Immersion Corp (IMMR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion First Quarter 2013 Conference Call. (Operator Instructions). This conference is being recorded today, Thursday, May 2, 2013.

I would now like to turn the conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please, go ahead, ma'am.

Good afternoon, and thank you for joining us today on Immersion's first quarter fiscal 2013 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 different 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 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 gap financial measure is available in today's press release.

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

Thanks, everyone, for joining us this afternoon.

In the first quarter of 2013, Immersion made strategic breakthroughs and recorded record results. We earned $13.9 million in revenues for the quarter, our highest total ever, and achieved strong profitability at $0.08 per share and $4 million of adjusted EBITDA.

In addition, we made critical progress towards fulfilling our Basic Haptics licensing strategy entering into Basic Haptics patent licenses with Samsung and LG Electronics, two of our largest and most influential customers. Taken together with our earlier Basic Haptics license agreement with Motorola, we are now poised to capture a much larger share of the rapidly expanding worldwide smartphone market with Basic Haptics acting as a pricing floor that gives us the ability to sell more of our advanced technology software solutions at fair prices.

During the quarter, a number of market leaders, including Samsung, LG, and Pantech, launched flagship products incorporating our touch-enabling technology. And, as we demonstrated at February's Mobile World Congress, we continue to develop and introduce new technology solutions that showcase the ways in which Haptics can bring an increased sense of realism and rich communication capabilities to our customers' products.

Moreover, even as we bring immersive Haptic experiences to life in today's cutting-edge products, we are already envisioning tomorrow's advances in Haptic technology and how they can enrich future generations of digital devices and new product categories and environments.

In a few minutes, I will discuss our recent business developments, but, first, I'll ask Paul to provide a detailed review of our financial results for the first quarter of fiscal 2013.

As Vic mentioned, revenues in the first quarter of 2013 were $13.9 million, up 43% compared to revenues of $9.7 million in the year-ago period. Revenues from royalties and licenses of $13.6 million were up 50% compared to revenues of $9.1 million in the first quarter of 2012.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2013, a breakdown by line of business as a percentage of total revenues was as follows -- 66% for mobility, 19% from gaming, 11% from medical, and 4% from auto. Please, note that, as a large majority of our chip and other business relates to mobile products, we're now including these revenues as part of our mobility revenue percentage.

Gross profit was $13.7 million, or 99% of revenues, compared to gross profit of $9.4 million, or 97% of revenues, in the first quarter of 2012.

Cost of revenues in the first quarter was $148,000, compared to $315,000 in the first quarter of 2012. Excluding cost of revenues, total operating expenses were $11.5 million in the first quarter of 2013, compared to $9.1 million in the first quarter of 2012. This includes noncash charges related to depreciation and amortization of $658,000 and stock-based compensation of $1 million.

OpEx in the first quarter of 2013 included litigation-related expense of $3.1 million. This litigation expense was higher than anticipated, as we were preparing for the ITC hearing scheduled for April. Now that the HTC matter has been moved to the District Court, we expect litigation expense to continue at a lower level and are forecasting that expense for this litigation will be approximately $2 million over the remaining three quarters of 2013.

Net income for the first quarter of 2013 was $2.3 million, or $0.08 per share, compared to net loss of $219,000, or $0.01 per share, in the first quarter of 2012.

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 first quarter of 2013 was $4 million, compared to adjusted EBITDA of $1.6 million in the same period last year.

Our cash portfolio, including cash and short-term investments, was $64.2 million as of March 31, 2013, compared to $43.5 million exiting 2012. The cash increase relative to the December quarter is reflective of our recent license agreements and the fact that certain licensing payments we receive are not recognized at once but, rather, are treated as deferred revenue that is then recognized in future periods.

Cash generated from operations during the quarter was $19.7 million.

Immersion did not repurchase any stock in the first quarter; however, management and the board remain very confident in our business fundamentals and future prospects, continue to believe that our stock is attractively priced, and expect to execute opportunistically on the $19.4 million remaining under our authorized stock repurchase program. We will continue to monitor our cash balance and stock price relative to any future buyback activity.

