Immersion Corp (IMMR) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation second quarter 2013 conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Thursday, August 1, 2013. I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead, ma'am.

Thank you, Operator. Good afternoon and thank you for joining us today on Immersion's second 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 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'll turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks, Jennifer and thanks everyone for joining us this afternoon. I am very pleased to report that in the second quarter of 2013, Immersion generated $10.2 million in revenues, reflecting robust growth and up 58% from the year ago period. This represents a record for Immersion, the highest second quarter revenue in the history of the Company.

We earned $776,000 or $0.03 per share in net income and $2.4 million of adjusted EBITDA. These strong results illustrate the scalability of our licensing business model and underscore the success we've had in establishing the value for Immersion's Haptic technology in mobility and other markets.

During the quarter we introduced new tools to help our developers create great Haptic games and our licensees continue to launch new products showcasing our technologies and using Haptic effects to communicate relevant and rich information to users.

In addition, we felt renewed enthusiasm for Haptics in the gaming market with the announcement of new consoles from Sony and Microsoft and new peripherals coming out of the E3 conference.

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

Thanks, Vic. As Vic mentioned, we had record revenues of $10.2 million in our seasonally lighter second quarter of 2013, up 58% from revenues of $6.5 million in the year ago period.

Revenues from royalties and licenses of $10.0 million were up 68% compared to royalty revenues of $5.9 million in the second quarter of 2012.

While revenue mix for line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the second quarter of 2013 a breakdown by line of business as a percentage of total revenues was as follows -- 65% from Mobility, 22% from Gaming, 7% from Medical, and 6% from Auto.

Our gaming revenues during the quarter included ongoing licensing fees as well as amounts which were secured through our royalty licensing compliance program.

Gross profit was $10.1 million or 99% of revenues compared to gross profit of $6.3 million or 97% of revenues in the second quarter of 2012.

Excluding cost of revenues, total operating expenses were $9.3 million in the second quarter of 2013 compared to $8.6 million in the second quarter of 2012. This includes non-cash charges related to depreciation and amortization of $532,000 and stock based compensation of $1.2 million. Litigation related expense for the quarter was $470,000.

The overall increase in expenses versus the prior year quarter was driven primarily by compensation related costs including stock based compensation, offset in part by a reduction in litigation expenses. The increase in compensation costs reflects, in part, a 15% year over year increase in sales and marketing and research and development headcount as we have strengthened our presence in key geographies and accelerated our development efforts on strategic initiatives.

As our HTC lawsuit proceeds in the District Court in Delaware, we're forecasting that expense for this litigation will be in the $1 million to $1.5 million range over the remaining six months of the year.

Net income for the second quarter of 2013 was $776,000 or $0.03 per share compared to a net loss of $2.2 million or $0.08 per share in the second 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 second quarter of 2013 was $2.4 million compared to adjusted EBITDA of negative $938,000 in the same period last year.

Our cash portfolio including cash and short term investments was $63.9 million as of June 30, 2013 compared to $64.2 million at the end of the first quarter of 2013. As we recognize revenue from customer payments received in prior periods we used $3.5 million in cash in our operations which was offset by the receipt of $4.3 million in cash from stock exercises and sales.

While we did not repurchase any stock in the second quarter, Management and the Board remain very confident about our business fundamentals and future prospects and continue to believe that our stock is attractive in price 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, we continue to expect record top line results and as we enter the second half of the year with greater visibility we have narrowed our revenue range expectations for 2013 to $45 million to $48 million, an increase of between 40% and 49% over last year's revenue of $32.2 million.

As a reminder that the typical seasonal pattern for our business is for our third quarter results to be roughly in line with our second quarter followed by a strong fourth quarter as our customers gear up for the holiday season.

We continue to expect adjusted EBITDA for 2013 to be in the range of $12 million to $15 million. Based on our profitability projections we are evaluating the need to continue carrying a full valuation allowance for our deferred tax assets. The release of a substantial portion of the valuation allowance could have a significant positive impact on our reported financial results in the period of release. We expect to have better visibility as to the timing of a potential release once we've completion our evaluation.

