Immersion Corp (IMMR) 2008 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen.

  • Thank you for standing by.

  • Welcome the Immersion Corporation quarterly conference call.

  • During today's presentation, all parties will be in a listen-only mode.

  • Following the presentation, the conference will be opened for questions.

  • (Operator Instructions).

  • This conference call is being recorded today, Monday, March 2nd, 2009.

  • I would now like to turn the conference over to Alex Wellins of The Blueshirt Group.

  • Please go ahead sir.

  • - IR, The Blueshirt Group

  • Thanks, Mary, and thanks, everyone, 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 it's 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 stockholders, as well as any factors mentioned during our discussions today.

  • With that said, I will turn the call over to Immersion's President and CEO, Clent Richardson.

  • Clent.

  • - President, CEO

  • Thank you Alex.

  • Welcome to today's call.

  • Today we will review Immersion's fourth quarter and full year business activities, our financial results, and our Company's go-forward strategy.

  • These results reflect solid progress and execution, against a backdrop of severe economic turbulence.

  • Immersion's fourth quarter revenue was $9 million, which was flat with last quarter, excluding the one-time deferred revenue from IS, LLC recognized in that period.

  • Revenue for the fiscal year grew to $36.5 million, a 5% increase over fiscal 2007.

  • While single-digit growth is not the bar which we intend to be measured, we do believe that posting year-over-year growth, during a period of intense and rapid transformation in our Company, is indeed noteworthy.

  • We ended the year with approximately $86 million in cash.

  • Our strong debt-free balance sheet, combined with our diversified low cost business model, is a core foundation for our Company, providing a secure platform to drive future growth.

  • Last quarter I told you that we were taking decisive steps, designed to accelerate the growth rate and predictability of our business.

  • Since our last call we have continued to follow through on this commitment.

  • Our leadership team has been rebuilt, featuring world-class executives, with extraordinary passion and enviable track records of success.

  • We announced the planned divestiture of our 3D line of business, which has been a low growth distraction, and is not core to our go forward strategy.

  • We forged important new customers relationships, and deployed record numbers of our solutions across vertical and geographic markets.

  • And in the last few weeks, we have relaunched in manner in which the world sees Immersion via an updated logo, which better represents our two lines of business, and a new modern website.

  • The new site provides unmistakably provides users, investors, and potential customers who visit, a way to learn about Immersion, who we are, and what we are focused on.

  • It is complemented by a corporate messaging platform, that better explains who we are and what we do, while appropriately capturing the aspirations and opportunities in front of the Company.

  • More importantly, we have structurally reorganized and simplified our Company, from five businesses into two lines of business, Medical and Touch.

  • To improve focus, drive future growth, and leverage synergies inherent in our business model.

  • Today we continue to take bold steps to simplify, reduce duplication, and realize greater synergies, by announcing that we will relocate our medical line of business, to our corporate headquarters in San Jose, California.

  • We believe that this move will measurably improve our business from and executions, operations, and management perspective.

  • Moreover, it will result in meaningful cost savings, that will positively impact our financial results in 2009, and in the future.

  • The divestiture of our 3D line of business and move of our medical line of business, continues the rapid and positive change, that we are propagating throughout our global organization.

  • Every element of this plan is designed to make Immersion a more simplified, unified, customer focused Company, that is open for and ready to do business with the leading companies in the world.

  • On our last call, I invested time to defining Haptics, and Immersion's leadership in this burgeoning market.

  • The fact that in a remarkably short period of time ,the need for these explanations is diminished, is an extraordinarily important shift for the Company.

  • I will give you two very brief examples.

  • First off, it is not an overstatement to say that touch products were the dominant theme at CES this year, the first major consumer technology event of 2009.

  • You couldn't walk more than a few dozen feet in the show floor without seeing a demo of a touch-based interface on a digital device.

  • In fact, the trend was so pervasive that The Discovery Channel put it's spotlight on Immersion, in a special television segment titled 'Game Changers at CES'.

  • If you haven't seen it yet, I urge you to do so.

  • You will then understand why the reaction to this program among current and potential customers and business partners, has been positive, rapid, and significant.

  • Second, noted technology forecaster, Paul Saffo, cited haptics as one of the most important and meaningful trends for the next decade.

  • I will briefly paraphrase.

  • 'One word that should be in everybody's vocabulary is haptics.

  • At the moment, we look at our machines, and they look at us, but they don't have the sense of physical touch or feedback.

  • Haptics is the way to give sensory touch between machines and humans.

  • The real event of the decade is running just below the surface of all of these sensors, that are helping connect our computers and our network to the physical world.'

  • This bold vision echos our claims that Immersion's technology is the future of user experience in digital devices.

  • I have said that in order for us to capture the immense business opportunities before us, our mission must be to operate at a higher level of activity, simplify our business, be customer focused and partner friendly, and leverage the world's most comprehensive portfolio of patented haptics technology.

  • Looking back, it is a credit to our team that we made strong progress against these objectives since our last call.

  • We stepped up the pace at which we made noteworthy announcements, to improve transparency, and enable our investors to better mark our success.

  • We posted solid performance amidst a new global economic reality.

  • We made strong progress in resetting the leadership team, and preparing to relaunch the Company.

  • We moved past several pieces of distracting litigation, consolidating five lines of business into two, and exited the year with growing momentum, and a greater appreciation for Immersion's products and solutions than ever before.

  • Our plan for 2009 is designed to further this momentum, by capitalizing on the positive changes we have put in place, building on our successes, and leveraging our strong balance sheet and diversified business model.

  • We will move away from custom engineering products, to product-based solutions that will drive scale to our business.

  • 2009 will be a year of execution, as we march toward sustainable profitability, while striving to deliver longer term shareholder value.

