Immersion Corp (IMMR) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation Second Quarter 2012 Earnings Conference Call. (Operator Instructions)

This Conference is being recorded today, Thursday, the 2nd of August, 2012.

I'd now like to pass the call to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you.

Good afternoon, and thank you for joining us today on Immersion's Second Quarter 2012 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 is Vic Viegas, President and CEO; and Paul Norris, CFO.

During this call, we may 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-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 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'll turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks, Jennifer. And thanks for joining us this afternoon.

Our revenues for the second quarter were $6.5 million, lower than anticipated. However, due to our continuing cost-management efforts, our net loss of $2.2 million or $0.08 per share was within our expected range.

Revenues from royalties and licenses were roughly flat year-over-year, as the number of phones infringing on Immersion's technology continued to accumulate, deferring our ability to fully participate in the dramatic growth of haptics within Smartphones and applications.

At the same time, we demonstrated continued progress during the quarter with our higher ASP-generating Reverb technology now shipping in Samsung's Galaxy S III phone, the launch of new haptic-enabled titles from top-tier applications developers, the cultivation of new standard and high-definition haptics-compliant components with our ecosystem partners, and growing momentum for haptics within the automotive space.

In a few minutes, I will discuss our recent business developments and provide an update regarding our guidance. But first, I'll ask Paul to provide a more detailed review of our financial results for the second quarter. Paul?

Thanks, Vic.

Revenues in the second quarter of 2012 were $6.5 million, down 3% compared to revenues of $6.7 million in the year-ago period. Revenues from royalties and licenses of $5.9 million were roughly flat with the second quarter of 2011. Revenues from product sales were $344,000, compared to product sales of $546,000 for the second quarter of 2011.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, in the second quarter of 2012, a breakdown by line of business as a percentage of total revenues was as follows -- 47% from mobility, 27% from gaming; 13% from medical, 7% from auto, and 6% from chip and other. These percentages are based on total revenues, including revenues from royalty and licensing, product sales and development contracts.

Gross profit was $6.3 million or 97% of revenues, compared to gross profit of $6.4 million or 96% of revenues in the second quarter of 2011. Cost of revenues in the second quarter was $214,000, compared to $247,000 in the second quarter of 2011.

Excluding cost of revenues, total operating expenses were $8.6 million in the second quarter of 2012, compared to $7.5 million in the second quarter of 2011. This includes noncash charges related to depreciation and amortization of $554,000 and stock-based compensation of $818,000. Excluding these noncash charges, OpEx was $7.2 million during the quarter, compared to $6.0 in the second quarter of 2011.

OpEx in the second quarter of 2012 also included litigation-related costs of $1.5 million. We expect litigation expenses to trend slightly above this level during the second half of the year and are modeling OpEx excluding noncash charges to be in the $7.5 million to $8 million per quarter moving forward.

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 share-based compensation. Adjusted EBITDA in the second quarter of 2012 was a loss of $938,000, compared to positive adjusted EBITDA of $442,000 in the second quarter of 2011.

Net loss for the second quarter of 2012 was $2.2 million or $0.08 per share, compared to net loss of $1.3 million or $0.05 per share in the second quarter of 2011. Our cash portfolio, including cash and investments, was $52.4 million as of June 30, 2012, compared to $56.3 million at the end of 2011.

Cash use during the quarter was $5.2 million. This primarily reflects expenditures on our patent litigation as well as activity within our stock repurchase program. In the second quarter, we purchased 387,288 shares of our common stock at an average cost of $5.29 per share, for a total of $2.0 million. As of June 30, 2012, we have $23.1 million remaining under our authorized stock repurchase program.

With that, I'll turn it back over to Vic.

Thanks, Paul.

Today we announced that Fujitsu launched the world's first Smartphone with Immersion's HD Haptics. The Raku-Raku F-12D uses Immersion's TouchSense 5000 software to control a high-fidelity Piezo actuator, along with our Integrator product to create a consistent high-quality haptic experience throughout the interface.

Immersion's HD Haptics has the fastest response time and the broadest range of haptic sensations available in the Smartphone market. As a result, the haptic effects are crisp, precise, and very realistic. We are thrilled to see the adoption of our HD Haptics into the Smartphone form factor and continue to work with OEMs to create high-quality haptic experiences.

During the quarter, we were also pleased to see the previously announced Samsung Galaxy S III begin shipping internationally. Samsung's flagship Smartphone uses our TouchSense 3000 software and a module from our Integrator product called Reverb, which monitors the audio and applications and turns them into haptic effects in real time, automatically adding haptics to games and applications.

The feature can be turned on and off at the application level via the device settings, giving consumers great flexibility and customization options through Immersion software. In its first two months on the market, the Samsung Galaxy S III has shipped over 10 million units, marking the largest deployment of our Reverb technology today. Samsung's inclusion of this feature underscores the demand for and interest in more engaging mobile content that is haptic-enabled. And we're thrilled to have the visibility of haptics raised with such a high-profile device.

