Immersion Corp (IMMR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation first-quarter 2014 conference call. (Operator Instructions) This conference is also being recorded today, May 1, 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 first-quarter 2014 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-K filed with the SEC, as well as the factors identified in the press release we issued today after market close.

Additionally, please note that during this call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable 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. Immersion commenced 2014 with more record results, generating a new high of $15.4 million in revenue during the March quarter.

The quarter was full of exciting events and milestones as we demonstrated new technologies and solutions at Mobile World Congress in Barcelona, benefited from the console refresh cycle in gaming, signed agreements with key automotive licensees, continued to make progress on our mobile content initiative, and saw one of our key mobile OEMs, Samsung, release new flagship wearable and mobile devices featuring innovative Immersion technology.

In a few minutes, I will discuss our recent business developments, but first I will ask Paul to discuss the details of our first-quarter 2014 financials. Paul?

Thanks, Vic. As Vic mentioned earlier, revenues for the March quarter were $15.4 million, up 11% from revenues of $13.9 million in the year-ago period, and representing a record revenue quarter for Immersion. Revenues from royalties and licenses of $15.2 million were also a record and were up 11% from royalty and license revenues of $13.6 million in the first quarter of 2013.

Of these amounts, in the first quarter of 2014 variable royalties based on shipping volumes and per-unit prices totaled $7.5 million, and fixed-payment license fees totaled $7.7 million. This compares to variable royalties of $7.5 million and fixed-license fees of $6.1 million in the prior-year period. As a reminder, in the first quarter of 2013 we received a one-time benefit of more than $2 million in royalties in our mobility business due to an overlapping receipt of both tail period and new revenue under a former agreement that expired and was subsequently renewed.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2014 a breakdown by line of business as a percentage of total revenues was as follows: 50% from mobility; 33% from gaming; 13% from medical; and 4% for auto. Gross profit was $15.3 million or 99% of revenues, compared to gross profit of $13.7 million, also 99% of revenues in the first quarter of 2013.

Turning now to operating expenses. Excluding cost of revenues, total GAAP operating expenses were $12.4 million in the first quarter of 2014, compared to $12 million in the year-ago period. Operating expenses in the first quarter of 2014 included non-cash charges related to depreciation and amortization of $127,000 and stock-based compensation of $1.6 million.

Of the non-cash charges, $251,000 were included in sales and marketing, $530,000 in research and development, and $910,000 in G&A expense. Litigation-related expense for the quarter was $1.5 million, down from $3.1 million in the first quarter of 2013.

Net income for the first quarter of 2014 was $1.9 million or $0.06 per diluted share, compared to $1.7 million or $0.06 per diluted share in the first quarter of 2013. Net income for the first quarter of 2014 includes a provision for tax expense based on an effective rate for the quarter of 36.7%.

As a reminder, beginning in 2014, in addition to normal GAAP metrics we are using non-GAAP net income and non-GAAP earnings per share to track our business performance. We define non-GAAP net income as GAAP net income less stock-based compensation. We define non-GAAP earnings per share as non-GAAP net income per fully diluted share.

Non-GAAP net income for the March 2014 quarter was $3.4 million or $0.12 per diluted share, up from non-GAAP net income of $2.7 million or $0.10 per diluted share for the same period last year.

Our cash portfolio, including cash and short-term investments, was $81.3 million as of March 31, 2014, up from $71.1 million exiting 2013. The increase was driven primarily by $16.4 million in cash generated from operations during the quarter.

During the March quarter, we spent approximately $6.9 million to buy back 605,000 Immersion shares, leaving us with $12.6 million remaining under our authorized stock repurchase program. Management and the Board remain very confident in our business fundamentals and future prospects, continue to believe that our stock is attractively priced, and expect to continue to execute opportunistically to buy back shares under our authorized stock repurchase program. We will continue to monitor our cash balance and stock price relative to any future buyback activity.

As we indicated heading into the new calendar year, based on our current outlook we expect revenues for 2014 to be in the range of $54 million to $62 million, an increase of between 14% and 31% over the prior year. Non-GAAP net income for 2014 is anticipated to be in the range of $8 million to $15 million.

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

Thanks, Paul. Q1 is always an exciting quarter for us, with a number of new product introductions and industry events driving activity around the world. At the end of February, we participated in the Mobile World Congress tradeshow at Barcelona, the most important mobile industry event of the year.