  • We will continue to carefully invest in our business in areas that we think will deliver strong ROI, while maintaining a robust balance sheet, with a goal of accelerating our growth rate over 2008 levels.

  • I will now ask our CFO, Stephen Ambler, to review our financial results.

  • Following Stephen's comments, I will provide you with greater detail on our recent achievements, and insights into our 2009 strategy, before taking your questions.

  • Stephen.

  • - CFO

  • Thanks, Clent.

  • For the fourth quarter of 2008, revenues were $9 million, sequentially flat compared to the preceding quarter, when you exclude $1.1 million of one-time deferred revenues from IS, LLC recognized in Q3, and a decrease of 9% from $9.9 million in the comparable period last year.

  • As previously announced, we are in the process of divesting our 3D line of business.

  • For comparison purposes, revenues for the fourth quarter excluding the 3D business were $7.6 million, compared to $8.2 million a year ago.

  • Revenues for the fiscal year totaled $36.5 million, an increase of 5%, compared to $34.7 million for fiscal 2007.

  • Excluding the 3D line of business, revenues totaled $31.6 million in 2008, and $29.9 million in 2007, an increase of 6%.

  • Looking at a breakdown of revenue across our various lines of business, fourth quarter revenues from medical were $4.3 million, represented 48% of total revenues.

  • This is up 27% from the year ago period, and up 34% sequentially.

  • For the year, our medical revenues totaled $14.8 million, down 4% from 2007, and represented 41% of our total revenues.

  • We continued to see strong growth in international sales with our medical line of business.

  • Medical international revenues grew 135% over the year-ago period, and also grew 24% sequentially.

  • Quarterly revenues from touch interface products of $600,000, accounted for 7% of total revenues, and were down from $1.3 million in the year-ago period, and $1 million in the preceding quarter.

  • For the year, revenues from our touch interface line of business were $3.5 million, down 29% from 2007, and represented 10% of total revenues.

  • Fourth quarter mobility revenues of $1 million, represented 11% of total revenues.

  • I will note that due to revenue recognition rules related to payment terms from one of our licensees, approximately $700,000 of repeating licensed revenues, that we would normally have recognized in Q4 of 2008, will now be recognized in Q1 2009.

  • Annual revenues for mobility totaled $4.9 million, up 106% from 2007, and represented 13% of total revenue.

  • Quarterly revenues from our console and PC gaming business, which comprised 19% of total Company revenues, were $1.7 million, down from $2.5 million in the same period last year, and from $2 million non-one-time revenues in the preceding quarter.

  • Revenues from 3D products accounted for 15% of our total revenues for the quarter, and 13% for the year.

  • Analyzing our fourth quarter and year end revenues by category, total product sale revenues increased 30% compared to the fourth quarter of 2007, 16% sequentially, and represented 61% of revenue.

  • 72% of product sale revenues came from our medical business, 24% came from our 3D business, and 4% came from our touch interface products business.

  • For the year, product sale revenues accounted for 53% of total revenues, and grew 5% over 2007.

  • Patent, technology licensing and royalty revenue decreased 29% from the comparable period in 2007, and 40% sequentially, and represented 32% of total revenue.

  • 59% of licensing and royalty revenue came from our gaming business, while 28% came from our mobility business, 13% came from our touch interface products business.

  • For the year, licensing revenues accounted for 39% of total revenues, and grew 20% over 2007.

  • Development contracts and other revenue declined 62% from the year-ago period, but increased 8% sequentially.

  • The year-over-year decrease reflects our continued efforts to move away from development work, and concentrate our focus on product sales and licensing.

  • Development work comprised 7% of total revenue.

  • Mobility comprised 49% of this revenue, with the majority of the remainder coming from our touch interface products business.

  • For the year, development contract and other revenues declined by 35% compared to 2007, and represented 8% of total revenues.

  • Gross margins of 46% for the fourth quarter reflect $2.1 million in costs of product sales, related to the divestiture of our 3D line of business.

  • Excluding this impact, gross margins decreased to 69%, from 77% in the year-ago period, and 71% in the preceding quarter.

  • For the year, gross margins were 72%, excluding the write-down of the 3D business, compared to 75% in 2007.

  • Going forward, we expect gross margins to trend up, based on the resulting change to our product mix.

  • Total operating expenses of $14 million for the fourth quarter of 2008, include $537,000 in restructuring charges related to the disposal of the 3D business, as well as non-cash stock charges of $1.1 million.

  • This compares with operating expenses of $9.1 million in the year ago quarter, which also included non-cash stock charges of $786,000 with operating expenses of $12.4 million in the preceding quarter, and those included $1 million in non-cash stock charges.

  • Overheads included litigation expenses related to our patent infringement lawsuit against Mentis and Symbionix.

  • We are looking forward to the discovery portion of this litigation, which will begin in the next quarter.

  • Total headcount at the end of December was 183, compared to 175 in the preceding quarter, and 155 at the end of the fourth quarter of last year.

  • In January 2009, we commenced the divestiture of our 3D line of business, and performed a small reorganization, the net of which was to reduce headcount by 13.

  • While we continued to invest in people, we do not expect net growth in headcount in 2009.

  • We are focused on driving efficiencies throughout our organization.

  • Interest and other income, net of other expenses, comprising investment write-downs, totaled $392,000 for the quarter, compared to $1.8 million in the year-ago period, and $988,000 in the preceding quarter.

  • Interest income primarily affects lower invested cash balances, following the recent Microsoft settlement, in addition to share buybacks completed during the quarter, as well as general interest rate declines over the past year.

  • Investment write-downs totaled $250,000 for the quarter.

  • After accounting for the one-time charge related to the disposal of our 3D line of business, our net loss for the quarter was $9.7 million, or $0.35 per share.

