Immersion Corp (IMMR) 2013 Q3 法說會逐字稿

Good day ladies gentlemen, thank you for standing by. Welcome to the Immersion Corporation's third-quarter 2013 conference call.

(Operator Instructions)

This conference is being recorded today, Thursday, October 31, 2013. I would now like to turn the conference over to Ms. Jennifer Jarman of the Blueshirt Group. Please go ahead, ma'am.

Thank you, Lilly. Good afternoon and thank you for joining us on Immersion's third-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 project, 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, all I'll the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks, Jennifer and thanks everyone for joining us this afternoon. I'm very pleased to report that in the third quarter of 2013, Immersion generated record revenue for the for period of $11.3 million, reflecting robust growth up 59% from year ago period. We earned and $1.2 million or $0.04 per diluted share in net income and $3.3 million of adjusted EBITDA. These strong financial results illustrate the scalability of our licensing business model and underscores the success we've had in establishing the value for Immersion's Haptic technology and our TouchSense software, particularly in the mobile market.

During the quarter we entered into a broad licensing agreement with Xiaomi, one of the most rapidly growing and exciting OEMs in China. This was our first direct licensing agreement with a mobile OEM in China, which is a key area of focus for us as we look to grow our customer base. In addition, Sony executed it's option to license Immersion IP for its new PlayStation 4 console system and we were pleased that Samsung chose to incorporate TouchSense software into its new Galaxy Gear Smartwatch demonstrating how Immersion Tactile Effect technology can and enhance innovative projects in the emerging wearables device category.

In a few minutes I will discuss our recent business development, but first, I'll ask Paul to provide a detailed review of our third-quarter financial results. Paul?

Thanks, Vic. As Vic mentioned, we had record third-quarter revenues of $11.3 million in the September quarter of up 59% compared to revenues of $7.1 million in the year ago period. Revenues from royalties and licenses of $11 million were up 72% compared to royalty revenues of $6.4 million in the third quarter of 2012. While revenue mix for line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the third quarter of 2013, a breakdown by line of business as a percentage of total revenues was as follows -- 71% for mobility, 16% from gaming, 7% from medical, and 6% from auto.

Gross profit was $11.2 million or 99% of revenues, compared to gross profit of $6.9 million or 96% of revenues in the third quarter of 2012. Excluding cost of revenues, total operating expenses were $9.8 million in the third quarter of 2013, the same as in the third quarter of 2012. This includes non-cash charges related to depreciation and amortization of $633,000 in stock-based compensation of $1.2 million. Litigation related expense for the quarter was $669, 000.

Total operating expenses were flat versus the prior year as increases and compensation related costs including stock-based compensation were offset primarily a by a reduction in litigation expenses. The increase in compensation costs reflects in part a 24% year-over-year increase in our sales and marketing and research and development headcount, investments we have made to capitalize on key opportunities and strategic initiatives.

As our HTC lawsuit proceeds in District Court in Delaware, we're forecasting that expense for this litigation in the fourth quarter will be similar to expense in the third quarter of 2013. Net income for the third quarter of 2013 was $1.2 million or $0.04 per diluted share, compared to net loss of $3 million or $0.11 per share in the third quarter of 2012.

As you know, in addition to normal GAAP metrics, we use 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 third quarter of 2013 was $3.3 million, compared to adjusted EBITDA loss of $1.6 million in the same period last year.

Our cash portfolio, including cash and short-term investments, was $64.7 million as of September 30, 2013, compared to $63.9 million at the end of the June quarter. The increase primarily reflects $1.1 million in cash generated from operations during the quarter. While we did not repurchase any stock in the third quarter, Management and the Board remain very confident about 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, we continue to expect record top line results in 2013. We are narrowing our revenue guidance to the high end high-end of our previously announced range and now expect 2013 annual revenues to be in the range of $46 million to $48 million, an increase of between 43% and 49% over last year's revenue of $32.2 million. We also continue to expect adjusted EBITDA for the year 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. We expect to conclude our evaluation by the end of the current year. 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 too the timing of a potential release, once we've completed our evaluation. With that, I'll turn it back over to Vic.

Thanks, Paul. The continued strength of our financial performance reflects the foundation we have established based on the strength of our IT portfolio as well as the rich Tactile experiences we offer with our TouchSense software. As a result, existing and potential OEM customers now clearly recognize the importance of licensing our intellectual property in order to offer Haptic functionality in their devices and increasingly seek to license our premium TouchSense software solutions to differentiate their products and offer higher-quality experiences to end-users.