On that note, we continue to see growing momentum for haptic-enabled content, with new titles from some top-tier applications developers. Our relationship with Rockstar Games continues with the recent launch of Max Payne Mobile with Immersion Haptics. This comes on the heels of the launch earlier in the year of Grand Theft Auto III.

In addition, SEGA of America launched both the Sonic CD and Sonic the Hedgehog 4 titles on the Android market this quarter. It is encouraging to see developers who have integrated haptics into their mobile games using our Haptic SDK return to the market with new haptic-enabled titles based on the positive response they have received from consumers. We believe this enthusiasm will drive additional developers to create new games featuring compelling haptic effects, such as Jellyflop from Concrete Games and World of Goo from 2D Boy, both of which launched during the quarter.

As mobile gaming continues to gain traction on the market, we were excited to see one of our partners in the console gaming space, Power A, launch a peripheral for the mobile market. The MOGA device is a mobile peripheral that houses your mobile phone. It's shaped like a gaming controller and brings improved gaming controls to the mobile platform, as well as the rumble feature powered by Immersion that gamers enjoy in their home consoles.

During the quarter, Immersion participated in a number of mobile industry events. In May, we attended the CTIA Conference in New Orleans. There we partnered with AT&T to host a developer event and demonstrated haptic apps like Sonic CD and Max Payne, as well as a new version of our Reverb technology, which uses improved algorithms to translate audio into haptic effects for music, movies, and other multimedia content. All in all, our exhibit showed how haptics can create a more cinematic mobile entertainment experience, which is something we continue to evolve and develop through advanced prototypes and discussions with possible new partners.

We also hosted a meeting space for customers and participated in a speaking panel at the Mobile Asia Expo in Shanghai. We're encouraged by the level of excitement we're seeing in the China market for haptic-enabled mobile games and for Immersion TouchSense solutions. This includes interest for haptics from both Immersion and our partners, like TI and Emojis, who offer solutions in the China market.

As we announced during the quarter, TI has released two new apps to streamline the process for mobile OEMs to incorporate haptics into their devices. The DRV2665 is the first integrated amplifier for Piezo modules that is compliant with our TouchSense 5000 software for HD Haptics, while the DRV2603 helps provide optimal performance for devices using Immersion's TouchSense 3000 software with resonant actuators.

Both of these products show TI's commitment to Immersion and innovations for the haptic market. And we're excited to continue our partnership with TI to bring improved solutions to mobile device manufacturers.

Finally, at the end of June, we were pleased to be invited by Google to participate in the Developer Sandbox at Google I/O. Google I/O is Google's own conference that they use as a platform to launch new products and software and to highlight innovators in their ecosystem. Participation in the event is on an invitation-only basis. To be selected as one of the few companies to demonstrate our technology in the Android pavilion was great validation that haptic technology is providing a distinctive advantage to developers on the Android platform.

At the show, we unveiled a new haptic SDK, which improves upon our library of haptic effects and also offers developers more flexibility to incorporate haptic effects into their applications by extending support for native applications beyond Java to also include C, C++ and C# interface for Unity 3D. With this support, developers will now be able to incorporate haptics into HTML 5, allowing them to bring advanced haptic technology to an entirely new category of apps. We will continue to improve the tools we make available to the developer community to support the broad range of mobile content that can be enhanced through haptics.

Moving to the automotive market -- as I updated you last quarter, we continue to see interest in and traction for haptics as a way to provide a safer and more intuitive user interface for today's automotive control systems. We announced during the quarter that Kia launched a haptic rotary dial for their 2013 flagship car, the K9, which is currently available in Korea. This opportunity was made possible through our partner, Daesung. And we continue to work directly with automotive manufacturers and system integrators to incorporate haptics into automobiles in new and compelling ways. We are also excited about the launch of the Cadillac Q haptic-enabled touch screen infotainment system, which is now available in the Cadillac XTS.

Moving on to a discussion of our efforts to monetize basic haptics -- haptics has enjoyed widespread adoption in the mobile marketplace, and we have licensed hundreds of millions of phones that are haptically enabled and authorized to include Immersion technology.

In addition, though, we believe that today there are more than 200 million unlicensed phones in the marketplace that include basic haptics and that infringe our IP. And this number could rise to 300 million or more by the end of 2012. Clearly, the monetization of basic haptics in the mobile market represents an increasing yet unrealized opportunity for Immersion that -- were we to receive our appropriate return on the use of our haptics technology -- would constitute a very healthy, fast-growing business.

While our pending patent litigation is designed not only to address prior infringing sales to basic haptics -- but also to enable us to participate in this dramatic growth opportunity moving forward through incremental royalties. Our near-term growth has been impacted by the current widespread violation of our intellectual property rights.

Based on our current outlook, reflecting both the impact of this ongoing unlicensed activity, as well as the additional upside of potential basic haptics licensing revenue we could receive this year, we're expanding our 2012 revenue guidance to a range of $32 million to $38 million. In determining this range, we have made certain assumptions based on our existing business; plus, for the high end of our range, potential revenue from the licensing of our basic haptics intellectual property to new and/or existing customers. This potential 2012 basic haptics revenue includes payments for prior shipments of unlicensed and infringing basic haptics products.