  • Excluding the one-time items, net loss would have been $7.1 million, or $0.26 per share.

  • This compares to net income of $511,000, or $0.02 per diluted share in the fourth quarter of 2007, and to a net loss in the preceding quarter of $4.3 million, or $0.15 per share, excluding the associated charge and tax effects from the Microsoft settlement.

  • For the year, our net loss totaled $47.7 million, or $1.61 per share, including the one-time charges previously mentioned.

  • Excluding these items, net loss would have been $24.4 million, or $0.82 per share.

  • This compares to net income for 2007 of $117 million, or $3.71 per diluted share, and that included $134.9 million of litigation conclusions, and patent license income.

  • For the year, we used $18.3 million to buy back 2.8 million shares under our stock repurchase program.

  • This included the purchase of 960,000 shares in the fourth quarter, at a cost of $5 million.

  • We have since suspended our stock buyback program in light of the macroeconomic environment, and continue to be conservative with our balance sheet.

  • Our cash, cash equivalents, and short-term investment balances were $85.7 million at the end of December, equivalent to $3.07 per share.

  • The decrease in our cash balance from the prior quarter, reflects the Microsoft settlement on October 1st, stock buyback, and near term investments we have made to accelerate revenue growth.

  • Receivables at the end of December were $6.8 million, compared to $5.3 million at the end of September, reflecting increased product sales, and the timing of orders during the period.

  • DSOs at the end of the quarter were 70 days.

  • At December 31st, 2008, we had 27.9 million shares of common stock outstanding.

  • Before I turn the call over to Clent, I would like to make note of a few housekeeping items.

  • As Clent indicated in his opening remarks, we have streamlined the Company into two lines of business, Touch and Medical.

  • While we will continue to segment our revenues by royalty and license, product and development in our financial statements, beginning with the first quarter of 2009 conference call, we will begin to discuss our financials in terms of touch results and medical results.

  • I would also note that we expect to generate some remaining revenue from our 3D line of business in the first quarter of 2009, or until the disposition of this group is finalized.

  • As we have already mentioned, we are relocating our medical line of business to San Jose.

  • This move stems from the expiration of our lease in Gaithersburg, Maryland, and the opportunity to realize significant synergies and cost savings leveraging the office space and infrastructure that we have available at our corporate headquarters.

  • This move will also save significant sums on travel, ongoing expenses related to having additional offices, and other operational efficiencies.

  • Several key managers will be relocating during this process, and we expect to supplement them with new hires as needed in San Jose.

  • Which we are presently finding to be a quality hiring market, and should remain so for the foreseeable future.

  • While we are not providing specific guidance at this time, we expect to begin realizing cost savings from this move starting in mid-2009.

  • We estimate that savings will exceed $1 million per year in subsequent years.

  • Finally, we recently completed the sale of the SoftMouse portion of our 3D business.

  • The amount of the sale is not material to our business, and we will be accounting for this in Other income within our Q1 financial results.

  • I would like to thank you for your attention, and I will turn the call back to Clent.

  • Clent.

  • - President, CEO

  • Thank you, Stephen.

  • As Stephen and I have mentioned, we have reorganized our Company around two lines of business, Medical and Touch.

  • Observations and thinking toward this restructuring has been in the works, since shortly after I assumed the role of CEO.

  • The Board and I recognized the need to simplify Immersion's business, to increase velocity, drive results, improve collaboration, and maximize efficiencies inherent in our operating model.

  • This new structure is already creating operating leverage, and improving the manner in which we deal with global customers in our Touch line of business.

  • For example, branded global companies might produce mobile phone handsets, MP3 players, and consumer electronic devices.

  • Under our old structure, we may have three separate groups selling and supporting a single customer.

  • Our new structure has allowed us to streamline our operations, and is creating cross-fertilization concepts and opportunities, that we believe will directly translate into increased revenue and a better return on investment.

  • This restructuring is also designed to spur growth and innovation in our Medical line of business.

  • We believe that the combination of new leadership, the move to our San Jose headquarters, and new product introductions that I will discuss in a few minutes, will deliver meaningful synergies, and provide substantial growth catalysts for this line of business.

  • As many of you know, the majority of our employees for the Medical line of business, are currently located in Gaithersburg.

  • I will note, however, that no salespeople are located in our current medical facility, and that a portion of our development and test work will also be unaffected, as it will remain in our Montreal site.

  • So we expect the move will be reasonably seamless from a business continuity standpoint, with no material interruption to our operations.

  • As Stephen mentioned, the move will result in substantial cost savings that will positively impact our financials, starting in mid-2009 and beyond.

  • But most importantly, this move is a critical step in emphasizing and affirming our one company, one team strategy, and value.

  • As a further point of emphasis, I will note that we are no longer calling this line of business Immersion Medical.

  • Moving forward, we are all part of Immersion, regardless of where we are located, or what business we are in.

  • We are one Company, with one brand, globally.

  • This shift will drive added return and value for our marketing investments.

  • Simply put, any marketing investments made going forward will be for one, unified, global brand, Immersion.

  • Commensurate with the restructuring of our business is the recent relaunch of our updated brand.

  • I hope that everyone has visited Immersion.com by now, and if not, that you will do so.

  • The intent and mission of this effort was to deliver one cohesive corporate message to a global audience.

  • Our research and feedback already reveals that users have found the content rich and compelling, the navigation clear and concise, overall, simplified logical, and focused on the future.

  • The updated logo and website are complemented by new marketing materials, and a revised messaging and communications platform, all downloadable PDFs from our website.

  • In short, we have reset our team on a global basis, and that team is now poised to deliver results, backed by one fully integrated Company.

  • Now, digging into the results of our Medical line of business, Medical represented 48% of our revenue in Q4, and 41% for fiscal 2008.

