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Operator
Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Immersion First Quarter 2011 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, May 5th, 2011 and I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.
Jennifer Jarman - IR, The Blueshirt Group
Thank you, Douglas. Good afternoon and thank you for joining us today on Immersion's first quarter 2011 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 www.immersion.com. With me on today's call are Vic Viegas, President and CEO and Shum Mukherjee, CFO.
During this call we 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 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 a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in the Company's press release issued today after market close.
With that said, I will turn the call over to Chief Executive Officer, Vic Viegas. Vic?
Vic Viegas - President, CEO
Thanks, Jennifer, and thanks everyone for joining us this afternoon. It's been a year since Immersion completed the transition of certain medical lines of business to CAE. During that time we have focused on creating a scalable high margin licensing business that is driving bottom line results for the Company. While the first quarter is typically our seasonally strongest quarter, our financial performance during the period illustrates the benefits that this model will deliver as haptic technology gains traction in consumer devices.
We achieved bottom line profitability during the quarter with net income of $1.4 million based on revenues of $9.8 million. Record royalty revenues of $8.4 million for the quarter grew 30% over the same period last year. We generated positive adjusted EBITDA of $3.3 million and positive operating cash flow of $4.7 million. As you've seen from our recent announcement, we continue to focus on driving value to our platform through our outreach to the development community and have some exciting initiatives under way to help foster creativity and encourage adoption of our new MOTIV haptic development platform.
In a few minutes I will discuss these developments and our momentum as we progress into 2011. First, Ill ask Shum to provide a more detailed review of our financial results for the first quarter. Shum?
Shum Mukherjee - CFO
Thanks, Vic. Revenues in the first quarter of 2011 were $9.8 million, slightly above revenues of $9.7 million in the year ago period, which included $2.1 million of product revenues related to the transition of certain medical lines of business to CAE.
Revenues from royalties and licenses were $8.4 million, up 30% from the first quarter of 2010. Growth in royalty and licensing revenues was driven primarily by the gaming and mobile segments, which grew 51% and 21% respectively over the year ago quarter. The increase from the gaming segment reflects the success of holiday sales bundles by certain of our OEM customers.
While revenue mix per segment is expected to fluctuate on a quarterly basis due to seasonality patterns, in the first quarter of 2011 a breakdown by segment as a percentage of total revenues is as follows; mobility, 44%; gaming, 27%; medical, 15%; auto, 5%; chip and other, 9%.
Revenues from products were $1 million compared to $3 million in the same period last year and revenues from development contracts were $400,000 compared to $300,000 last year.
Gross profit was $9.3 million, or 95% of revenues, compared to gross profit of $8.3 million, or 86% of revenues in the first quarter of 2009. The increase in gross profit reflects the shift in business mix to licensing revenues, which accounted for 86% of total revenues compared to 66% of total revenues in the same period last year.
Cost of product sales in the first quarter was $474,000 compared to $1.4 million in the first quarter of 2010. Excluding cost of product sales total operating expenses were $7.4 million in Q1 of 2011 compared to $10.8 million in the first quarter of 2010. This decrease primarily reflects the divestiture of the medical product lines, a reduction of average headcount during the quarter from 117 employees to 93 employees and other cost saving actions.
The operating expenses of $7.4 million include non-cash charges related to depreciation and amortization of $600,000 and stock based compensation of $780,000. Also, operating expenses in the first quarter of 2010 included non-recurring expenses of $1.6 million related to restatement costs. Excluding these non-cash and non-recurring charges OpEx was $6 million during the quarter compared to $8 million in the first quarter of 2010 and is expected to trend in the $6 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 grow our business.
As you know, in addition to normal GAAP metrics, we use a metric called adjusted EBITDA to track our business. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization less stock based compensation and other non-recurring items such as internal investigation and restatement costs, restructuring costs and discontinued operations.
Adjusted EBITDA in the first quarter of 2011 was $3.3 million compared to adjusted EBITDA of $374,000 in the first quarter of 2010.
Interest and other income was $62,000 compared to $79,000 in the first quarter of 2010. Provision for income taxes was $594,000 compared to $339,000 in the year ago period.
