Immersion Corp (IMMR) 2010 Q3 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Immersion Corporation Third Quarter 2010 Earnings 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 is being recorded today, Thursday, November 4, 2010. I will turn the conference over to Alex Wellins of The Blue Shirt Group. Please go ahead sir.

  • Alex Wellins - The Blueshirt Group - Partner & Co-Founder

  • Good afternoon and thanks for joining us today on Immersion's third quarter 2010 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at immersion.com.

  • With me on today's call are Vic Viegas Immersion's President and CEO and Shum Mukherjee, the company's CFO.

  • During this call, we may like to make forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products, anticipated market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a listing of the risks that could cause this, please see our latest Form 10-K and Form 10-Q filed with the SEC as well as the factors identified in today's press release.

  • Additionally, please note that during this call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and the reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in the Investor Presentation section of the company's IR website, at ir.immersion.com.

  • With that said, I'll turn the call over to Chief Executive Officer, Vic Viegas. Vic?

  • Vic Viegas - President & CEO

  • Thanks, Alex. And thanks everyone for joining us this afternoon. I'll start by providing a high-level summary of our performance for the third quarter. Then, I'll turn the call over to Shum for a more detailed review of our Q3 results. I'll then discuss recent developments and our thoughts on the current business environment before opening up the call to your questions.

  • Total revenues for the third quarter were $6.5 million. We achieved strong growth in revenues from royalties and licensing, which increased 81% year-over-year. Net loss for the third quarter was $1.1 million or $0.04 per share as compared to a net loss of $9 million or $0.32 per share in the same period last year. And we generated positive adjusted EBITDA of over $400,000 versus negative adjusted EBITDA of $4.6 million in the year ago period.

  • Immersion is making solid progress across our key initiatives as we continue to lay the foundation for future growth. During the third quarter, we continued to expand our product offering, saw our technology incorporated into additional high-profile design wins from multiple OEMs and posted our third consecutive quarter of adjusted EBITDA profitability.

  • I will provide an update on our business in just a few minutes, but first let me turn the call over to Shum for a more detailed review of our financial results.

  • Shum Mukherjee - CFO

  • Thanks Vic. Revenues in the third quarter of 2010 were $6.5 million, roughly flat to the third quarter of 2009. Revenues from royalties and licenses were $5.1 million, up 81% from Q3 2009, reflecting strong demand in mobility, gaming and other lines of businesses. Revenues from the sale of products were $1.2 million down 65% from Q3, 2009, primarily reflecting the transition of certain medical products to CAE.

  • Revenues generated from development contracts were $189,000 in the third quarter of 2010, slightly below revenues of $285,000 in the year ago quarter. Gross profit was $6.1 million in the third quarter of 2010 or 93% of revenues, compared to gross profit of $3.3 million or 50% of revenues in the third quarter of 2009. The increase in gross profit reflects the shift in business mix to primarily licensing revenues, which accounted for 79% of total revenues in the third quarter of 2010, compared to 43% of total revenues in the same period last year. As we look at our long-term model, we expect licensing revenues to grow as a percentage of our overall mix driving gross margins higher.

  • Cost of product sales in the third quarter of 2010 were $457,000, compared to $3.3 million in the third quarter of 2009. Excluding cost of product sales, total operating expenses were $7 million in the third quarter of 2010, compared to $12.4 million in the third quarter of 2009, primarily reflecting the license and transfer of certain medical product lines, reduction of headcount from 141 employees to 93 employees, and other cost saving actions.

  • The operating expenses of $7 million include non-cash charges related to depreciation of $260,000 amortization of $211,000 and stock-based compensation of $896,000. Excluding these non-cash charges, operating expenses were $5.7 million during the quarter and is expected to trend in the $5.5 million to $6.5 million range over the near term. We have lowered our expenses related to corporate, admin and legal but plan to continue to invest in sales, marketing and R&D to fuel our revenue growth. Net loss in the third quarter of 2010 was $1.1 million or $0.04 a share, compared to a net loss of $9 million or $0.32 a share in the third quarter of 2009. As you know, in addition to normal GAAP metrics, we use the metric called adjusted EBITDA to track our business. We define adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization, less share based compensation and other non-recurring items such as internal investigation and restatement costs, re-structuring costs and discontinued operations. In 2009, adjusted EBITDA also excluded change in fair value of warrant liability. Adjusted EBITDA in the third quarter of 2010 was $428,000, compared to negative adjusted EBITDA of $4.6 million in the third quarter of 2009.

  • Revenues for the nine months ending September 30, 2010 were $24.7 million, 19% over revenues of $20.8 million in the comparable period of 2009, once again reflecting strength in royalty and license revenues, which grew 75% compared to the first nine months of 2009, partially offset by a decline of 37% in product revenues.