  • While Immersion's touch products are undeniably hot, and of great interest on Wall Street, it is critical for investors in our Company to understand our Medical line of business.

  • Historically, the largest contributor of Immersion's revenue on a percentage basis, the Medical line of business, is one of the most meaningful and vital growth drivers of our Company.

  • In Q4, our team delivered revenue that was up both year-over-year and sequentially, following a disappointing Q3.

  • While we are not yet satisfied with the results or growth rate for this line of business, the numbers are encouraging for several reasons.

  • First, we did not launch any significant new products or procedures in 2008.

  • Meaning that our sales team was able to grow revenue solely on current products, service, and technology.

  • Second, this is a capital based business with reasonably high per unit pricing.

  • Given the macroeconomic climate, we are pleased that our team is able to identify and close customers, and we believe this is a firm indicator of demand for Immersion Medical simulation products.

  • And finally, international revenue for our Medical line of business nearly tripled in the fourth quarter of 2008 over Q4 2007, and doubled in full year 2008, demonstrating the magnitude of the global opportunity for Immersion.

  • Diving into more detail, we have installed new leadership for this line of business in Dan Chavez, and we recently announced that Steve Anderson has joined us as Vice President of Product Development.

  • In addition, [Terry Sutton] has been appointed Vice President of North American Sales.

  • You should expect that we will continue to build out this team, as we transition the business to the West Coast in the first half of 2009, while driving growth and measurable results.

  • Last quarter we mentioned that we signed a key distributor in China.

  • In November, I made a highly productive trip to Beijing, where I delivered a keynote address at the first-ever International Forum on the Future of Simulator Education in China.

  • The fact that this was held at the Great People's Hall in Tiananmen Square, gives you a sense of the significance of this event, with the Vice Leader of the party in attendance.

  • In addition, I hosted an in-depth media event with a top medical and technology publications from around that vast country.

  • After this experience, I can tell you that the need and interest our solutions is high, and the demand is great, with over 700 medical teaching institutions in China alone.

  • While China in and of itself represents an enormous opportunity, we are starting to make an impact in other geographies as well.

  • One recent example was a sale of several medical simulation systems to a university in Colombia, another unmistakable indicator of growing interest for our medical simulation solutions worldwide, and specifically in the important and growing Latin American market.

  • We also signed BT Medical Consulting in Greece, and [Borsley] Medical Services in the Middle East as distribution partners, again highlighting the significant global demand of our solutions.

  • I mentioned that our 2008 Medical revenues were executed without the benefit of new product introductions.

  • That has already changed in early 2009, and changed with significance.

  • We have a pipeline of new products slated for this line of business, two of which we recently announced.

  • In another example of Immersion's leadership in this key sector, we launched the first-ever Haptic medical simulation for a new lung cancer diagnostic procedure.

  • With a new EBUS-TBNA module for Bronchoscopy system.

  • This module provides realistic virtual reality training, leveraging sight, sound and touch, for a difficult, yet highly accurate procedure that diagnoses and stages lung cancer, the single largest annual cause of cancer deaths worldwide.

  • We also launched a critical enhancement to our Endovascular platform, with new carotid modules that provide multi-modal, virtual reality training, for carotid angioplasty and stenting, a minimally invasive procedure performed to help prevent strokes.

  • By bringing these new products and cases to market, we will add fuel to our sales engine for this line of business in 2009 and beyond.

  • You should expect a number of product enhancements and launches during 2009, which will provide us with the momentum and ammunition to drive improved performance this year, and heading into 2010.

  • In summary, the 2008 year was a year of progress and reinvention for our Medical line of business.

  • Driven by new leadership, ongoing investment in new product development, as well as more aggressive marketing and channel expansions.

  • We have set the stage for growth in 2009 and beyond.

  • It is important to note that growth in this line of business will not be linear due to seasonality, and given the uneven nature of contracts for capital-based solutions.

  • That said, we intend to improve our business via a much stronger presence in the industry, a retooled and reinvigorated product set, combined with a focused, global team, creating and ready to capture opportunities.

  • I will conclude my comments on Medical, by noting a highly relevant piece of legislation, HR 855.

  • This has been introduced in the House of Representatives.

  • If passed, the Enhancing Simulation Act of 2009, also known as HR 855, would increase the use of medical simulation technology, creating nationwide centers for training, education and research.

  • The goals of this Bill are to improve the quality of care, reduce medical errors, and increase healthcare savings.

  • Passage of this Bill could present a significant opportunity for Immersion, and our team will monitor it's progress, and participate in activities to support it's ratification, where and when needed.

  • Now turning to our Touch solutions.

  • In early January, we materially streamlined this line of business, and appointed Craig Vachon Senior Vice President and General Manager.

  • Immersion's Touch line of business now encompasses our mobile, touch interface products and gaming groups, all under Craig's leadership.

  • By fully integrating our Touch solutions, we will realize functional synergies to gain simplicity, speed, and accountability.

  • To illustrate our progress, I will invest a few moments to highlight some of the significant inroads we have made in touch since our last earnings call.

  • Starting with the mobile phone market, I will note that licensees of Immersion solutions, Nokia, Samsung, and LG, are now #1, #2, and #3 in the world market, helping to drive our revenue in this source for us in Q4.

  • Additionally, our partners shipped over 12.5 million handsets in Q4, up from 10 million in Q3.

  • Well over 40 million Immersion-enabled handsets have been delivered to the worldwide market.

  • Nokia's 580 Express Touchscreen music phone launched to great reviews and acclaim throughout Europe, and in Asia, resulting in a shipment of over 1million units of this device in Q4 alone.

  • We are penetrating the important Open Software Operating system phone market, with participation in the Android mobile platform, and inclusion in an upcoming Samsung Linux phone for South Korea Telecom.

