to buy back 1.1 million shares under our authorized stock repurchase program. For the nine-month period year-to-date, we have used $13.4 million to buy back just over 1.8 million shares. Since September the 30th, we have bought back a further $840,000 shares at a cost of $4.5 million. Given the current macro-economic environment, we plan to curtail stock buybacks for the foreseeable future, and we will be especially discriminating with regard to cash expenditures.

As a result of the buyback and near-term investments we have made to accelerate growth, our cash, cash equivalents and short-term investment balances decreased to $119.1 million at the end of the September quarter. Given that our Microsoft payment was made on October the 1st, our current cash position was reduced to $98.4 million on that date, equivalent to $3.41 per share. We do not hold any auction-rate or mortgage-backed securities. Receivables at the end of September were $5.3 million, the same as at the end of June. DSOs at the end of the quarter were 48 days. At the end of September, we had 28.8 million shares common stock outstanding.

In the light of the large impact on our financials from the Microsoft settlement, I would like to step back for a moment and encapsulate these financial results to give you a better sense of our ongoing cash flows. As I mentioned earlier, our Q3 operating loss, excluding the Microsoft settlement, was $5.3 million. This included $1 million of non-cash stock charges. We also earned just under $1 million in interest income. The net of these sums shows a cash outflow of just $3.3 million related to our current cash statement.

In Q4, we anticipate we will incur lower litigation costs. You can therefore see that our cash usage within the business will be minimal if not close to break-even in the fourth quarter. When you compare this cash flow with our cash balance, we believe that we have an extremely strong position for our company. We're in an extremely strong position with our company, especially given the current economic climate. I'll turn the call back to Clent. Clent?

Thank you, Stephen. Let's dive right into an operational review of our Q3 results and the drivers behind our record revenue, starting with our medical lineup business. Immersion Medical implements our patented haptics technology within a complete hardware and software solution that provides truly differentiated medical simulation solutions.

Our tools enable physicians, students, nurses and other healthcare professionals to practice and learn skills in a risk-free immersive environment. The instruments used are exactly like the ones you would find in a hospital or clinic. You can actually see, feel and even hear how a patient's body reacts to your actions, and our patented force feedback technology produces resistance against the instruments as they interact with tissue. I encourage our investors to get a demo to experience this breathtaking technology for themselves.

Immersion medical simulators are differentiated by our superior intellectual property, and we are vigorously defending our IP against infringement. To that end, we are pleased that the U.S. District Court for the Eastern District of Texas has set a scheduling conference for December 2nd, 2008, regarding our patent infringement lawsuit against Mentice and Simbionix. We anticipate that the court will set a trial date during the conference, and we are eager to press forward with a defense of our IP.

As Stephen mentioned, medical represented 32% of our revenue in Q3, down from the prior quarter and year. This performance is both disappointing and unsatisfactory. Revenue from medical would have been higher if not for a shortfall in US revenue from this line of business. The shortfall is specifically attributed to customer delays on planned development contracts combined with expected government orders that did not materialize, coinciding with the end of the fiscal year on September 30th. We believe that the recent economic downturn may have impacted our sales this quarter, given widespread delays in capital equipment spending, which is how our education and training simulators are categorized.

In contrast, as disappointing as our US sales were, our international results were predictably and equally promising. Overseas revenue for medical grew more than 3 times over the third quarter of last year. As I stated in our last quarterly call, we are committed and heavily focused on the global market for our medical solutions. As our research shows, the international market is in excess of 2 times that of the US market.

Medical solutions are and will be an important growth driver for our business. This quarter's results are only the latest sign that we must rebuild this business for both predictability and scale. We recently announced the addition of Sarah Adkins as VP of Marketing. Sarah is an industry veteran with a strong track record of achieving results and expanding relationships in the medical sector. In addition to Sarah, we are in the process of making other key hires to drive growth.

During the quarter, we expanded our market opportunity by signing agreements with several key partners that would develop and bring international channels to market, focusing on Asia, Pacific and Europe. Last week, we announced a distribution agreement with Tellyes Scientific, a leading supplier of advanced medical education products in China. Products and solutions like Immersion Medical's are now in high demand in China as their health care system undergoes significant reform.