  • Gross profit for the first nine months of 2010 was $22.1 million or 90% of revenues compared to gross profit of $13.9 million or 67% of revenues in the first nine months of 2009.

  • Operating expenses excluding cost of product sales in the first nine months of 2010 were $25 million, compared to operating expenses of $39 million in the first nine months of 2009, a reduction of $14 million, primarily reflecting the license and transfer of certain medical product lines, headcount reduction and other cost saving actions.

  • Interest and other income was $212,000 in the first nine months of 2010 compared to $1.2 million in the first nine months of 2009, which included $334,000 of interest income attributable to the enforced judgment with Sony. The interest income related to Sony arrangement was fully amortized by Q4, 2009.

  • Provision for income taxes was $1.1 million in the first nine months of 2010 compared to $577,000 in the first nine months of 2009. These taxes are primarily related to withholding taxes payable in Asian countries and tend to rise in conjunction with the increase in business in those countries.

  • Net loss in the first nine months of 2010 was $3.6 million, compared to a net loss of $24 million in the first nine months of 2009.

  • Adjusted EBITDA in the first nine months of 2010 was $2.8 million compared to negative adjusted EBITDA of $14.7 million in the first nine months of 2009, an improvement of $17.5 million.

  • During the first nine months of 2010, the company used $1.2 million of cash in operating activity, compared to cash usage of $13 million in operations in the first nine months of 2009. Our cash portfolio, including cash and investments was $62.1 million as of September 30 2010, compared to $63.7 million on December 31, 2009.

  • In terms of guidance, based on our current visibility, we expect revenues to be in the range of $5.8 million to $6.3 million for the fourth quarter and to exceed the high-end of the $25 million to $30 million annual revenue guidance we provided earlier this year. Additionally, we are on track to achieve positive adjusted EBITDA for full year 2010.

  • And with that, I'll hand it back to Vic. Vic?

  • Vic Viegas - President & CEO

  • Thanks Shum. Let me start with the discussion of our progress over the past few months. In mobile, I'd like to highlight two recent notable designs featuring Immersion's technology. The first is the Samsung Galaxy S which leverages our TouchSense 3000 solution. This phone has successfully ramped world wide and is reportedly now available in over 100 countries and through most major carriers globally including AT&T, Verizon, Vodafone, Orange and SKT to name a few.

  • In addition, Nokia's N8 smartphone recently began shipping, which features Immersion's technology. This model is one of the best examples today of how the user experience can be maximized through broad incorporation of haptic. If you haven't yet demoed the phone for yourselves, I highly encourage you to do so.

  • As one technology reviewer put it, "The haptic feedback, a vibrating response which confirms your input has been recognized, is the most effective on any phone delicate but definite." And another reviewer pointed out that the implementation goes beyond simple button presses saying, "Kinetic or inertial scrolling is now available throughout the interface which makes scrolling much easier, the screen also gives a vibration feedback when you touch it and as usual the vibration feedback on a Nokia phone is just perfect."

  • Incorporating haptics throughout the UI dramatically elevates the ability to enhance user interaction and we are working with other licensees and platforms to try to drive this approach forward. Stay tuned over the next coming months for some of the things we will be doing to raise the bar in demonstrating just how rich the haptics experience can truly be. The team is working on tools to arm the mobile ecosystem with ways to create better haptic experiences including deeper integration of haptics in the games and other application.

  • Last quarter we announced that Toshiba became a new licensee using Immersion's haptic technology in the Toshiba Libretto W100 dual touch-screen mini-notebook PC. This product began shipping during the third quarter. I'm also pleased to mention that our technology is now being featured in Samsung's Galaxy Tablet device.

  • Larger touch screen devices represent a new opportunity for Immersion and we've expanded our product portfolio to target this area with our recent TouchSense 2500 offering, which enables drop-in IC solutions to drive compelling haptic effects that transform the user experience in touch-based PCs, slates, tablets, netbooks, notebooks, and ultra-portable.

  • As you recall last quarter, we introduced the TouchSense 2100 solution to power touch feedback effects for a broad range of applications including touchpads, capacitive buttons, touch screens, and virtual keyboards. We are working closely with our leading ship partners on near-term product launches leveraging touch surfaces in the consumer electronics, white goods and industrial areas, providing the relevant sales and marketing support to drive the adoption of our technology within the broader ecosystem.

  • On the medical side, Immersion is steadily building a strong base of business following the transition of our products base sales to a high margin licensing model. We have forged a number of notable licensees which now include CAE, MAKO Surgical, Simbionix and SOFAR.

  • The medical market represents a meaningful growth opportunity for the company and we expect to continue to expand our reach with new partners in the areas of robotic surgery, medical devices and medical simulation.

  • On the corporate front, as you may recall, we filed a motion to dismiss the consolidated securities class action against the company on June 15, which motion is currently pending. The related state and federal derivative cases have been stayed until the motion to dismiss has been resolved.