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

Thanks, Paul. Our financial performance reflects the successful execution of our Basic Haptics licensing strategy and the continued success of products using Immersion's TouchSense software.

As you know, the strength of our IP portfolio has now been widely recognized in the mobile marketplace which has given us an opportunity to secure additional Basic Haptics licensees as well as the ability to charge an appropriate premium for our advanced TouchSense and Integrator software solutions.

With this foundation in place we are very pleased to be executing at a higher level and tracking toward a record year for revenue. Also, given the current license agreements in place, we believe we have good visibility and predictable revenue growth over the next 12 to 24 months.

While we continue to execute our double pronged IP and software licensing strategy, our new and existing licensees are advancing to Haptic ecosystem by using our TouchSense software to create innovate new tactile features that enrich end user experiences.

For example, Samsung has used our TouchSense software to power new and unique Haptic features in its recently released Galaxy S4 smartphone. Users who pick up this flagship Samsung phone benefit immediately from smart alerts, touch feedback that lets them know if they have new voicemail, text, or emails, all without even looking at the phone.

Also, when users interact with their Galaxy S4 phones using Samsung's new gesture based Air View feature, they can feel reassured in TouchSense powered tactile effects, confirming that they have successfully completed the desired action. This novel use of Immersion's technology illustrates nicely how Haptics can add substantial value to cutting edge interfaces even those that allow users to control their devices without touching the screen.

We're pleased and excited to see Samsung continue to innovate with Immersion technology and to use tactile effects to deliver meaningful information in new and creative ways.

During the quarter we also announced a new mobile licensee, Sharp Corporation. Sharp worked closely with Immersion to design touch effects to enhance the rich visual and audio experience available in Sharp's Feel UX.

The first Sharp device using Immersion's Haptics, the Docomo Aquos SH-06E, came to market this quarter, offering a tightly integrated multimodal user experience and making the sense of touch an important part of Sharp's Feel UX brand experience.

On the developer front we continue to release tools designed to simplify the Haptic integration and design process including a number of platform plugins and integrations that we announced at the AnDevCon developer event in Boston.

We also recently released a simple Android app that displays and features our preprogrammed library of tactile effects in an animated gaming context, making it easier for developers to access these effects and decide which ones will work best in their games. We remain dedicated to supporting the developer community as it looks to use Haptics to create more engaging and realistic mobile gaming experiences.

Even as we advance our existing business initiatives we are diligently working to invent the future through research, product development, and other innovative activities designed to transform user experiences by bringing rich touch experiences and a true sense of Immersion to the digital world that now encompasses so much of our lives.

As an example and as I've mentioned in previous calls, we strongly believe that Haptics can enhance mobile media and content. Our current focus in this area is on developing the necessary products including encoding and decoding tools, creating a significant catalog of haptically enabled content for demo and user purposes, conducting user studies to measure and quantify the enhanced value Haptics can bring to media and in deploying new resources to build and deploy the business.

We continue to actively demonstrate and discuss the use of Haptics with content creators, content publishers and distributors as well as hardware suppliers.

We see opportunities with at least five different types of mobile content. The first is short form video ads including movie and game trailers. The second is short form consumer premium content such as music videos and sports headlines. The third is long form consumer premium content including movies, games and TV shows. The fourth is user generated content and the final is long form live sporting events.

All of these opportunities except user generated content have content owners, creators and distributors. We have been meeting with these parties and would like to work with them to provide license rights and encoding capability that will haptically enhance these forms of content for distribution and immersive playback on smartphones and tablets.

If we can show that haptically enhanced content generates advertising premiums, increases subscription rates, influences buyer behavior or produces other quantifiable benefits, we believe that we will be able to generate revenue directly from the content ecosystem as well as from our OEM partners.

