Immersion Corp (IMMR) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation fourth quarter and fiscal year 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, February 20, 2014. I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

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

Thanks Jennifer and thanks everyone for joining us this afternoon. 2013 was a breakthrough year for Immersion. We successfully executed our basic Haptics licensing strategy and saw the continued market success of cutting edge products featuring our TouchSense software.

As the market recognized the strength and increasing value of our technology and solutions we were able to execute at a higher level and achieve record revenues throughout 2013. I am very pleased to report that this trend continued in the last quarter of 2013 as we generated record fourth quarter revenues of $12.1 million, reflecting robust growth of 36% from the year ago period. Aided by these strong Q4 results, our annual revenue for 2013 totaled $47.5 million which was at the upper end of our guidance range and represents an all-time high for Immersion.

Adjusted EBITDA for 2013 excluding the impact of a change in accounting method adopted in the fourth quarter was $12.8 million, also within our guidance range. Paul will provide details regarding the accounting method change in his review of financial results for the quarter and year.

In 2013 Immersion also achieved key milestones that have established the foundation for future growth in the immediate and long term. These milestones include extending existing licenses and securing additional new licenses with key mobile OEMs including Samsung in Korea, Sharp in Japan, and Xiaomi in China, building a strong team of Immersion sales and technical support staff in China to quickly serve the needs of customers and capture our growing opportunities in that region, witnessing Cadillac, Aston Martin, Opel, and Acura bring the very first Haptically enhanced automotive touch surfaces to market signaling a bright future in which Haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces, extending our license agreement with Sony to cover the use of Immersion Haptics in the PlayStation 4, reinforcing the importance and popularity of Haptics in gaming and setting the stage for Immersion to power Haptic experiences in a new generation of game consoles, participating in the launch of Samsung's first wearable device, the Galaxy Gear Smartwatch with Immersion's TouchSense software and strengthening our senior management team through key hires including the appointment of Jason Patton as General Manager to lead an execute our content strategy, an area where we see great promise.

In a few minutes I will discuss our recent business developments and expectations for 2014 but first I will ask Paul to discuss the details of our fourth quarter and fiscal 2013 financials. Paul?

Thanks, Vic. Revenues for the December quarter were $12.1 million, a record for Q4 and up 36% from revenues of $8.9 million in the year ago period.

Revenues from royalties and licenses of $11.6 million were up 52% from royalty revenues of $7.6 million in the fourth quarter of 2012. While the revenue mix per line of business is expected to fluctuate on a quarterly basis, for the fourth quarter of 2013 a breakdown by line of business as a percentage of total revenues was as follows -- 61% from mobility, 26% from gaming, 7% from medical, and 6% from auto. Note that the increase in the relative percentage of our gaming revenues, up from 16% in the September quarter, in part reflects amounts we recognized in connection with the expansion of our license with Sony to cover the new PlayStation 4 gaming console as well as normally strong pre-holiday sales.

Gross profit was $12 million or 99% of revenues compared to gross profit of $8.5 million or 96% of revenues in the fourth quarter of 2012.

During the December quarter we adopted a change in accounting method relating to how we account for external legal fees incurred in applying for patents in maintaining our IP portfolio. Whereas our pioneer method was to capitalize these amounts and then amortize them over a ten year period once the applicable patent was issued, under the new method we simply expend all of these amounts in the period incurred.

We have adopted this change for several reasons. One, we believe it will make our financial statements more transparent in conveying the total amount we are expending to develop and maintain our patent portfolio and all such amounts whether external legal fees or internal technical resources expenditures will now be treated in the same way and expensed as incurred.

In addition, as we continue to grow the size of our global patent portfolio, the change will simplify the administrative and compliance burdens associated with tracking and amortizing these external IP-related expenses and eliminate the need for us to perform complex and subjective portfolio impairment analyses.

Finally, we believe the change will also provide for a better comparison with our industry peers as the predominant industry practice is to expend external patent related costs as incurred.

Turning now to our operating expenses, excluding cost of revenue, total GAAP operating expenses under our revised accounting method were $11.3 million in the fourth quarter of 2013 compared to $8.8 million in the year ago period. The impact of the accounting method change was to increase our December 2013 G&A expense by $1.1 million and to reduce amortization expense by $400,000 resulting in operating expenses that are $700,000 higher than would have been reported under the prior method.

Comparably, in the December 2012 period, the changed accounting method increased G&A expense by $700,000 and reduced amortization expense by $500,000 leading to operating expenses that are $200,000 more than the amount previously reported for that period.