  • And we have signed a worldwide license with Pantech, one of Korea's largest mobile phone manufacturers, to use Immersion's haptics technology in several of it's premier mobile phones, the first model by Pantech is expected to launch by the end of Q2.

  • Craig Vachon and I recently returned from Mobile World Congress in Barcelona, where we met with customers, prospects and leaders in the world of mobile services and devices.

  • We aggressively promoted the value of Immersion's haptics technology as the future of mobile devices, to all of our relevant audiences, and we generated a great number of new opportunities from those meetings.

  • Other highlights from our Touch line of business include, Samsung's highly successful launch of it's P3 device, CES, which is the first digital music player featuring Immersion's haptics technology.

  • This was the result of a very successful pilot of an integrated sales effort initiated in Q3, prior to announcing the change to one fully integrated Touch line of business.

  • This product introduction is a proof point of the benefits of integrating all our touch efforts under one integrated line of business.

  • Additionally, we are making strong progress with regard to integration of our haptics technology with semiconductor companies.

  • Vertically integrating our technology at the chip level is a key part of our go-forward strategy, and we recently made two announcement that are proof points of that progress.

  • First, we entered into an agreement with Leadis Technology, a provider of analog and mixed signal semiconductors.

  • We are jointly combining Immersion's haptic playback software, effects library and technology, with Leadis' touch controllers to enable the rapid implementation of high quality feedback in capacitive touch-enabled devices.

  • Second, we are building on the success of our existing relationships with Imagis.

  • The first product of this partnership has been very successful for Imagis' top tier customers, including LG and Samsung.

  • Our expanded partnership should drive further integration of Immersion's haptic technology into integrated circuits, making it easier for additional customers to gain the competitive advantages that haptics provides.

  • Turning quickly to Automotive.

  • Toyota selected our TouchSense technology to power a new haptics-based driver control feature for the 2009 Lexus RX, which is now in showrooms across the country.

  • This feature has far geared extremely positive reviews, relative to improving safety and allowing designers increased flexibility in the positioning and navigation of the audio display and navigation system.

  • If you have not experienced this excellent implementation of our technology, CNET has a segment from CES, which features this model with our technology.

  • As mentioned last quarter, we have two additional new car wins for mid-2009 release, with others in the pipeline for 2010 through 2012.

  • We also signed a license agreement with Tier 1 systems integrator Visteon, that will lead to future innovations for haptic-enabled controls in the automotive sector.

  • Visteon's booth at CES featured a car control console of the near future with our technology embedded and brought to life.

  • The booth was extremely popular and so much so, that CNET also did a video feature story on this concept with our technology.

  • And finally, we announced the first ever automotive grade actuator, to enable fast integration of advanced touch feedback, into touch screens and touch services for the global automotive industry.

  • Moving on to the other Touchscreen applications, our haptics technology for casino gaming systems, was prominently featured at the 2008 Global Gaming Expo.

  • Our partner, 3M, as well as numerous gaming systems integrators, demonstrated the technology in new products throughout that show.

  • The gaming category of our Touch business, is an area where we are seeing interesting and highly promising developments and new innovations.

  • These innovations are being driven by our Research & Development efforts, and I look forward to sharing some of our product plans with you in future earnings calls.

  • In summary, Immersion's progress since our last call is tangible, measurable, and accelerating.

  • 2008 was a year of transition, reinvention and transformation across our lines of business.

  • We posted growth in 2008, despite the macroeconomic meltdown, and exited the year with a diversified global business, backed by an extremely healthy balance sheet.

  • Haptics is one of the most talked technology trends for the coming decade, and Immersion leads the world with patented IP in this vibrant market.

  • While we will continue to strategically and carefully invest for future growth in our business, we have been and will continue to manage the Company prudently, given the macroeconomic environment.

  • The relocation of the medical line of business to San Jose, will begin to drive down costs beginning in mid-2009, and the substantial investments we have made to reinvent the Company, these will in fact slow now, as we focus on operationalizing and exploiting the value from our investments.

  • Being mindful of the economy in our business plans, we have implemented salary freezes across the Company, and curtailed all non-essential travel.

  • We intend to exit 2009 with a very strong cash position, and I want to be quite clear, our goal is to attain a breakeven position, then turn the corner by delivering profit as quickly as possible, and drive to sustained profitability moving forward.

  • 2009 is a year of execution, where we will begin to deliver on the promise of Immersion, and I look forward to updating you on our progress regularly.

  • Thank you for your attention, and now operator, let's open up the call for the first question.

  • Operator

  • Thank you, sir.

  • Ladies and gentlemen, we will now begin the question-and-answer session.

  • (Operator Instructions).

  • Our first question comes from the line of Mark Argento with Craig-Hallum Capital.

  • Please go ahead.

  • - Analyst

  • Good afternoon, Clent.

  • Couple of questions.

  • First off, on the HR 855, that Bill, can you just give us a little more color on would that actually mandate that medical institutions actually use training machines?

  • Could you just elaborate on that a little bit?

  • - President, CEO

  • You bet.

  • It is still early days.

  • This is still in consideration.

  • The Bill has not been finalized or ratified.

  • But what it implies, is that much like simulation is required for pilot training, we would expect that the same would hold true for various forms of medical procedures and surgeries, and so our expectation, is this would create a significant opportunity for us.

  • - Analyst

  • Is it part of a larger bill, or is it a standalone bill?

  • - President, CEO

  • I am not a specialist in the Bill, this is specific to simulation.

  • And we believe that this hits our sweet spot for the solutions we provide, as well as I think it provides other simulation requirements as well.

  • - Analyst

  • Okay.

  • Thank you.

