Immersion Corp (IMMR) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Immersion Corporation second-quarter 2014 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jennifer Jarman. Please go ahead.

Thank you, April. Good afternoon and thank you for joining us today on Immersion's second-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 new markets, 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. 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 now turn the call over to CEO Vic Viegas.

Thanks, Jennifer, and thanks, everyone, for joining us this afternoon. In our second quarter we generated revenues of $11.8 million, a June quarter record, and we were profitable for the sixth quarter in a row.

During the quarter we launched our new official business entity in Shanghai, entered into a new multiyear license agreement with Huawei, the largest mobile OEM in China, and made great progress in key initiatives with both our OEM customers and our mobile content business. We are very pleased with the headway we have made to date and our prospects for growth in the future, but as Paul will discuss shortly, due to the timing of deals and the pace of certain negotiations, we are making an adjustment to our short-term 2014 financial outlook.

After Paul has provided the details of our second-quarter 2014 financials and described our adjusted guidance, I will share our recent business developments. Paul?

Thanks, Vic. As Vic mentioned, revenues for the June quarter were $11.8 million, up 16% from revenues of $10.2 million in the June quarter last year and a record for our second quarter. Revenues from royalties and licenses of $11.6 million were also up 16% from royalty and license revenues of $10 million in the second quarter of 2013.

Of these amounts, in the second quarter of 2014 variable realties based on shipping volumes and per-unit prices totaled $3.9 million and fixed payment license fees totaled $7.7 million. This compares to variable royalties of $3.8 million and fixed license fees of $6.2 million in the June quarter last year.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the second quarter of 2014 a breakdown by line of business as a percentage of total revenues was as follows: 65% from ability, 23% from gaming, 7% from medical, and 5% from auto. Gross profit was $11.7 million, or 99% of revenues, compared to gross profit of $10.1 million, or 99% of revenues, in the second quarter of 2013.

Turning now to our operating expenses, excluding cost of revenues, total GAAP operating expenses were $11.6 million in the second quarter of 2014 compared to $9.6 million in the same quarter last year. Operating expenses in the second quarter of 2014 included non-cash charges related to depreciation and amortization of $147,000 and stock-based compensation of $1.3 million. Of the non-cash stock-based compensation charges, $324,000 were included in sales and marketing, $216,000 in research and development, and $752,000 in G&A expense.

Litigation-related expense for the quarter was $925,000, up from $471,000 in the second quarter of 2013. In addition to the increase in litigation expense, the higher year-over-year operating expenses were driven primarily by an increase in our headcount as we have invested to capitalize on key opportunities and strategic initiatives. As we've expanded our presence in China and built out our content business over the last 12 months, we've increased our sales marketing headcount by 15% and our research and development headcount by 12%.

Net income for the second quarter of 2014 was $169,000, or $0.01 per diluted share, compared to $466,000, or $0.02 per diluted share, in the second quarter of 2013. Net income for the second quarter of 2014 includes a provision for tax expense based on an effective tax rate for the quarter of 35%.

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 June 2014 quarter was $1.5 million, or $0.05 per diluted share, compared to non-GAAP net income of $1.6 million, or $0.06 per diluted share, for the same quarter last year.

Our cash portfolio, including cash and short-term investments, was $74.2 million as of June 30, 2014, up from $71.1 million as of the end of 2013. The increase was driven primarily by $9.7 million in cash generated from operations during the first six months of 2014. During the first half of 2014 we spent approximately $7 million to buy back 616,000 Immersion shares, leaving us with $12.4 million remaining under our authorized stock repurchase program.

Management and the Board remain very confident in our business fundamental 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 Vic mentioned, due to the timing of deals and the pace of certain negotiations, including our renewal negotiations with LG electronics, we now expect revenues for 2014 to be in the range of $51 million to $56 million, an increase of 7% to 18% over 2013. Non-GAAP net income for 2014 is anticipated to be in the range of $6 million to $12 million.

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

Thanks, Paul. As I mentioned earlier, during the second quarter we made great strides in expanding our OEM business and executing on our content strategy. We are pleased by our record revenues during the quarter and our progress in building the foundation for increased and sustainable growth in the future, but do recognize that the timing and structure of new deals, renewal negotiations, and revenue recognition principles can impact the pace of that growth in the shorter term.

Our exciting progress in China illustrates the progress we are making. Just weeks ago, we announced that we had entered into a multiyear TouchSense license agreement with Huawei, the third-largest smartphone maker in the world behind only Samsung and Apple. This relationship represents a tremendous endorsement of Immersion technology by a premier Chinese company. The deal enables Huawei to use Immersion's software to create rich haptic experiences in certain of its branded devices and could set the stage for a substantial increase in the number of Immersion-enabled Huawei mobile devices in the future, generating increased revenue for us.