Operating expenses in the fourth quarter of 2013 included non-cash charges related to depreciation and amortization of $145,000 and stock based compensation of $1.2 million. Of non-cash stock based compensation charges, $300,000 were included in sales and marketing, $200,000 in research and development, and $700,000 in G&A.

Litigation related expense for the quarter was $627,000, down from $1.9 million in the fourth quarter of 2012. Total operating expenses increased versus the prior year quarter primarily due to increases in compensation related costs. The increase in compensation costs reflect in part a 17% year over year increase in our sales and marketing and research and development headcount, investments we've made to capitalize on key opportunities and strategic initiatives, as well as a 51% increase in stock based compensation increase. These increases were offset in part by the reduction in litigation related expense.

As I mentioned last quarter, due to our consistent profitability in recent periods, the success is the investment we made in protecting our basic Haptics IP and the visibility and positive expectations we now have regarding future profitability. We have been evaluating the need to continue carrying a full valuation allowance for our deferred tax assets. We have now completed that evaluation and as a consequence, have released substantially all of our federal deferred income tax valuation allowance in the fourth quarter of 2013. This release resulted in a non-recurring benefit for income taxes of $36.8 million in the December quarter.

Beginning in the first quarter of 2014, for financial statement purposes net income will include a tax provision based on the 35% tax rate. However, we do not expect to be paying significant cash taxes in the near future as our net operating losses and other tax assets carry forward and will offset cash taxes on more than $65 million in future taxable income. We continue to maintain a full valuation allowance on certain other deferred tax assets primarily relating to state and foreign taxes.

Net income for the fourth quarter of 2013 was $37.4 million or $1.26 per diluted share compared to net loss of $402,000 or $0.01 per share in the fourth quarter of 2012. The impact of the change in accounting method was to reduce net income for the fourth quarters of 2013 and 2012 by $800,000 and $200,000, respectively, as compared to the amounts that would have been determined under the prior method.

As you know, in addition to normal GAAP methods we use adjusted EBITDA to track our business. We defined adjusted EBITDA as earnings before interest, taxes, depreciation and amortization less stock based compensation.

Adjusted EBITDA in the 2013 December quarter was $2 million, up from adjusted EBITDA of $610,000 in the same period last year. The impact of the change in accounting method was to reduce adjusted EBITDA for the fourth quarters of 2013 and 2012 by $1.1 million and $700,000, respectively, as compared to the amounts that would have been determined under the prior method.

Turning now to our results for the fiscal year ended December 31, 2013, as Vic mentioned earlier, revenues were $47.5 million, up 48% from revenues of $32.2 million for fiscal 2012. Full year revenues from royalties and licensing were $46.2 million in 2013, up 59% from $29 million in 2012, driven primarily by increased mobility revenues but also aided by revenue increases in our automotive, gaming, and medical lines of business.

Revenues from product sales and development contracts in 2013 were $105,000 and $1.2 million, respectively, compared to revenues of $2 million and $1.2 million, respectively, in 2012.

For the full 2013 fiscal year, a breakdown by line of business as a percentage of total revenues was as follows -- 66% from mobility, 21% from gaming, 8% from medical, and 5% from auto.

Gross profit for the year was $47 million or 99% of revenues, up from gross profit of $31 million or 96% of revenues in 2012. Taking into account the change in accounting method, GAAP operating expenses excluding cost of revenues was $43.4 million in 2013 compared to $37.7 million in 2012. The impact of the accounting method change was to increase our 2013 and 2012 G&A expenses by $3.9 million and $3.1 million, respectively, and to reduce amortization expense by $1.7 million and $1.5 million, respectively. This translates to operating expenses that are $2.2 million greater in 2013 and $1.6 million greater in 2012 than those that would have been determined under the prior method.

Due primarily to the patent infringement litigation against HTC, litigation expense in 2013 was $4.9 million, down from litigation expense of approximately $8 million in 2012.

Net income for the year including the non-recurring income tax benefit of $36.8 million from the partial release of our valuation allowance was $40.2 million compared to a net loss of $7.2 million in 2012.

Adjusted EBITDA for 2013 was $8.9 million compared to adjusted EBITDA loss of $2.9 million in 2012. The impact of the change in accounting method was to reduce adjusted EBITDA for 2013 and 2012 by $3.9 million and $3.1 million, respectively, as compared to the amounts that would have been determined under the prior method.

Our cash portfolio including cash and short term investments was $71.1 million as of December 31, 2013, up substantially from $43.5 million exiting 2012. The increase was driven primarily by $21.2 million in cash generated from operations during the year.