Net income for the first quarter of 2011 was $1.4 million, or $0.05 a share, compared to a net loss of $2.7 million or $0.09 per share in the first quarter of 2010.
Our cash portfolio including cash and investments was $65.2 million as of March 31, 2011 compared to $61.2 million exiting 2010. Cash generation from operations was $4.7 million compared to cash generated from operations of $242,000 in the first quarter of 2010. As mentioned in our last conference call, we benefited from cash inflows of around $3 million in the first quarter of 2011, which were originally expected in Q4 2010.
While we remain mindful of the situation in Japan and the potential ripple effects it could have on our markets, we are reiterating the 2011 guidance we provided last quarter and continue to expect annual revenues to be in the range of $31 million to 33 million, an increase of 17% to 25% over revenues from ongoing business of $26.4 million in the prior year.
We also continue to project positive net income for the full year and with that, I'll hand it back to Vic. Vic?
Vic Viegas - President, CEO
Thanks, Shum. Our results demonstrate continued strength in the mobile segment where industry analysts continue to project strong multi-year growth for touch enabled smartphones in the 25% to 40% range. We are also pleased to see continued interest in gaming and other segments, including the emerging tablet category.
During our year-end conference call a month ago we highlighted the first quarter launch of the MOTIV haptic development platform, which we created to provide easier and more compelling ways for OEMs and developers to integrate haptics into their applications and devices.
I would like to update you on some of the engagements the team has had with both OEMs and application developers in implementing the MOTIV platform. During the quarter we successfully ported the MOTIV solution to demonstration devices for multiple new and existing OEM customers. The ease of implementation, combined with the added benefit of a haptic enabled UI, has further validated our approach of delivering automated haptic integration tools for device manufacturers. While these demonstrations represent the first step in the design process, we're encouraged by how well the value proposition for haptics is resonating and the number of OEMs who are moving forward to the next stage of identifying target programs.
On the developer front we've seen hundreds of downloads of our MOTIV SDK and the response from the development community has been enthusiastic. We have already made subsequent updates to our development tools based on developer feedback and judging by the level of response, I expect by our next conference call to be able to share a number of new gaming and other applications that are designed with the MOTIV SDK.
Another element in our overall strategy to drive haptics adoption in the developer community is the recent formation of Haptify Inc. This subsidiary is comprised of a select group of Immersion employees and developers tasked with leveraging the MOTIV platform to create new applications that highlight now haptics can enhance the users mobile experience.
In addition to creating new content, Haptify will also serve as a publisher of haptic enabled apps with our team assisting developers with haptic integration and providing a marketing and distribution channel for MOTIV developers. Haptify's first application titled Enzo's Pinball was released in April and was well received by the Android community and press. We expect more apps from Haptify in the coming months.
While Haptify is designed to function as an individual profit center and is expected to have minimal impact on our financials in fiscal 2011, we believe there are many near-term strategic benefits to the initiative. One, by dedicating a team to work with the MOTIV platform to develop new applications, we are creating a test bed for our own development tools and for new concepts and business models for haptic applications. This level of feedback can help us refine our products and also ignite interest in discussion and the developer community.
Additionally, because the Haptify team will serve as a publisher and marketer of haptic enabled games, they will have a direct channel to the development community that we can access to help us refine and iterate future products. We're excited about using Haptify to help foster and evangelize haptics within the development community with the goal of driving broader adoption of haptic technology in the mobile space.
The investments we are making to support the development community through the MOTIV SDK and Haptify will provide a number of advantages to Immersion. First, because the MOTIV SDK is a technology agnostic haptic development platform, it offers developers ubiquity. This eliminates the complexity of managing multiple code bases and makes our platform much more attractive to the development community. Immersion has learned through our success in the gaming controller space that an open design tool that is well adopted by software developers helps deliver content that drives overall market adoption.
Second, by investing in the creation of applications, Immersion is aiming to see the mobile community with content that utilizes haptics to the fullest extent demonstrating the true potential of haptics beyond gaming and text entry to exciting new user experiences.
Finally, we believe there is an opportunity to offer haptic enabled content to our OEM customers. We intend to leverage our new platform to strengthen our relationships with both prospective and existing mobile customers and work with them to deliver not only quality haptic experiences on the handset but compelling user content as well.
