Immersion Corp (IMMR) 2009 Q1 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen.

  • Thank you for standing by.

  • Welcome to the Immersion Corporation first quarter 2009 earnings conference call.

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

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

  • (Operator Instructions) I would now like to turn the conference over to Mr.

  • Alex Wellins with the Blue Shirt Group.

  • Please go ahead, sir.

  • Thank you for joining us on Immersion's first quarter 2009 conference call.

  • This call is being webcast and is accessible from the investor relations section of the company's website at immersion.com.

  • 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 on our annual report to stockholders as well as any factors mentioned during our discussions today.

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

  • Clent?

  • - CEO

  • Thank you, Alex.

  • Good afternoon to Immersion's investors and analysts, and thank you for your time today.

  • As you've undoubtedly seen from our press release, Immersion posted revenue of approximately $7.5 million in total revenue for the first quarter 2009.

  • $7 million from continuing operations and slightly over $0.5 million in discontinued operations.

  • Revenue mix from continuing operations was $4.5 million from our touch line of business and $2.5 million from our medical line of business.

  • Our net loss was approximately $7.5 million and cash burned during the quarter was approximately $5 million.

  • While Immersion is making operational progress and we are signing a number of exciting deals that bode very well for the future and growth of the company, we fully understand that we must improve our results, both on the top and bottom line.

  • Therefore, Stephen and I will keep our comments today succinct and to the point.

  • We will be clear and direct with regard to plans to continue our success in areas that are showing progress and specific actions we are taking to address the issues in the areas that need improvement and are underperforming.

  • We have stated that Immersion intends to reach and sustain profitability as quickly as possible and we have taken aggressive action and prudent action to decrease expenses towards this goal.

  • We began laying the groundwork for these cost reduction initiatives as we exited Q4 and they began to take hold late in Q1.

  • These actions include the relocation of our medical line of business from Maryland to our headquarters in San Jose, which will result in significant cost savings beginning in the second half of 2009, including the elimination of approximately 20 full-time positions from the medical line of business.

  • Overall, our headcount decreased from 183 in Q4 2008 to 174 at the end of Q1 2009.

  • We reduced our full-time headcount in Q1 by 5% and are in the process of reducing it further by approximately 12% in Q2, which would result in a 17% reduction in the first half of this year.

  • Additionally, we are eliminating virtually all temps and contractors to further reduce our costs.

  • Other decisive and measurable steps we have taken to control expenses in this difficult economic environment include CEO and senior executive management team salary reductions, a reduction in retainer fees for members of our board, a company-wide salary freeze, the elimination of all nonessential travel, and two company-wide furloughs or shutdowns in 2009.

  • All of these actions have been taken and set in motion, though results will not be evident overnight.

  • While we did reduce our total net loss from Q4 to Q1, you should expect that our cost cutting initiatives will not materially benefit our financial results until Q3.

  • That said, investors should understand both the trajectory of our expense reductions and the strategy behind them.

  • We believe that the sum total of these actions will be that by Q3, you will see our expenses decrease by in excess of $2 million per quarter from Q1 levels.

  • Our plan is to operate the business with a goal of cash neutrality in the second half of 2009 by lowering each expense line of our business to cross the important break-even milestone and then drive forward and sustain profitability in 2010 and beyond.

  • Immersion is backed by an extremely strong balance sheet ending Q1 with approximately $81 million in cash.

  • We have added further emphasis to our cash preservation plans and will maintain a very strong balance sheet as we exit 2009.

  • I'll note that gross margins increased sharply to 84% in Q1.

  • Maintaining healthy margins is a key element of our go-forward financial plan and a focus area for our company.

  • Shifting from expenses to our products and solutions, the Immersion team marked progress on both the medical and touch sides of our business during Q1.

  • Demand for our haptic solutions across the various sectors of our touch line of business, including mobile, gaming, automotive and touch interface products is, in fact, intensifying.

  • The outlook for our medical simulation products internationally remains robust and as you may have seen in a recent press release, we forged an exclusive reseller partnership with leading medical device and industrial distributor Gadelius KK in Japan.

  • That said, we have substantial work to do given the softness of the domestic medical market and the challenges from the overall economy.

  • I will provide additional details on our touch and medical lines of business after Stephen reviews our Q1 results with you in detail, and then we'll be happy to take your questions.

  • Stephen?

  • - CFO

  • Thank you, Clent.

  • As you are all aware, we commenced the divestiture of our 3D line of business in the quarter.

  • Under US GAAP, we are required to separately account for incremental expenses that are directly attributable to our 3D business as discontinued operations, while the remainder of the business is accounted for as continuing operations.

  • For today's discussion, I will focus my comments primarily on our results from continuing operations.

  • Please note that all comparative numbers have been adjusted to reflect this accounting.

  • Looking at a breakdown of revenue across our two lines of business, medical and touch, first quarter revenues from medical of $2.5 million represented 36% of total revenues.