In early 2014 we recommenced our stock repurchase program, spending approximately $4.4 million during the month of January to buy back Immersion shares and leaving us with $15 million remaining under our authorized stock repurchase program. Management and the Board remain confident in our business fundamentals and future prospects, continue to believe that our stock is attractively priced, and expect to continue to execute opportunistically to buy back shares under our authorized stock repurchase program.

As of January 31, 2014 based on ongoing operations and payments received under new and existing agreements and taking into account our stock repurchases, our cash portfolio totaled $86.6 million. We will continue to monitor our cash balance and stock price relative to any future buyback activity.

Based on our current outlook we expect revenues for 2014 to be in the range of $54 million to $62 million reflecting growth of 14% to 31% over the prior year based primarily on expected growth in the mobile and gaming markets.

As a reminder, in the first quarter of 2013 we received a onetime benefit of more than $2 million due to an overlapping receipt of both tail period and new revenue under a former agreement that expired and was subsequently renewed. While we do continue to expect a certain amount of seasonality in our business, we expect that as we transition to more contracts with fixed elements that generate recurring revenue, the effect of seasonality will be less in 2014 and in future years.

We expect the quarterly run rate for our OpEx excluding non-cash charges to be in the range of $10 million to $11 million. Next, in 2014 we will report two new non-GAAP measures, non-GAAP net income and non-GAAP earnings per share and will no longer report adjusted EBITDA. We define non-GAAP net income as net income, GAAP net income plus stock based compensation. We define non-GAAP earnings per share as non-GAAP net income per fully diluted share. We expect non-GAAP net income for 2014 to be in the range of $8 million to $15 million. Based on assuming shares outstanding of $30 million, we expect non-GAAP earnings per share to be in the range of $0.27 to $0.50.

With that, I will turn it back over to Vic.

Thanks, Paul. As I mentioned in the opening remarks, Immersion successfully executed our basis Haptics licensing strategy and is performing at a higher rate, leading to record revenues in 2013.

We are now investing in critical programs to set the Company up for continued growth in 2014 and beyond which include establishing a sales and technical support team in China, investing in our mobile ads and entertainment initiative, expanding our support for the automotive market, and driving demand for Haptics in gaming and wearables. I would like to take this opportunity to dive into each of these initiatives in greater detail.

During 2013, Immersion announced its first direct mobile licensee in China, Xiaomi. As a technology innovator, Xiaomi is a high profile and well regarded OEM in China. Its use of Immersion's TouchSense software to incorporate numerous customized Haptic features into its flagship Mi3 product was highlighted by Xiaomi's CEO in his keynote address at the products launch event.

Our success at Xiaomi points to the value that Immersion can bring to China OEMs who are looking to rapidly incorporate high impact technologies to differentiate their user experiences.

During the fourth quarter we continued to deepen our relationships with OEMs in the region including being invited as a technology innovator at the China mobile industry event in Guangzhou in December. As a result of the level of activity we have experienced throughout 2013, Immersion has established a regional headquarters in Shanghai and we will continue to build our technical support teams to meet the growing needs of Chinese customers.

As the value of Haptics in mobile devices has expanded beyond reassuring touchscreen confirmation, we have been investing in novel ways that our touch feedback technologies can increase realism and open the door to richer ways of communicating with various forms of mobile content.

For example, in the growing world of mobile gaming apps, we first launched a Haptic SDK for game developers in 2011. Large and small developers have now used this SDK to create immersive and engaging mobile games that have proven to be extraordinarily popular. In 2013 alone, our analytics show that apps using our SDK were installed over 70 million times.

We are also making a substantial investment in our mobile content initiative. We believe that adding Haptic feedback to mobile content including rich media advertisements and premium video content represents a tremendous opportunity for Immersion and we have been devoting between 35% and 40% of our technical resources as we build this new business.

Our early usability research has shown that mobile ads and entertainment enhanced with Haptics generate greater levels of consumer engagement and more positive levels of enjoyment and brand sentiment while also improving long term content recall.

As we move forward with our content business we are measuring our progress in six principal areas. First, we are focused on the foundational IP and innovation that will define, support and protect this initiative.

As our technical and user experience teams have developed new and innovative use cases and technology for use in mobile ads and entertainment, we have been active in securing the resulting IP. While innovation is an ongoing process we feel that we have already built a solid base upon which to build our content business.

Second, we have developed a flexible set of tools and software technologies to enable a successful end coding, distribution and playback of Haptic content. In developing these technologies we have worked closely with professionals in the content industry to ensure that our offerings are easy to use and compatible with existing work flows. We have made great progress in this area and anticipate we will be performing test integrations with third parties in the near future with potential product launches to follow in late 2014.

