Immersion Corp (IMMR) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation fourth-quarter and fiscal year 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, the 28th of February, 2013.

I would now like to turn the conference over to Jennifer Jarman of the Blueshirt Group. Please go ahead, Jennifer.

Thank you, Operator. Good afternoon, and thank you for joining us today on Immersion's fourth-quarter and fiscal 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 are 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 the press release we issued today after market close.

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 today's press release.

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

Thanks, Jennifer, and thanks, everyone, for joining us this afternoon.

2012 was a year of strategic accomplishment for Immersion, as we made significant progress in executing our strategy of, one, creating new haptic technologies and user experiences; two, focusing on the haptic technologies and experiences that bring maximum value to OEMs, developers, and consumers; and, three, monetizing both our innovative software solutions and our strong patent portfolio.

The success of our strategic initiatives in 2012 has established a solid foundation for growth in 2013 and beyond. Our software licensing business is profitable and expanding rapidly, particularly in the mobile market where our OEM customers have shipped over 550 million TouchSense-enabled smartphones and tablets.

In 2012 we expanded our mobile market presence in important new geographies, including Japan and China. We provided our OEM customers and content developers with powerful tools that make it easy to integrate rich haptic-enabled user experiences into their products. And we strengthened the ecosystem for haptics by working with key industry partners such as chip suppliers, actuator companies, and driver vendors to bring technologies to market.

At the same time as we've been enhancing the value of our TouchSense solutions, we've also been investing strategically in the expansion and enforcement of our intellectual property rights. We achieved a significant milestone in our basic haptics patent enforcement initiative last November, when we successfully resolved our patent infringement litigation against Motorola by entering into a settlement and licensing agreement with Google and Motorola covering our Basic Haptics IT.

More recently, our January 2013 agreement to expand our license with LG Electronics to include Basic Haptics patents further underscores how the most powerful players in the mobile ecosystem not only are embracing our advanced software solutions, but are also recognizing the strength of our patents.

We are continuing our Basic Haptics litigation against HTC and feel confident regarding the strength of our case. The hearing in the ITC action is scheduled for late March, with an initial determination due in June and a final determination in October.

By gaining recognition for the value of our IP portfolio, we are preventing low-cost infringing alternatives from competing unfairly against our software solutions, establishing fair pricing within the haptic ecosystem, and setting a baseline for future touch technology innovation. We are pleased with how we are progressing not only through the litigation process as we seek to enforce our IP rights, but also in our ongoing licensing negotiations with existing and new customers.

In a few minutes I will discuss our recent business developments and expectations for 2013. But first I'll ask Paul to provide a detailed review of our financial results for the fourth quarter and fiscal 2012. Paul?

Thanks, Vic.

Revenues in the fourth quarter of 2012 were $8.9 million, up 15% compared to revenues of $7.7 million in the year-ago period. Revenues from royalties and licenses of $7.6 million were up 12% compared to revenues of $6.8 million in the fourth quarter of 2011. Revenues from product sales were $837,000, up 21% from product sales of $691,000 in the fourth quarter of 2011.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the fourth quarter of 2012 a breakdown by line of business as a percentage of total revenues was as follows -- 46% for mobility; 21% from gaming; 23% from medical; 6% from auto; and 4% from chip and others. These percentages are based on total revenues, including revenues from royalty and licensing, product sales, and development contracts.

Gross profit was $8.5 million, or 96% of revenues, compared to gross profit of $7.3 million, or 96% of revenues, in the fourth quarter of 2011. Cost of revenues in the fourth quarter was $386,000 compared to $342,000 in the fourth quarter of 2011. Excluding cost of revenues, total operating expenses were $8.6 million in the fourth quarter of 2012 compared to $7.1 million in the fourth quarter of 2011. This includes noncash charges related to depreciation and amortization of $647,000 and stock-based compensation of $800,000.

Excluding these noncash charges, OpEx on a non-GAAP basis was $7.2 million during the quarter compared to $5.5 million in the fourth quarter of 2011. OpEx in the fourth quarter of 2012 included litigation-related expense of $1.9 million.