  • This is down 16% from the year-ago period and down 41% sequentially.

  • Although we did experience significant weakness in revenue from our domestic medical market, which accounted for most of the shortfall, some of the drop from Q4 2008 was caused by normal seasonal buying cycles.

  • Quarterly revenues from our touch line of business of $4.4 million accounted for 64% of total revenues.

  • This is up 13% from $3.9 million in the year-ago period and up 34% from $3.3 million in the preceding quarter, which is seasonally strong within our gaming and handheld markets.

  • In analyzing our first quarter revenues by category, total product sales revenues, which represented 39% of revenue, increased 3% compared to the first quarter of 2008, decreased 34% sequentially.

  • 92% of product sales revenues come from our medical business and 8% come from our touch line of business.

  • Patent technology licensing and royalty revenues increased 9% from the comparable period in 2008, an increase of 32% sequentially.

  • Patent technology licensing and royalty revenues all came from our touch business and represented 54% of total revenue.

  • Development, contract and other revenue decreased 44% from the year-ago period and decreased 23% sequentially.

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

  • 98% of development contract revenues came from our touch line of business and the remaining 2% came from medical.

  • Development work comprised of 6% of total revenue.

  • Gross margins of 84% for the first quarter increased from 76% in the year-ago period and from 69% in the preceding quarter.

  • Gross margins improved primarily as a result of efficiencies and decreased staffing levels within our operations groups as well as a change in revenue mix.

  • Total operating expenses of $14.1 million include $646,000 in restructuring costs related to reorganizations within both our touch and medical lines of business, as well as non-cash stock charges of $1.2 million.

  • In addition, these total operating expenses of $14.1 million compare with operating expenses of $10.9 million in the year-ago quarter, which included non-cash stock charges of $943,000 and with operating expenses of $13.2 million in the preceding quarter.

  • Those included $537,000 in restructuring costs, as well as non-cash stock charges of $1.1 million.

  • Headcount decreased from 183 at the end of Q4 2008 to 174 at the end of Q1 2009.

  • As Clent mentioned, our expense reduction plan includes reduced headcount as we move through 2009.

  • Interest and other income totaled $431,000 for the quarter.

  • That compares to $1.5 million in the year-ago period and $392,000 in the preceding quarter.

  • Interest income primarily reflects lower invested cash balances as well as general interest rate declines over the past year.

  • After offsetting gain from the sale and operation of our discontinued 3D business in the period, our net loss for the quarter was $7.5 million, or $0.27 per share.

  • This compares to a net loss of $2.6 million, or $0.08 per share in the first quarter of 2008 and an improvement over net loss of $9.7 million, or $0.35 per share in the preceding quarter.

  • Our cash, cash equivalents and short-term investments balance was $80.9 million at the end of the March quarter, and that's equivalent to $2.90 per share.

  • Receivables at the end of March were $4.1 million, which compares to $6.8 million at the end of December.

  • DSOs at the end of the quarter were 52 days net of reserves and 65 days gross of reserves.

  • As of March 31, 2008 -- 2009, we had 27.9 million shares of common stock outstanding.

  • Thank you for your attention.

  • I'll turn the call back to Clent.

  • - CEO

  • Thank you, Stephen.

  • As is evident from the results, our medical line of business has not met revenue expectations.

  • We believe this is due to a very challenging current macroeconomic environment, especially domestically.

  • On a seasonal basis, it's important to note that Q1 has been the slowest quarter for our medical line of business for each of the past four years.

  • That said, there is no question that we have been negatively impacted by hospitals and other facilities slowing or pushing out capital equipment spending, especially in the US.

  • International sales were down only slightly from Q4, partially due to Asian markets that are always seasonally slower in the first few months of the year due to Chinese New Year and other holidays.

  • While macro and seasonal factors negatively impacted our medical results for Q1, a careful analysis of the operations and forecasts for the medical business late last year led us to the conclusion that in order to drive and sustain growth as well as better management of our bottom line, we needed to restructure this business.

  • This analysis resulted in our decision to relocate the business to San Jose, as we announced in last quarter's earnings call.

  • I am pleased to report that as of today, we are commencing medical operations based here in San Jose.

  • The time line of this transition has been managed aggressively and effectively to ensure that we have seamless operations for the most important selling months of the quarter to avoid any unnecessary rent payments and eliminate expenses wherever we can.

  • From an expense standpoint, we are reducing headcount in medical from roughly 80 down to 50 full-time equivalents, and we have taken significant costs out of the business in terms of consultants, temps and contractors.

  • To reiterate, we will not realize much of the benefit of these cost reductions in Q2 due to relocation and restructuring expenses, though we will see a meaningful impact in the second half of 2009 and most importantly, we are sizing this business for its expected revenue trajectory for the balance of 2009.

  • Last quarter, we introduced two new products into the market, the first new product introductions for our medical line of business for quite some time.

  • Despite this typical six to nine-month sales cycle, I can report that we've already made initial sales of these products.