  • In terms of the Company, haptics has been around for quite a while.

  • We have seen some traction in terms on the mobile side, given the form factors of the handsets, medical, it seems like international is picking up a little bit, autos, some modest wins.

  • Looking back, kind of a broader picture here, what are really the key one or two things that you see the Company having to reach kind of the tipping point, in terms of being able to really get the right return on the investment that you guys have put in the business?

  • Is it Medical?

  • Clearly it sounds like that is an area.

  • Do you need an HR 855 to make a profitable business out of it?

  • Could you just talk a little bit more thematically, about how you guys look at this business, and what really needs to happen for this Company to become profitable on a sustained basis?

  • - President, CEO

  • Mark, thanks very much.

  • First of all, it starts with people, and so we have now I believe got the team in place to execute, and we have provided the focus.

  • Divesting 3D, bringing our Medical line into our headquarters to streamline and provide synergies, creating a platform for us to manage two businesses, Touch and Medical.

  • Medical for us, with or without HR 855, is a significant opportunity, and one where we believe fits into a broader curriculum, that we will call healthcare education.

  • And without going into great detail at this point, what I will suggest is that we have not had any new products to fuel growth.

  • We now are beginning that pipeline and delivery.

  • That will fuel growth.

  • We have proven clearly that international is a substantial upside opportunity for us.

  • We have not had I would say, the correct formation for go to market, and we now have that.

  • So for us, I believe Medical is all about operationalizing and delivering against our product plans, and ensuring that we continue our march internationally.

  • In Touch, Touch I believe we are very near the tipping point.

  • Certainly, I think it is safe to say the dominos are starting to fall in the mobility category.

  • That is proven, as we are now seeing quarter on quarter growth, and we expect somewhere north of 10 million phones per month toward the end of 2009 alone.

  • In the Touchscreen interface products category, one of the things that we have discovered is that it has taken longer to do design wins, and to actually begin to harvest revenue from those design wins.

  • That said, that doesn't diminish the opportunity at all.

  • We are having a longer view on that particular business, which means that we are also focused on our haptics chip partner program, vertically integrating our technology at the chip level.

  • So between touch interface and the design wins in the consumer and the machine control categories, combined with our embedding technology in the haptic chips, we believe that this creates a tipping point for us, both on the device side, but also in the embedded side.

  • And then thirdly, in gaming, while we are seeing the initial signs of PlayStation2 begin to slow, we have new inventions, and we have new creations and innovations that are in the gaming side, that I mentioned in my comments at the outset, that I am not able to talk about on this call or maybe even the next call, but we expect to provide very interesting opportunities which we will pursue in the future.

  • Wrapped together, I believe focusing on Medical and Touch provide us the two right businesses, and now for us it is about execution.

  • - Analyst

  • Thanks, Clent, I appreciate that.

  • In terms of, I know there has been a lot of change in terms of personnel within the organization.

  • Has that made it's way into the sales organization as well?

  • I know the heads of these groups have been changed out, but how far down in the organization have you made changes?

  • - President, CEO

  • I think it is fair to say that the leadership team we have in place is very, very hands-on, as you know that I am.

  • I would say there is nothing sacred, as we have revectored and reorganized the business.

  • And so without getting to specifics below the senior executive level, you could rest assured we have taken a very serious look at the way we go to market, the way we have incented our teams, and the way we have created either vertically or geographically our plans, and so we have new sales leaders in both sides of the business.

  • Earlier this year or earlier last year, we announced David Barkay internationally in Medical, Terry Sutton is an announcement that we just talked about.

  • And we have Leslie Mulligan, who used to run our 3D tech line of business and the gaming line of business, she is our Vice President of Sales for our Touch line of business now.

  • - Analyst

  • Last question, I know you guys don't talk a lot about this on your conference calls, but I think it would be helpful to get a little better idea about how you guys feel about your IP position relative to your patents?

  • A large amount of your value is locked up in those patents.

  • Could you just talk about how you feel, where you are in terms of your patent positioning with some in some of the key verticals, in particular touchscreens on the mobile side, and maybe medical.

  • - President, CEO

  • The way I would characterize this, Mark, is we have a robust patent portfolio and we are clearly the leader of patented technology in the haptics segment.

  • Our job as a management team is to unlock shareholder value from those patents.

  • And we are exploring every way possible in which to do that.

  • And I think probably what I will do at this point, is not get into a lot more detail on this call, but stay tuned in subsequent calls, as we talk about how we exploit our Intellectual Property, whether it be in royalty and licensing, or in actual design implementations with partners moving forward.

  • And I think one great example of that is how we are going to be distributing our IP through vertical integration with haptic chips.

  • I really do like that model.

  • It gives us broad distribution, gives us a wonderful platform upon which to build other solutions on top of that embedded technology, and you wouldn't be surprised at all, if we would have solutions in the Medical space in subsequent years.

  • - Analyst

  • Great.

  • Thanks for the answers.

  • Appreciate it.

  • - President, CEO

  • Thank you, Mark.

  • Operator

  • Thank you.

  • Our next question comes from the line of Jeff Schreiner with Capstone Investments.

  • Please go ahead.

  • - Analyst

  • Hey, Clent, hey, Stephen.

  • Thank you for taking my questions this afternoon.

  • Clent or Stephen, could you help us understand a little bit, on the conference call for the third quarter earnings, if I am not mistaken you guys had guided to maybe a little bit better in revenues than what was reported.

  • That was around the end of October.

  • Obviously everyone has been going through this macro environment, certainly a change across the industry.

  • Could you guide us through what happened to Immersion specifically there, and where a lot of the erosion came from in the timeframe from November to December?

  • - CFO

  • Yes, I will take that one.

  • Hi, Jeff.