Net loss for the fourth quarter of 2012 was $200,000, or $0.01 per share compared to net loss of $270,000, also $0.01 per share, in the fourth quarter of 2011.

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 fourth quarter of 2012 was $1.3 million compared to adjusted EBITDA of $1.9 million in the same period last year.

Turning now to our results for the fiscal year ended December 31, 2012, revenues were $32.2 million, up 5% from revenues of $30.6 million for fiscal 2011. Full-year revenues from royalties and licensing were $29.0 million in 2012, up 8% from $26.9 million in 2011, driven largely by increased revenues in our mobility, automotive, and medical lines of business.

Revenues from product sales and development contracts in 2012 were $2.0 million and $1.2 million, respectively, compared to revenues of $2.6 million and $1.1 million, respectively, in 2011.

Gross profit for the year was $31.0 million, or 96% of revenues, compared to gross profit of $29.4 million, or 96% of revenues in 2011.

Operating expenses, excluding cost of revenues, were $36.1 million in 2012 compared to $29.4 million in 2011. Due primarily to the ITC patent infringement litigation against Motorola and HTC, litigation expense in 2012 was $8.0 million compared to litigation expense of approximately $500,000 in 2011.

Net loss for the year was $5.6 million compared to a net loss of $1.6 million in 2011, primarily reflecting the increased 2012 litigation expense. Adjusted EBITDA for 2012 was $259,000, down from adjusted EBITDA of $6 million in 2011, also primarily due to the increased litigation expense in 2012.

Our cash portfolio, including cash and investments, was $43.5 million as of December 31, 2012 compared to $56.3 million exiting 2011. Cash used during 2012 was $12.8 million. This primarily reflects expenditures on our patent litigation, as well as activity within our stock repurchase program.

In 2012 we purchased 1,054,538 shares of our common stock at an average cost of $5.43 per share, for a total of $5.7 million. As of December 31, we had approximately $19.4 million remaining under our authorized stock repurchase program. As we consider further activity under this program we'll continue to balance the attractiveness of our current stock price with the need to remain adequately resourced to fully exploit our IP monetization efforts.

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

Thanks, Paul.

In recent months Immersion has taken significant steps forward in establishing the value for our intellectual property and software solutions. The successful resolution of the ITC action against Motorola, combined with the expansion of our license agreement with LG Electronics to include both our Basic Haptics IP and our TouchSense software demonstrates the heightened value of our technology in today's touch-centric mobile market.

We're pleased to know that our technology is valued and in demand throughout the mobile market. While we will continue to protect and enforce our IP rights in 2013, we are looking forward to working with our partners to develop and implement solutions that will enable richer, more realistic and more compelling haptic experiences for mobile device users around the world.

I'd like to take this opportunity to give some visibility into the status of our negotiations of a new license with Samsung, the current license having expired at the end of 2012.

When we last renewed our agreement with Samsung several years ago, the world of smartphones was much smaller and the primary value for haptics was button confirmation, where it saw limited adoption in the mobile space. At the time, we had developed some innovations in our TouchSense embedded-level software, but our solutions addressed a limited use case.

By contrast, today our TouchSense solutions offer powerful new ways for users to communicate through touch and enjoy tactile effects in games and other media. We offer OEMs a suite of integration tools designed to enable them to easily customize the haptic environments of their mobile devices, and the value of our Basic Haptic patents in the mobile space has been validated.

As a result, we believe the value of our IP and solutions has substantially increased. Given the recognized importance of our software solutions and the strength of our IP portfolio, we are in a strong position to seek substantially higher compensation for Samsung's use of our TouchSense and Integrator software solutions, as well as for its prior and future shipments of mobile devices containing Basic Haptic technology. As we have not yet reached agreement with Samsung, we continue to consider all available options to maximize shareholder value.

We are also seeing great opportunities with new OEM customers. This includes continued strength in Japan, where we just recently announced our newest mobile licensee, Panasonic. In addition, in China we are actively engaged with our chip partners to offer haptic solutions to Chinese OEMs and have seen ZTE, Huawei, and Xiaomi each release new devices in 2012 that incorporate Immersion chip-based solutions. Moreover, we have been very pleased to see these same OEMs express increased interest in working directly with us in order to gain access to the richer haptic experiences made possible by our more advanced TouchSense solutions and integration tools.