  • This initial success indicates the significant levels of interest for our medical simulation solutions and as is our plan, we must now capitalize on this interest.

  • International demand for simulation remains strong, and we are making progress globally as we continue to add and expand relationships with important distribution partners.

  • As mentioned at the top of the call, one such partnership is an exclusive new distribution agreement with Gadelius KK, one of Japan's prominent distributors of medical devices and industrial equipment.

  • Our two companies are already deploying sales and marketing initiatives aimed at bringing the highest level of advanced virtual reality, medical training simulators, curricula and services to the Japanese market.

  • I attended the kickoff for this partnership at a high profile medical trade show for surgeons in Japan in late March.

  • It was notable that Japan has placed a strong emphasis on using simulation for both the training of new surgeons and for government mandated ongoing medical training in this country.

  • Demand for simulation solutions also remains extremely high in China and on my recent trip there, I observed the construction of a 90 thousand square foot training center outside Beijing.

  • Another 100,000-square foot center was also highlighted in the Wall Street Journal recently, a remarkable illustration for that country and its focus on providing healthcare to its enormous population.

  • Today we announced that MAKO Surgical Corporation, a leading innovator of orthopedic robotically assisted surgery has become our first licensee in the area of surgical robotics.

  • We are very confident about this partnership as it represents the convergence of our touch and medical solutions, and we are opening a new revenue stream for Immersion at the same time.

  • We will recognize a small amount of this revenue from this relationship immediately and we believe and expect this segment has the opportunity to in fact grow over time as well.

  • To summarize on medical, we are taking rapid and aggressive steps to cut costs while focusing our sales efforts to reverse the negative trends of this line of business.

  • We have relocated the business to corporate headquarters and by the end of Q2, we will have sized the operation to match current revenue forecasts.

  • We are working through a difficult macroeconomic environment, but we are encouraged by interest and demand from our customers globally.

  • Our touch line of business has grown revenue both sequentially and year-over-year.

  • Interest in and demand for innovative touch solutions is extremely high and the magnitude of the opportunity before us is great as we're still in (inaudible) phases of adoption for our technology.

  • In the mobile phone market, which is the most discussed sector among investors in the media, this represents a microcosm of the overall touch industry.

  • While overall phone sales are expected to be flat or decline for the first time ever this year due to the general economy, industry analysts are forecasting that touch-based phones in the smart phone category are by far the fastest growing area for handset makers and carriers alike.

  • This trend was further reinforced at the two largest mobile phone trade shows, the Mobile World Congress and CTI A.

  • It's fair to say that the focus of most activity was around touch-based products and the thousands of new apps available for mobile users worldwide.

  • To win in this market, handset makers must be focused on enhancing the user experience to differentiate their products in a manner that is fun for consumers, yet efficient technically.

  • And Immersion helps them do just that.

  • Immersion's touch sense feedback solutions dramatically enhance the user experience in these devices.

  • The top three handset makers in the world, Nokia, Samsung and LG are all licensees for Immersion's haptic solutions, which are shipping in their high volume touch-enabled phones.

  • In fact, our partner shipped over 15.3 million handsets in Q1, up from 12.5 million in Q4 of '08.

  • This means that on a cumulative basis, more than 58 million Immersion-enabled handsets have been delivered to the worldwide market.

  • Along with robust growth, our market penetration has been very impressive over the last three years.

  • Our data reflects that in 2007, Immersion was integrated in only 3% of all touch screen phones shipped globally.

  • In 2008, that number grew to 15%.

  • And based on our run rate and our market analysis, we believe that by the end of 2009, we will be designed into approximately 25% of the touch screen phones shipped during this calendar year.

  • Last quarter, I commented on our strategy of vertically integrating Immersion solutions with semiconductor companies and our progress relative to signing our two first licensees in this area, Leadus and Imagus.

  • Not surprisingly, the integration of Immersion's technology is of substantial interest to a number of chip makers as it allows them to embed and deploy haptic functionality ubiquitously across a wide spectrum of devices.

  • We have received our first royalty revenue from our initial licensees already and we are both encouraged by and confident of the prospect of a new high margin incremental revenue stream for Immersion via partnerships with chip makers.

  • This is a major focus area for our touch group's efforts and you should expect that we will sign additional partnerships in calendar 2009.

  • Quickly turning to other sectors in our touch line of business, Immersion recently participated in GDC, the Game Developer Conference, where we met with a number of manufacturers and licensees to demonstrate recent product and technology innovations by our team.

  • We engaged in positive and encouraging discussions relative to the future products in the gaming sector, which is critical, as sales of PS 2 and related peripherals begin to show signs of winding down in favor of newer consoles.

  • And while the slowdowns in the automotive sector have in fact impacted Immersion's deployments, we are involved in a series of promising projects in this area as well.

  • Last quarter, we noted that Toyota selected our touch sense technology to power a new haptic-based driver control feature in the 2010 Lexus RS, which is in market now.