In regards to guidance, as we indicated mid quarter, based on our current outlook, we expect revenues for 2013 to be in the range of $44 million to $48 million, an increase of between 37% and 49% over last year's revenues of $32.2 million. After factoring in the anticipated legal spend to support our efforts to defend and monetize our IP, we expect adjusted EBITDA for 2013 to be in the range of $12 million to $15 million.

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

As I mentioned earlier, in addition to achieving record revenues for the quarter, we entered into important contracts with Samsung and LG Electronics and set the stage for more complete monetization in our mobility business as a result of our Basic Haptics strategy. The strength of our IP portfolio has now been widely recognized in the mobile marketplace, which should give us an opportunity to secure additional Basic Haptics licensees in the future, as well as the ability to charge an appropriate premium for our advanced TouchSense and Integrator software solutions.

During the quarter, we continued to see the launch of new devices incorporating our technology. For example, Samsung's eagerly anticipated Galaxy S4 smartphone and Note 8.0 tablet each include our TouchSense 3000 solution, and LG's recently announced flagship smartphone, the Optimus G Pro, will also use TouchSense 3000.

In addition, we saw Pantech roll out a highly popular phone with HD Haptics in the domestic Korean market, the VEGA No. 6, which uses our TouchSense 5000 software.

Moreover, we gained further penetration in the Japan market with Panasonic releasing the Eluga phone, the first device that is launched with Immersion technology as a result of the newly signed license agreement between our companies.

With leading mobile manufacturers signaling their continued commitment to Haptics, we've garnered additional interest from companies that recognize the value of Haptics and want to work with us. This interest spans multiple market segments, including mobile, but also a renewed interest in gaming, growing momentum in automotive, and new thinking on how Haptics can add value to the next generation of digital devices and content.

On the gaming front, we're excited to see anticipation building as new consoles, such as the Sony PlayStation 4, near their expected launch in 2013. And, while we anticipate increased opportunities associated with the new gaming console releases, we're also working closely with peripheral companies who are designing game controllers for the mobile market. Gaming is crossing over into new form factors, and we're encouraged by the renewed enthusiasm and innovation we're seeing across this transitioning market. As gaming is an area that appreciates and requires Haptics, Immersion is well positioned to capitalize on the expanding opportunities in this space.

Much of the current work we're doing in automotive will result in Haptic interfaces in the market in 2015 and beyond. But, with the success of the recent automotive interfaces that utilize Immersion Haptics with leading manufacturers such as Cadillac, Aston Martin, Lexus, and Acura, more manufacturers and partners are now looking to us to provide guidance as to how Haptic interfaces can increase driver confidence and improve safety.

Beyond automotive, consumer electronics companies are pursuing new product categories that can be enhanced by Haptic feedback, including wearable devices such as smart watches and fitness and health monitors. While these product areas are still in the development stage, we believe they offer real opportunity for our touch-enabling technologies, particularly where it may be difficult to interact visually with products while engaging in activities.

We continue to innovate and build on what we believe to be the core values for Haptics, such as reassuring touch confirmation, increased realism, and rich forms of communication. OEMs have responded very positively to integrated themes and tactile presence, the new product solutions we recently introduced at Mobile World Congress.

Integrated themes allows OEMs to reinforce their brands by incorporating intertwined and consistent visual, auditory, and touch elements into their products.

And tactile presence weaves touch interactions in the mobile communications, allowing users to transmit tactile gestures or actions to friends and family members who can physically feel those gestures through Haptics in their own mobile devices.

We are also excited by recent consumer research, which shows how Haptics can bring a true sense of immersion, excitement, and greater enjoyment to mobile media, such as video and advertisements. As we pursue these new market opportunities and areas for advancement in Haptic technology, we remain focused on continuing to build a valuable portfolio above intellectual property and solutions.

At the same time, we remain diligent in ensuring that we protect our intellectual property. We terminated the International Trade Commission's investigation of HTC Corporation for infringement of certain Immersion patents in order to proceed directly with our action against HTC in the US District Court to accelerate our demand for damages. The remedy available in the US District Court includes damages and attorneys' fees.