Beyond the mobile market we continue to see innovation and enthusiasm for Immersion's technology in the automotive and gaming markets. In automotive, the 2014 Acura RLX and MDX models have been receiving high marks for their haptically enabled touchscreen interfaces. Edmonds.com recently reviewed the 2014 Acura RLX and commented, and I quote, using the navigation is simple and intuitive as the Acura allows you to look up destinations by the central control dial, a new seven inch touchscreen interface, or an enhanced voice recognition system. The touchscreen provides both Haptic and audible feedback. In our experience, this helps minimize the amount of time you spend looking away from the road, end quote.

We're pleased to see reviews such as these that recognize and highlight the value of Haptics in the automotive environment.

On the gaming front, this quarter's industry news was dominated by the new console announcements from Sony and Microsoft, both of which incorporate Haptics into their game play.

Both platforms were on display at the E3 conference in June. Microsoft demonstrated a new form of Haptic feedback in its Xbox One controller, a developer-programmable trigger which takes advantage of new actuators located near the device triggers. These actuators can work in tandem with additional rumble motors located in the controller to create more meaningful and distinctive Haptic effects.

We look forward to seeing developers take advantage of these new Haptic capabilities to deliver more immersive experiences and are eager for the new Microsoft console to come to market and provide an opportunity for a broader ecosystem of peripherals that could leverage Immersion's technology.

Sony was also at the show to demonstrate its highly anticipated PlayStation 4, highlighting the console's user friendly features. In addition to representing a new peripheral opportunity, the PS4 may also become an additional revenue opportunity for us if it is released with Haptic technology contemplated under our existing agreement with Sony.

We will know more about both the Sony and Microsoft related opportunities as their products come to market later this year.

In addition to the excitement in the console gaming market, E3 also marked the announcement of the first mobile peripheral enhanced with Immersion Haptics. Power A, a longtime partner of ours, announced that its next generation game controller, the MOGA Pro 2, will include Immersion Haptics.

The MOGA Pro game controllers work with select Android games to create a console-like gaming experience. To enable the developer ecosystem, a customized version of Immersion's Haptic SDK will be available for MOGA Pro 2 game developers. The mobile peripheral market is an emerging space with great energy and creativity and we look forward to partnering with innovative companies looking to advance the mobile gaming experience.

Lastly, as we discussed last quarter we are now pursuing our patent infringement action against HTC Corporation in the U.S. District Court where we can seek damages and injunctive relief and attorneys' fees.

During the quarter, HTC sought to delay the case by asking for a stay of the litigation until the resolution of the patent reexaminations that the PTO had initiated previously at the request of HTC, a process that can frequently take two to three years to complete. We're pleased to update you that the U.S. District Court denied HTC's request to stay the case and we're scheduled to move ahead with the trial as early as next year.

To conclude my formal remarks, Immersion continues to execute based on the progress we have made with our existing and new licensees. We are excited about the ongoing growth opportunities in the mobile, gaming and auto markets as Haptics continues to be embraced in evolving formats and user experiences.

At the same time, we are working diligently to lay the foundation to further expand our market opportunities and long term growth engine through continued innovation.

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

(Operator Instructions)

Our first question is from the line of Jeff Schreiner with Feltl and Company. Please go ahead.

I guess the first question is what has changed or gives you new confidence to tighten the overall guidance and why did you choose to lower the bottom end of the range and maybe not expand the top end?

Sure, we actually raised the bottom end so the bottom end is now $45 million to $48 million. As I did mention in the script, the current agreements that we have in place today give us very good visibility over the next 12 to 24 months so we have, with a great deal of precision, the ability to forecast out Q3 and Q4 and it's that confidence that gives us that comfort that we can raise the bottom end of the guidance. We're comfortable with the guidance. We're comfortable with the business and obviously, we hope to continue to exceed expectations and deliver great growth and great results.

And a question I guess regarding your current agreements that have been revised to expand the scope of some of these agreements. What is covered by some of the agreements with your leading customers right now? Is it just smartphones or are Android based tablets which these manufacturers release, also falling under kind of the Basic Haptic functionality?