  • If you actually look at our revenue, the Medical side of our business increased it's revenues by over $1 million compared to Q3, so we are recently happy with that, and I think it shows that despite the tough economic environment out there, Medical can grow.

  • On the Touch side, looking at those three businesses in total, one area that really hurt badly in Q4 was the auto side.

  • As you know, I mean, people aren't making large capital purchases of cars.

  • We are primarily in high end vehicles.

  • So that did have an effect on us in the quarter.

  • Also, I alluded to in my part of the discussion, that we had to defer about $700,000 of revenue out of Q4 into Q1.

  • We weren't actually expecting that at the beginning of the quarter, it came up during the quarter, so it makes obviously the cost look worse, and the next quarter will look a little bit better.

  • So in total, I think our revenues have hung on in there.

  • The other thing to note about Q3 was that we had about $1 million of legal settlement, for want of a better phrase, within revenues, that was a dispute with a licensee that we had be deferring revenues for quite a while.

  • So if you take that out of Q3, and match that against the Q4 actual revenues, they are flat.

  • And as I have just said, we had to defer $700,000 out of this quarter into next quarter.

  • So I actually, I don't feel too disappointed by this quarter's revenues.

  • - Analyst

  • Okay.

  • Thank you very much for the clarification.

  • That was very helpful.

  • - CFO

  • No problem.

  • - Analyst

  • Could you talk about possibly, Clent, the new ASIC that you guys have recently announced, and how that could improve the opportunities going forward for the Company, potentially lowering the build of materials, what impact that may have on build of materials for you and your customers?

  • Looking at the comments we have heard today about being more product centric, is it this ASIC type of structure that the Company is going to be now focusing on, and if so, how does that impact the margins going forward?

  • - President, CEO

  • Right.

  • I will let Stephen talk about the margins.

  • What we have recently announced is agreements with both Imagis and Leadis, and both of these firms are embedding our technology onto chips that they design, and that they distribute.

  • What this does and without getting too deep into the gears, it provides an opportunity for us to distribute our technology, to anyone that is putting their chips into their devices.

  • And the implication here is there are chips in virtually every electronic digital device.

  • So contemplate the vast opportunity.

  • We will take a mobile phone for this example.

  • Our job is not to talk about the bomb, and what not.

  • It is a relationship for Imagis and Leadis in this case, to work out with the manufacturers.

  • But it solves a distribution problem for us, because they are already calling on these particular device manufacturers, and it also protects us from an intellectual property standpoint, in ensuring that our IP is well protected, particularly in dark territories, where IP is not as well respected.

  • So while we are not suggesting that we are going to now run to this side of the ship, and only focus on haptic chip partners, this is something that we are adding to our go to market strategy and mix in the touch line of business.

  • It is going to be a vibrant part of our revenue mix moving forward.

  • I would expect, we would hope to make rain toward the end of 2009 and into early 2010, but this is laying a foundation upon which we think is quite significant revenue opportunity.

  • And if you look at most of the chip manufacturers, they are all understanding well the power and opportunity of touch.

  • Touchscreen.

  • Touch feedback.

  • Confirmation, validation, flat screens, and so on, and our technology is a natural to help make a better user experience, for people that have touchscreen solutions.

  • - CFO

  • On the margin side, because this will effectively be a licensing and royalty stream, that will provide very, very high margins, so the margins that we have as a Company will increase.

  • It is interesting, when you look at the margins, excluding the write-downs of the inventory on the 3D side, our margin was 69% which was below 70%, and part of that was because we did a discount on some of our 3D products in the fourth quarter, to effectively run down some of the inventories that we had.

  • The Medical business is a product sales business.

  • It actually brings our gross margins down a little bit as well.

  • But the combination of the ASIC model, as well as the expected increases in some of the licensing revenues from some other parts of our business, and the removal of the 3D business, which had margins below 50%, you will see our margins rising as each quarter passes in 2009 over the fourth quarter of 2008.

  • - Analyst

  • Okay.

  • And that would be a sequential increase, if I understand correctly?

  • - CFO

  • You will definitely see, probably should never say definitely.

  • You will see an increase in Q1 over Q4 2008, yes.

  • - Analyst

  • Okay.

  • Kind of touching on Mark's question, looking at the future value of the Company here, and how things are shifting and changing, and obviously it looks like a lot of positive things going on, but what should we look at on a financial basis, in terms of kind of a benchmark for us to judge the Company on for breakeven level going forward, as we move into this new model that you seem to be creating, and adding on to the strategy, as I have heard several times today?

  • - President, CEO

  • Right, so we are not going to be forecasting or providing guidance on when we expect to breakeven, but I will give you a couple of benchmarks.

  • The first is growth.

  • For any organization to be able to grow in this macroeconomic reality, that is not trivial, and we intend to grow, and I believe we are not only on a path to growth, we have a solid plan that will take us to respectable growth.

  • The second measure by which I would ask investors to consider us, is managing our business such that we actually perform cash neutral, in terms of impacting our cash in the bank, and so that would be the first step on a path to profitability, that of course is the ultimate goal here, as we turn the corner.

  • And then the fourth measure is design wins and customer announcements, talking about our technology and future use.

  • Which is an early indicator of rain that will fall in subsequent quarters.

  • Stephen, do you have other comments you would like to add?

  • - CFO

  • No, not really.

  • I think that says it all.

  • - Analyst

  • Gentlemen, thank you very much for your time this afternoon.

  • - President, CEO

  • Thank you, Jeff.

  • - CFO

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from the line of Glenn Mattson with GTK Capital.

  • Please go ahead.

  • - Analyst

  • Good afternoon.

  • I must say that the expenses have certainly grown.

  • I am a little bit shocked year-over-year how much they have grown.