Ultimately these advantages help Immersion deliver more value to the OEM by setting a new standard for mobile devices containing haptics and haptic enabled applications. I look forward to updating you as applications and devices come to market utilizing the MOTIV platform in the coming months.
Turning to an update regarding our ecosystem partners, I am pleased to announce that our licensing agreement with Atmel has resulted in the incorporation of Immersion's TouchSense technology into Atmel's QTouch capacitive touch controllers. These controllers provide haptic support for 14 unique haptic effects in buttons, sliders and wheels, which can be used to greatly enhance the user experience in applications such as mobile devices, game consoles, navigation devices, cameras, netbooks, appliances, PCs and other devices. We are excited that Atmel now has its first offering in the market embedded with Immersion's technology, as we strive to drive the greater proliferation of haptics with the rapid adoption of touch interfaces across multiple markets.
I would also like to provide you with a quick update on our TouchSense 5000 product, which we announced a year ago at Mobile World Congress. TouchSense 5000 was designed to create superior haptic experiences by precisely controlling a high fidelity actuator called piezo electric. Because Immersion takes a system level approach to designing haptic solutions, we have spent the past year working with customers and partners to ready the overall ecosystem. This has involved testing and authorizing component vendors as well as designing and testing engineering implementation guides for our OEM customers.
As with any new technology implementation, time frames for designs in the market are difficult to predict but we continue to be actively engaged in design activity with our customers and believe that piezo technology combined with our TouchSense 5000 embedded control software represents the next step in the evolution of high fidelity haptics in mobile devices.
In the interim, and as we highlighted last quarter, Immersion continues to enable HD haptic experiences based on both high fidelity and lower fidelity underlying technologies and across all mobile offerings from our TouchSense 3000 to our TouchSense 5000 series.
In summary, our strong performance in the first quarter provides further evidence that our shift to a scalable licensing model is working. At the same time, we continue to move forward on a number of strategic fronts in order to further capitalize on the opportunities in front of us. We remain focused on building out our design pipeline and working to accelerate design wins with both existing and new customers with the help of our new MOTIV platform.
We will continue to work with our network of chip partners to drive the broader adoption of haptics within a variety of markets and are encouraged by the first round of product offerings now being marketed. As I mentioned earlier, we continue to build out the overall ecosystem to support the next generation of high fidelity haptics and through our Haptify subsidiary and our MOTIV SDK tools we are coalescing around the developer community to establish Immersion as the de facto standard in creating compelling opportunities and applications leveraging haptics, helping to drive greater value and differentiation to OEMs. We will continue to keep you informed of our progress as we execute across these initiatives.
Lastly, I would like to close in saying that we look forward to seeing our investors at our Annual Shareholder Meeting or at one of our upcoming investor relation events including the JMP Securities Conference in San Francisco on May 10th and the Jefferies Technology Internet Media and Telecom Conference on May 13th in New York.
With that said, we will now open up the call to your questions. Douglas?
Operator
(Operator Instructions). Our first question comes from the line of Jeff Schreiner with CapStone Investments.
Jeff Schreiner - Analyst
Shum, was there any catch up royalty payments in the quarter for either mobile or gaming?
Shum Mukherjee - CFO
No.
Jeff Schreiner - Analyst
No. Okay great and within the mobile area and the strength it seems that was in mobile here on the royalty side how much came from the direct type of a mobile versus maybe the integrated or licensed? I know you guys talked about the other semiconductor and you broke that out for us but was there more strength in one or the other at this point or are you seeing more traction in one or the other at this point?
Shum Mukherjee - CFO
It predominantly came from the direct customers.
Jeff Schreiner - Analyst
From the direct, okay. And why -- maybe this is more for Vic or for you, Shum, but you guys obviously came, knocked the ball out of the park, doesn't seem to be any hair on it, no royalty payments being caught up here, a lot of positive things on the come. It seems to hear about from MOTIV, Vic. Why not raise guidance at this time, given that you've already kind of exceeded by a great deal what you thought you might be able to do in the March quarter?