Now I'd like to provide our analysts and investors with some thoughts on how you might view Immersion in the near term, as well as over a longer-term horizon. As I've emphasized throughout the call today, we're very pleased with the recent activity and successes with our new licensing arrangements and the momentum that they have created for us in the market. We believe these efforts put us in the position to execute well on our current business initiatives and to grow our revenue as we move forward this year and beyond.

Over the longer term, we recognize that innovation is the engine that got us here and that it remains pivotal to unlocking the additional substantial growth opportunities in front of us. We're excited by our prospects and continue to work on cultivating rich, new Haptic experiences from our latest mobile product offerings to promising elements of our roadmap in other markets. We are investing in future innovation. And, while certain initiatives may take some time to come to full fruition, we believe we are setting the stage for future Haptics-based monetization opportunities in the years to come.

Before I conclude my formal remarks, I'd like to provide a quick update regarding upcoming investor events. We will be attending the Jefferies Tech, Media, and Telecom Conference on May 9 in New York; the JMP Securities Conference on May 15 in San Francisco; the B. Riley 14th Annual Investor Conference on May 21 in Santa Monica; and the Credit Suisse Communications Technology Conference on June 10 in Boston. We look forward to seeing some of you there.

With that said, I'll now open up the call to your questions. Lili?

(Operator Instructions). Jeff Schreiner, Feltl and Company.

I just had a couple questions here. I guess one -- Paul or Vic, could you talk about the spending in legal? It seems like it was a little bit higher than the prior estimate, even when you look at the kind of full-year run rate, and maybe help us understand what's going on there?

And, then, is the Company looking to start making some investment spending? It seems its sales and marketing and R&D were both up about $0.5 million sequentially. Is the Company now looking to start investing a little bit more on the OpEx side as we move through fiscal year 2013?

First, on the litigation expenditure, it was a little high in the quarter. But, again, we were getting right up to the trial in the case before we switched over to the District Court. So it was a little bit on the high side, but it was well within the overall range we looked at for the case. And, again, as we look at the remainder of the year going forward, it should really come down pretty substantially as we look at the going-forward quarters; as I mentioned in the prepared remarks, maybe $2 million over the remainder of the year for that litigation.

And, as far as the OpEx, those expenditures -- they're a little bit higher this last quarter. There really were three factors at play there. First, our stock price has gone up, and, as that goes up, our stock-comp expense calculations rise as well.

Also, our headcount has ticked up just a little bit. We had 101 employees at the end of 2012, and we're up by maybe five or six at the end of this quarter. But we're not expecting to add on any substantial number of new employees over the future months.

And, then, finally, I guess, if you're looking at it quarter over quarter, keep in mind that our OpEx for last quarter was a little bit on the lower side because we do close down over the yearend holidays.

Okay. Maybe one or two more questions from me. I appreciate your time. Just in terms of the calculated gross margin, that equaled about 99%, if I'm not mistaken, in the March quarter versus it typically being somewhere around 96% or 97%. Is this the new run rate for the Company in terms of its calculated gross margin?

Yes. I think you can look at about that 99% going forward. That's really a reflection of our having transitioned the remaining part of our medical product business in the fourth quarter last year. That was the Laerdal Virtual I.V. product business that we've converted to a strict licensing royalty arrangement going forward.

Okay. And, I guess, Vic, if I may, you talked about at the end, I think, of your prepared remarks just what investors and shareholders should think about the Company. How should we think about -- ? Given the fact that it looks like there's a lot of drivers of growth in fiscal year 2013 from these recent licenses, both maybe on the unit and even on the per-unit royalty side, what are the drivers that are going to keep this kind of growth that Immersion's seen -- certainly saw in the March quarter going into 2014?

Sure. Well, clearly, you kind of walk through the various elements. There are additional patent licensing opportunities for Basic Haptics, as well as Advanced Haptics. So there's still a number of unlicensed OEMs.

And there are also new applications that people want to invest in to develop their own solutions. For example, wearables is an area where patent licensing is an opportunity for us.