Mobile World Congress offers us the opportunity to pull back the curtain and share new tactile experiences and technologies that we have been working on, ones that will enhance mobile products for years to come. This year was particularly exciting, as we not only introduced an array of innovations relating to our core OEM products, but we were also able to show the results of our investment in haptically enabled content and media, creating new ecosystem opportunities for OEMs, advertisers, developers, content owners, publishers, and others.

As I have discussed before, user research shows that mobile ads and entertainment enhanced with tactile effects are demonstrably more enjoyable and perform better on key commercial metrics, including increased intent to purchase, higher long-term recall rates, and greater user engagement. At the show, attendees were able to go hands-on to experience tactile ads and short-form video content, as well as preview some of the tools we have developed for content designers and producers to add tactile effects into their editing and production environments.

We continue to make a substantial investment in mobile content and are pleased with the rapid progress we are making in the principal areas that we are measuring. During the quarter, we strengthened our IP position, refined our tools and technologies, engaged in user testing to validate our offerings, worked closely with potential partners throughout the ecosystem, and -- perhaps most notably -- entered into our first evaluation and testing agreement.

Under this agreement, our ad tech partner will work with us to integrate our enablement tools into their software environment and evaluate the performance of haptically-enhanced ads. At this point, we believe we are on track to launch commercially and achieve our first content and media revenue as early as the end of 2014.

At Mobile World Congress we also demonstrated tools and technologies allowing consumers to add tactile effects to their own personal videos. Using our haptic tools, users can bring their videos to life by engaging the sense of touch to exaggerate, emphasize, and intensify physical feats, incorporate personal commentary, and express emotion. Imagine using social media to share a six-second micro video clip of a festive 50th anniversary where you can physically feel the clink of champagne glasses raised in a toast, or the rhythmic beating of an animated heart sticker inserted at a particularly touching moment.

We also previewed sensor-based tactile technology where data captured from athletes wearing gyroscopes and accelerometers are translated into haptic tracks and incorporated into mobile video. Sensor-based haptics can really bring mobile sport video to life by, for example, allowing viewers to literally feel every sharp turn carved out by a snowboarder slaloming down a ski slope.

Sensor-based haptics is a great example of technology being developed within Immersion's R&D labs. And as digital sensors proliferate and the Internet of Things increasingly becomes a reality, we believe that we will see a growing number of comparable opportunities where haptics can make engaging with the digital world more meaningful, more intuitive, and more realistic.

Beyond content and media, we unveiled a large number of new mobile UX concepts and tools at Mobile World Congress, demonstrating just how rich and rewarding haptic effects can be in smartphones and tablets. For example, visitors to our booth were able to feel how haptics can transform a simple camera app into a satisfying, true-to-life SLR photo experience, just by adding the realistic shutter click, autofocus, and zoom sensations that camera enthusiasts have come to expect.

Similarly, we showed OEMs, developers, and others how to use Immersion tools and technology to quickly and easily implement innovative and intuitive typing and data entry cues, novel ways of using proximity sensors to feel device buttons without even touching them, and emotionally rich social communications using touch-enabled stickers, emoticons, and doodles.

We also took advantage of the Barcelona event to highlight the ways the tactile feedback can add great value to the emerging wearable device industry. By providing personal, private, and discrete interactions between a wearable device and the user, tactile effects offer a unique, rich, and meaningful communications channel. The wearables demonstrations at Mobile World Congress let visitors experience a wide range of tactile enhancements, including rich alerts and notifications, smart-home controls, health and fitness applications, and gaming.

During the quarter, we were also pleased to see customers announce important new devices featuring our TouchSense software. In March Samsung launched its flagship Galaxy S5 smartphone, which uses a unique new haptic feature from Immersion called Tactile Assist.

Tactile Assist is an accessibility feature which allows consumers with disabilities to enjoy a more immersive experience while engaging with mobile games and entertainment, by enhancing the visual and audio action with tactile effects. We are particularly excited by the opportunity for haptics to enable unique accessibility features and are investing in further product development to improve the mobile experience for those with disabilities as well as for users operating devices in environments where it may be difficult to clearly see or hear.