Vic Viegas - President, CEO
Sure, Jeff. Well, I think first of all the first quarter for us is seasonally a strong quarter as it's been in prior years. As Shum mentioned in some of our earlier remarks, there's also the uncertainty of the impact of the Japan tragedy. There's the overall economy we continue to monitor. Obviously we're influenced by the timing of our customer launches so it seems premature at this time to increase the full-year guidance but we hold out hope that we can beat our targets and set new higher targets somewhere down the road.
Jeff Schreiner - Analyst
All right last question for me and I'll step back into the queue but can you talk, Vic, about how the strength you're seeing in gaming now could be impacted from maybe some fallout, negative fallout, from the recent online issues for a key customer of yours and Sony?
Vic Viegas - President, CEO
The Sony revenue for us relatively fixed based on the agreements we've reached with them subject to the litigation so there is really no exposure at all with our Sony revenue. In terms of other customers and the impact it may have, I don't see that having any impact on our revenue forecast and, in fact, I see the cloud computing as a platform for gaming opportunities with some of our current and new customers so we see the gaming sector as potentially one that can grow substantially for us.
Jeff Schreiner - Analyst
Okay thank you very much, gentlemen.
Operator
(Operator Instructions). Charlie Anderson, Dougherty & Company.
Charlie Anderson - Analyst
You know, Vic, I really appreciate all the color on the pipeline. It sounds like you guys have a lot going on there. I wonder if you could just kind of speak to if you have a regions of particular strength there, any particular tiers, whether they be handset vendors, tablet vendors, just a little bit more color on kind of where we could see some of these initial wins for the next couple quarters.
Vic Viegas - President, CEO
Well, I would say Asia and I am probably not overstating by saying that that's a market that's just exploding, lots of interest whether it's Korea, Japan, Taiwan or China, Mainland China. So that is a sector in a geo area is growing rapidly for us. The interest levels are very high. We have not only customers there but a significant number of ecosystem partners that are very active in promoting our technology so I would say that from a geo standpoint is clearly exciting.
Computex is a show that will occur here early June in Taiwan. I would expect to see a number of new tablets using Immersion's technology so I see that as a potential sector where we see design win opportunities growing. I think across the board this quarter it was gaming and mobility but across the board continues to be enthusiasm in the automotive, the medical, our industrial markets so I'd say for right now, with the rapid adoption of touch screens as a general technology and user interface, haptics is in great demand in lots of markets.
Charlie Anderson - Analyst
Great and then I wonder on the quarter itself I think it was maybe in sort of the first quarter where you could get tablet revenue because you had the Galaxy Tab and then the Libretto, how much that helped you guys and kind of how you see that sort of tablet segment for you guys moving forward.
Vic Viegas - President, CEO
So from a design win standpoint we're excited. There are a lot of great applications. In fact, I guess it's probably worthwhile just quoting there was a review done on PC World. I think it was April 26th when somebody was reviewing the Sony tablet, that's one, and the person who was reviewing this, Martin Williams, said -- his quote was, "with no tactile feedback it feels a little strange so clearly the tablet space is a great showcase for our technology. It begs. Haptics is part of the user interface.
Gaming used on mobile devices I think will become a great platform for the use of high quality haptics from Immersion. In terms of actual revenue, I think at this stage it's still rather immaterial, rather modest when you compare it to the monies that are coming in from the Smartphone segment.
Charlie Anderson - Analyst
Got it, good. And then just a quick housekeeping for me, Shum, when you gave the mix was that on total revenue or was that on royalties?
Shum Mukherjee - CFO
No that was on total revenues.
Charlie Anderson - Analyst
On total revenue great and do I have it right? Was it 44% mobility, 27% gaming?
Shum Mukherjee - CFO
Yes.
Charlie Anderson - Analyst
Got it. Good deal thanks, guys.
Operator
(Operator Instructions). [Carey Kelly], Conquest Capital Group.
Carey Kelly - Analyst
I had in my notes from last quarter that you had expected to resume the buyback. I didn't see any evidence this quarter. Is there a reason behind that and I guess could we expect it to start in earnest here soon? Thanks.