We think there's tremendous upside in further penetration on standard definition offerings, moving our Chinese customers from our TS 2000 chip-based revenue to the TS 3000, plus further migration from Basic Haptics up to our standard definition solutions.

Then you have the whole high-definition area, where we're just at the very early stages of this very rich capability that enables new experiences. We call it rich communication and realism, where you move to piezos or electro-active polymers. You can take advantage of those new capabilities.

We've made some investments with our tactile presence and themes. So you can see that new solutions such as these or enhanced games, enhanced chat, other kinds of applications could be a big opportunity.

And then, as we grow our market share, higher ASPs are obviously something we'll be driving.

And then you have the non-mobile opportunities in gaming, automotive, and medical.

So I think, if you look across the gamut of either IP or solutions or future opportunities, there's lots of ways for us to win. In fact, you kind of look at today and say we had a good quarter, and we're making progress, clearly, with the business strategy. But I think that we really believe we're at the very early stage of a broader Haptic adoption and value creation cycle.

So, when you look at this financial strength and the investments we've made, pretty clearly, we will have a meaningful impact on the user experience. And, if you look at that and what do we believe we can do, we think we can influence e-commerce and content consumption. And, if we can do that, and we've got evidence -- we've got white papers and other evidence of user studies that show people want an immersive experience. And, if we can bring that to the marketplace and package it correctly, it's a massive opportunity.

Thank you, Vic. One quick question from me before I jump off. Could you just let us know if you haven't in the past -- ? What is the percentage of the standard to high-definition contribution within the revenue on the Haptics side?

I don't know that we've ever broken that out. It's not really something we track right now. But, clearly, there's four or five products in the market that use our high-definition versus thousands of products with our standard definition. So I would be thinking it's 95%-plus based on either our IP or our standard definition versus the high definition.

All right, gentlemen. Thank you very much. I appreciate your time.

Charlie Anderson, Dougherty & Co.

You guys have sort of a different quarter than you've had in the past here in terms of business mix and things that are going on. And I wondered. If we just think about Q2 -- I know you don't guide quarters. But, just so that we don't get it wrong here in terms of how this impacts your sort of normal seasonality that we would see Q1 to Q2 --

I think we have in the past and we expect to continue in the future to have some seasonality that benefits our Q1 revenue. Those are the results of gaming products and mobile devices that are sold typically in the fourth quarter of a calendar year, which is our first quarter revenue. So we saw some of that seasonality benefit us as well.

But, if you look at the guidance that we've provided and the outlook that we have, we believe very much in the guidance of $44 million to $48 million. And so I think we expect that you'll see the same kind of trend, the same type of revenue growth for the balance of the year.

And I'd add that the relative mix, to the extent that's changed -- I think you will see a fairly comparable profile in the remaining quarters of 2013.

And then the last thing I would say on this is just to clarify. There were no one-time events that occurred in Q1 that resulted in the growth in revenue. So what we're seeing is a general trend and broader adoption of technology, and the recent license agreements has built this base of revenue that we see growing and continuing through the balance of the year.

And then I noticed the deferred revenue jumped up, and so did cash by quite a bit. I wonder. Are there some fixed elements now in revenue that were -- we should think about modeling for just kind of how we have been for gaming, maybe in mobility perhaps?

Yes. You can see that our short-term deferred revenue is at about $19 million, plus, now. So you can assume that we'll be recognizing that over the -- that's money that we've received and that we'll be recognizing that over the next 12 months.

We do have some fixed elements. I think we've mentioned that before. We may as we get into different geographies consider even additional fixed arrangements as part of our ongoing contractual negotiations. So, yes, I think the fixed elements are part of the mix that you will see going forward.

Overall, though, as Vic has indicated, we're expecting to see our revenue growing. So, long term, it will be replenished as we periodically will get the fixed payments. So that will perhaps move the deferred revenue back up periodically. And then that will be amortized over time as we recognize.

Yes. And, then, in terms of the cash, you said you guys are believers that Immersion's a pretty good investment, a good use of cash. Is there anything else that you might consider in terms of use of cash?