In addition to the Galaxy S5, Samsung also announced two new wearable devices, the Gear 2 and Gear Fit. Immersion worked closely with Samsung to develop custom versions of Immersion TouchSense to support the Tizen OS in the Gear 2 and RTOS operating system in the Gear Fit. We believe that haptics will be of increasing importance in the wearables market and are working with our partners to ensure that haptics is an integral part of the technology capabilities being established for these platforms.

On the mobile contracting front, we continue to engage with a number of potential OEM customers in China, where we are seeing great enthusiasm for our new demonstrations and an understanding of how haptic technology can be a valuable product and platform differentiator. We have established a strong sales team in the region and are building out technical teams in order to provide rapid local response to these potential customers in China, and we look forward to updating you on our progress with new licensees in the region.

In gaming, our quarterly revenue rose dramatically, driven by Sony's launch of its new PS4 console platform as well as strong holiday sales by our third-party peripheral customers. More generally, the gaming industry has been rejuvenated by new console releases, and we are excited by the opportunities presented as console gaming converges with mobile gaming and as participants in the gaming ecosystem explore new business models.

In our automotive business, we announced a new relationships with Continental and Tokai Rika, two major first-tier suppliers, and had productive meetings with automakers at the Consumer Electronics Show in Las Vegas and throughout the quarter. We continue to see growing interest from auto manufacturers who appreciate that haptics can enhance safety by reducing driver distraction.

They recognize that their customers feel more confident when using automotive touch interfaces with haptic feedback and that they prefer tactile feedback to visual and audible alerts. The commercial value of the Immersion technology has now been clearly demonstrated as Cadillac, Lexus, Acura, Opel, Aston Martin, and Kia all brought touch interfaces with haptics to market in 2013; and we look forward to an increasing number of design wins in the future.

Lastly, we have concluded the fact discovery phase of our lawsuit against HTC Corporation in the US District Court in Delaware and have now moved into expert discovery. Our trial is now less than a year away, commencing on March 23, 2015. We remain extremely confident in our case.

Overall, we are encouraged by the interest and investment in haptics that we're seeing from industry leaders in many markets and are constantly exploring ways to innovate and extend access to Immersion technology beyond our core markets today, bringing rich tactile feedback to advertising and entertainment content, to social media, and communications apps, to wearable and new device form factors, and to evolving areas such as the Internet of Things.

In closing, we look forward to seeing some of you this quarter out on the road or at the Jefferies TMT Conference in Miami, the B. Riley Conference in Santa Monica, and the Cowen Display Technology event at the SID show in San Diego. With that, we will now open up the call to your questions. Operator?

(Operator Instructions) Josh Nichols, B. Riley & Company.

Hi. I was just wondering about -- how can Immersion gain some upside from the Samsung product inclusion, aside from obviously the fixed component of the license, for some upside opportunities?

Well, we continue to work at adding more value to the Samsung products and extending the product lines from smartphones into wearables. The specific contract terms we can't get into; but as we have alluded to in the past, there is a fixed component to the Samsung agreement, so in order for us to benefit from upside opportunities we need to continue to bring them more value and offer solutions in new markets.

Do you have anything on the breakout? I know that it's about a 50-50 split for the total revenue, as Paul alluded to in the beginning of the call. Do you have any specifics on the breakout for Samsung or perhaps Sony for the fixed versus royalty split?

We don't have a breakout other than, as I mention in the prepared remarks, the approximately 50-50 split just over all of our different vertical markets, royalty versus fixed license.

Great, okay. I guess just one or two more things real quick. I noticed G&A took a bit of a bump to $6.5 million. I know there were some legal expenses. Could you just provide a little bit of color on that, please?

Yes, sure. There were some, as you noted, additional legal expenses in the quarter, quarter over quarter, so that is higher. And then also we had increased headcount at the end of the year.

At the end of 2013 we had 112 total employees, and that is now up to 121 at the end of the first quarter of 2014. So most of our OpEx in general is driven by headcount.

We also had some expense, although not necessarily pinpointed toward G&A, in connection with the Mobile World Congress tradeshow event during the first quarter.

Okay, thank you.

Jeffrey Schreiner, Feltl and Company.

Yes, thanks, guys, for taking my question. Vic, could you talk a little bit about maybe a time frame for the contract renegotiations that you had previously discussed are somewhat part of a driver in your annual guidance? Could you give us any help as to when we should be expecting these to occur, or not occur?