  • It's been a year since I returned to the helm of CEO, which I think presumes a good opportunity to reflect on Immersion's position and progress relative to that time. Based on our results in Q3 and our expected performance in Q4, we should exceed the high-end of the $25 million to $30 million revenue guidance we provided earlier this year. Perhaps more importantly, we've been setting the stage for the future growth of the company, having cleared up the previous hurdles, putting a strong management in place and transitioning the company to a scalable business model based predominantly on licensing.

  • Zooming in on another level, we've made numerous enhancements to our technology offering and have built a strong and growing network of ecosystem partners to encourage the broader proliferation of our haptic solution. We've established the solid value proposition for OEM, leveraging our strong IT portfolio and expect a cumulative deployment of our technology and at least 200 million mobile phones worldwide by year-end.

  • On the cost side, we streamlined the organization and made a turnaround to sustainable profitability on an adjusted EBITDA basis, having generated nearly $3 million this year to-date. And as I mentioned last quarter, we are completing our three-year strategic plan and are focused on effective and efficient execution in a few key areas, including driving the adoption of high-definition haptics into the market, refining our intellectual property strategy, scaling our chip partner market penetration and growing our design pipeline.

  • While we're still on the cusp of the next major phase of adoption, as we work towards broadly deploying our Piezo-based solution and beginning to leverage additional channels to promote the use of our technology. Immersion is well positioned to play in the rapidly growing touch market. We believe we are successfully laying the groundwork for the company's future growth and are extremely excited about the opportunities ahead.

  • I'd like to thank you for your continued interest and support of Immersion. And I'll now open up the call to your questions.

  • Operator

  • Thank you sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Jeff Schreiner with CapStone Investments. Please go ahead.

  • Jeff Schreiner - Analyst

  • Good day, gentlemen. Thank you very much for taking my questions. Vic, Shum, I'm just trying to understand here about the product revenue, maybe what was recognized in there. Perhaps I'm mistaken, but I was thinking that we were kind of instructed that the last quarter's medical products and I'm just wondering maybe is the guidance that you had given previously coming into the September quarter, is that kind of an apple-to-apple with the results that you reported?

  • Vic Viegas - President & CEO

  • Yes, Jeff. I think we have said all along that even though we've transitioned three medical product lines to CAE, we still have a medical product line, we also have products related to chips, related to reference design, and other kinds of design packages, demo solutions and so on. So, I think it is what I would compare relative to the forecast. And I think the revenue from product sales is about what we would have expected. A little high, but I think its pretty close.

  • Jeff Schreiner - Analyst

  • So, would that be maybe something that, is that something that's going to fluctuate a lot, Vic or is it something from, I think you reported somewhere around $1.2 million, I mean is this somewhere it's going to bounce around between $1 million and $1.5 million quarterly?

  • Vic Viegas - President & CEO

  • It'll move around a little bit, I think somewhere in the say, $700,000 to slightly over $1 million is probably what I expect the normal range to be.

  • Jeff Schreiner - Analyst

  • Okay. Thank you. It's very helpful. It looks like you're going to achieve above the range that you'd laid out on an annual basis and then congratulations for navigating through these tough times. And if you were to reach levels somewhere above that $30 million, you're probably looking at an annual growth rate of around 13% to 14% year-over-year, which by my calculations would be the second highest year-over-year growth level in the last five years. Is this kind of the feeling right now for Immersion or do you think that the model is starting to shape up where you believe that you could grow 15% plus on a year-over-year basis at the top-line?

  • Vic Viegas - President & CEO

  • So, Jeff I think the year-over-year growth that you're estimating is obviously looking at a couple of different business models. So you're combining royalties and licensing revenues along with product sales. And so, there is probably another layer to the story which is that as you probably know year-to-date, our royalty business has grown about 75% and our product business has decreased by I think 30%, 35%. And so when you add those two, that transition to the bottom line, I think you are seeing a net growth similar to what you said. I think as we move away from the medical product business, as we go forward with the licensing business, you should see growth in those levels or higher is what I would expect.

  • Jeff Schreiner - Analyst

  • Okay. Last question from me. Thank you very much for taking some time here, but wondering about -- we are already hearing about the TouchSense 3000 in your prepared remarks within the Samsung Galaxy S as you said Vic, and you highlighted TouchSense 2500 and it seems like a unique drop-in type situation. Is this going to see a higher per unit royalty maybe than the legacy products that Immersion has offered and how many licensees have transferred over to this solution already?

  • Vic Viegas - President & CEO

  • So, the solutions that we offer in the mobile market include the TS-3000, which is predominantly what is in the market today from Immersion, the results of the TS-4000 which is using multiple actuators, and the TS-5000 which uses the Piezo actuator, and for each of those solutions the TS-4000, just premium priced to the TS-3000 and TS-5000 our best solution, and so it's the highest pricing to the mobile market. The TS-2500 is typically a solution that would be offered to non-mobile markets. These would be markets including white goods, office products, consumer appliances. And so, it's a different solution targeted capacitive button and other kinds of interfaces.