Beyond OEMs, we continue to work with mobile content providers to build tools that allow developers to create amazing user experiences with haptic technology.

As we look to 2013, we are excited to share our progress with you. We have already started off the year by seeing new, exciting products enter the market, such as the Eluga from our newest licensee, Panasonic, and the Razor Edge gaming tablet, which won Best of Show awards at CES in January.

In addition, last week we launched our newest product offerings, Integrated Themes and Tactile Presence, ahead of Mobile World Congress in Barcelona. Integrated Themes is a framework to help OEMs add customized haptic effects to their audio and visual interface designs, empowering them to create branded and compelling touch-enabled mobile user interfaces.

Our new Tactile Presence module weaves touch interactions into long-distance communications, allowing users to transmit tactile gestures or actions to other users and enabling them to physically feel what others are doing onscreen. We believe the ability to translate gestures into meaningful touch feedback and transmit this information is a revolutionary way of communicating that will greatly enhance mobile interactions, video conferencing, and even gaming. We've seen great response from both our OEM customers and the press, and we will continue to focus on innovations such as these to deliver more value to our OEMs and mobile users.

While we're seeing positive momentum with existing customers and are optimistic regarding the opportunity for new and expanded software and patent license agreements, until we have greater clarity with regards to our Samsung relationship it is difficult to provide comprehensive annual guidance. However, given the health of our existing business, we are pleased, even absent a new agreement with Samsung, our current 2013 revenue guidance is $28 million to $32 million.

In closing, we at Immersion are tremendously excited by the future for haptic technology and we are working on innovative new user experiences and technology advancements in mobile and other exciting markets, including automotive, gaming, and wearables. We will remain diligent in enforcing our IP rights and pursuing high value agreements that are aligned with the success we've achieved in establishing the importance of our technology in our target markets.

We are committed to our strategy of creating new haptic technologies and user experiences, maximizing their value, and monetizing our technology. We are pleased to see the value of our technology repeatedly validated through our activities in 2012 and look forward to sharing more developments with you in 2013.

As we close out the year, I'd like to thank our dedicated employees around the world, our customers and partners, and you, our valued investors, for your ongoing support. We look forward to seeing some of you at the upcoming ROTH Investor Conference on March 19 in Dana Point or out on the road.

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

Thank you, sir. (Operator Instructions) Charlie Anderson; Dougherty & Company.

I wanted to start out first with -- you guys are on some Samsung devices that will continue to ship, I would imagine, or are shipping still in 2013. And I wonder are you still getting paid on those devices and is that embedded in the guidance? And then I'll ask my follow-up after that.

Yes, Charlie. I'm really not at liberty to discuss the current Samsung agreement.

I guess what I'll ask you is, to what degree, Vic, is it self-inflicted in terms of could you have gone forward with the economics that you had? And then the other thing that I was wondering is, I believe that you've been adding more content in their more current devices. And I believe that I always felt like you were getting paid more for that extra content. Were there mechanisms to earn more or were they just simply not sufficient in your mind?

Yes, sure. Over the last few years we clearly have been adding additional capability to the TouchSense solutions. And we have been receiving additional compensation for that extra value that we've created. So, yes, it has been an increasing growth in our ASPs and in our revenue base.

In terms of the status of the negotiation, I think, as I stated in the script, over the last few years the value of haptics has grown dramatically. The number of devices using the TouchSense solution as well as Basic Haptics has grown dramatically. We think that the value of the solutions and the IP has increased substantially. So it was not a matter of accepting terms consistent with the prior agreement. It really is a matter of us establishing substantially higher payments for the increased value of the IP and the solutions. So that is what we're trying to achieve.

Is there any direction you can give us in terms of quantifying what you mean by substantial?

At this point, no, I'm not in a position to be able to do that.

I think historically you guys have talked about the bottom-line performance in the annual guide. So maybe if you could address that, or at least maybe talk about where you expect expenses to shake out for the year?