Third, we have been pulling together a strong sales and marketing team to direct the content business moving forward. In January, Jason Patton, an experienced entertainment and technology executive joined us as Vice President and General Manager for Content and Media. Jason will oversee our ads and entertainment business and continue to assemble a team with the capabilities and experience necessary to make it a success.

Fourth, as we are increasingly able to quantify the value of Haptics, we will work closely with industry advocates to generate support throughout the mobile advertising and entertainment ecosystem. We will continue to meet with industry participants and work to forge relationships with partners like ad networks, content creators, media companies, and mobile OEMs to ensure a high quality Haptic experience across platforms, devices and applications.

Fifth, we will begin to enter the marketplace working with select partners to launch pilot programs and market tests. Our main focus at this stage will be to validate our technologies in a commercial setting, getting user feedback, quantify the benefits of Haptic ads and entertainment content, and gather insights through analytical data.

We anticipate that we may initiate testing and pilot programs as early as the first half of 2014 with additional programs being launched throughout the remainder of the year.

Finally, we look forward to the commercialization and monetization phase of our content business. Based on our progress with the near term activities I have just outlined we now expect that we may achieve our first content revenue by the end of 2014 and that our content business could begin generating meaningful top line revenue by the latter part of 2015.

While many of our early stage efforts in the content area will be internal in nature we will keep you posted on our progress and where feasible, announce specific milestones as we achieve them.

Turning to the automotive market, we recently entered into new agreements with leading suppliers who are incorporating Haptic technology into the interface systems they provide to automotive OEMs. Car makers and their suppliers now realize that by incorporating Haptics, they can reduce glance rates and task completion times, improving the safety and usability of their user interfaces.

Under our recently announced multiyear licensing agreement with Tokai Rika, the leading supplier of automotive control systems and components, they will offer Haptic enabled touchpads to their automotive customers.

I am also pleased to announce that we recently entered into a multiyear licensing agreement with Continental, one of the world's largest tier one auto suppliers and a leading international provider of interface solutions for auto interiors. Under this agreement, Continental will offer Immersion Haptics for its touchscreen, touchpad, and button interfaces.

The first design concept to come out of the Continental agreement was a recently previewed 2015 Mercedes touchpad for the C-class which uses a unique backlit touchpad with Haptics to navigate the automotive UI.

As part of its solution development, Continental performed research to evaluate key safety metrics for touchpad interfaces with and without Haptics which generated some compelling results. Their published research shows that the driver's gaze is diverted away from traffic 23% less with Haptic feedback and that tasks were completed 33% quicker with Haptics technology than without.

At January's Consumer Electronics show we announced the launch of our automotive Haptics web portal located at automotive.Immersion.com. This resource provides information for OEMs and designers looking to implement Haptics into their auto interfaces. The portal shares technical best practices based on Immersion's years of mechanical, electrical and software experience and highlights key usability criteria OEMs should consider when creating specifications for Haptics in their interiors.

The development of this portal was a direct result of the increased interest we have had from the automotive community. By distributing these guidelines we hope to educate auto makers and suppliers to create the highest quality Haptic experiences for consumers.

As automotive OEMs view the car user interface as an extension of their brand and a key factor in the overall consumer satisfaction with the car experience, we are now engaging directly with OEMs at a much higher level in the design and specification phase.

This is an exciting elevation in our level of engagement and speaks to the value that OEMs are placing on Haptic technology. While these engagements have long design cycles, the enthusiasm we are seeing leaves us feeling very optimistic about the future of Haptics in the automotive interior.

On the gaming front, we are pleased to see the highly anticipated Xbox One and the PlayStation 4 both launch in 2013 using Haptics. These new consoles have been well received in the marketplace, have generated enthusiasm for innovations in Haptic feedback for the gaming market and have once again shown that Haptics is an expected feature for any high quality gaming experience.

We were pleased to extend our licensing agreement with Sony during the year and are investing in ways to bring new Haptic capabilities to the gaming market for both console gaming and the emerging mobile peripherals market.

Lately, as wearable computing devices have been generating an increasing level of excitement, we have been working closely with manufacturers to bring Haptic feedback to this emerging market opportunity. In launching its high profile Galaxy Gear Smartwatch, Samsung selected our TouchSense software to create high quality Haptic effects while reducing noise and battery consumption.

Many companies are investing heavily in this area, competing with each other to introduce the must have Smartwatch, fitness band, health monitor, or other wearable devices. We are working with many of these companies and as our TouchSense technologies offer a silent, intuitive, and compelling communications channel for all types of wearables, we expect to see our software design into new wearable products both in 2014 and beyond.