  • Jeff Schreiner - Analyst

  • Okay. Thank you very much. I'll get back in the queue.

  • Vic Viegas - President & CEO

  • Thanks Jeff.

  • Operator

  • Thank you. Our next question comes from the line of Mark Argento with Craig-Hallum Capital. Please go ahead.

  • Matt Bendixen - Analyst

  • Hi, guys its Matt Bendixen in for Mark. Congrats for the new licensing deals, could you talk a little bit about the overall tablet PC market, are you seeing a lot of traction there outside of Toshiba and Samsung?

  • Vic Viegas - President & CEO

  • Well, the two that we announced, Toshiba and Samsung, we are very excited about the implementation. We think that the experience is of high quality and we think that their customers will appreciate the benefit. So, we're pretty excited about that. In addition there are a number of others that we work with directly in helping them design the best solution possible. But we also have the benefit of our chip partners who are also working with other tablet manufacturers. So, I would say, we're coming on the tablet market from both angles, direct and then indirect through our chip partners and there is a lot of activity as you're probably aware of and we're hoping to be successful in winning a number of those design opportunities.

  • Matt Bendixen - Analyst

  • Great. And then, my last question is when will you start seeing meaningful revenue contribution from those new tablets deals?

  • Vic Viegas - President & CEO

  • It's hard to say. I think we're anticipating substantial revenue, but the timing is really related to the product launches, the shipping volumes from marketing programs behind the products. So, right now I think we're anticipating a fair amount of revenue, probably in 2011 and hope that over time it'll continue to grow from there.

  • Matt Bendixen - Analyst

  • Great. Thanks guys.

  • Vic Viegas - President & CEO

  • Thanks Matt.

  • Operator

  • Thank you. Our next question is from Charlie Anderson with Dougherty & Company. Please go ahead.

  • Charlie Anderson - Analyst

  • Good afternoon everyone. Thanks for taking my question. Wanted to just to go sort of to the top-line first guys, if I could, on the royalty and license side. Obviously great growth there year-over-year. I just want to get an understanding on sort of the seasonality now; you guys are down about 18% sequentially. And I think guidance implies maybe just a tick up next quarter. So, I'm just trying to kind of understand when I look at sort of the smartphones and seeing more of a ramp, more of a sequential ramp, if could unpack that and tell us what's up, what's down, Q2 versus Q3 and then also Q3 versus Q4 what you're thinking?

  • Vic Viegas - President & CEO

  • So, Charlie I'll go ahead and give you my thoughts and then I'll ask Shum maybe to clarify. But, just comparing Q3 over Q2, you have I think a fair amount of revenue in Q2 from medical products that was non-recurring in Q3 in the neighborhood of about $1 million, I believe is what we said in the past. And then, if you look just at the royalty line, royalties were down when you compare Q3 to Q2 by a little over $1 million. A big portion of that was related to the timing of some gaming royalties. As we said in Q2 we had a number of licensees that reported corrected reports and as a result we benefited from some of that revenue. So I think that probably affected some seasonality. Other than that, I think we experienced relatively flat mobile revenue and relatively flat auto. But we did see some revenue growth in the chip and the medical business. But net-net, I think it was affected by the medical products that were transitioned out and the timing of some gaming revenues in Q2.

  • Charlie Anderson - Analyst

  • Got it.

  • Vic Viegas - President & CEO

  • On answering your question on Q4....

  • Charlie Anderson - Analyst

  • Yeah.

  • Vic Viegas - President & CEO

  • We think that the royalty business will be relatively flat. We think that we will see in the mobility space kind of similar types of revenues, gaming, similar types. Probably the area we see a little bit of weakness is on the chip side and we think that there is some inventory out there and anticipating that that will come down a little bit. So, net-net you will again have reduced product sales in Q4 from Q3 and probably flat to slightly lower royalties.

  • Charlie Anderson - Analyst

  • Got it. And then, on expenses, I appreciate the guidance there, the $5.5 million to $6.5 million that you guys are a little bit below the mid-point on the quarter. Can you tell us a little bit of how you will trend from here, I mean did you have, it sounds like maybe there was a little bit cut there, did you cut towards the end of the quarter and maybe that's even down next quarter and just kind of talk us through sort of the trend there as you go from this $5.7 million where we are at right now?

  • Shum Mukherjee - CFO

  • No, we are expecting cash operating expenses to be in the $5.5 million to $6.5 million range. We have averaged -- we had 5.7 million in Q2, 5.7 million in Q3 and we expect that range to continue in the medium term. We might see a slight increase in cash operating expenses related to marketing programs, but we expect it to be in the $5.5 million to $6.5 million range.