Well, we're always monitoring for opportunities. There are a lot of exciting business areas that are opening up. Right now, we're not planning on any major investments in terms of personnel, but we'll look -- you know, we keep our eyes open. And we also are a licensing company. So, while we don't like to litigate, periodically, that becomes something that we may invest in. But nothing else specifically that we can point to.

And then, Vic, you did a really good job in the last question talking about the future opportunity. And you mentioned sort of the media opportunity, enhancing content. I wonder if you could just frame up for us what that might look like in terms of revenue contribution down the line if you guys are successful in that area.

Sure. The Haptically-enabled media and content as a category is an area that we're very excited about. We've been working in this space for some time, building out IP tools, product solutions, and have spent a fair amount of time demoing and working with potential partners on how they might incorporate this in their content or in their distribution channel.

One of the things that I would highlight for you and for anyone else who has an interest -- we recently conducted a user study where we enhanced media with our Reverb technology. And the results were very promising. They're quite amazing, in fact, if you look at the quality and improvement, the brand sentiment, and the product recall that we're able to achieve. So it's a study -- we've written a white paper. It's entitled Reverb User Experience Value Investigation. And I think that is what we refer to in terms of creating this immersive experience that will influence e-commerce and content consumption.

So this is an area that could be huge not only as a revenue-generating opportunity, but, obviously, it's further value that we bring to our OEM partners. And so monetizing it from content and monetizing it from the handset side are two opportunities. And it would be an area that, if we see a way to enhance this, grow this, and speed the adoption, it could be an area that we might want to invest in.

But, as Paul mentioned, we're mindful of our scalable model. We like profits. We're going to be driving high-margin profitability as we make these selective investments.

But I would point you to this Reverb study. And, as I said, it really is pretty compelling. And our partners and potential partners are really excited by the potential.

And then just a last question from me, just housekeeping. You guys made the reclass from sort of that other touch into the mobility bucket. Would that have been just a few hundred thousand dollars like we've been seeing the last few quarters?

That's about right. Yes.

Okay. Perfect. Thanks so much.

Mike Crawford, B. Riley & Co.

I can't wait to feel the crack of the bat on my iPad as I'm watching a baseball game.

We love it, and so do our potential partners like it as well.

Great. Now that kind of the free solutions are by and large out of the market so you have kind of the floor on what's out there, how quickly do you see adoption of your proprietary software solutions?

Well, when you capture both the IP and our proprietary, I think we're now approaching half of the world's smartphones. So we're gaining rapid adoption. And we have the ability to bring compelling experiences not only to our proprietary but also to this Basic Haptics capability.

As we continue to gain market share, show the capabilities in these applications, the realism, the rich tactile communication, people want more than just button confirmation. And, as that gains traction and as consumers come to expect that from their content, it puts tremendous pressure on the OEM to up-level the experience by adopting our TS 3000 and then our 5000. So we're very optimistic that we can convert Basic Haptics license to TouchSense license.

Okay. Great. And, for your partners that are taking your proprietary software, is this typically some kind of up-front license plus a unit-based royalty? And, if so, are you always going to report royalty and licensing in one line? Would you ever break that out into more detail?

We don't have any plans to break it out in more details. And it's a mix. There are -- we've got some arrangements that are purely per-unit royalties that get reported, and then, as you saw in this month's result, there are some where we get some fixed elements, where that is received and then recognized over time. So we don't have any plans, though, right now to try and parse that out. And, in fact, in some contracts, we may have a little bit of each. So it would be probably fairly difficult to do so anyhow.

And are your contracts typically in dollars, or might they be in yen or other currencies?

For the most part, we work with dollars.

Okay. Thank you very much.

Mr. Viegas, there are no further questions at this time. Please, continue with any closing remarks.

Okay. Thank you. Thank you, everyone, for being on the call with us today. And we look forward to hopefully seeing you at one of our tech events. And we'll look to update you again on our next quarterly call. Thank you.

Ladies and gentlemen, this concludes the Immersion Corporation first quarter 2013 conference call. Thank you for your participation. You may now disconnect.