Huawei has already launched its first Immersion-powered smartphone, the Honor 6 handset. We worked closely with Huawei to design and implement a number of fun and creative haptic features in this handset targeted toward young tech-savvy Chinese consumers. One of these applications uses the camera as a mirror, allowing users to add animated effects to their own images. For example, when users press on their glass reflections while using the app, they can feel, see, and hear the glass cracking in their hand.

We also collaborated with Huawei to create a haptically-enhanced weather app allowing users to physically experience the weather forecast. Feeling, for instance, the drumbeat of rain and the clap of thunder on their fingers as part of a stormy forecast.

In May, we expanded our presence in China with the opening of an official business entity, Immersion (Shanghai) Science & Technology Company. This new entity will be our regional technology center focusing on design and development of haptic user experiences and enabling us to expand our sales and support for our growing China business.

While we just launched the Shanghai development center and are still in the early stages of our China OEM initiative, we have already established a broadly comprehensive relationship with [Xao Mi], one of the hottest brands and most innovative companies worldwide, as well as the newer, more targeted relationship with Huawei. These early successes are a testament to the energy, dedication, and skill of the sales and technical team we have been building in China, something that I witnessed firsthand during my recent travels to Shanghai for the opening of our new office.

In the short time since our Huawei announcement, we have already seen heightened interest from other significant Chinese OEMs as well as content providers, social media and gaming companies, and others in the Chinese mobile ecosystem. While some new relationships in China may take time to establish and some of these deals may be structured to expand to broader overall relationships, we have never felt more positive about our prospects for building a substantial, growing, and profitable business in China.

As we continue to advance our OEM business and deploy rich new haptic features, we have also been taking steps to ensure that we are able to realize the full value of our haptic innovations.

In that light, we have been engaged in contract renewal negotiations with LG Electronics, one of our large OEM customers. Our current agreement with LG has now expired and we have not yet entered into acceptable new terms. We are currently in discussions with LG and are actively working towards mutually acceptable terms, but are firmly committed to ensuring that we receive fair value for Immersion haptic technology.

We also made substantial progress on our important content initiative during the second quarter. We have solidified our IP position, enhanced our tools, made key hires to strengthen our team, and successfully integrated our enablement technology into the platform of our first evaluation partner, a major mobile ad network. In addition, I am pleased to announce that during the quarter we entered into an evaluation license agreement with a second significant mobile ad network, setting the stage for additional testing and integration work as we move toward commercial launches as early as later this year.

As we have progressed with this business, we found that participants throughout the mobile ecosystem quickly catch our enthusiasm and are validating our early findings that haptically-enhanced mobile entertainment content and ads are more engaging and perform better, both in terms of subjective measurements such as enjoyment and favorable brand sentiment, as well as objective metrics such as likelihood to watch a movie or purchase an advertised product.

Moreover, many of the studios, brands, agencies, networks, and publishers who have experienced our content enhancements have become advocates and have made introductions to other important players in the content ecosystem, providing us with additional connections and future opportunities.

A further positive development has been that as we have explored the many ways our technology can enhance mobile user experiences, we have identified growing interest and opportunities in the social media space. Over the last couple of years social chat and messaging platforms have enjoyed explosive growth and commercial success by offering consumers new and innovative ways of sharing information.

We have begun discussions with several chat and messaging providers regarding how haptics can improve and differentiate various elements of their offerings such as through stickers and emoticons. We look forward to updating you on these and other content opportunities in future quarters.

Moving to the automotive market, we are deepening our engagements with major carmakers who are looking at haptics as a key technology in their next-generation automotive interfaces. We have been working closely with both brands and tier suppliers as they develop and respond to RFQs that identify haptics as a system requirement for new car models and are pleased with what we are seeing on the design win front.

Most recently, Lexus announced that its 2015 NX and RC models have moved to its next-generation remote touch interface, which will feature a touchpad enhanced with haptic feedback to provide more intuitive navigation of the infotainment system. The automotive community continues to embrace the safety and usability benefits of haptic technology and we expect to see more automotive brands announce models with tactile user interfaces in the near future.

Lastly, we are continuing with the expert deposition phase of our lawsuit against HTC Corporation in the US District Court in Delaware. Our trial is now eight months away, commencing in March 23, 2015. We remain extremely confident in our case.