  • Charlie Anderson - Analyst

  • Got it. I mean, are you going to build towards $6.5 million or would you have any sort of one-time type items, seasonal items that would make you go that high in a quarter in the near-term?

  • Shum Mukherjee - CFO

  • It wouldn't be any one-time seasonal items, but there will be the usual increases due to inflationary increases, merit increases, slight increases in marketing programs, which would tend to make that number a little higher in the future quarters.

  • Charlie Anderson - Analyst

  • Got it. And then, just one last question going back to, Vic. Vic, you just talked about the pipeline, I mean obviously you guys have done well in mobility, you've get these tablet wins, what do you see as sort of the next big things in the pipeline for you guys and kind of characterize how strong you think it is?

  • Vic Viegas - President & CEO

  • Well, as we kind of mentioned, the high-definition haptics, our TS-5000 solution, we spent a lot of time finishing up the product, helping develop an ecosystem that can deploy this quickly and showcasing the benefits. And I think we've got some really good positive feedback and expect design wins and a real interest in take-up in that technology. So, as I look out, I'd say high-definition haptics is probably one of the biggest upside opportunities. We continue to see automotive design wins and opportunities we add to the tier suppliers as well as we're happy with the increasing penetration of touch screens in the automotive market and so that's a natural opportunity for haptics to enhance that.

  • The chip partners that we are working with, they are just now getting ready to launch products. They are starting to put marketing muscle behind those efforts. We are finding our product solutions. And so the combination of products from our partners and recognition of the value in the market we think is going to also scale and grow that business. In the medical space, it still looks very vibrant. And so, I guess what gets me excited, the high-definition haptics clearly on the mobile side, potential to participate on some of the content efforts with gaming and working with developers to showcase and highlight the benefits of haptics. And then, each of the other verticals all have growth opportunities that we just need to close these design opportunities and turn into revenue.

  • Charlie Anderson - Analyst

  • Got it. Thanks so much.

  • Vic Viegas - President & CEO

  • Thanks Charlie.

  • Operator

  • Thank you. And our next question comes from James Basch with Dialectic. Please go ahead.

  • James Basch - Analyst

  • Hey, guys. Thanks for taking my call. Couple of questions one is, just talk about how you guys are weighing, continuing to be a standalone company versus being part of a larger company and then walk me through what your internal process is if you receive an outside bid and then I have follow-up question after that?

  • Vic Viegas - President & CEO

  • Well, our primary focus really is in growing the current business. We see terrific opportunities and organic growth opportunities that we want to continue to invest in. In term of partnering with other companies, we are always looking at ways to gain scale on leverage and benefits that's in great measure why we're working with some of our chip partners who have resources to help leverage our reach into the market. As far as staying independent, I think it probably goes to your second question, if there is interest in the company whether it's M&A partnership or an outright acquisition, we would ask for that to be formally presented. We would always share that with the board and the board then would go through the normal process of evaluating the offer deciding exactly how to respond to the interest.

  • James Basch - Analyst

  • Got you. And then, in terms of your mobile business overall, obviously we're seeing healthy industry growth especially in smartphones, when are we going to start to see that reflected in growth in your mobile business?

  • Vic Viegas - President & CEO

  • Well, I think if you compare what we've done from a licensing standpoint, the first three quarters of this year versus last year, we've shown 75% revenue growth there. So, we are experiencing substantial growth. And I'd say the bulk of that is coming from the mobile market. So, in fact, I think you are seeing each quarter the benefits of what's going on in the mobile market and Immersion is benefiting from that. Unfortunately that is reduced or hidden possibly by the reducing revenues from the transfer of some medical products. So, I think we're experiencing that now. And I think we'd like to think that there is even more growth opportunities with new OEMs and especially our high-definition haptic solutions that we're hoping is taken by our customers here in 2011.

  • James Basch - Analyst

  • Okay. And then, last question, you talked about some of the partners on the mobile side and touch, Cypress, Atmel, Synaptics, I guess as well as other industries as well, talk about what that partnership means to them. Where they are a sustained customer, what is the haptic solution mean to existing and potential customers when their trends sell their own solution?

  • Vic Viegas - President & CEO

  • I think as you mentioned as customer Synaptics, they are not a customer we have had.

  • James Basch - Analyst

  • A partner.

  • Vic Viegas - President & CEO

  • Yeah. Co-development efforts with them in the past, but mostly Cypress and Atmel, IDT, Renesas, those are our current partners. I guess, I would answer that, there is kind of three stages. One is that there is customer interest that we see and that our partners see. And so, it obviously excites them moving forward into say, demos. We put agreements in place with our partners. We began developing and introducing them to the ecosystem partner. So, this is the first stage of introduction. And I think they look at this as a way to differentiate themselves from other touch controller buyers and they look at it as a way to enhance their product lines, service their customer needs and their interest. I'd say we're clearly through Phase I with most of our partners.