As we are doing across our business, we are accelerating the rate of change and culture of this global team. While we are both very pleased with the international growth of this line of business and see vast potential for these products globally, we are not at all satisfied with our current results domestically. We expect better results in Q4 from medical, and we are moving aggressively to drive this business line's contribution for the future.

Our mobility line of business, which encompasses mobile handset and content revenue, was a strong performer in Q3, posting an impressive 70% year-over-year revenue increase. While we can talk about haptics-enable phones, you really must go out and experience a phone with haptics to fully understand this exciting part of our business. Pick up the LG Dare, which features Immersion's patented VibeTonz technology. Test how much more intuitive it is to navigate through menus and find content. See how much more fun it is to use a device when you get feedback from a touch. It's beyond cool. We believe this experience is a must-have once you've tried it.

There is no question that global leaders in this market are implementing haptics technology. Samsung has implemented our technology across many of their most popular, high-volume phones. The lineup includes the Instinct, Soul, Omnia, Tocco and others. LG has added our haptics technology to the Voyager, [Vu-T], Dare, and other models as well. Nokia recently launched its first phone under our partnership agreement. In all, this is proof positive that the largest handset manufacturers in the world recognize that haptics is a necessity to compete, differentiate and capture customers in the global market.

From an overall market perspective, let's step back and remember that back in Q1, there were 3 million phones shipped with our technology. That number grew to 7 million Q2 and is now 10 million in Q3. And today, on a cumulative basis, more than 35 million handsets have been sold worldwide featuring Immersion's haptic technology, 25 million of which were sold this year alone. While 35 million is a good number, it is only a fraction of the phones sold globally. Immersion will remain at the forefront of innovation, and we are well-positioned to capitalize on upcoming market trends.

For example, the second generation of Samsung's wildly popular Haptics phone sold in Korea features the first implementation of our technology allowing users to design their own haptic effects. Like the first haptics phone, the Haptic 2 launch was supported by a massive print, TV and online marketing campaign, driving sales in excess of 75,000 units in just the first three weeks. On the content front, Immersion is viewed as a key enabler to the trend of handset OEMs, taking a broader role in the industry to differentiate their products and drive content. We have programs underway in this area, specifically with Samsung's mobile innovator program and with Forum Nokia, Nokia's developer group.

Two last comments before wrapping up our discussion on mobility. First, from a business model perspective, it is clear that Immersion's primary near-term opportunity, given current market trends, is in tactile feedback in handsets, rather than revenue streams based on content, messaging or downloads, which is a market that is, in fact, still emerging. Second, the recently announced hire of Craig Vachon as Vice President and General Manager of our mobility group represents an important and positive shift in our strategy. Immersion now has a proven leader from the mobile sector in this role. Craig's mobile experience includes gaining design wins with top-tier handset manufacturers, executing license agreements with large mobile operators and building a strong network within the broader mobile ecosystem. In short, Q3 was a great quarter for our mobility line of business.

Revenue for our touch-interface products line of business, which includes our touchscreen feedback and automotive progress was up modestly over Q3 of 2007. We are deeply engaged in accelerating the rate of growth for this business and have secured recent design wins that will help achieve this goal moving forward. These include design wins at TopCon for a machine control application and an expansion of our license agreement with Samsung for digital audio players.

Our great partnership with SMK is also delivering design wins. One is the state-of-the-art touch panels with tactile feedbacks for factory automation controls manufactured by Ishii Hyoki Company Limited in Japan. The second is a touch-feedback display in a navigation system for a major US car-rental company. In this instance, thousands of these displays have been recently shipped, representing the first installment in a planned multi-year replacement project.

SMK's efforts have and will continue to generate revenue in these quarters and years to come. In short, we are starting to deliver on design wins rather than talking about the promise of the future. In fact, very often we cannot provide you with details and specifics due to confidentiality agreements. However, these just mentioned are a few of the tangible victories that will result in revenues for future periods.

Regarding other automotive solutions, we will see the start of production of a new vehicle enabled with Immersion rotary-based technology this calendar quarter. I'm not at liberty to review the details of this make or model yet, but I will see that this is a high-profile vehicle from another premiere car maker, and that we expect the new model to debut at the LA Auto Show in November. Additionally, our tier-1 automotive systems integrators have secured several new design wins with start-up production dates for the first two vehicles beginning mid-2009.