In September, we were very pleased to announce a broad multi-year licensing agreement with Xiaomi, one of the fastest growing smart phone makers in China. The agreement covers both Immersion's basic Haptic IP, as well as our TouchSense software. Within days after signing this license, Xiaomi announced the launch of its flagship Mi3 smart phone, which uses our TouchSense technology to offer Tactile Effects throughout the user interface and various tool applications and in downloadable themes. At the launch event Xiaomi's CEO specifically called out Immersion Haptics as a key differentiator for the Mi3 and when the device went on sale in early October we were excited to see that Xiaomi sold out its initial stock of 100,000 phones in the first 86 seconds.

We have been enjoying our fast-paced collaborative engagement meant with Xiaomi, working closely with their key design teams to implement exciting features quickly. Xiaomi is one of the admired design companies in China and we are pleased that they recognize the strategic value of Haptics in achieving their design and brand vision. We believe the Xiaomi agreement is an important stride forward in establishing a solid business in the region and look forward to expanding our business with Xiaomi and to entering into direct relationships with other growing Chinese OEMs. As we've discussed before, China represents a significant opportunity for Immersion and we plan on investing accordingly in order to execute successfully.

We also continue to be pleased with the way that our existing licensees use Immersion TouchSense software to add enriching tactical -- Tactile features to innovative new products. For example, in September, we announced that Samsung included are TouchSense software and its new Galaxy Gear Smartwatch. This design win is an excellent illustration of how Immersion technology provides value to customers beyond established touchscreen environments. Tactile Effects open a powerful communication channel between wearable devices and their users. And the private and non-visual nature of Haptics creates a more natural user interface in this setting. We believe Tactile Effects are in ideal way to alert and notify wearable users to new information without requiring full attention and without socially disruptive audio alerts or visual distraction.

Moreover, we were able to provide Samsung with the specially optimized of our TouchSense software that was ideal for the Galaxy Gear is new form factor, this new and enhanced version of our TouchSense software supports small, inexpensive actuators, extends battery life by reducing power consumption, and can reduce hardware costs by minimizing the need for additional components such as drivers and amplifiers. While these are particularly well suited to wearable devices, we believe that these types of the advancements will ultimately strengthen our entire portfolio of TouchSense products and improve Haptic performance for wide range of markets and device types.

On the developer front, Immersion reached out to the international game developer community through our participation in the game developers conference in China and Europe. And earlier this week, we participated in Samsung's first developer conference in San Francisco, where we announced a number of new game houses including top developers HeroCraft and Creative Mobile, who have released games enhanced with Immersion Haptics. We continue to see enthusiasm for our Haptic SPK from game developers, who recognize the value in creating more engaging and realistic mobile gaming it experiences.

Even as we advance our existing business initiatives, we are diligently working to extend how Haptics can influence the mobile user experience by bringing the technology to mobile media, advertising, and entertainment content. As I mentioned in previous calls, we strongly believe that Haptically enhanced content can generate a premium by influencing buyer behavior and providing a more immersive user experience. This opportunity continues to be an area of focus for the Company's research, product, and engineering teams.

During the quarter, we continue to develop enabling technology including encoding and decoding tools, and performed usability research to improve the performance and feature sets of these tools. In addition, our user experience team conducted user studies to measure and quantify the value Haptics brings to media. We are making great progress in the refinement of our technology and the development of key enablement tools. As we demonstrate these capabilities to content creators, content publishers and hardware suppliers, the response has been very positive.

Beyond the mobile market, we continue to see innovation and enthusiasm for Immersion's technology in the automotive and gaming markets. At the Frankfurt Auto Show in September, Opel unveiled a mid cycle refresh to their Insignia sedan, which includes a redesigned center console that uses an illuminated touchpad with Immersion Haptics. Motor Authority reviewed the design and commented that, I quote here -- the Insignia's illuminated touchpad reacts immediately to finger movement including Haptic feedback and makes operation of the new infotainment system much easier and faster, end quote.

On the gaming front, as I mentioned earlier, we are pleased to announce that Sony executed the option to extend its license for Immersion intellectual property in connection with the soon-to-be launched PS4 console. We believe that Haptics plays a critical role in the gaming experience and are pleased to work with Sony to ensure its next-generation platform has the high quality immersive Haptics that gamers have come to expect.

In addition, third party peripheral OEMs continue to look forward to supporting the upcoming release of new gaming platforms from Sony and Microsoft. The new trigger capability in the Microsoft Xbox One, which uses additional actuators to provide distinctive feedback in the trigger controls, is a particularly exciting advancement for gaming Haptics. Developer interest and reviews for the trigger technology have been encouraging and given our strong IP position and know-how in this area, we've been actively working with third parties to take advantage of trigger capabilities to enhance gameplay and improved next-generation controllers.