  • Phase II is where we begin allocating marketing resources. They begin investing in and launching products. We are beginning to identify design opportunities or customer programs where this would add value. And then, sourcing begins to start to take place. Immersion's products become enhanced and specified for the particular application and used for partner C.

  • And then, Phase III is the design wins, sales and revenue for our partners, as well as Immersion. And that's the phase that we're just now entering into on a limited basis and we hope to leverage that greater. But specifically the answer to your question, I think they see the interest from their customers and they know that it's a way for them to differentiate and add a higher level of experience, a way for them to get premium pricing and to grow their market share. And so, that's why they have genuine interest and we love to work with them, because they have got an established distribution network with FAEs in place that help us scale our business.

  • James Basch - Analyst

  • Sorry, I apologize just one more, if I could tweak it in here.

  • Vic Viegas - President & CEO

  • Sure.

  • James Basch - Analyst

  • There might be some concern looking at the revenue guidance for next quarter versus consensus that I think there might be one or two outlier street models that called for higher revenue into next quarter, where as it seems like you guys versus your early expectations in 2010 are actually guiding to the high-end or even exceeding the high-end of that $25 million to $30 million range. So, if you kind of set aside some of those concerns that might -- one might have looking at your guidance versus street consensus, can you talk about what your demand outlook looks like versus your own internal expectations as you go into Q4. Are things in line with what you expected, softer or better?

  • Vic Viegas - President & CEO

  • Sure. I guess, I would say that when you look at our Q4 forecast, I'd start off by saying it really is a forecast and is based on the information we have available today. We can't predict with a very high-degree of confidence with specificity, but it's our best guess as we look at it today. It is consistent, I think with where we thought we would be for the year and we will be at the $30 million plus level. So, it's going to beat the full year target. And I think that was consistent. If you look at the royalty growth, clearly 75% year-to-date is something that we're proud of. It is offset though with the reduced revenues from the product sales of medical.

  • Revenue has a number of things that affect it from reporting to time-based accounts, cash flow. So there are lot variables that go into predicting future revenue. So, as I look out, I'd say that it's pretty well in line with what we would expect, some markets are up, some markets are flat, some markets are potentially a little bit down. But I think it's consistent with where we've been communicating in terms of where we think the company should be.

  • We'd like to think that our efforts are -- from a qualitative standpoint, as I said in the prepared speech was, from a qualitative standpoint, the progress we are making with the ecosystem on our high-definition haptics, the interest level in the marketplace and the progress we're making in some of our design win opportunities, we feel real good about the future and we feel good about our execution.

  • James Basch - Analyst

  • Okay. Thanks.

  • Operator

  • Thank you. And our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

  • Shawn Boyd - Analyst

  • Hi, gentlemen. Thanks for taking the question. I wanted to just hone in on a couple of things here. In terms of your answer earlier, Vic, regarding royalty revenues and looking both backwards and forwards, Q3 to Q2 and onto Q4, it seems like we've got a fairly stable level of about $5 million a quarter in royalty revenues, is that a fair way to characterize that and/or is there anything else in there that we need to think about in terms of the decline?

  • Vic Viegas - President & CEO

  • Well, I guess if I look back at Q4 of last year, just as a reference point, it was about $4 million and if you look at this year kind of where we're ending up Q3, Q4, I think is right around that $5 million level that you mentioned. Q2 was higher, it was about a little over $6 million and part of it was because a fair amount of that, the gaming revenue was a bit of an anomaly in the quarter. But, I would say that if you look at the royalty rate, currently it's right around that $5 million level.

  • Shawn Boyd - Analyst

  • And, do you as we go forward here and we think about the new products, if you could, you went through -- you mentioned Samsung Galaxy S and Nokia N8 et cetera, can you just give us launch dates on each of those, just roughly what we're expecting on when those have started or when they are going to?

  • Vic Viegas - President & CEO

  • So, both of those examples are actually in the market. The Galaxy S is, I think we said in over 100 countries, so it's having quite a bit of success in the market and the N8, I think it had been delayed a number of times. But it did launch, I think a couple of months ago I believe.

  • Shawn Boyd - Analyst

  • Okay. So, both of those were September quarter, right?

  • Vic Viegas - President & CEO

  • Yes, right.

  • Shawn Boyd - Analyst

  • Okay. And, in terms of Libretto, is that available now, that product is shipping as well, right?

  • Vic Viegas - President & CEO

  • I believe so, yes.

  • Shawn Boyd - Analyst

  • Okay. And then, the Galaxy Tab probably starts in the fourth quarter?

  • Vic Viegas - President & CEO

  • I don't know the exact timing, but I do believe they're expecting to sell that beginning this year. So, I would imagine that fourth quarter should see [some sales]. But it will really depend on their plan.