Lastly, as we discussed last quarter we continue to move through the discovery phase of our lawsuit against HTC Corporation in the U.S. District Court in Delaware which is scheduled to go to trial in March 2015. We are pleased to report that the reexaminations of two of the patents in the litigation that the PTL had initiated at the request of HTC have concluded. We have received reexamination certificates for both of the patents reflecting only minor amendments that do not change the substance of the patents. We remain extremely confident in our case and after the results of the reexamination, extremely confident in the validity of our patents.

Looking forward to 2014 we are excited by our business prospects. As Paul noted earlier, we anticipate another record year for Immersion. In the near term we look forward to establishing agreements with new mobile licensees such as those in China as well as expanding existing agreements as our mobile and gaming OEMs look to adopt new higher value applications for Immersion technology.

Longer term, we will continue to invest in the tools and technology needed to recognize the opportunities in the mobile ads and entertainment business as well as in the automotive market. While our 2014 guidance does not include these long term opportunities we believe our initiatives in these areas will position us well for substantial growth in future years.

For those of you who will be at the Mobile World Congress event in Barcelona next week, I invite you to come visit Immersion's booth in Hall 8. The booth was designed to highlight the user experience as we believe will drive Haptics into new areas over the next few years. Demonstrations will include novel use cases for Haptics, enhancing today's mobile apps, user interface and games, new concepts in user created mobile video that allow tactile effects to be inserted into your mobile video automatically created through GoPro-style devices with intelligent sensors.

We will have wearables demonstrations that capture how Haptics can create a valuable and intuitive communications channel for advanced wearable interactions for the home, fitness, and gaming.

Finally, we will also have tactile ad and entertainment demonstrations with a sneak preview of the enablement tools we are developing for professional video editors to create their own tactile effects.

To conclude my formal remarks, Immersion has achieved a record 2013, successfully establishing the value of its technology and software. In addition, we have the teams in place to execute on new growth opportunities worldwide. We look forward to updating you on our progress in the coming year.

As we close out the year I would like to thank our dedicated employees around the world who helped make 2013 a success. I would also like to recognize our customers, partners, and valued shareholders for your continued support. We look forward to seeing some of you this quarter at Mobile World Congress, the JMP and Sidoti Investor Conferences in March or out on the road.

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

Thank you, sir. We will now begin the question and answer session. (Operator Instructions)

And our first question comes from the line of Jeff Schreiner with Feltl and Company. Please go ahead.

I have two here, just some housekeeping items that I wanted to go over. One, is Immersion going to provide a historical reconciliation for the adjustments that were made within G&A and amortization expense that happen probably on a quarterly basis and have changed to be in accordance with GAAP? Is there going to be some type of reconciliation that we can use to update our models?

Yes, when we file the 10-K report in the next week or so we will include a set of reconciling tables that basically show you the roadmap of the adjustments from the old to the new method.

Okay, nothing that could be released today in terms of getting that into the analysts' hands and investors' hands?

No, we don't have anything today although I would be happy to answer any questions you may have at this time.

I will pass on that and save questions for later but I also wanted to just understand what was going to be the add-backs to the non-GAAP net income that you are now reporting from GAAP? I didn't hear anything talked about in terms of what the offsets were going to be.

We are going to be adding back in just the stock based compensation.

Okay, thanks for getting those out of the way there. I guess the first thing I would like to understand is, Vic or Paul, why did mobile decline sequentially? That is not seasonal by any means. It is typically an up quarter sequentially. What can you tell us about mobile and what was going on there?

Mobile is very healthy and we are excited with performance and the outlook. If you look at it over the prior year which I think is the right comparison, because you do have some seasonality, you will see healthy growth over the prior year's quarters. As you mentioned, sequentially it was down a little bit and I guess I would say that there are certain quarters where there are catch up payments, contract timing and other types of seasonality that impact the revenue but we have in the past also had other sequential revenue declines in mobility, again just because it can be lumpy so I still think it is a very robust healthy growing business and our 2014 outlook is very positive.

Can you just talk about the recent acquisition by Lenovo of an Immersion licensee, Motorola? First, is the license transferable and is there any risk to revenues from this transaction in calendar year '14?

I don't believe that that transaction has actually occurred yet so that is still subject to the normal closing process. We see that as a net positive for Immersion. We don't see it as a significant risk with our Motorola relationship. We think that Motorola has a bright future and if anything, Lenovo probably helps support their growth efforts so we see this as a net positive.

Obviously, with a relationship directly with Motorola we would like to think that we can continue to work with Lenovo and eventually sign them to a license agreement for Lenovo branded products. To be clear, the Motorola agreement I don't believe is transferable and it really is covering the Motorola branded products.