  • And Road and Track Magazine just gave a sneak peek of the new 2012 Tesla Model X -- S, excuse me, highlighting its use of haptics, noting a 17-inch touch screen infotainment system in the center console with haptic interface.

  • We are engaged in discussions with most of the major auto manufacturers in the world, and as previously announced, two additional 2010 car models have designed in our technology, one from Toyota that is already in the Japanese market and another from a new licensee that will be available later this year.

  • And finally, on the product front, we continue to diligently pursue opportunities in the consumer and office product sector.

  • There is no question that touch screens are being implemented across a wide range of industrial categories, including IP phone systems, white goods and printers.

  • While confidentiality agreements preclude us from disclosing progress in this area at this time, we are working closely with category-dominant brands and household name OEMs to bring a number of innovative products to market, and we'll update you as we are able to share more details.

  • As we look ahead to the balance of 2009, our financial goals are simple and clear.

  • We intend to improve revenue performance and drive growth.

  • We intend to reduce expenses across the board as we drive for cash flow break-even and sustained profitability, and we intend to maintain a strong balance sheet.

  • To accomplish these goals, we must and will continue to improve the efficiency of our operations, focus our sales efforts to capture both short and long-term opportunities and continue to innovate, creating highly differentiated solutions in user experience and deploy the world's leading portfolio of patented haptics technology in end markets globally.

  • I've now been the CEO of Immersion for one year and can say without a doubt that we are making progress beyond what is evident in today's financial results.

  • This team has been engaged in the restructuring and reorganization of the company, which is already beginning to show the fruits of our investments.

  • We understand that we are fighting the headwinds of a global economy, and we recognize that investors are often not patient when told of long design cycles and an inability to disclose specific design wins due to contractual obligations.

  • We are making significant progress.

  • We are forging new important relationships that will, in fact, drive new revenue.

  • Further, the expense management initiatives laid out in today's call will begin to take measurable and impactful effect in the second half of this year.

  • Expenses will decline.

  • Cash usage will be aligned with revenue production and we will maintain our solid financial footing.

  • We are taking rigorous and precise actions relative to headcount and overhead so they properly reflect our revenue.

  • In short, while it sounds quite simplistic, as we move through the year, you will see that we will indeed adjust our operations and investments to spend less than we make.

  • And all of these actions are designed to eliminate our cash burn and turn the corner to ongoing profitability.

  • Interest in touch-based solutions is greater than ever before, and industry trends such as the emphasis on touch in Windows 7 demonstrates just how focused major OEMs are in creating a touch base product portfolio.

  • And despite current softness, interest in medical simulation is quite high as well.

  • While our expense reduction actions demonstrate that we are unmistakably serious about making the tough choices and appropriate investments required to operate in today's environment, we also refuse to miss the critical opportunity to deploy Immersion solutions ubiquitously.

  • Stepping back, it's critical to note that we are participating in very large and growing markets.

  • Our touch business is both growing and performing well.

  • And we're also taking prudent and aggressive actions to improve the performance of our medical line of business.

  • Our IP and ability to innovate in the growing and important areas of haptics and user experience are second to none.

  • While being highly cognizant of the need to stop our cash burn in our business, we must not step back from vital investments as Immersion has an unmistakable opportunity to shape the future of user experience in digital devices.

  • We look forward to keeping you informed and having you mark our progress as we move through 2009 and emerge a very different company than we were a year ago, than we are today.

  • Thank you for your attention and interest.

  • Operator, let's open up the call for our first question.

  • Operator

  • Thank you, sir.

  • (Operator Instructions) And our first question is from the line of Mark Argento from Craig-Hallum.

  • Please go ahead.

  • - Analyst

  • Hi, Clent, hi, Stephen.

  • - CFO

  • Hi, Mark.

  • - Analyst

  • Question -- first question, this Mako deal, I know it's early on in the company.

  • Mako's just ramping up in terms of units, but is it typically this type of deal, you get up front royalty and then a per unit payment, or how should we think about these deals going forward?

  • - CEO

  • Thanks, Mark.

  • We're particularly confident and excited about this Mako announcement, as it's the first in a new category, and it is also a new revenue stream for us.

  • Typically the arrangements will be a fee up front to start and a per-unit royalty payment, or a licensing payment depending upon the agreement.

  • - Analyst

  • You guys have to put any upfront engineering costs in, in terms of getting the the product up and running in their device, or is it fairly well integrated at this point?

  • - CEO

  • This -- each agreement will be a little bit different because each of these surgical robotics manufacturers are in varying stages of implementing and considering haptics.

  • That said, in this instance, this will have a very quick turn into the market , and we believe that there will be little work we will have to do to help get them up and

  • - Analyst

  • Okay, and in terms of the -- I know you had mentioned the press release and discussed a little bit on the call about your market share assumptions.

  • 15% to 25% on the flat panel mobile devices.

  • Does that assumption -- your assumption there include any new OEM wins, any new manufacturers, or is that with who you have already announced relationships with?