Well, we have quite a large number of licensees, so at any point in time there is some number coming up for renewal. We deliberately keep those agreements relatively short-term in nature so that we're more aligned to the market trends and activity.

We currently are in discussions with a number of licensees. You may be referring to LG; we are in discussions with them.

But our current guidance we feel comfortable with. And it anticipate some number of renewals, some number of discussions that don't lead to renewals as well.

Okay. That was very helpful. Then is there any update -- you told us you can't wait to show us the new licensees maybe from the Mainland in China. But I was just wondering if you could maybe update us a little bit more regarding additional licensing opportunities.

Have things changed? Are you more convinced something is going to happen? Anything you can provide some color on, that would be helpful.

Sure. I guess our one existing licensee in China is directly with Xiaomi, and I would point to the success that they have had with a number of products. Including the one I think today they discussed preorders, substantial pre-orders for their phablet; our technology is in that product.

So we are seeing great exposure of Immersion technology in China. I was just there for a couple of weeks and spent the bulk of my time meeting with OEM prospects.

But also a really strong interest from the content community, and I would say broadly based. These are people who create games, chat applications, and other types of productivity applications, as well as people who would be ideal for our mobile video ad business.

So lots of interest in China, and we are building a good, solid team there. As you can imagine, early efforts are evaluating software products, building demo units, porting technology to platforms, and proving that it's market-ready.

So we are going through all of those, and then lastly is closing of contracts. So I can't tell you exactly timing; we don't want to give away our negotiating positions. But we do believe we will have some number of new OEMs in China this year.

Okay. And last one for me, just quickly. Paul, could you repeat the prior-quarter and prior-year variable and fixed breakdowns?

And then what is the target mix going to be going forward? What should we be thinking about in terms of where you want the model?

Right. In the year-ago period, the variable-royalty component of the revenue was $7.6 million -- or $7.7 million; let me just double check -- $7.6 million, rather; and then the fixed was $6.1 million. And this quarter it was $7.5 million royalty, and 7.6 -- or $7.7 million fixed. Excuse me, $7.5 million variable and $7.7 million fixed.

Okay.

As far as that target goes -- and then one other piece of information I can give you is that for the full year last year, the total variable was $19.5 million and the total fixed was 26.7 -- $26.6 million, rather.

Going forward, we generally expect that we will be emphasizing fixed deals where it makes sense. We have considered that in our China negotiations, partly because that relieves the pressure on having to rely on royalty report.

But each negotiation is different. We are pretty happy either way. We look at the overall economics of the deal; and depending on all of the factors that go into it, we will look to maximize and get the best terms overall for our shareholders. So I don't think we have a target percentage.

Okay. Thank you, gentlemen.

David Williams, Ascendiant Capital Partners.

Hey, guys. Good afternoon and thanks for taking my questions. Just a couple of quick things.

Just thinking about the landscape today, we have heard several positive data points from around the industry; and you guys obviously had a very successful quarter in making some of these developments come to fruition. Just wondering: your guidance was fairly flat with what you had provided previously.

Is there anything to that? Is there -- maybe your outlook has changed any? Or are you maybe just staying a little more conservative today just on what's in front of you?

I would say that we still feel confident in the guidance. I think our outlook is probably as it was at the beginning of the year.

During the quarter, we had great progress in a number of fronts. We still have almost three quarters of the year left in front of us.

So we feel good about what we are doing, but there's always exposure and risks and things that you can't predict. So we feel, given the seasonality effect of the first quarter, which we benefited, we think Q2 will be below Q1, as it always is.

But we think in general the business is healthy. It is growing over the prior year, and we are feeling pretty good about the guidance.

Great. I know prior there was no guidance, or the video content contribution was not included in that. Are you including any of that in this year's guidance?

No. No, I think our goal this year is to get a large number of pilot studies underway and have the market verify what we believe internally, and what we have proved through user tests, that it makes a measurable difference in the consumption behaviors of consumers. So we want to do these pilot studies and get the market to see that themselves.

And then we expect to generate some revenue, but we believe it will be relatively modest and would not impact the current guidance.

Great. And one more if I can, just thinking about China and the growth that is going on in the emerging markets, are you seeing anybody that is really coming up as a competitor that you are concerned with? Anybody that is maybe trying to knock off your technology, that you are seeing today?