Overall, we are confident that we are building a healthy and sustainable growth-oriented business. We have successfully built the teams we need to succeed and the key initiatives we have established for our OEM and content businesses. We are focused on developing the tools and technology to bring Immersion's offerings to new mobile user experiences, including mobile ads and entertainment and social applications, and we are seeing great progress in activity that will bring early implementations of these programs to market in the coming quarters.

I will close my formal remarks by mentioning that Paul is scheduled to present at the Needham Interconnect Conference on August 6 in New York. With that said, we will now open up the call to your questions. April?

(Operator Instructions) Josh Nichols, B. Riley.

Thanks for taking the call. Real quick I was looking -- I see the revenue guidance drop and I'm sure a lot of people are thinking about it. I'm just going through my head and, okay, so LG is under renegotiation, but whenever you signed up Huawei they are the third-largest smartphone provider.

I was wondering why are we still getting such a large drop in revenue whenever LG is not that big of the market. I'm kind of wondering would Huawei more than offset that or at least get to breakeven by Q4.

Sure, Josh. LG is a well-established customer of ours and has a large number of models that they launch each year, so they have built up a sizeable revenue base with us in the past. Huawei is a new customer and one that is launching individual models, as you would expect in an early relationship. They will launch a handful of models, and since they are on a per unit basis, that revenue will ramp as they increase the number of models. So we're excited about the Huawei opportunity and we are hopeful with the LG negotiations.

Great. Real quick, I guess I was just looking for -- I know that you said cash was up as far as at the end of Q4, but the decline sequentially was fairly significant. I was just wondering what the outflow was.

Yes, I think it was down from $81 million at the end of the first quarter and that's really just timing. It reflects our in many cases having payments that we receive under fixed relationships and that we recognize in future quarters, so it's sort of normal flow throughout the year that I think you are seeing.

Yes, I was just looking at 2013. It seemed a bit more than normal but with the deferred revenue I understand that most people pay up front. That's fine.

Then, lastly, are you still looking -- I know the HTC litigation that you mentioned original target was around $3 million and I think you're probably around about $2.4 million spent through Q2. Are you still targeting around $3 million in spend for that for the year?

Yes, it's maybe a hair above what it had looked like about a quarter ago so you might want to go and think about $4 million, $3.5 million, that range.

Okay. Thanks a lot, guys.

David Williams, Ascendiant Capital.

Good afternoon, guys, and congratulations on the progress you made. It sounds like you guys have been busy.

Just wanted to ask, I guess kind of looking at the midpoint of your guidance, on the revenue it sounds like that's coming down about 8%. But if we look through the net income line it looks like we're down about 22%. Is there maybe -- is that just a loss of leverage to the revenues there? Is there anything else going on that we should be thinking about, maybe running through OpEx outside of just the litigation that may be coming through in the second half of the year here?

The profitability of the business, obviously the margins are still very strong so we are benefiting from that. The increase in costs are primarily from increased headcount and those are investments we are making, for example, in China to build out a sales force and a technical team to support those initiatives. I think in that region we are now over or close to 10 people.

And so as we add headcount there, we are also adding some headcount on our content initiative. We are building out a sales team and a marketing team and an operations team to bring our content solution into the content media space. So I would say the increase in OpEx primarily from headcount, partly from litigation, and we do expect to see that continue and the impact of that will affect Q3 and Q4.

How should we maybe think about the fixed and the variable mix split? Obviously, you guys achieved about a 50/50 last quarter. Obviously it's down; the variable portion is down this quarter.

But going forward if we are looking at maybe over the longer term one to two years out, where should we really expect that to sit and what kind of volatility would you expect to see in that once we get out a couple of years? Just looking at the progress that you have made at really moving to that fixed model.

I think in general you will see more fixed than variable, all things being equal. In the first quarter variable is a bit higher because in that quarter the per-unit sales that some of our customers make during the holiday season come in and we recognize those. And then in the remainder of the year you will see in general the fixed take a higher percentage.

I think last year for the whole year we had a balance that was a little bit closer to what we saw in this quarter than in the first quarter. I think we had a total of $26.7 million fixed out of the $47-million-and-change total revenue.

I think, looking to future years, we should continue to see a bit more on the fixed side than the variable side as we look to establish future recurring fixed payment relationships. But some of it depends, too, on new initiatives we are doing like the content business. As that goes forward, depending on how we structure things, there could be advertising or other revenue that might be based more on a variable basis.

So, again, all things being equal, a bit more fixed than variable, but there are some factors that could change the mix.