Lastly, during the quarter we had our initial scheduling conference in the case against HTC Corporation in the US District Court in Delaware. The court set a scheduled for the case through the trial which is slated for March 23, 2015. We've moved into the discovery phase of the lawsuit and the parties have begun their document productions with depositions to follow.

To conclude my formal remarks, Immersion continues to execute based on the progress we have made with existing and new licensees. We are excited about the ongoing growth opportunities into China as well of the mobile gaming and auto markets, as Haptics continues to be embraced by new customers and emerging device categories. At the same time, we are working diligently to lay the foundation to further expand our opportunity by extending our reach into new areas of the mobile content ecosystem.

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

(Operator Instructions)

Jeff Schreiner, Feltl and Company.

Try to get a couple questions in here and then maybe jump off-line, but Vic, first I'd like to understand just where we are in terms of the timeframe of when Immersion will recognize 100% of licensee Samsung LG smartphone shipments?

Let's see here, Jeff. Can you maybe clarify the question, when we will be recognizing 100% of their smartphone shipments?

Yes it was my understanding that in prior agreements you were only recognizing a very small portion of smartphones. And when you changed that agreement, it still took -- because of the lag in your recognition of smartphone units from your licensee shipments, that you had not yet been recognizing 100% of their shipments, meaning that when you got the new revised agreements in place, you are now not just recognizing them on things like the Galaxy line, your recognizing them on every smartphone.

Well, we did renew the agreement with Samsung earlier this year. And beginning from January 1, and coming forward, we are recognizing revenue virtually on every Android smartphone and tablet that they are shipping.

So this includes those devices that include our TouchSense software, as well as those other Android devices that are using the basic haptics capability inherent in the Android operating system. So, from January 1 on we have been recognizing revenue on virtually 100% of their Android days products.

Okay, that's helpful. Just quickly as a clarification, maybe Paul can answer this, as to you've got mobile, gaming, medical, auto, where's other? Like semiconductor royalties, have they been rolled up into mobile into the third quarter in terms of what you're reporting for end market?

Yes, the other was always a small component of our overall picture and it's primarily our chip-based partners who are selling primarily to the mobile market. So we've rolled that all into the mobility sector at this stage. Okay. And maybe this will help me out a little bit Vic with clarification from question one to this question. How many licensees are flat fee, versus volume based at this time?

Well, we have literally hundreds of licensees, if not more. And so, I don't think we've ever analyzed the percentage.

I would say that some of the bigger agreements that we've entered into more recently, we have transitioned to a philosophy where we do have built-in recurring revenue streams as part of the license agreement.

So, in some cases it is purely a per-unit royalty, in other cases it's a purely fixed, and in some cases it is a hybrid. But we are quite sensitive to the maturation in the smartphone market, it's not growing as fast, even though it is still growing substantially.

Based on these new agreements, some of the fixed elements are continuing to help us capture significant revenue growth.

Okay, and I guess last one for me and I'll step back into the queue, here. Can you help us understand the puts and takes to achieving the low or high end of your annual guidance? You've tightened it, but always moved the bottom portion of the range up a little bit, never moving the high-end portion of the range up. What should we be thinking about with one quarter left in the year in terms of what you may need to get to the high end or what may happen to push you down to the low-end?

Well, we continue to expect Q4 to be a very strong solid quarter, and we're always working hard to try to exceed our targets and my team is motivated to try to beat the guidance that we've provided to you today. The difference really is a matter of timing of revenue recognition, timing of some certain contracts that get signed.

For example, we're very excited by the opportunity now with Sony on the PlayStation4. Those products begin shipping in this quarter, the fourth quarter and because of the reporting timeline, that revenue will be reported in Q1 of next year, primarily. But there are other agreements, other relationships, certain deliverables, other things that will trigger revenue recognition and could put us -- will put us somewhere in that range that we provided.

Okay. Thank you for your time, gentlemen.

(Operator Instructions)

Charlie Anderson, Emerson.

Congrats on the quarter and some of the recent deals. So Vic, I'm wondering if you can give us any sort of sense of how the Sony deal will work? Is it a per console? Is that a per controller? Just any color would be helpful.

Sure, the economics were primarily negotiated as part of the settlement and license agreement that we entered into a number of years ago. We are excited to see them continue to invest in high-quality haptics as part of the gaming experience and recognize the value of our IP.

So, this is a very big deal for us. We believe it generates substantial new revenue and I that will take a couple of forms. One is primarily tied to per-unit royalties, so as they ship their controllers, in particular, there will be a per-unit royalty payment.