Vic Viegas - President, CEO
Yes sure, Carey, so our Board has authorized the resumption of our stock buyback program, which is currently in place. The mechanics of setting up the program itself are currently being put together as we speak so during the quarter there were no stock repurchases by the company.
Carey Kelly - Analyst
Okay so it's just a matter of getting a plan in place with your broker and executing on that but we should obviously have the balance sheet to do it. Should we expect you to be aggressive or is it going to be just enough to cover the stock comp or what should we expect throughout the year?
Vic Viegas - President, CEO
Well, I think we're still having those discussions so I would say we probably won't be aggressive but it will depend on the pricing of the stock how aggressive we use the program but it's definitely something we intend to execute on.
Carey Kelly - Analyst
All right thanks.
Operator
Robert Kast, SunWest.
Robert Kast - Analyst
Excellent quarter, congratulations on the beat. I have a question about when do you expect the piezo product, based products, to ship and what segment? Do you expect that to appear first in the tablet, a phone or some other type of device?
Vic Viegas - President, CEO
I would say that the first would be on the Smartphone segment probably followed by the tablet and sometime shortly after that mobile gaming I think is a great platform for piezo technology so those would be the platforms.
In terms of timing, it's really something that we are dependent on our customers and their launch plans but we're building out what we think is a terrific ecosystem platform with amp vendors, chip suppliers, actuator vendors. We've been certifying a number of these components so the ecosystem is starting to round out nicely and then we're anxiously trying to support our customers and have them launch their products soon. We're still shooting for something this year but it could easily bleed into early part of next year.
Robert Kast - Analyst
So in terms of product shipping this year royalty's recognition most likely Q1 next year?
Vic Viegas - President, CEO
On the TS5000 platform yes I believe that's correct.
Robert Kast - Analyst
Okay excellent and do you have the product segmentation for quarter as well, the royalty segmentation? Like mobile?
Shum Mukherjee - CFO
The product is primarily medical product and that constitutes most of our product and product sales were $1 million this quarter.
Robert Kast - Analyst
In terms of the royalty's breakout for last quarter?
Shum Mukherjee - CFO
You want the royalty breakout for Q4.
Robert Kast - Analyst
Q4.
Shum Mukherjee - CFO
Q4 of 2010, just give me a minute. Yes so the royalty breakout for Q1 of 2010 was mobile was 36%; gaming was 18%. Recall that last quarter in 2010 we had the bulk of the medical product line so the total medical segment was 29%. Touch and other segments were 9% and the balance was auto around 5%.
Robert Kast - Analyst
And that was for Q1.
Vic Viegas - President, CEO
Robert, can I ask you though just to clarify so what we gave you is part of our script earlier today. That was segment percentages of total revenue. What Shum just gave you was revenue as a percentage of royalties.
Robert Kast - Analyst
I see okay yes I'll circle back with you guys to try and straighten that out, reconcile the two. Thanks, guys, great quarter.
Operator
(Operator Instructions). [Terr Marimiam], [Monroe Investment Advisors].
Terr Marimiam - Analyst
You mentioned that you were going to be reinvesting the marketing. I want to know if you can put a dollar amount or a percentage of revenue. And secondly, do you anticipate on deploying the same people or are you looking into hiring a company or hiring more people? Thank you.
Vic Viegas - President, CEO
I would say we are continuing to invest in our people so within our Company we are moving, brought in a new person to handle our developer relations activity. We are moving some of our technical talent over into the marketing area as well to support the product marketing team and their efforts. We're already engaged and have outside consultants and a PR firm that supports us in these efforts and, if I remember correctly, our advertising and promotion budget this year is considerably, if I remember correctly, something in the neighborhood of 60%, 70% higher than it was last year.
Terr Marimiam - Analyst
Wonderful thank you so much.
Operator
(Operator Instructions). And at this time I am showing no further questions in queue. I would like to turn the call back over to management for closing remarks.
Vic Viegas - President, CEO
Thank you, Douglas. So thank you, everyone, for being with us on the call today. We appreciate it and we look forward to updating you again our next quarterly call. Afternoon and good day.
Operator
Ladies and gentlemen, that does conclude our conference for today. We would like to thank you for your participation and you may now disconnect.