Just to add to Paul's comment, the Q1 variability really it's a mix across a number of verticals. So if you look, the large year-end sales of gaming products, which is typically recorded by Immersion in the first quarter, those are predominantly variable in nature. You will see, I think, typically first quarter will be higher on a variable basis and then throughout the year, as you see a more normalized revenue stream, you should see the fixed become a larger percentage.

Great, and one more if I can. I just kind of wanted to think about Samsung and realizing that you guys have a fixed contract with those guys, but we are definitely starting to see a little bit of softness in their business. Is there anything that you can see or look at as being maybe being a contributor to your business? Any concern maybe about the softness there?

I think the nature of the relationship we have with them is, as we've said in the past, relatively fixed and so I think we are somewhat insulated from any of the market challenges that they might have. We still work hard to bring new technology to new product areas and have the opportunity to continue to increase revenue there, but for the most part I would say we are fairly well protected from the market differences or the volume assumptions that happen throughout the year.

As Samsung may play a slightly smaller percentage-wise role, that may mean that we have opportunities either with new growing OEMs in China or other customers of ours that could actually be a benefit to us. Obviously, Android is still doing well overall. I think the total percentage that Android represents out of the smartphone pie has increased up to 85% over the last little bit, so it's doing very well.

Great. Thanks, guys, for the time. I certainly appreciate it.

Matthew Galinko, Sidoti.

Couple questions; first, on the Huawei deal. I think you mentioned it starts off as a variable, but just curious, given your preference for fixed license deals, is there a plan to at some point start sort of lock that in as a fixed or is it going to remain variable for the foreseeable future?

Matt, I think what's typical with our early engagements is our OEM partners launch some number of models, part of it is to test the market and influence other product managers within their companies. And over time, as those products gain success and the market really appreciates the value that haptics brings, then we move from those few models to many more models.

And at some point there's a tipping point where they are launching a large number of models, they are utilizing a wide range of different solutions from Immersion. At some point it makes sense to offer them, let's say, a packaged or bundled offering where we move to the fixed revenue in nature. So I would say this is following the path of LG and Samsung and many of our other licensees.

I don't know how fast the adoption will be, but I would assume that over the next year or two that we would begin having those types of discussions moving from a per-unit to a much larger fixed payment stream.

Got it. Then on the headcount growth; how do you feel about your numbers through the balance of the year and then looking into 2015?

Well, we have -- at the end of the quarter we were up to 125 employees, which is -- I think at the end of last year it was 112. We may see a similar growth pattern as we continue through the year and then next year as well. We obviously will be looking at how, for example, our content initiative is beginning to play out in the commercial phases as we make investment decisions, but generally we still see that and the China business as areas that we will be investing in at a similar pace.

Got you. All right, that's all from me. Thanks, guys.

(Operator Instructions) Larry Solomon, Capital Research.

Thank you. So if you sign the deal with LG would you expect that the guidance would go back up? In other words, was all of the miss from LG going from an ongoing customer to a customer in dispute?

Then, secondly, there's a lot of speculation that Apple is going to have haptics that are much more significant in the iPhone 6. And if that were to occur is that something you would recognize sort of the quarter after they begin shipping, or how might a relationship like that work?

Sure. Thanks, Larry, for the questions. In the LG case, I would say at this stage LG actually is a relatively large factor in the guidance low end to high end, so having them licensed at a fair price would be obviously good for us and would start to move us to the upper end.

Other things that affect the guidance would include things like just the normal volumes and success of our current customers and the timing of new licensees and their product launches. So a handful of things go into our thinking, but clearly the biggest swing factor would be the LG initiative.

With regards to Apple, we have heard rumors with Apple for a number of years and the hope or potential that they might adopt haptics, so I wouldn't be able to really predict whether those rumors are true or what impact it might have on our revenue. Simply, we are hopeful that they do adopt haptics, but we do think that haptics will improve their products and we would obviously welcome the chance to work with them.

The dispute with LG; is that them basically wanting to renegotiate at a lower rate and is that the main reason for the dispute? What are the major issues there?

I wouldn't characterize it as a dispute necessarily. It is -- as these negotiations proceed many times they get done and you are able to strike a fair balance of price and terms. In this particular case, the majority of the issue is around price, our expectations versus their expectations. There's a gap and that's why we continue to talk.

But I wouldn't characterize it as a dispute, even though we may choose not to license them and that may lead to other activities. So for now I think we're going to try hard to get them licensed.

Great, thanks.

John Fichthorn, Dialectic.

Couple quick questions. First, how many guys are you currently in active negotiations with outside of the LG renewal? What does your pipeline look like?