In addition, there are other fixed elements to the agreement which will be ratably recognized over a period of time. So, it will be a combination, and again a reflects some of the philosophy that we've been implementing over the last year or two, which is combining per-unit as well as certain fixed elements.

Great, and then maybe just a comment on the pipeline, obviously it's been a real banner year for you guys with a number of deals. Just help us understand how that looks in terms of number of people you are talking to and the quality of the people you're talking to right now?

Well, as you said, we are having a banner year. We still continue to see substantial growth opportunities as we move forward. Some of these agreements are extremely important strategically.

For example, Xiaomi is a really fast up-and-coming innovative company. They put additional pressure with their haptic offerings for other Chinese OEMs, so they are helping speed up the discussions that we are having with other OEMs.

They put pressure on some of the market leaders, people like Samsung and others as they innovate and build high-quality products. So, not only is that a new agreement with fresh revenue, but it is also strategically valuable for us.

Sony is a brand-new agreement, so it has substantial amount of upside over the next number of years as they roll that platform out. So maybe I'll let Paul add to this a little bit, but we're seeing a great base of business. We are seeing these recent successes fueled by some of the prior IP wins we've had.

These new design wins, these new successes are leading are leading to further advanced discussions with other OEMs, and we see nothing but upside here.

Yes, I would only add to that, that as we engage in renewal discussions with existing OEMs, it is more apparent to them, too everybody, that haptics are a highly valued part of their offerings. And so we've generally found that we're able to increase the amount that they're willing to pay to us at the time of renewal.

And then there are the other areas that we are looking at, and we have a little bit of away and see attitude about, for example wearables, new kinds of form factors that may grow quickly. They are a little bit of a wild card, but they could be important as the markets shape over the next few years.

And of course content as well, where we see that being a potential really big opportunity for us, not so much in the next couple of quarters from a revenue standpoint, but over the longer haul.

Perfect, thank you so much. And then I noticed G&A picking up a little bit if I exclude stock based comp and legal, and I think you mentioned some of the headcount additions.

Wonder if you could just talk us through what some of the investments are? I think you mentioned need to be in China more, maybe more on the mobile media side. ust any color on that would be helpful.

Yes, sure, I kind of tracked from last quarter and we've had an increased headcount of five, three were technical in the engineering and product areas and two in the sales and marketing area. If you look back about a year ago, I bet we are probably up close to 15% to 20%.

Most of those increased headcounts are all focused on, primarily, on sales and marketing. We're building out a full-scale office in China. We've got a country manager, office, a number of salespeople, some technical people on the ground doing porting and application development work.

So most of the investments are in the fast-growing opportunity that we've been recently capitalizing on.

One other thing too, as our revenue grows in China, there is a business related expense there that goes through G&A that's -- it's almost like a VAT tax of a certain percentage of revenue, so that will be part of our -- or an increasing part of our G&A as we are increasingly successful in China.

Perfect, thank you so much.

Thanks, Charlie.

Jeff Schreiner, Feltl and Company.

Could you just, Paul, maybe give us an idea, I'm going to ask a question about litigation, but I want to ask a question about maybe how OpEx is going to look like in fourth quarter versus third quarter?

Yes, I would expect that our OpEx for the fourth quarter will be roughly comparable with the third quarter as we make some of these investments. It may moderately move upward, but it should generally be consistent.

And I think I mentioned in the prepared remarks that we are expecting the litigation expense itself to be roughly comparable to the $669,000 we incurred this quarter.

And where does that put you relative to prior guidance for the full year? On the litigation expense portion?

That puts us about in line. I think we had suggested over the last three quarters that we would have $2 million to $2.5 million of expense, and this would put us in around $2 million.

I think last quarter we set a total of -- before last quarter we had set a total of approximately $1.5 million to $2 million and this will put us in for the last quarter at just shy of $1.5 million. So we've done a pretty good job I think of managing litigation expense to at even a hair below what we had guided to.

And can you remind us just how much litigation is going to be next year?

We haven't actually given out next year guidance at all, but as we move forward in the District Court case, it should be lower than it was this year. If you may recall, in the first quarter of this year, we had approximately $3 million of litigation expense in the ITC action that was near its hearing, the equivalent of the trial phase of the ITC.

So if you look at the overall 2013 litigation expense it may add up to something like $5 million. It should be a good bit less than that next year.

Okay. That's all for me. Gentlemen, thank you.

Thanks, Jeff.

That's all the time we have for questions. I'd now like to turn it back to management for any closing remarks. Please go ahead.

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

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