That's right, Jeff. It covers Motorola branded product and it is an IP license and so as we go forward, talking currently with the Motorola group and in the future, to the extent the acquisition goes through with Lenovo, we will be focused on opportunities to expand the license scope and to shift the attention from IP to higher quality TouchSense solutions as well.

And then last one for me, I was just wondering within mobile, or excuse me, within gaming revenues, what is a reasonable assumption? We have seen such volatility in terms of the contribution. We just saw last quarter it went from 16% to 26% in one quarter. What is a range in terms of level of sales that we think gaming could be in 2014?

I would say that the whole gaming industry I think is excited by the launch of these two successful platforms and so we have benefited as well as a number of others. There is also this growing mobile gaming opportunity that we believe could also be substantial so net, net I believe many in the industry are benefiting from some of the successes that they are having.

In terms of quantifying our gaming business, I don't think we are able to break out the specific vertical from the guidance but we obviously expect gaming to be growing and a bigger part of our 2014 revenue as a result of these new platforms launching and the new initiatives we have underway.

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

I want to make sure I heard this right. Vic, are you talking about, on content revenue, it is possible but you are probably not including it in guidance to any degree in terms of some of the probabilities?

That is correct, yes. I think we have made enough progress more recently that we believe we will generate some revenue in 2014. We have not included any of the content revenue opportunities in the guidance.

And then frame for us what is happening in content that is going to drive revenue. Just give us some examples of some things and how that might be structured.

As I said, there is a series of metrics that we measure our own internal progress. We are moving quickly through a number of them. I would say that one of the next key events would be to conduct pilot studies with a number of different ecosystem partners. Using that data, then we believe that if we wanted to predict that data, we believe it will show a meaningful increase and engagement as we have done in our own tests so if we can prove that in the marketplace with our partners then we believe those relationships quickly convert over to revenue generating and they will be actively promoting this capability to their customers and that is what gives us some confidence that the content business can generate revenue in 2014.

Specifically, the kinds of revenue generating relationships that we are looking at would be the typical ad business which is measured in cost per thousand impressions and we would like to participate at that level. There are also opportunities maybe to participate per campaign, revenue sharing, or time based and so these are the kinds of revenue generating relationships that could trigger meaningful revenue for us.

Great, and then question for Paul on the OpEx guidance. I think you are going to be up maybe $6 million or so in absolute dollars over 2013. Can you help me look through the puts and takes between legal expense, the change in accounting and then the increase in headcount that is maybe driving some of that?

I think as I mentioned in the prepared remarks, legal expense associated with litigation was around $5 million last year and our trial with HTC is scheduled for March of 2015 so assuming we don't settle that, we will see legal expenses continuing for HTC throughout the year, probably ramping up a little bit toward the end as we get nearer to the trial date. Overall though, I would expect litigation expense to be down relatively substantially from 2013, maybe a couple million lower.

Then going forward, looking at the change of accounting policy, you will see rather than the run rate of around $400,000 or so of amortization, you will see a very minimal amount of amortization but you will see our full expenditure on patents and on outside legal fees to either maintain or file the initial applications for patents, to go with the G&A expense and that generally, if you look at our prior cash flow, investments in capitalizing IP but call it around $1.25 million and then beyond that, we are -- in the last year our headcount went from 101 employees at the beginning of the year to 112 at the end of the year.

We are going to continue to invest in some of these new opportunities that we are seeing. We are going to try to do that very smartly so that we are tying the investment to revenue that is within sight as we make the investments but we will continue to grow, I would say, at the same pace or even a little bit more as we ramp up on content throughout 2013. Those are the main drivers I would say in the OpEx picture for the coming year.

Perfect, thank you so much for that color. I wondered if you, now that we are moving to have a greater percentage of revenue coming from fixed deals, if you are able to break out for us at all what percent of revenue came from fixed in '13 versus what your expectation is in '14, that would be helpful.

It is very difficult actually to do that because in some cases we have the fixed elements in the same relationship as in which we are generating variable revenues as well and so we haven't done that and we can certainly try to give you as much color as we go forward as possible but right now we don't have that kind of a breakout.

When I look at -- I'm sorry, go ahead, Vic.

I was just going to add that our fixed portion of our mobile revenues is exceeding 50% so it is a bigger percentage of our total mobile revenue.

Got it, and then a way to ask the question on gaming in the quarter, was any of the -- I mean, Sony didn't start shipping until I guess in Q4 which makes me think it is more like Q1 royalty as opposed to a Q4 impact so help me understand what happened in Q4 with that relationship that it had an impact on revenue and anything sort of upfront, license-type payments versus what was just happening in the market to drive it if you stripped out the Sony relationship.