I would say across all of our verticals we are probably engaged with over 30 or more OEMs, and that includes auto companies and tier suppliers, gaming companies, and the whole mobile ecosystem. Not only OEMs but content providers, game developers, chat providers. So I would say probably well over 30.

How about specifically on the mobile side if you include China and globally?

Well, the advantage we have in China, we have a strong team. We have a great momentum right now with [Xao Mi] and now Huawei. A number of the other OEMs are using a solution through our chip partners and so they have already been exposed to Immersion software, but they are quite interested in working with advanced software products and tools.

So clearly the other guys on our list include ZTE, Lenovo, a whole host of Tier 2 guys, TCL, Zopo, (inaudible), and a number of others. So there's quite a number of Chinese companies.

What we are really enjoying is the fact that in China there is a very well-established content community and so that community includes people who are focused on chat applications, gaming applications, as well as media. We are seeing with the opportunity to bring these OEMs and this content together in China is a really big opportunity.

So with regard -- a similar question to the previous question that was asked. If you were to really land some deals -- you got the LG deal just for the sake of argument and maybe you landed some of your more optimistic negotiations, you still don't think you would be above the current high end of your range for the year?

And if not, since you did give that as your high end, is that due to more the way the deals are structured in that they are either, like the Huawei deal, tied to a scaled-up unit basis or due to the total size?

We haven't said we are limited to the upper end of the range at $56 million. Our hope is that we continue to have success, that we do renew the LG under favorable terms. There's always new cars that are in designs that could launch and be a part of the revenue stream. There is a number of OEMs that we think would be in a position to launch products and could generate substantial amount of revenue.

If you are talking about bluebird opportunities, there are things that could take us well above the $56 million. What we are trying to do is capture what we think is a reasonable moderate level of risk given the success or lack from some of the customers and the likelihood of renewing the LG license. That gives us some confidence we will be within that range, but we are hopeful and have expectations we could go well above that range.

John, I would add, too, that on some of the Chinese deals, just as an example, you are right that there are structural and timing elements that could impact the 2014 revenue but wouldn't be indicative of the overall value of the contract.

For example, when we do a per unit deal as opposed to a fixed deal, we are going to typically recognize a quarter in arrears. And if you think about the fact that we've got now a little less than half the year left in 2014, you are going to have a relatively smaller period of time to recognize revenue on a per unit deal.

Super. Just last question; on the media side, you talked about that fairly extensively. I know it's not meaningful on the revenue side, but you talked about possibly even a commercial launch this year and having maybe two mobile ad networks.

Do you think you could exit this year with $1 million, $5 million, $10 million run rate of revenue? Do you think there really is going to be revenue from that business by year-end that you can kind of show proof-of-concept? You talked about a lot of different opportunities there; it seems exciting. Could you help quantify it for us?

We are very excited and this is a space where, if we can prove the value in these pilot studies, the business could ramp quickly and could become very substantial. Our current expectation is that it goes at a slightly slower pace.

We don't anticipate a lot of revenue this year, but I do think it's really going to hinge on rolling out the pilot studies, proving through analytics that it makes a meaningful impact on buyer behavior. And then, if it does, these are people who -- that's how they make their money is monetizing the marketability of technology and solutions.

So it could ramp quickly, but at this stage we don't expect it to be more than $1 million in revenue this year. It would be substantially less, but it could ramp fast so we are hopeful and working hard to try to achieve those types of growth opportunities.

Super, thank you.

Jessica McHugh, Doherty & Company.

Thank you for taking my question. It seems like there are a lot more cars coming out with haptics. I know you mentioned a Lexus model for 2015, but could you maybe elaborate on what the design pipeline looks like for the rest of the year and then maybe more into 2015?

Jessica, thanks for the question. The adoption is growing substantially. We're actually starting to see a number of RFQs requesting haptics in the new interfaces and so we are actively involved with the OEMs themselves inspecting that capability and helping them in that process to request haptics as part of the solution.

We also work with the tier suppliers to make sure they are able to build the right capability. They are aware of all the advanced technology we have to offer, so we are working hard through OEMs and through the tiered suppliers. Active licensees that I think are having great success in the market include Alps, Continental, [Tokarika], so we are seeing them in front of a lot of design opportunities and time will tell how many they launch and in which years.

Great, thank you.

It appears there are no further questions at this time. I will turn the conference back over to management for any additional or closing comments.

Thank you all for being on the call with us today. As always, we look forward to updating you again on our next quarterly call. Good day.

That does conclude today's conference. Thank you all for your participation.