  • - CEO

  • Based upon -- let me just quickly unpack how we arrived at that.

  • First, it's based on an eye supply study that everybody that follows us and this category generally understands from May of 2008.

  • It also is based upon our track record run rate and knowing what models of phones we're working on that are coming to market, as well as forecast and validation from the three largest handset manufacturers on the planet, which are Nokia, Samsung, and LG.

  • So this is an integrated understanding of the market.

  • We do not take into account any new OEMs in this particular forecast.

  • - Analyst

  • And then thinking about -- shifting back over to medical, I know there's been some bills, or some pending legislation introduced.

  • I believe it's HR 855.

  • I think we've touched on this before.

  • Are you guys following that bill, and have you guys put any lobbying efforts behind that, the bill to see if you could get that medical training somehow pushed through?

  • - CEO

  • You bet.

  • And for those that haven't read it, it's a reasonably easy read.

  • It has been referred to committee, which is the first phase after a bill has been sort of introduced.

  • It goes to committee for review and edit and consideration and implementation and it's a process.

  • We do follow it very, very closely.

  • We have self-serving interest in it certainly, and we believe it will also help improve patient care in the United States.

  • We have contributed modestly in lobbying, but generally speaking, lobbying efforts at this stage of where the bill is in process aren't hugely impactful.

  • That will help a little further on in the process.

  • - Analyst

  • Okay, and in terms of the -- shifting over to more housekeeping questions, cash flow from operations for the quarter, I know you guys are still taking in some cash payments, I believe from Sony, if I'm not mistaken.

  • How much did you guys burn on an operating basis versus, say, from some of these royalty payments?

  • - CFO

  • Yes, hi, Mark.

  • So our non-cash expenses are around $1.6 million a quarter, or at least they were in Q1.

  • So you take our operating expenses, which were $14.1 million and take out 1.6, you get a 12.5.

  • So that's the expense that we burned on expenses.

  • From an overall cash flow point of view in Q1, we burned, as Clent said in the call, just under $5 million, and we're targeting cash flow neutrality in the second half of the year, and we get there with some modest growth.

  • - Analyst

  • Are you still -- are your payments from the Sony detail, that deal that you did with Sony a couple years ago, is that still -- are you guys still taking any cash from Sony?

  • - CFO

  • Yes, we are.

  • We will continue to take in some cash from them each quarter through the end of this year.

  • So there's, I think l three more payments still to come.

  • - Analyst

  • And in terms of the moving costs and some of the severance costs related to repositioning medical, is that in this quarter or will that be in next quarter?

  • - CFO

  • So we took $646,000 of restructuring charges in Q1.

  • We are in the process of, as you say, moving our medical business to San Jose.

  • There's going to be some facilities-related costs there and some people-related costs.

  • And we expect the majority of those costs to hit in Q2, this quarter that we're in now and expect those costs to be in about the $1 million range.

  • - Analyst

  • Those will be all expensed, I assume.

  • - CFO

  • Yes, they are all going to be sitting in that restructuring line.

  • They are not going to be in an overall expenses.

  • So with this -- as we said, we expect our overall expenses to come down a couple of million dollars or more each quarter between this Q1 that we've just been through and Q3.

  • You will see some reduction in Q2, but it won't be significant.

  • And the line by line item sales marketing, et cetera, you will see some reduction in, but you will have restructuring costs sort of offsetting that.

  • - Analyst

  • And then in terms of the -- I know you said headcount has gone down from about 80 to 50 in medical.

  • Clent, where have you guys targeted the reductions and is it R&D?

  • Is it sales?

  • Where are you making adjustments?

  • - CEO

  • You bet.

  • So we're -- when you restructure and reorganize the business, as well as relocate, it gives you an opportunity to take a look at the entire business inside out, which we've done.

  • As you would well expect, there are a number of synergies that we're gaining in corporate functions, which bring into headquarters, we don't need two IT departments, we don't need two finance departments, we don't need two security, and it goes on and on.

  • We also have substantial floor space here that we've recently vacated as a result of our divestiture of our 3D lines of business that free up production floor and inventory capability.

  • So we'll see the benefit of that as well across corporate functions, and with little exception, we are doing operationalizing across each of the major categories of that business, where we have some development, there's some in the marketing area, there's some that will be done modestly in the sales and business development area, but predominantly in the revenue generation and the development side, we're doing our level best to try to keep those intact.

  • - Analyst

  • And last question, in terms of the one-year look back, I mean any, anything you would do differently if you got the opportunity to do it again, or what leaves you most excited and most frustrated?

  • - CEO

  • Good question.

  • Thank you.

  • I stutter just a little bit on the philosophy of it all.

  • The world has changed two times in the last year, and I think if I were to look at doing anything different, it would probably be to take a little earlier view of some of the restructuring that we did in Q1.

  • We might have considered and contemplated that a little earlier in the Q4 quarter.