We anticipate the other design wins will ship in vehicles for model years 2010 through 2012. In addition to the wins already mentioned, we are in close collaboration with a number of market leaders across various sectors targeting the consumer electronics, office automation and machine control markets. At this time, we have a number of customers at the prototype stage with new products designed around Immersion's touch-sense technology.

While it is premature to discuss specifics, think about haptics implementations for applications ranging from multi-function printers, navigation devices, high-end remote controls, industrial machine controls and desktop IP telephones. Interest in our solutions is high, and we're pushing change through the organization to capture the myriad of opportunities before us.

Let's now turn our attention to our gaming business before providing a quick wrap-up and moving on to questions. Immersion's haptics technology dramatically revved the gaming experience, whether played on a console, PC or mobile device. This line of business showed 27% year-over-year growth in Q3, excluding the settlement of a legal dispute with ISLLC. Our progress during Q3, including adding new licensee dreamGEAR, a successful and popular seller of gaming products. We are also seeing good market uptake of various steering wheel models that Logitech introduced for the PS3. We expect this momentum to continue when Logitech starts to ship steering wheels for the Wii later this calendar quarter.

To be clear, gaming represents a vital opportunity within the touch segment of Immersion's business, and we have reignited our innovation in the PC gaming and console market. We are working very closely with our licensees on exciting new product ideas while continuing to explore new opportunities for growth within other entertainment platforms, all designed to create revenue opportunities for future harvest. While the gaming industry changes rapidly based on shifting consumer preference, one thing is a constant. The addition of haptics and force feedback technology dramatically improves the immersive user experience in gameplay, and Immersion's technology in gameplay can and should lead this market.

That completes my review of our Q3 progress across our lines of business. Stepping back for a moment, I want to quickly reiterate a few elements of our go-forward strategy and note some of the milestones you should look for as we close out 2008 and head into 2009.

First, I want to explain how we are now looking at our business. Essentially, we have two lines of business, medical and touch. Touch, which includes mobility, user interfaces and gaming. We believe that this view simplifies our business, and this is how we intend to discuss it moving forward. Second, we intend to increase our market opportunity by signing new licensees, entering new markets with the touch and medical fields, introducing new products and expanding our geographic reach. We are building our executive team and putting in place highly motivated leaders with winning track records of driving up growth and closing deals that will deliver revenue. And third, we will continue to leverage the world's best IP portfolio of haptics technology across multiple horizontal, vertical and geographic markets.

In closing, the third quarter was highly productive for Immersion. We exceeded $10 million in revenue for the first time, and we demonstrated growth amidst a turbulent market. We cleared the decks of some significant legal distractions. The pace of positive change is accelerating throughout our organization, and that will result in stronger growth and greater predictability as we move forward.

We are making a transition to what I refer to as a "customer focused, forward-leaning organization." That will be reflected in the way we do business, portray ourselves, and how we communicate with our customers, partners and investors. The rate of news releases coming from Immersion has increased, and we intend to build on this momentum. We are working to improve the transparency and granularity of our business. We understand that some analysts and investors have expressed difficulty in modeling our business based on a lack of forward-looking comments. Our goal is to provide you with more visibility, and during our prepared comments today, we have shared aspects of that outlook with you.

Specifically, and to reiterate, for the fourth quarter, we expect that the number of handsets sold worldwide featuring our technology will continue to increase, that revenues from our medical line of business will increase, and that legal expenses will decline. As the predictability in our business, and therefore our visibility, improves overall, we will share that with you. We are not there yet, but we understand that this is an important issue for our stakeholders.

We are committed to building a business for sizable growth and long-term profitability. Immersion has the world's best haptic-patent portfolio at a time when consumers and OEMS are truly recognizing the power of touch in the user experience. We understand that a strong balance sheet is a requirement for success in today's environment, and we indeed are well-fortified to make the targeted investments necessary to drive strong growth. We look forward to sharing our progress with you as we execute on our initiatives to drive the pace of growth across our lines of business.

Thank you for your attention today. I will note that at last quarter's call, we experienced a technical difficulty at the Q&A session. We have made the appropriate changes to correct these issues, so Operator, let's move right on to our first question.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Mark Argento with Craig-Hallum Capital. Please go ahead.

Hi, good afternoon, guys.

Hi.