I'd say our standard agreements cover both smartphone and tablets. We don't distinguish between the two so they are covered and as we have begun increasing the number of licensees to the Basic Haptic technology, that has built a base of revenue that we're now enjoying, so Motorola, LG, Samsung, those agreements all cover Basic Haptics, Android-like devices for smartphones and tablets. It covers those and it provides us a revenue stream. Over the last few quarters you have been seeing that benefit whereas prior to that, we were not monetizing those Basic Haptics devices.

Our next question is from the line of Charlie Anderson with Dougherty and Company. Please go ahead.

Just a couple housekeeping questions, I wondered if you had a 10% customer, any 10% customers you could just give us the percentage of? That's my first one.

Yes, we had an approximately 50% customer, the same as we had last quarter.

Perfect, and then in terms of the year over year growth in the R&D and then the sales and marketing, would you kind of expect it to stay at those levels through the rest of the year? I notice you didn't change anything in the guidance on profitability so pretty steady as she goes there?

Yes, I would say steady as she goes. None of the increase is unexpected from our standpoint. We're seeing opportunities, as Vic mentioned, in various areas and making appropriate investments but we're doing it prudently and consistent with our plan so I think you can expect to see our OpEx staying pretty well under control for the remainder of the year.

Got it, and then I think I heard you say you had maybe a royalty true-up on gaming. What was the extent of that?

Charlie, we have a compliance program and have for some time and the compliance program includes verification of reports. In many cases we utilize a third party auditing firm to confirm and verify reports and shipments from our licensee. I would say almost every quarter there is some amount of activity. There is some number of true-up activities that occur and we highlight those periodically when the number gets to be a reasonable percent of any of the growth in any given quarter so during this quarter in the gaming space we had some compliance pickups in the quarter and that's what you're seeing and that's what we're calling out.

Got it. It looks like, just looking at historical patterns here, maybe under $1 million, right? I mean, it wasn't huge.

I think that's a fair assumption.

One thing I noticed is that the mobility revenue on a sequential basis was down a lot more than it was a year ago. You have some of these Basic Haptics licenses that you have a little bit broader coverage and I feel like there might be some fixed elements of those so I was thinking that maybe we'd be a little flatter in mobility than we're seeing. I just wonder if you can give me any color there to just think about how we model this new customer group you have relative to patterns we've seen historically.

I think as far as modeling goes, the general profile of seasonality that we've had in prior years, if you look at the future periods, is not a bad starting point. We spent a bit of time talking about our revenue in first quarter and mentioned that with some of these broad expanded agreements, it's not that we had one-time payments. It's not that they were loaded up on the front but there was some overlap between the expiration of older agreements and the initiation of the new agreements that gave it that slight extra pop in the first quarter so again, going forward I would look for similar seasonality and growth.

Our next question is from the line of Paolo Gorgo with Nortia Research. Please go ahead.

Is there any comments you can give about where Immersion's life has been as far as wearable computing?

Yes, we have been actively developing solutions in the wearable space. We see a number of different key market applications, one from a medical standpoint monitoring body functions, providing appropriate alerts and so on and so we see it as an extension of our medical business and as you know, for quite some time we have been active in developing solutions and generating IP.

In addition, there is also consumer uses for sports, health monitoring, productivity and those also are areas that we've been actively involved so we have quite a bit of IP in the space. We have solutions that we're developing and dialog with companies who are building such devices so we're feeling pretty comfortable that as wearable becomes part of the common user interface on a daily basis that Haptics has a meaningful role and that Immersion will be able to monetize that opportunity.

And just another question really on two partners, LG and Motorola. Is there any comment you can make on the new just launched Motorola Moto X phone which seems to have (inaudible) Haptic (inaudible)?

We, as you know, have a license agreement with Motorola. It's a Basic Haptics license agreement and there isn't too much we can specifically say about what technology they're implementing in the new phone. I know they did just release the Moto X phone. They've also had Basic Haptics functionality in prior phones. That was the reason why we involved them in litigation in the first place. We have only announced a patent license agreement with them at this point. We do not have a software agreement relationship that we have discussed.