  • Shawn Boyd - Analyst

  • Okay. So, given your royalty model, we will have 3 out of those 4 starting to contribute revenues in the December quarter for Immersion, is that a fair statement or would it lag even further?

  • Vic Viegas - President & CEO

  • Well, so I think our revenue really is tied to product shipment a quarter in arrears. So, our customers launch products and then report in the following quarter which is when we record. So, I think you got to kind of balance out the actual shipment date from when they report it and record it as revenue.

  • Shawn Boyd - Analyst

  • Okay. So it could but not substantially March quarter, when it is actually recognized and then get their numbers to you and you recognize on the royalty?

  • Vic Viegas - President & CEO

  • That's right exactly.

  • Shawn Boyd - Analyst

  • Okay. But still four very nice products that are coming out in the market that are all incremental to Immersion?

  • Vic Viegas - President & CEO

  • Yes [we would degree].

  • Shawn Boyd - Analyst

  • Okay. And if we could, can you just remind us about any difference there might be in terms of royalty or maybe if we could kind of talk about revenue content for device on a tablet PC versus a smartphone, can you help us on that?

  • Vic Viegas - President & CEO

  • Not really. I think it's clearly that the tablets we mentioned will have our technology. They are under license agreements. Royalty rates are appropriate for these product lines. So we really don't want to provide any more guidance than that.

  • Shawn Boyd - Analyst

  • Is it fair to assume that you got greater complexity in a touch screen tablet PC than you would in a smartphone and greater surface area, or you might have a little bit more content than what you require in a handset?

  • Vic Viegas - President & CEO

  • It really depends on the product. I think it's -- in some cases you will have a higher degree of complexity where the screen is larger. It may require multiple motors, the type of effects, the applications that are using and benefiting from haptics can be quite expensive and more complex or it could be that it's simply providing capacitive buttons that would actually tend to be on the simpler implementation of Immersion tablet. So I think just because it's a larger device, it's not necessarily appropriate to say that it's a more complex solution.

  • Shawn Boyd - Analyst

  • Okay, fair enough, there be a range then. Okay and going back you gave a lot of color on the partnership. I think we are in good shape there. The only question I have is you made the comment we are just entering Phase 3 which is design win and sales of revenue to the partners and to Immersion? So I have been going along with the assumption that we probably have no material revenues from the partner so far in our royalty revenue line, that $5 million a quarter. Is that fair or am I misreading that?

  • Vic Viegas - President & CEO

  • Well, I would say it's still not significant, at least not by my definition and we expect it to grow and become a significant part of our revenue. But we do have existing products in the market from our licensees and if you were to just separate out revenue from some of our chip partners, it is actually approaching 10% of our total revenue. We do have a fair amount of activity there.

  • Shawn Boyd - Analyst

  • Got it. Okay, that's helpful. And that's 10% of revenue or 10% of royalty revenue?

  • Vic Viegas - President & CEO

  • I am looking at what we did in Q3 and what I would call chip-based revenue was about 10% of our total revenue.

  • Shawn Boyd - Analyst

  • Got it, okay. And just a last couple from me. Shum, if we think about that gross margin on the mix shift here, you made a great point that as we go more toward the royalty revenues, we will have a mix shift that helps our gross margin a little bit. It seems like that wouldn't be moving around too much here in the fourth quarter. Can give us any help as we go out into the next year, would you expect several percentage points on that or something more minor?

  • Shum Mukherjee - CFO

  • Yes, we would expect gross margins in the 95%-ish range next year.

  • Shawn Boyd - Analyst

  • Okay, got it. And then last thing is just the tax item. The tax line (inaudible) here for a couple of quarters. So remind me again why that is knocking around on us and what we should think about it going forward?

  • Shum Mukherjee - CFO

  • It knocks around on us because of withholding taxes when we send to certain Asian countries we have to pay withholding taxes ranging from 15% to 20% and that is what you see in the tax line. Once we become profitable as you know, we have got a fairly large number of NOLs. We will use those NOLs and some of these withholding taxes will be creditable against those profits. But for the moment we have to record those as expenses.

  • Shawn Boyd - Analyst

  • Okay. And would you expect them to stay at this level that we think the VARs did in the last couple of quarters?

  • Shum Mukherjee - CFO

  • Yes, it will stay at this level and hopefully as business in those countries grow, the taxes also will grow proportionately.

  • Shawn Boyd - Analyst

  • Right. Okay, thank you very much.

  • Vic Viegas - President & CEO

  • Thanks Shawn.

  • Operator

  • Thank you. Our next question comes from the line of Madhu Kodali with Yorkshire Capital. Please go ahead.

  • Madhu Kodali - Analyst

  • Good afternoon. In the past you folks used to breakdown revenue by industry sector, auto, communications and mobile communications and others. I was wondering if you have something like that now.