No. We continue to be the sole provider of quality haptic technology, not only solutions but IP. We haven't seen anything occurring in any of the markets, any of the verticals, or any of the geos that we work in. So at this stage, if you want a good quality haptic experience, Immersion is your source.

Great. Thanks.

Charlie Anderson, Dougherty & Company.

Yes, good afternoon. Thanks for taking my questions. I wondered -- thank you so much, by the way, for the fixed and variable breakout. I wonder, in terms of your annual guide, would you suggest that we just straight-line the Q1 fixed amount, and then fit the variable within the brackets of your guidance? Or are there puts and takes on that fixed line we need to be thinking about the rest of the year?

I think there are some puts and takes on the fixed amounts, in particular as we look at potential new arrangements with OEMs. Those may or may not include some additional fixed elements to them.

So last year, we started out the year with the fixed component being actually less than 50%, and it ended up being a good bit more than that. And this year I think you will see that in general the fixed amount will become a little bit larger relative to the variable royalty. But I don't know that I would -- again, because we are still negotiating and talking about some of these future relationships and they haven't been structured yet, I don't know that I can give you a direct way to extrapolate it out.

Got you. I noticed medical seemed higher than the last few quarters; and it was also high in Q1 a year ago. Is there a seasonal thing going on there? And how should I think about what is happening in medical the rest of the year?

I wouldn't say there's seasonal, but clearly it is a big-ticket item. And so depending on particular promotions or different activities by our licensees, you can see some movement in that.

It was a good, strong quarter. I don't know that I would expect that continued growth for the rest of the year, but we do think it will grow and we project increased revenues from medical.

Great. Then one of the things that has happened, Vic, interestingly, in the last, I don't know, maybe month or so is one of the largest suppliers of microphones, AAC, has talked a lot about a ramp in what they are calling their haptics business, but it is really just an actuator business. And they have a lot of customers who are people you would love to license, I think.

I wonder if you have seen that and just your take overall, and if there's any benefits that could accrue for you with that ramp, or if it is just a market-share situation as far as you can tell.

Well, we are always excited to see advanced actuator technology come to market. I believe if I am not mistaken, you will see that AAC actuator in the new Xiaomi device. So they are already in the market, and that is an opportunity for them.

So we think that that's good for the overall haptic market. It's a good quality solution, and we've worked with them for many years in helping them optimize their solution.

Great. Then as it relates to China, since you were just there, I am kind of curious. I think the expectations are that there will be maybe over 400 million smartphones sold in China this year. Do you have a sense of what percent are using haptics and are licensable on an IP basis for you over there?

Well, the market's served by a number of different OEMs. I think Samsung has had success there in China as well as India, so we benefit from Samsung having success in broader territories. In terms of OEM shipments in China and the IP, it is still all subject to our negotiations and agreements that we have yet to close.

I think that of the amount in China, a relatively smaller percentage is Apple, maybe 10% or 15% is Apple. But the bulk of it we would consider to be licensable Android.

Got it. So I guess the answer would be the vast majority of phones over there are already using some form of haptics. Correct?

That's correct, yes.

Perfect. Thank you so much.

(Operator Instructions) Matthew Galinko, Sidoti & Company.

Hey, guys. Thanks for taking my question. Just curious how much legal expense you have baked into the guidance related to the HTC proceeding.

Well, as I mentioned last quarter, our expenditure on the litigation was $5 million approximately in 2013, and we expect that to be down relatively substantially this year by a couple million dollars. And we still think that that we are tracking toward that.

It is always a little bit difficult to predict litigation expense, just because there are two parties involved. But the first quarter was a little higher than we would expect it to be the rest of the year.

Got it. Thanks.

Paolo Gorgo, Nortia Research.

(technical difficulty) shine a light to the China market (technical difficulty)

Paolo, I'm sorry, but we can't hear you. There is a tremendous echo.

Oh, sorry. Okay. Well, I hope you can hear me. (technical difficulty) licensing opportunities for (technical difficulty)

Again, Paolo, we are not hearing you clearly. It's a lot of echo.

Sorry, sorry.

Operator, I think we might have lost Paolo.

I am showing there is no further questions in the queue, sir.

Okay. Well, thank you, everyone, for being on the call with us today. And as always, we look forward to updating you again on our next quarterly call. Good day.

Ladies and gentlemen, this concludes the Immersion Corporation first-quarter 2014 conference call. Thank you for your participation. You may now disconnect.