Okay, I was trying to understand if it was something more than just Basic Haptics.

I think clearly, Basic Haptics is covered. There is the ability to incorporate TouchSense 2000 via our licensing chip partner so until the product is out, we've had a chance to examine it, it's probably limited to those two areas so it could have some advanced functionality but with the current relationship, it does not yet at the level of the TouchSense 3000.

And just on LG, it seems like they are executing a great comeback in the smartphone subsector. Is there any additional color you can make? I mean, they seem to be a steady manufacturer right now in this space.

We are very excited to see LG continue to succeed and grow. We have a [quasi] field application engineering team in Korea whose primary activity is to support LG as well as Samsung so we do work with them closely on new applications, new ways to use our technology. They're an innovative company and they look to utilize Haptics as a way to differentiate their products so we're excited to see their growth. We're happy to work closely with them to innovate.

We recently expanded our relationship with them and we'd like very much for them to include more of our high end solutions in their products so it's very nice that they're doing well.

Great, and just lastly, do you think you will introduce quarterly guidance? You mentioned visibility to the next 12 to 24 months. Will there be some kind of quarterly guidance from the company?

I would say at this point I do not see us providing quarterly guidance. If we do gain that kind of confidence on a quarterly basis then we'll consider it but right now I think the idea of providing annual guidance and then each quarter providing an update is the right way to approach this. As I said, we do have very good visibility 12 to 24 months out but sometimes the revenues bleed from one quarter to another so to be very precise in any given quarter I think we want to make sure we're giving the right level of information that is accurate and so we'll stick to the annual guidance for now.

(Operator Instructions)

Our next question is from the line of James Basch with Dialectic Capital. Please go ahead.

A couple questions, one is if you could talk a little bit more about some of the studies that you've done on reverb, potentially making video content more compelling and how that feeds into your attempts to kind of go after the advertising market.

The second question has to do with whether or not you guys believe for some of the next generation consoles that are going to be coming to market, whether you think they will include Haptics capabilities?

Sure, James. On the media content opportunity, as you mentioned, we've done a number of studies, one we've published. We used 33 different individuals who were provided with a series of content types with and without Haptics and we measured things such as skin conductance which really measures the amount of arousal that is derived from the Haptic experience and we noticed a substantial increase in the response. We measured video rating so how an individual would rate the video and we noticed that with Haptics, it was 10% higher.

Brand sentiment, we noticed that it brought about a 5% increase in a positive sentiment. When we measured the likelihood of an individual to see a movie when they watched the trailer with Haptics, they were 15% more likely to go see the movie than if they didn't.

And then lastly, on the movie sentiment and the sense of being there and the emotional response, it generated a 10% to 15% increase in approved responses. These are very meaningful improvements and we are continuing to develop more content and initiating substantially larger studies with not only ourselves but with some partners, or potential partners, to measure the benefits and as I mentioned previously in the script, these kinds of differences and improvements and recognition, these are significant to people who pay ad dollars and want you to consume their content so we're very confident, very pleased with the results and the direction that this is headed. We made good progress in the quarter and we feel very good about where we're headed into the future.

In terms of next generation, we thought it was terrific to see Microsoft launch a controller with a triggering mechanism. It adds another dimension to game play, gives us an opportunity to work with their third party controller suppliers to potentially license them and in terms of the Sony PlayStation 4, I think they have announced advanced rumble capability. We have not yet seen the product but we're optimistic that it does have Haptics to provide an immersive experience so we're very optimistic that this will yield additional revenue for Immersion.

I show there are no further questions at this time. I would like to turn the conference back to Management for any closing remarks.

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

Ladies and gentlemen, if you would like to listen to a replay of today's conference call you may dial 1-800-406-7325 or 303-590-3030 and enter the access code 4625303 followed by the pound sign. Those numbers again are 1-800-406-7325 or 303-590-3030 and enter the access code 4625303 followed by the pound sign.

This concludes the Immersion Corporation's second quarter 2013 conference call. Thank you for your participation. You may now disconnect.