Sure, I think we have characterized in the past the relationship with Sony for the PS4s is coming in really two fashions. One is a license payment that allowed them this option to extend the license and then the other is a per unit royalty so clearly, the per unit royalties are typically reported a quarter in arrears and as you said, most of their shipments occurred in Q4 so we will be picking up the variable portion in Q1 of 2014 but there was some revenue generated in 2013 as a result of this option exercise. And I might add that that revenue continues for quite some time so this is not frontend loaded, just in the fourth quarter revenue. It is something that I think you will see on a recurring basis.

Okay, so a fixed and a recurring element there and we only saw the fixed in Q4.

Exactly.

Got it, and then did you have 10% customers that you can talk about in Q4?

We always have one or two, I think, and I imagine that during the quarter, we probably -- I think we will disclose in the K the number of customers but I would imagine that in the fourth quarter we probably had one or two as we usually do.

We did have one, Charlie, and the odd thing about the way you report your 10-K results is you don't actually break out and report that quarter's 10% customers. You go back to the whole year and so you will see when we file the 10-K there is out disclosure of our 10% customer for the year.

Fair enough, thanks so much.

Thank you and our next question comes from the line of Richard Magnuson with B. Riley and Company. Please go ahead.

Regarding the recent announcement with Tokai Rika, you mentioned it is a multiyear licensing agreement. Of course, you didn't give the amount. Is there any way you can give us maybe an idea of how many years and how soon we can see some of that revenue?

Tokai Rika is a world leader in automotive component supply and the typical auto relationship is multiyear. I would say five years and in some cases even longer than that because of the time it takes to design and launch a vehicle whereas in the mobile space, our agreements tend to be shorter in duration, maybe two to three years. Tokai Rika is definitely five years or longer and some of their efforts will generate revenue here in the near term. Specific quarters or product launches, we're not able to really disclose but we also mentioned today, Continental, and Continental already has a design win in the 2015 Mercedes so the timing of a license agreement doesn't necessarily dictate the beginning of a development relationship. It may be documenting an existing relationship where the design efforts have occurred for some period of time. We expect Tokai Rika to be a very meaningful part of our business as we go forward.

Just to be clear, near term, that would mean we would likely see some revenue in 2014?

Again, I don't really know the design schedule and the product launches so I couldn't tell you if it is going to turn 2014.

(Operator Instructions)

And our next question comes from the line of Paolo Gorgo with Nortia Research. Please go ahead.

I just saw a report from Frost and Sullivan talking about the impact of Haptics. Can you comment on that? Are you aware of this report?

I am aware that they just released it. I can't say that I have actually read it, however.

Only talking about applications like ATM kiosks and industrial monitors which is something you haven't touched in this conference call, is it going to be kind of a longer term opportunity for the company or do you believe that it would be marginal in terms of revenues?

I would probably characterize it as marginal at least in the near term. We are quite familiar with Frost and Sullivan and have worked with them in the past numerous times as they educate themselves around the Haptic industry. These particular verticals and these opportunities we have historically looked to our partners such as Atmel, Cypress, Microchip and others who have had success in getting design wins in these other verticals and so we see longer term, the opportunity for automotive, for home, office, appliances, and other types of devices to incorporate Haptic touchscreen so we are quite excited by that opportunity but I believe that that will take some time and at this stage, I would say it would be a marginal impact on our revenue.

Just a quick comment if you can, there is a rumor that the next Samsung watch might not have Android but keep them as Tizen OS. Would this change something as to Haptics or your relationship with Samsung related to this vertical?

We have worked with Samsung on both the Tizen OS and the Android OS and there could be certain reasons why they would launch one product with one operating system and another with another but from our standpoint, each represents an opportunity.

Okay, great and just a quick comment on the Mercedes and Continental win, can we really say, like I have kind of said in the past but Mercedes is really enforcing Haptics and we might expect most of their products to include it?

I don't know that I would make the statement that most of their products -- clearly, they appreciate the value that Haptics brings to the interface, the user interface as well as the safety aspects of incorporating Haptics in the touch interaction.

Continental obviously has published some very interesting research which is consistent with the research that we have conducted and the other technical literature that is out in the marketplace so yes, I think in general, the industry understands the value of Haptics. Continental has done a really good job of promoting it and we hope that they are successful with Mercedes and other OEMs. Specific trends and adoption rates within Mercedes is something we don't know ourselves. We wouldn't be able to predict that.

We understand it involves the C-class. Typically at this stage, the types of packages that include the touchscreens are optional navigation packages. How Mercedes decides to offer those to its customers is a little hard to say. It certainly seems like those are becoming more commonly selected options if not universally chosen in the luxury automobile class as time has passed.