Our current and ongoing settlement and licensing discussions lead us to believe that prior to December 31, 2012, it is possible we may conclude one or more basic haptics agreements that would lead to our achieving the higher end of our guidance. Due to our ongoing efforts to manage our expense run rate, we continue to expect to achieve positive adjusted EBITDA for the year.

In closing -- while we are not seeing the growth trajectory we would have liked during the litigation phase, we ultimately expect to monetize the increasingly large revenue opportunity presented by the unlicensed use of Immersion haptic technology in the mobile marketplace.

We remain committed to prudently managing our operations during this period. We believe more strongly than ever that the value of haptics-enabled interfaces and content is becoming more and more integral to the user experience. And we continue to innovate and develop new solutions and IP to further expand the opportunities in front of us.

As evidenced by our recent stock buybacks, we are extremely confident in our position at the center of the haptics ecosystem.

With that said, we will now open up the call to your questions. Lorenzo?

(Operator Instructions) Charlie Anderson, Dougherty & Company.

I wonder if we could just unpack the guidance -- how much of it is the potential for the settlements, the license deals for basic haptics toward the end of the year? And how much is the ongoing business?

Sure. The $32 million would include no revenue from basic haptics. It would be our base business. That $32 million would be the low end of the base business, we would hope; and are working hard to generate more revenue than that for our base business. The balance, then, from our base business to the higher end of the range would include some amount for basic haptics.

But would you go to $32 million to $34 million of the base business? Is that the right way to think about it? Because you had sort of a $2 million range before?

We haven't been that specific in terms of the guidance. We feel, at the low end, $32 is the right number. And then, including upside to the base business plus basic haptics revenue, based on some certain assumptions, we think $38 million at the upper end would be the right range.

You obviously got something to give you comfort to put it in the guidance. I wonder if you could just give us a little bit more color on that -- where is that sort of comfort level coming from?

Well, I think that the strategic importance of haptics, and the need for OEMs to continue to innovate and differentiate their products -- when you compare the importance of haptics plus the strength of the case and the costs to defend -- I think those are good incentives for defendants to settle, or want to settle. We're a licensing company. And so obviously, our goal is to license our IP and solutions to these companies on fair terms.

So we've met a number of times with a number of different companies. Based on those discussions and, I believe, further discussions that we'll continue to have, I think I'm optimistic that we can find some common ground and enter into licensing agreements that would lead us to success and growth in the revenue stream.

And are there sort of sign posts in the case, in terms of timing, that would sort of cause agreements to come in certain quarters or certain months, based on the timeline of the case?

Well, I think we're at the phase where we're continuing discovery. We've received a lot of materials and information. We're gearing up for depositions. Experts are engaged and evaluating and examining a lot of this material.

So we have a lot of information at our disposal. We feel good about the case. We feel as good now as we did when we filed the case. And so, at this stage, we've learned a lot. I'm sure over the next few quarters we'll learn even more.

Just to give you an update -- I believe the current schedule calls for a hearing before the judge in the first -- March/April of next year, and then an initial determination in June of 2013, and a target date for completion in October of 2013.

Yes. And Charlie, there are also some court-designated times for the parties to specifically sit down and talk about getting together, and whether a settlement is something that can be worked out. And so, that's a process which is actually active right now.

Right.

Thanks so much for taking my questions.

Thanks, Charlie.

(Operator Instructions) Jeff Schreiner, Capstone Investments.

Just one, real quick -- wondering about the guidance -- why the need -- I wasn't able to listen to all your comments, but why the need to extend it from $32 million to $38 million, when it was previously at $34 million $36 million? And maybe moving it up would be positive, but moving it so wide -- I'm trying to understand the puts and takes there as to what you're seeing.

Sure, Jeff.

Maybe speaking to the basic business -- when you look at the most recent quarter, our gaming revenue was lower by about $0.5 million from what we anticipated. So we saw some weakness there. It was down from Q2 of last year. And obviously, it was down from our seasonally high first quarter. But we're seeing some softness in the gaming business, and we attribute that to the economy and the overall movement of gaming from console devices to mobile devices.

On the mobility side, we also have seen revenue come in about $0.5 million than we had anticipated. And that has to do with some uneven performance by some of our licensees. Some are doing well, and others are not doing quite as well. And so, when you couple the weakness in the base business to the degree of about $1 million, I felt that the base business could come in at the low end, at the $32 million, which is why we decided to widen the range, if you will, to $32 million.

Terms of the $38 million -- as I said before, the optimism around our discussions and the opportunity to capitalize on this rapidly growing, unlicensed set of units -- to the extent we can monetize that this year, then we would -- we'd be able to achieve the higher end of the range.

All right. Thank you very much, Vic.

Thanks, Jeff.

(Operator Instructions)

At this time, we have no further questions in the queue. I'd like to pass the call back to management for closing remarks.

Thank you, everyone, for being on the call with us today. We look forward to updating you again on our next quarterly call. Good afternoon. Thank you.

Ladies and gentlemen, this does conclude the Immersion Corporation Second Quarter 2012 Earnings Conference Call. We'd like to thank you for your participation today, and you may now disconnect.