Sure. As we said, we're not in a position to provide the annual EBITDA or profit guidance. We are evaluating all of our options with regards to our relationship with Samsung. And so we can say that we do expect to increase headcount modestly. We expect to maintain appropriate cost controls on all of our expense areas. So I would think that you won't see anything dramatically changing there. But, depending on the path that we take, there could be a substantial change in some of the OpEx categories.

Got it.

And, Charlie, this is Paul. As I think we indicated, once we have a little bit more clarity on the Samsung situation we'll come back with, as necessary, updated guidance and bottom-line guidance as well as top-line guidance (multiple speakers).

Yes. Do you guys have a sense of how long it will be before you have to make a decision on that?

We have put plans in place. We're evaluating a handful of options. But in terms of a timeframe, that's not something we can share with you just yet.

Got it. And I think --

When we make a move, you will be aware.

Yes. And you guys, I think, last year on your guidance you embedded the potential for settlements in. Did you do that at all in this year's guidance?

This year's guidance is based on the existing customer base, some of our more recent license arrangements and anticipated growth in the business, but it is absent anything related to a Samsung renewal or new relationship.

Okay. Perfect. Thanks so much.

Jeff Schreiner; Feltl and Company.

Wanted to understand. Basically, the tone that I'm assuming here is that if things don't go the way that Immersion would like in negotiations with Samsung, is Immersion then willing to pursue litigation?

Jeff, we're not going to try to predict what we will ultimately end up doing. We just are currently evaluating our options and I'd like to leave it at that.

You recently obviously had the success of negotiating with Motorola and Google. And thinking back about other agreements you have with either Nokia or Samsung, just trying to understand if any of these agreements might have a most-favored-nation clause which could be triggered if someone is given a lower rate than someone else.

To my knowledge, I don't believe we have used a most-favored-nation's clause in any of our agreements. So I'm not aware of any limitations we have on entering into new agreements.

Yes. Jeff, I don't think we've talked too much about specific terms in contracts to date that we might have. But, as you can imagine, we generally try to avoid any kind of most-favored-nation's limitations that would impact other relationships based on an initial relationship.

Thank you. Just wondering as well -- you've been talking about a strategy of working toward settlements. And that was kind of what I think Mr. Anderson was trying in terms of the embedded revenue you had for last year if those settlements came. And those were with possibly people that you were either litigating with or not litigating with yet and you might be able to reach a settlement. Is the current Samsung situation going to possibly have a negative impact on any other potential negotiations as others may wish to see what Samsung chooses to do?

I don't know the impact that it would have on any of our discussions or future business. So it's hard for me to predict what impact it might have. I think that the use of haptics is growing. The value is something that is growing in user experience. So I believe the people that we have worked with in the past, they appreciate good value. They continue to launch and ship new products. So I don't believe it's going to have any measurable impact on our ability to enter into agreements going forward.

I think kind of by implication you're talking about recent agreements. Maybe I'll just clarify that we are able to, in many cases, negotiate and settle differences. We did with Motorola. We have captured payments that they have made for prior shipments. That was treated as a contra G&A expense item, so you would not have seen any impact on our revenue for that deal. The LG Basic Haptics agreement was entered into here in the first quarter of 2013. We'd expect the impact of that to begin in 2013. And I'm not aware, really, any other agreements that would have been impacted by the prior guidance that we gave for 2012.

Okay. And there's also -- I guess I left it out too. There's a third bucket and I'd like to understand if there's possibly negotiations outside with maybe nonlitigants or nonprior licensees. Are there ongoing negotiations still for the Company in that bucket?

Yes. Absolutely. There's a full Basic Haptics licensing strategy. We were engaged with a number of parties that are not existing licensees or litigants and we continue to make progress. And, again, the momentum created with the Motorola settlement and the expansion of the LG licenses has given us great momentum and given us confidence we'll have success with the others as well.

And just one last question from me, gentlemen. Thank you for your time. Given the experience I've had in the past in IP litigation and things that can happen, what is the risk to Immersion that going to trial with HTC, and if you lose to HTC, that that could negatively impact, let's say, just at least your recent agreement with Motorola and Google?

Again, this requires some hypothetical analysis and I'd say we feel so confident that's not a possibility that I'm prepared to even imagine. We feel good with our case at the ITC level and we expect to win.