When I'm thinking about your business, I know you're not providing any specific financial guidance, but is it your expectation that the business would return to profitability sometime in 2009?

Mark, thanks a billion for the question. At this point, we would hope that by the time we cross into the 2010 calendar year that we would have crossed the threshold. I think it is a bit premature at this point, based on our '09 planning to forecast at this point, but that is definitely a plan. As you know well, I came to a company to run a business that is profitable, and we are making the right investments today, I believe, to cross that threshold, but I believe it will be probably towards the end of the year. Stephen?

Alright, and can you-- switching gears in terms of the-- some of the things you guys have had in the pipeline for a while, such as the 3M relationship there-- can you give us an update? Is 3m shipping any equipment on the touchscreen for the casino market? Of course, the casino market is very difficult now, but is that relationship-- should that bear fruit, hopefully, in '09?

Yes, Mark, this is Stephen. Yes, it will. There is really no change from what we said last quarter. They're going to be showing-- the touchscreens at the G2E show in November, and they should be in a situation whereby they're taking orders from by the end of the second quarter next year. It's taking longer than we want, and thought it would take, and it has been a bit frustrating, but I think that we are getting to the final leg of the journey with them.

And can you talk a little bit about the international-- looks like you're making a lot of progress internationally, is it-- are these existing relationships that are-- that you've had for a while that are finally coming to fruition, or is it literally putting new people on the ground and these guys getting to work pretty quickly? Just a little bit of the color and dynamic of what's going on internationally?

You bet. As you will recall, recently, in the last few months, we announced the addition of David Barkay as our Vice President, General Manager International for Medical. This individual is leading and building a team that is delivering exemplar results, as you can see. He is both operationalizing and improving the relationships of some of the existing distribution channels we have had. He is rebuilding the infrastructure for some direct relationships that we are creating internationally to sell direct to customers, and he is also bringing on new licensees like Tellyes Scientific.

And I would offer, Mark, I am on my way to Asia next week to personally assist David and his sales team, both in Japan as well as in China, and we are confident that we will continue to grow and scale the business in that region.

Okay. In terms of-- it looks like your increased spending in the quarter, some of it was in building up the sales infrastructure. It looks like R&D was up a little bit. Where are you spending the incremental R&D dollars right now?

We're going through a process of developing additional medical products and also on our touch interface side, we're working on increasing the number of product offerings we have and improving the products we've currently got.

Okay.

Mark, if I could just add quickly to that, in the prepared comment, I mentioned the fact that I view, and we, as a team, view gaming as a frontier, and part of where we're investing our resources now is also in reigniting the innovation engine in the gaming space. As you know, our patents in the gaming space have paid handsomely, and we will continue to innovate in that space, and we think that that's a wise space to make some investments.

Okay. And then, can you just touch again-- I know you had mentioned about the automotive opportunity, did you say-- was it one or two OEMS that you have reached agreements with? And could you just review that again? I didn't quite catch all of that.

You bet. The first one, and the nearest one, is from a new premiere high-profile car that we are expecting to be debuted at the LA Auto Show next month, and so stay tuned for that one, and then we have two other car manufacturers that have new products coming in the mid part of 2009. And then we have subsequent ones that are coming online 2010 through 2012.

Okay, and can you-- is it-- in screen interfaces, or what-- like, what kind of applications should we be thinking about in terms of in the car? I know the buttons, or the knobs in the BMW iDrive, but is it expanding beyond that?

The initial ones that we're seeing will be largely rotary-based, and we are pushing forward on the touch side, but that is an area that is highly, highly competitive in automobile manufacturing right now. So, I think we need to keep our powder dry. This is their products and their technology they want to announce, but rest assured, we feel touch is a solution that will go across virtually every electronic and motorized device, and we plan to play in that.

Great. Thanks, guys.

Thank you very much, Mark. Next question, please?

Thank you. Our next question comes from the line of Jeff Schreiner with Capstone Investments. Please go ahead.

Good afternoon, gentlemen. Thank you for taking my call. I was wondering if you could talk a little bit more, Clent, about the opportunity in consumer products, and also maybe if you could try to size some out for us-- maybe the potential with Samsung that you guys recently announced here in the last week or so.

I apologize, you just cut out. Could you say the first part of your question again, please, Jeff?