  • Vic Viegas - President & CEO

  • So, I think in the past we've had because of the medical business we actually had two separate lines of business so we reported and disclosed those two. And then, depending on an annual basis many times we give in our MD&A we respond to revenue within or between these different market segments. But on a quarterly basis we don't track, we don't really provide that level of visibility on an individual specific market basis.

  • Madhu Kodali - Analyst

  • Okay. How are the ASPs trending now? Are you seeing any pricing power, were you able to increase your pricing or do you have to reduce some volume growth?

  • Vic Viegas - President & CEO

  • The ASPs are negotiated and as we introduce new solutions we are in a position to increase our ASPs. So, I am happy to say that the market appreciates the value of, for example, our TS5000 Piezo solution. But our ASPs are relatively stable and linked to our agreement.

  • Madhu Kodali - Analyst

  • Okay. And the ASPs would they change and how much across these various applications, mobile phones versus auto applications, et cetera?

  • Vic Viegas - President & CEO

  • Well, each industry is different and they can range quite varied ranges. So, I think it is really difficult to compare, let's say, royalty in the auto or medical space to the mobile space or chip space. Each of those verticals is a different solution and different pricing.

  • Madhu Kodali - Analyst

  • Right. And you did say that large revenue increased approximately 75% in terms of volume. Is it mostly from mobile application?

  • Vic Viegas - President & CEO

  • So if you compare the first nine months of this year versus last year, royalty revenue grew 75%. I would say yes that the majority of that increase came from the mobility market.

  • Madhu Kodali - Analyst

  • Okay sounds good, thank you very much.

  • Vic Viegas - President & CEO

  • Thank you.

  • Operator

  • Thank you and our final question comes from Jeff Schreiner with CapStone Investments. Please go ahead.

  • Jeff Schreiner - Analyst

  • Thanks for the follow-up guys. I just wanted to know, Vic, we have been talking a lot about the partners and you gave us some great clarity. Thank you very much about maybe what you thought they represented in the third quarter for you in terms of these total revenues. I was wondering maybe if you could just do it as a group, not as an individual, but just with your chip partners, maybe how much you've recognized to date from these partners? And when we talk about mobile royalties, does mobile royalties include your conversations or are you looking at two separate lines within mobile and then maybe chip partners?

  • Vic Viegas - President & CEO

  • We actually break that out internally. So we track our mobile revenues which are predominantly direct with the OEM. Our chip revenue can be a combination of a chip sold into the mobility space or sold into white goods or industrial products or other markets. So it's a little difficult and in many cases we probably won't be able to track specific industries. So we internally we do track the chip business separately from mobility.

  • In terms of revenue, we had revenue from the chip space. Even going into last year we had some revenue. I think it has been growing substantially and that's why I said in the recent quarter, Q3 is probably the first quarter where it's getting near the 10% level. So I think it's fair to give you that visibility. But on this we have been generating revenue from our partners for at least over a year.

  • Jeff Schreiner - Analyst

  • Okay. One last question for me. I was just wondering maybe -- now that you have been here a year, you've been able to start to position the company in the direction that you would like to see it go. Where are you now in terms of the review and prioritization of the company's overall patent portfolio?

  • Vic Viegas - President & CEO

  • Well, there is a lot of effort in that space. I think there is -- what's important is to make sure that as you continue to innovate, you capture these new innovative ideas and you file for and prosecute the patents as a result of that. It's also important to make sure that that innovation is directed at the markets and the interest levels that are out there. So there is no sense in inventing for just the sake of inventing and adding to your patent portfolio. It needs to be relevant in the markets that you are going after and the value you can promote and sell.

  • So from an innovation standpoint, there is a lot of attention to that area. The existing patent portfolio and the evolving patent portfolio, we have for some time been conducting an assessment so that we know what we have and this is primarily to make sure that we are able to do a matching of what might be an infringing use in the marketplace or maybe to identify IP that's not core to our future business and find out other ways to monetize this IP.

  • So, I would say that there is a lot of effort in assessing the patent portfolio, a lot of effort in competitive assessment making sure that we are aware of what's in the market and mapping it to the current IP and beginning to develop important strategies around that.

  • Jeff Schreiner - Analyst

  • Thank you very much gentlemen.

  • Vic Viegas - President & CEO

  • Thanks Jeff.

  • Operator

  • Thank you. And I am showing no further audio questions at this time. I will turn the call back to management for any closing remarks.

  • Vic Viegas - President & CEO

  • Thank you all for being on the call with us today. We look forward to seeing you on the road and updating you again on our next quarterly call. Thank you and good day.

  • Operator

  • Thank you, sir. Ladies and gentlemen, that concludes the Immersion Corporation third quarter 2010 conference call. Thank you for using the conferencing center and you may now disconnect.