Okay great and just last comment, if you had to hit the high end of guidance, basically the company would have doubled revenues in a couple years. That is basically correct, I believe.

Yes, I believe, almost. A couple years ago we were at $32 million so if we hit the high end it would be $62 million.

Thank you, and we have a follow up question from Jeff Schreiner with Feltl and Company. Please go ahead.

I am going to try to come at this a different way. I think you might have answered it, Vic, but I was wondering, now given that you have these fixed and fixed plus types of agreements and some are mixing with variable and obviously, we are kind of in the dark about what is what. I was just wondering if you might be able to provide to us a base level of revenues per quarter right now that Immersion has solidified through fixed or fixed plus types of agreements?

It is hard to really give you that sense because in some cases, agreements come up for renewal so you would have to assume that these agreements would continue to renew. That is our expectation but to give you a percentage of revenue which is fixed, it would only be for a period of time and there would be some variations to those so I'm not sure I can give you a percentage of what is fixed on a given quarter.

One thing I think you may be able to gain a little bit of insight from is to be able to take a look at our deferred revenue, both with this short term and long term and look at the, I think now we have had some movement in both of those accounts that has been relatively substantial over a one year period and you can kind of see how those go up. Certainly, the short term deferred revenue is all fixed revenue that we are expecting, or it is revenue that we are expecting to recognize within 12 months that we have now so that would fall into your category and I think you could look back a couple quarters on that as well.

Okay, that's helpful. Thank you, Paul. You talked about being a couple million less in litigation costs for '14. Could you just give us quickly on a housekeeping basis, just what the litigation cost was for the quarter?

It was $650,000, I believe. I had that in my prepared remarks. Hold on one second. I can give it to you exactly in just a minute. It was $627,000 in the fourth quarter.

And you think it is going to go down this year a couple million dollars.

(cross talk) had about $5 million in 2013 so that was the ballpark I gave you for 2014, down a couple million say for 2014. It is very difficult, as I am sure you are aware, to be precise with litigation projections because we don't control how the other party approaches the litigation but we do expect that they will be lower this year.

I would say, Jeff, we will spend what we need to to win.

Yes, that is absolutely correct.

And then just coming back to this OpEx, Paul, maybe I misheard or didn't hear the full context of your statement but you talked about it being $10 million to $11 million a quarter. That would basically suggest that OpEx is flat versus what you reported for '13. Is it maybe just $10 million to $11 million in the first quarter and then move up from there?

I am going to look at the exact question. That is excluding stock comp so I am not sure. It depends on which, whether you are looking at non-GAAP or GAAP OpEx for 2013.

On a GAAP basis, what would it be?

You would add in the stock comp so another $5 million above that for the year.

Stock comp is going to be $5 million for you guys this year after -- no, I guess that is kind of in line, so stock comp is going to be $5 million this year?

Yes, I am using this year as a benchmark for going forward so yes.

Okay, so just to be clear, you take the $10 million to $11 million and you add -- the $10 million to $11 million is non-GAAP is what you are saying.

That is correct, that is correct.

Okay, thank you for that and then, I guess that is it for me, gentlemen. I appreciate you taking the time to answer my follow up questions.

Thank you, and our next question comes from the line of Richard Marshall with Senvest Capital. Please go ahead.

On your guidance, Vic, how much of that is growth from existing customers and how much is from new customers?

In the guidance -- maybe one way to answer this is kind of looking at the requirements. To hit the high end we would need to be successful in some of our renewals so some of the existing customers, those agreements will come up for renewal and it also includes some additional new OEMs that we anticipate bringing on and then there are other areas like growth in wearables, growth in gaming and potentially transitioning some of our current customers from basic Haptics up to our full TouchSense. Those are kind of the sales initiatives and that would give you a mixture of existing customers and growth within those relationships as well as bringing new customers on board.

But not much from those major initiatives that you sort of mentioned that might be up for it in 2015, like the content?

Correct, the 2014 guidance includes nothing from content.

And Paul, you mentioned, towards the end of your remarks you mentioned when you were talking about the buyback, something about, I remember $86 million. Is that -- and you said January 2014 -- is that your cash position or I misunderstood that?

I was giving our cash position at the end of January 2014 and that balance of cash and cash equivalents was $86.6 million and that takes into account that we did spend $4.4 million during the month of January repurchasing shares.

Okay, wow, so you were aggressive buying shares in January and your cash was still up about $16 million from December.

That is exactly right.

There are no further questions at this time. I would like to turn the call back over to Management for closing remarks.

Thank you everyone for being on the call with us today and we do look forward to updating you again on our next quarterly call. Thank you and good day.

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