  • I know you are making investments for the future, and I know you have made a lot of other arrangements, but what can you tell me about, since we don't know when we are going to increase sales enough to be profitable, what can you tell me about the expenses.

  • I know you have taken no salary increases, and things of this nature.

  • I see Sales and marketing going up $2 million year-over-year.

  • Research and Development $800,000, General and administrative going up $1.4 million.

  • These are shocking numbers frankly for a company that is not growing.

  • - CFO

  • So let me talk a little bit about our overheads.

  • Yes, our overheads in Q4 were a little bit higher than we would have liked.

  • We are taking steps to get those overheads down.

  • As you know, we are divesting our 3D line of business, and I mentioned that we were reducing our headcount by 13 individuals, which will come out, that will have an effect on our operating expenses.

  • Also, moving the Medical business to San Jose will also impact our Medical expenses, as we make savings, and I mentioned earlier on that we expect to save over $1 million a year.

  • We have been involved in litigation and other legal expenses, and those have been quite high.

  • Those will come down.

  • So we do expect our overhead to decrease.

  • - Analyst

  • How much were your legal fees, could I ask?

  • - CFO

  • In the fourth quarter?

  • The actual litigation fees in the fourth quarter were about $0.5 million.

  • We do incur other legal expenses.

  • - President, CEO

  • Glenn, let me make a comment on your first question.

  • We are not satisfied with our overheads.

  • We are working to operationalize and bring those down, and you can measure us on our success and ability to do that at the same time, while we grow revenue, and we have grown.

  • We are not happy with the growth rate, but the fact that we have been better than flat, and grown year-over-year, we are actually happy with, and we will continue on that trajectory.

  • Operator

  • Thank you.

  • Our final question comes from the line of Mark McMahon with Raymond James & Associates.

  • Please go ahead.

  • - Analyst

  • Yes, good afternoon fellows, how are you doing?

  • - President, CEO

  • Good Mark, thank you.

  • - Analyst

  • Got a couple of questions in terms of some macro big picture, as well as some specifics.

  • I know that you guys don't like to give forward-looking statements, but I think part of the disappointment is that privately, off-line, talking with analysts, talking with potential analysts about revenue guidance, so to speak, not specifics, but in terms of generally how the industry is going, is that I guess my disappointment is, and when I am talking to my investors that entrust their money with me when I make investments in companies such as yourself is, that when we have such big, huge divergences between what is published and then tomorrow morning's Zach's headline news, is so different from what you guys reported, is that something you guys are thinking about changing going forward from this straight, absolutely no guidance rule, towards helping analysts out there, or potential analysts get a better grasp, better handle on what your businesses look like currently?

  • - President, CEO

  • Mark, certainly a reasonable question.

  • I think in this macroeconomic environment, no one knows how deep, how far or how fast.

  • I don't think we will get any credit for trying to provide any guidance, and candidly, predictability beyond a quarter or two, while we do have royalty and licensing revenue that we count on, or we have a business plan built upon, we are not going to be providing guidance until things in our business are more predictable, number one.

  • And number two, combined with the macroeconomic environment that settles down.

  • It is just not wise, and not advisable, and we won't.

  • - Analyst

  • Along those lines, for example, now you are two-thirds through the quarter.

  • I have got another small cap Company that I am invested in, a smaller cap company that is in the $100 million revenue range.

  • But from my understanding is how their Treasurer, how their Chief Financial Officer all works with analysts is, at this point in the quarter, because you usually get an analyst comment the day after, a couple days after, is they will say you can kind of give some indications on their previous numbers, on whether or not you are in-line or close to in-line, and sort of a you might want to rethink those numbers for the current quarter, because of macroeconomic times we are in.

  • I am just trying to get a feel as when hearing you guys discuss how you are today, and your expectations of growth going forward, and to measure you by that, I am not quite sure what to be putting down pen to paper, as to what my expectations should be for this quarter.

  • Should I be expecting that you guys did in fact grow from fourth quarter through the first quarter?

  • That you guys are now from an internal perspective, meeting your objectives on growth, or is that something that is esoteric, meaning you are hoping to be doing $10 million in unit sales by one manufacturer by the end of the year, and a bunch of other things congeal, and so at the end of the year, I should be expecting some growth, and there is a disconnect, and I am not quite sure what I should be thinking?

  • - CFO

  • Yes well, thinking about talking to analysts after the call, if we do give information to those analysts, we are effectively giving guidance, so we can't do that.

  • That is prohibited.

  • So we can't do that.

  • So I do sympathize with the fact that people are working in the dark.

  • To some extent, our business is seasonal as well.

  • We have different parts of the business seasonal at different times, Q4 is normally good for the gaming side of the business, Q3 is normally very good for some of the medical sides of the business.

  • So those come into play, and we are still an early stage company.

  • Some of our revenues are effectively lumpy.

  • That is just one of the things you suffer with.

  • - President, CEO

  • And I think to your question, Mark, this will be an unsatisfactory answer to your question.

  • We are just not going to be giving guidance for the foreseeable future, and I think if you are someone that tracks our business, if you look at 2006, 2007, 2008 results, you can see quarter by quarter, and our goal is to grow year on year, quarter by quarter.

  • And I think that is probably as much as we are going to say on this at this point.

  • Operator

  • Thank you.

  • Management, at this time we will turn the call back over to you for closing comments.

  • Please go ahead.

  • - President, CEO

  • Very good.

  • Thank you everyone for your interest, questions, and support today.

  • Thank you Stephen for your support.

  • Thank you Alex, and thank you Mary.

  • We look forward to seeing you on the road, or talking with you at our next quarterly call.

  • With that, have a good day.

  • - CFO

  • Thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, that will conclude today's teleconference.

  • We do thank you again for your participation, and at this time you may disconnect.