Yes. The question we had was and-- to try and discuss the opportunity for us, try to give us a sizing opportunity in the consumer products market that it seems you're having the opportunity to enter, and then try to help us (technical difficulties) potentially maybe how impactful this Samsung announcement could be that you had on consumer products about a week or so ago?

You bet. So, consumer products, as you could well appreciate, like many of our customer and design wins, they aren't product-specific. They're design wins that talk about technology that's going into future products and designs. So, the way I would talk about this is, in Samsung's case, they're going to be embedding this in their mp3 players, and it's not specific yet, but I would view this as a narrow end of the edge for other consumer electronic devices that they are considering in the future, and in the instance of other consumer devices, this is-- the applications range from washing machines, dryers, microwave ovens, sort of on that where everything is going to touch interface, all the way across to multi-function printers, as we have discussed in the past, Windows 7 is going to be touch-enabled. We think that there is an interesting opportunity for us there as well. So, that is-- it's a broad kind of non-specific answer, but it's a broad, broad market, and the way we're attacking the market is both with the people that help design the user experience for these people as well as the market leaders in each of their categories.

Okay. Also, I would like to just to kind of dwell also into the new, user-controlled VibeTonz and kind of size that. And will that be something that will be added functionality at the same price if you're already a customer such as Samsung, or is that something that could give incremental value to Immersion?

So, I guess I would answer it in two ways. The first one is, this the first implementation of it, and we're thrilled. It is-- I'm sorry to use the word cool, but it is pretty dang cool. Users can actually create their own haptics effects. We think that this is the beginning of a trend, and it is our hope and desire that it is the beginning of a trend that will spread like wildfire across the other announced handset manufacturers that we have, and I think another way to characterize this is, providing it does catch on like we are expecting, we believe this does create the potential for additional monetization for us.

Okay, fair enough. Just one last question, and I appreciate your time. You mentioned Nokia's new design that incorporated Immersion technology. Did the Company see any revenues from Nokia in the September quarter?

Well, so we've said in the past that we're not able to really talk a lot about our Nokia relationship. Generally on our mobility side we receive revenues for a combination of license fees and runtime royalties. So, we can't really disclose the specifics on the Nokia deal, but there are definitely incentivized to implement a large number of phones and, as we've said, the number of phones are increasing, and we expect growth on our revenues on mobility as we move forward next year.

Thank you, gentlemen.

Thank you, Jeffrey. Next question, please.

Thank you. Our next question comes from the line of Michael Camps, with Imperial Capital. Please go ahead.

Hi, Clent. Hi, Stephen.

Hello, Michael. Thanks for joining us.

Sure thing. Just touching on the mobile handsets side and, as a follow on to your comments, Stephen, I know it's hard to look down the pipeline at this point, but in '09, would you expect comparable handset volume growth in '09 that we've seen with '08, considering that we can assume Nokia will start to ramp their shipments?

I would actually expect to see faster growth in '09, primarily because Nokia provides a platform solution, and as we get included on that platform, and the platform we're going to be included on is the series 60 platform, that's a reasonably large part of their business and a growing part of their business. I mean, I believe at the moment, it's around 20% to 25% of the phones that they ship, and that's 400 million odd phones a year in total, so 20% to 25% of that is between 80 and 100 million phones, so by the end of the year, I would expect us to be being put on approximately 10 million phones a month.

And, Michael, we're just talking about touch screens here, because that's generally the series 60, but we have a solution in touch sense mobile and in VibeTonz where you don't have to have touch screen to be able to utilize our technology, so we actually think the market is much larger than we're sort of talking about in the traditional investor space, and it's up to us to figure out how to monetize and exploit that and explain that, but rest assured, we think it's a lot more than just touch screen. That's the obvious, but we provide haptic feedback to a number of phones that don't have touchscreens today.

Okay, great. And, just, also as a follow-on to the mobile side, can you talk a little about pricing? If there has been any significant shifts with pricing? I know it's difficult to talk about with Nokia, but, overall, are you seeing any changes in the marketplace?

We haven't seen-- there were no changes in the marketplace in the last quarter. We are looking to increase our revenues on the mobility side as we move forward. We probably won't be able to make a lot of progress in that until the middle to the second half of next year.