  • That said, we had an operating plan that I came into that we all supported and really believed is the right thing to invest into growing the business.

  • We -- so it's easy to sort of have the fifth quarter quarterback view of the game, but I will tell you, there aren't many regrets here.

  • Am I optimistic?

  • Yes.

  • If you take a look over the last three quarters, management continues to accumulate our stock.

  • We are working for the second half of the year to be cash neutral.

  • This company, as -- is cash neutrality is sort of the first gate that you need to pass to get to profitability.

  • We've never been organically profitable.

  • That's a huge milestone for the business.

  • We have a strong balance sheet.

  • We are debt-free.

  • We've got $80 million bucks in the bank.

  • I think we're really in the driver's seat.

  • Right now it's about proving that we can get --cross the threshold of profitability, cash neutrality before that and then really driving the revenue top line to show relevance in the broader market.

  • So I, I think the fact that touch is continuing to grow, that we have an international interest in our medical line of business, there's only nine or ten things that I listed there, but those keep me pretty bullish and we remain very confident and optimistic about the business.

  • - Analyst

  • Last question and then I'll hop back in the queue.

  • Your background is sales and marketing.

  • How do you judge the job that the company's done in terms of establishing its brand and reputation and mind share with a lot of these larger OEMs?

  • Have you made -- I know you guys have put up some deals, which is encouraging.

  • But I assume that we can all take heed that you guys are having discussions and guys understand the value proposition that you -- that the technology brings to the table.

  • - CEO

  • Yes, thanks, Mark.

  • As I said in the comments toward the end of the top of the call, the interest in haptics and the interest in Immersion is substantial.

  • And while we will do what we need do to spend less than we make, we also refuse to walk away from the necessary investments to ensure ubiquity.

  • I said as I was walking in here in the press release when I joined the company that I felt like Immersion was nearing the tipping point for our ubiquity and deployment.

  • I believe we're further down that path.

  • As we -- as I travel the world, as we talk to teaching hospitals and universities, we've opened up a new theater in South America.

  • Across the panhandle of Asia, Eurasia, India, Korea, Japan, China, these are markets that have an appetite for training surgeons and medical practitioners.

  • There's no other really way to scale it, short of using cadavers or using live patients, which brings some cultural stigma.

  • So we think we've got a unique solution there.

  • And as we look, sort of zoom out and look forward, our brand is stable and growing.

  • Our reputation is strong, and we are and have been customer leaning and doing our level best to try to cut deals when and where we can.

  • And at the same time, balancing that against ensuring that we vigorously protect our intellectual property.

  • Kind of a long answer to a short question, but we -- I would say our brand reputation is growing.

  • I inherited a quality company with lot of cash that was debt free, that has done a number of things very, very well, and I hope that we've been able to build substantially on that, and I think that we have.

  • - Analyst

  • Thanks for the perspective.

  • Appreciate that.

  • - CEO

  • Thank you, Mark.

  • Operator

  • Thank you.

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

  • Please go ahead.

  • - Analyst

  • Hey, Stephen, hey, Clent.

  • Thank you for taking my questions.

  • Stephen, could you just remind us please, what the revenue break-even level is for Immersion?

  • - CFO

  • Well, it's obviously a number that's come down a little bit because of the changes that we're making with our operating expenses.

  • We're kind of focusing more at the moment on cash flow neutrality, and if you take account of the operating expenses we had in Q1, which was $14.1 million and take over $2 million in expense reductions that we're implementing, plus the fact that some of our expenses are non-cash related, our cash spend on expense side is going to be around $10 million to $11 million, which will get us, in Q4 -- Q3 and Q4, which will get us to that second half cash flow neutrality situation.

  • So, with modest revenue growth, we achieved that.

  • And that's what we're planning on doing, and we can see that line of sight.

  • - Analyst

  • Okay.

  • So I have heard correctly then today in statements, I think that you just said it and Clent has referenced it, that the company does believe that on a cash neutral -- as you describe it, cash flow neutral basis that that likely is achieved, given not significant growth is needed to achieve that in '09?

  • - CEO

  • That's correct.

  • We believe and have confidence that we will have modest revenue growth and we are also constantly evaluating our expense line in the business to make sure that we spend less than we make and be clear.

  • Cash preservation is king.

  • We are into protecting the erosion -- against the erosion of our cash balance.

  • We have one more quarter of some heavy lifting and hard rowing that we need to do in Q2.

  • As we turn the corner on July 1, we enter Q3.

  • We'll realize the benefits of all the expense reduction initiatives that we've undertaken and with modest revenue growth, we expect to hit cash neutrality by the end of the year.

  • - Analyst

  • Okay.

  • Stephen, just wondering, one would think, just looking from the outside in, that a lot of the inventories you hold on your balance sheet is mostly related to the medical business, given the nature of some product sales there.

  • Could you tell us if that is correct, why was the inventories up sequentially from the fourth quarter, given kind of the, I would say neutral outlook provided by you guys in the medical business going forward?