Okay. Thank you, gentlemen.

(Operator Instructions) Krishna Shankar; ROTH Capital.

Can you elaborate on your recent agreement with the Chinese handset companies and also the Japanese companies and how you would work with the chip companies in terms of your licensing and royalty agreements?

Sure. The agreements in Japan are primarily focused on utilizing our TouchSense 3000 and our TouchSense 5000 solution. We've had quite a bit of success and they have had success growing their market share using TouchSense as a way to differentiate their products. So we're very pleased with the relationship that we have with all of our companies in Japan.

We're also happy with the relationships we have in China. We have in the past made our TouchSense 2000 solution available through chip partners such as Atmel, Cypress, and TI, as well as Imagis. And they have been quite active in promoting this solution to a number of Chinese OEMs. I mentioned three -- ZTE, Huawei, and Xiaomi. All three have launched products using a chip-based solution under license from Immersion, either purchased through TI or Imagis, primarily. And they have also had great success in the marketplace, such that they are now working with Immersion directly to utilize our advanced TouchSense features in our TouchSense 3000 and TouchSense 5000.

So we would expect to continue those discussion and those activities, ultimately leading to those companies launching products with our TouchSense solutions.

And going forward, as you look at the smartphone and tablet market, is there a subset of that market which will find your solution very applicable? Or how do you view your [sub development] market for your solutions? And what segments of the smartphone and tablet market do you think that you would be going after in terms of licensing and royalty?

Well, I think all smartphones and all tablets are made substantially better in terms of the user experience, with advanced haptics from Immersion. So I think all categories, whether they're the high end, the mid range, or the low tier phones would benefit. Because of certain cost constraints I think we've found ourselves to have a lot of success in the upper and mid end range of smartphones and tablets.

At the lower end range, we're having success with our chip-based partner solutions, as well as our IP initiatives with Basic Haptics. So in some of those lower tiered phones where cost savings for reduced actuator capability is something that they're using to reduce their costs, they're using the Basic Haptics solution. And typically those are under license from Immersion. And if they're not, then those are the subject of some of our enforcement actions.

Okay. thank you.

Richard Mashall; Senvest.

I just got back -- me and Rob just got back from Barcelona, so we saw basically a ton of phones employing your technology, especially in the Android universe.

Just clarify, are Huawei and ZTE currently licensees?

Huawei and ZTE are currently not licensees, but they're using a license solution from either Imagis or TI.

Okay. So they're on [side,] in terms of using your technology.

Yes, absolutely.

Okay, got you. Because we definitely saw a bunch of their phones.

Yes. And they feel great. They really are -- it's a great product.

Yes. And the HTC phone was quite nice, too. Unfortunately, they're not paying but it was quite a nice product.

The Samsung discussions now, would you characterize them as active, or did it sort of just lapse and the agreement lapsed and they've been slow to get to you?

I would say that the agreement expired at the end of 2012. And the discussions were quite active, even very recently. But at this moment, as of today, we want to make sure we're providing the right expectation, the right guidance. And so at this point, as I said before, we're continuing to explore and consider other options. And those options could include a very favorable and amicable resolution, which is always what you hope for, or it could include other kinds of activities. But very active discussions up until today, and we'll see how we move forward with our various alternatives.

Well, I would just like to say, as your largest shareholder, that we encourage you to stand fast in these negotiations with Samsung and make sure you get paid what you deserve for the technology. We're in it for the long haul and we're in it for the big win. We think this is a major differentiator when it comes to mobile devices, your touch technology, and it should not under any circumstance be sold short or too cheaply.

So whatever you guys decide, you've got to do what you've got to do to get paid, and paid fairly for this.

Richard, I appreciate that feedback and someone who really understands the story and who has had a good recent experience at Mobile World Congress with all of the activity. I really appreciate that comment and that's exactly how we feel and that's exactly how we're operating.

Good to hear.

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

Well, thank you, everyone, for being on the call with us today. We look forward to updating you again in our next quarterly call. Thank you and have a great day.

Ladies and gentlemen, that does conclude the Immersion Corporation fourth-quarter and fiscal year 2012 earnings conference call. I'd like to thank you for your participation. You may now disconnect.