Okay, great. And can you talk at least in broad terms what the progress of the-- or, how far along you are in conversations with another handset OEM to follow on with Nokia? I think you signed them about a year ago, a little over a year ago, and I'm just curious what kind of progress you have seen in your conversations with other major OEMS.

And, Michael, that is the $64,000 question. Thank you very much for asking. As you-- this is going to be an unsatisfactory answer in your mind, but it's the truth. We're not able to talk about ongoing discussions and contract negotiations until they're actually announced by our partners and customers. So, while it is frustrating to hear that answer, that is the truth.

I guess maybe another way of thinking about it is, obviously, Nokia, Samsung, LG have adopted the technology, is there any particular reason why other OEMs are not adopting the technology?

I would answer the question like this. I think some handset manufacturers are more sophisticated than others in terms of product design, the speed to market and how nimble they are at changing technologies mid-stream in their product planning. Others are better at it. Those that have announced solutions, I would say, are probably the best at it. You know, you might argue that there is a small handset manufacturer in California somewhere that you might argue is better at it, but they're not a high-volume provider. So, we're focused largely in the high-volume space, and those that are announced licensees of ours, I think, are probably the best at it today, but that doesn't mean that there isn't a lot of stuff that's on the stove. We're just not able to talk about it at this point.

Okay, no, fair enough. And then switching gears to the automotive side, with this high-profile car that will be announced, or, unveiled at the LA Auto Show, these two OEMs that you talked about for mid-'09, are these models that will range at the higher end of the volume, call it 100,000 units or more and, as a follow on to that, what's kind of the revenue opportunity? Is it a per-unit royalty, or is it more like what we've seen with the BMW iDrive?

Sure. I'm going to let Stephen talk about the revenue component. The way I would-- you might quickly be able to identify what manufacturer and where it is, and so I'm going to be a little bit vague on the volume. It is a model of car-- the one that will be announced in November, we expect, that is in a growing category. I guess that's the way I would characterize it, and it is probably in the range of the number that you talked about, but I think that's about as comfortable and as much information as I can share at this point. Stephen, do you want to characterize kind of what we consider that revenue opportunity to be?

Yes. Michael, the revenue opportunity is on auto-- it's a licensing model, and we do earn per-unit or per-vehicle royalties, depending on how many applications are included within a car. But just-- if one application is included in a car, we're earning up to $5.00 per car.

Okay, great, or fair enough. And then, lastly, on the cash position, you know, with about $100 million, I know it's a difficult environment out there, but do you have any thoughts about utilizing that cash either strategically or even opportunistically on the buyback side?

Well, I'll answer the buyback side. As we've just said, we've been buying back shares. We've bought quite a sum back so far, approximately 2.8 million shares. Cash is, in the last three months, has changed its profile with companies. I mean, it's the thing to have now, the liquidity. So, we, as I mentioned on-- earlier on, we're slowing down, curtailing our buybacks for the foreseeable future. As for the strategic side, if the right opportunity comes along, yes, we'll look at that.

Okay, great. Thank you very much.

Michael, thank you very much.

Thank you. Our next question comes the line of Mark Kabbash with EquityGroups. Please go ahead.

Hi, guys. Congratulations on the revenue threshold of $10 million. A question regarding the mobility side of things. With VibeTonz getting into more and more handsets, have we been seeing any increase, and what type of percentage increase on the gains side of things?

I assume you're talking about mobility gains?

That's correct. In the handsets, the phones.

Right. So, we're definitely seeing uptake there. As I mentioned in the prepared comments, gains we consider sort of the content side of the mobility business, and we are working furiously to try to unlock and crack the code of what that real business model is. However, that's not stopping us. We have several things that are in the oven right now that we expect to roll out in the next, probably, four to six months that would be focused in the gaming space. I also talked about some of our innovation on our traditional gaming line of business, and we think that there is also a natural convergence between these two business lines that we can exploit, and you can well bet that we're looking at that very, very hard.

In the mobility side of things, the handsets, the phones, is it a revenue model that has to be deployed only within the Qualcomm model, or can it be outside of that environment?

No, we're fortunate-- I guess the best way to describe it is, we're agnostic. If it is a mobile handset, and it has a motor or an actuator, that's the only discrimination we need.

Okay, and it-- as I understand now, the pricing of those games on the handsets, roughly-- range between $3 and $9. We would look for a percentage of that per download. Is that correct?