  • - CFO

  • Yes, correct.

  • The majority of the inventory of the company is on the medical side of the business.

  • It's not all medical.

  • There is some in inventory related to our touch side of the business, but the majority of it is medical.

  • I think it's fair to say that the medical domestic revenues have been disappointing in the last couple of quarters.

  • The buying cycle at the moment, capital purchases into that market is pretty tough.

  • And our manufacturing cycles take a little longer than some other companies.

  • So we have to build up some inventory to meet our expected revenues there and with those cycles, I think with the medical domestic being a harder sale in the last couple of quarters than we anticipated, we've seen our inventory balances increase.

  • We are obviously addressing that and intend to bring our balances down.

  • - Analyst

  • Okay.

  • One last balance sheet question here, Stephen.

  • Just about the -- anything changed year-over-year when we look at maybe the -- who is making up now your AR balance as to maybe the increase we've seen?

  • If I'm not mistaken, I think it was around 36 days in Q1 '08 and it's about 52 when you net out reserves this quarter.

  • Has anything changed there?

  • - CFO

  • Yes, we've seen a little bit of longer payments taking place, or payments not taking place on a timely basis from some of our overseas customers.

  • Our DSO does move around.

  • At the end of December, it was 70 days, now we're back down to 52.

  • And you're correct.

  • A year ago, it was actually 37.

  • So it does move around a little bit.

  • I think it's also tied up a lot to the way our business is changing and it comes back to Clent's answer to that last question from Mark over the last year.

  • A year ago, international revenues were about 35% to 40% of our total revenues -- of the company.

  • In Q1, our international revenues were 55% of total revenues, 45% domestically.

  • So we've seen more sales overseas.

  • And for us, it's just going to take our customers longer to pay when they are based overseas than within the US.

  • - Analyst

  • That's fair enough.

  • Just one final question.

  • Clent, you've been discussing about there's intense demand and intense interest in the haptic technology.

  • And certainly, that can be referenced by some of the key designs the company's had and the success -- one could point to even the handsets that you've had to recognize the value of haptics that some in the industry have found.

  • In your past life you worked at a company called TiVo, and they had a product, which if you interviewed anyone who had a TiVo would probably never give it up for the life of them.

  • However, the company, I would say if you were still looking at their model today, has still had a problem monetizing the overall value of that TiVo brand and what the product offers.

  • Can you help us understand maybe how haptics might be different than TiVo and how you see the monetization playing out over the next 12 to 24 months?

  • - CEO

  • Well, I'll do my level best.

  • I mean we're -- it's hardware solutions with a subscription service versus licensing and royalty revenues.

  • It's kind of hard to compare them directly across.

  • But what I would say is Immersion's opportunity is truly ubiquity in the user experience.

  • And while we have been a little bit hamstrung in our ability to talk about the dozens and dozens of engagements that we have with potential partners and partners that we currently have that we've not yet announced, the interest for our products and solutions continues to increase.

  • Our legal department is busy with new contracts and NDAs and agreements, and you will see that -- those announcements coming out as we can make those announcements.

  • But they are sort of customer and partner-driven.

  • We can't get ahead of their product announcements.

  • Our job clearly is -- if you take a look at the mobile market as a microcosm of touch, the same thing has happened in our automotive category.

  • We're seeing that now move to IP telephones and desktop telephones and across netbooks and notebooks and the input/output for Win 7 as that operating system comes across.

  • You'll continue to see this in industrial machines, in kiosks and in casino gaming.

  • For us, I think it's just a matter of making sure that we can give our investors confidence, that we're not going to erode our cash balance by our ongoing operations and that we then can prove that we have top line relevance by growing and our goals are to achieve that, and if we're successful at doing that, I have no doubt that we will achieve ubiquity.

  • And to go from 3% to 15% to 25% on the touch screen phone market, I think is one proof point of five or six that we're going to see across the consumer categories and I think you're also going to see a similar takeup as we move across our medical theaters as well.

  • - Analyst

  • Gentlemen, thank you very much for your time.

  • - CEO

  • Thanks, Jeff.

  • Operator

  • (Operator Instructions) And our next question is from the line of Aaron Husak from Lanexa Global.

  • Please go ahead.

  • - Analyst

  • Great, thank you.

  • A couple of questions.

  • First, thank you for the increased focus on cost reduction and cash flow break-even.

  • We appreciate it.

  • Can you give us an update on your progress in raising your average selling price in the handset space?

  • You've got a few initiatives underway and some contracts that I think are going to come up for renewal.

  • Can you update us there?

  • - CEO

  • Sure.

  • It will be largely unsatisfying response to a good question.

  • We don't talk about our ongoing negotiations as they are in the mix.

  • But there is a couple of things that the company did early on that were very smart indeed.

  • The first was to get the single largest handset manufacturer on the planet to sign up and agree that haptics was a table stake for them to differentiate their user experience, that being Nokia.

  • Soon after came LG and Samsung that actually beat Nokia to the market because of the design and manufacturing cycles.

  • And who'd have known that three years later, they would be the number one, number two and number three handset manufacturers on the planet.

  • That said, as we have the opportunity to raise prices, we certainly look to try to do that, and we have been successful in some relationships already in doing that.

  • The early ones in get the best deal and the later ones in, as the water line rises, generally pay a higher price and we also are following that model.

  • And we don't break out individual prices or individual contracts, but rest assured that as the water rises and more players come into the market, that we view that as an opportunity to increase price.

  • And that same model holds true for virtually every theater in the touch line of business, whether it be automotive, whether it be mobile, whether it be in the traditional computer touch screen space, in the gaming space or other.

  • - Analyst

  • And can you get into a little bit on the -- it's not just you going to them and saying, we would like to you pay more.

  • What are the kind of leverage points that you have in terms of additional features or capabilities with haptics that help bump them up a notch on pricing?

  • - CEO

  • Sure.

  • So we've got a truly brilliant innovation engine here in our research and development group.

  • And certainly, people are generally happy to pay more if they get more, and we are continually improving both the effects as well as the way customers -- our customers can improve and differentiate their user experience, and we are offering various ways for them to do that.

  • And I don't know if you've been following our product solutions, for example in the mobile category, which you can sort of get a view to off of our website, we essentially have kind of a good, better, best product segmentation strategy.

  • So you can get in for a reasonably value oriented price at the good sort of quality or the good mix.

  • But if you want some of the cooler whiz-bang features that our technology provides, you'll pay a higher price.

  • And so we use that same model across each of our touch line categories.

  • - Analyst

  • Okay, great.

  • And since you brought up Nokia, can you tell us, are you already shipping into the Series 60 platform, or for now, is your Nokia revenue just primarily the 5800?

  • - CFO

  • The Series 60 including our technology, I don't think has shipped yet.

  • We're expecting it to start shipping, I believe in the third quarter.

  • Of course, we can't control that.

  • That's completely down to Nokia.

  • But those are the -- that's a rough time line that that product's meant to ship.

  • - Analyst

  • Okay, and then for the touch screen haptics share numbers that you laid out there, do you have a sense for what you think those will be in sometime early 2010 when both S 60 and S 40 have haptics in them?

  • - CEO

  • We want to be careful not to forecast or preannounce our customers' products.

  • That said, we are in the Series 60, and that will be shipping, and we have delivery times.

  • It was to have been Q1 of this year, and it's been pushed to Q3 of this year.

  • Certainly, the next holy grail is the high volume market, which is series 40.

  • We expect that to be shortly thereafter.

  • But it is our belief and expectation that we will be across both platforms.

  • - Analyst

  • Okay, great.

  • And maybe just a housekeeping question.

  • The handset unit number that you threw out there, I guess it was 15.3 million units, given how you recognize handset royalties in arrears, is that actually the number of units that shipped with haptics in Q4 of last year, or is that a Q1 of this year number?

  • - CFO

  • That is the number that shipped within Q1 this year, January 1 to March 31, 2009.

  • - Analyst

  • Okay, and you'll be recognizing royalties on those units in Q2?

  • - CFO

  • That's correct.

  • We recognized royalties in one quarter in arrears.

  • - Analyst

  • Okay, okay, great.

  • Maybe just one more for me.

  • I know you can't really talk about the white goods and printer market yet, but can you give us any sense for how big you think it might be, maybe relative to your other product categories and a little bit more on timing of that opportunity?

  • - CEO

  • Sure, and I talked about this a little bit on prior calls.

  • Consumer design cycles generally are quicker than, certainly automotive, for example, and some other devices that we're in.

  • That said, it can be nine to 12 months, even for some of the fastest, though you could expect to see uptick in both announcement, product announcements, as well as some substantial revenue as we approach Q4, because that's generally a kind of a golden quarter for consumer buying.

  • And I want to be careful not to get too far ahead on any forecast there, but across virtually all categories, whether it be white goods or consumer, we are having conversations and helping OEMs and ODMs create a differentiated user experience.

  • Because the high end in particular, it generally starts in the high end products and moves its way down across the entire category of product portfolio.

  • We are having meaningful and material conversations in virtually all of those categories.

  • - Analyst

  • Great.

  • Thank you.

  • - CEO

  • You bet.

  • Thank you very much.

  • Operator

  • Thank you.

  • And that does conclude our question and answer session for today.

  • I would now like to turn the call back to management for any closing remarks.

  • - CEO

  • We appreciate your interest and attention for our earnings call today.

  • We look forward to seeing you on the road or at any event that we will have or our next earnings call next quarter.

  • Thank you very much for your interest and support in Immersion.

  • Have a good day.

  • - CFO

  • Thanks, bye.

  • Operator

  • Ladies and gentlemen, this concludes the Immersion Corporation first quarter 2009 earnings conference call.

  • You may now disconnect.

  • Thank you for using ACT.