Well, I think that's one way to look at it. As you would also expect, there is also a number of handset manufacturers which embed games actually on the handset as well, and that's another potential that we're exploring. I don't know if-- what the elasticity of $3 to $9 over time is going to be, particularly in this macro-economic environment, but I could well expect that there is a percentage that we might want to explore, but I think until we actually have the business model fully understood, I think I would rather hold and save that for an official announcement on how we intend to prove-- how we intend to move that forward.

And the timing-- your intent on that model materializing, roughly?

Well, I would hope that we would have progress that we could share with you in the next 4 to 6 months.

Outstanding. Shifting over to the medical side of things, in the past, we've seen applications being developed for the existing hardware at a rate of roughly 1 new application a quarter. Is that something that we can still anticipate? And are there going to be more hardware platforms approaching different types of medical surgeries?

So, Mark, the way we're looking at it now, we have looked at it predominantly as a hardware platform with individual models and procedures within each hardware platform, depending upon it-- in the vascular, endoscopy, laparoscopy, whatever it might be. What I have done since I have been here and working with the team, is zooming out and saying it might make more sense to have one unified hardware platform that we can specify by procedure that we can make more software-based rather than hardware-based. I think software is the future. They need to be connected so that we don't have to visit sites to upgrade them, and so I guess that's about all I'm going to tell you on our product planning, but it is a broader view rather than just sort of simply adding another hardware platform to get into a new procedure.

I think the model we would like to go to is more unified hardware where we have software solutions and procedures that would serve multiple procedures.

I understood. And, by the way, for the audience, Clent is absolutely right. Until you've actually tried these machines, you just can't believe the effectiveness of it. I took the time and I was wowed by the process and technology.

Shifting once again, this time over to the automobile side, right now you've only mentioned the touchscreen hard-to-crack market. You mentioned the rotary knobs. Is there any inroads being made, and can we anticipate anything materializing from the fly-by-wire type of methodology in need of haptics with clutch and brake and accelerator?

Right. We know that well, that market. We know the technology well. We have experts in it, we-- I think it's fair to say we're not prepared to talk about that publicly today.

Understood. Thanks for the time, guys. Keep up the great work. Looking forward to the next call.

Thanks, Mark.

Thank you. We have time for one more question. Our final question comes from the line of Glenn Mattson with GTK Capital. Please go ahead.

Hi, guys. A couple quick comments and a quick question. I want to congratulate you on a good quarter and design wins. Keep them up. And, secondly, I agree that the cash is a vital asset to a small, unprofitable company. There is plenty of opportunity in front of you. I'm not sure you need to spend any of that cash for other things out there. It provides a lot of protection in this world. But, lastly, I want-- I'm just curious. Is your goal eventually to move the pricing scale up in the mobility side? Or is just strictly a volume game?

We think there are two dynamics here. The first one is, you get more players, the waterline rises, and the more players you get, the broader distribution you get.

What do you mean by that, "the waterline rises?"

Well, so the first people in generally get the best deal.

Yes, sorry-- excuse me. I'm working from home today. I have my dog in the house.

No problem, as long as he doesn't bite. So, generally the first ones in get the better price, and the later ones in understand that they didn't have first mover advantage, and price would generally go up, and I think that that's sort of traditional market pricing, unless it's an extremely commodity-based one, which ours isn't. Ours is value-added, and we also believe that the more distribution there is creates the need for others that don't have it to have to have it.

Right. So, in deals that you are negotiating now, you are looking for better pricing than in prior deals?

We're always looking for better pricing. It-- we don't disclose that, those details, but you could well appreciate that we don't-- value goes up over time.

Right. Well, great, thanks. Keep up the good work, guys.

Thank you very much, Glenn.

Thank you, and at this time, I would like to turn the call back over to management for any closing remarks.

Thank you very much. We appreciate your questions, we appreciate your attendance today, and we appreciate your support. We look forward to seeing you at one of our investor conferences, of which we will be at two over the next three weeks. We will be presenting at, or you can check in our website to see those conferences, or we will catch up with you on our next quarterly call. We appreciate your support again, and have a great day.

Ladies and gentlemen, this concludes the Immersion Corporation third quarter conference call. You may now disconnect.