Immersion Corp (IMMR) 2015 Q2 法說會逐字稿

Good day, and welcome to the Immersion Corporation second-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarman from the Blueshirt Group. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us today on Immersion's second-quarter 2015 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 can 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 measures 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 Chief Executive Officer Vic Viegas. Vic?

Thanks, Jennifer, and thanks, everyone, for joining us this afternoon. The second quarter of 2015 was another quarter of record results for Immersion, generating $16.2 million in revenues and representing the 11th quarter in a row that we have delivered record quarterly revenues on a year-over-year basis. The quarter also marked an exciting milestone as we announced that over 3 billion devices have been sold using Immersion haptic technology. In addition, we continue to see growing market interest and adoption of haptic technology, illustrating how haptics is becoming a must-have technology for consumer devices.

In a few minutes, I'll discuss our recent business developments, but first I'll ask Paul to discuss the details of our second-quarter 2015 financials. Paul?

Thanks, Vic. As Vic mentioned, revenues for the June quarter were $16.2 million, up 37% from $11.8 million in the year-ago period and representing record quarterly royalty revenues for Immersion's second quarter. Revenues from royalties and licenses of $15.9 million set a similar record and were up 37% from royalty and license revenues of $11.6 million in the second quarter of 2014. Of these amounts, in the second quarter of 2015 variable royalties based on shipping volumes and per-unit prices totaled $6.3 million and fixed-payment license fees totaled $9.6 million. This compares to variable royalties of $3.9 million and fixed license fees of $7.7 million in the prior-year period.

While revenue mix per line of business fluctuates on a quarterly basis due to seasonality patterns, for the second quarter of 2015 a breakdown by line of business as a percentage of total revenues was as follows: 71% for mobility, 17% from gaming, 8% from auto, and 4% from medical. Mobility revenues were up 51% from the second quarter of 2014, principally due to new one-time license fees, higher ASPs and increased device sales by our customers. Additionally, this was the first quarter that we generated revenues as a result of the HTC settlement agreement. Automotive revenues were up 96% over the same quarter last year due to increased volume of vehicle sold and the timing of reporting from our customers. Medical revenues were down 21% year over year, primarily due to lower fixed licensing revenue, while gaming revenues were up 1% over the second quarter of 2014. Gross profit was $16.1 million, or 99% of revenues, compared to gross profit of $11.7 million in the second quarter of 2014.

Turning now to our operating expenses, excluding the cost of revenues total GAAP operating expenses were $13.9 million in the second quarter of 2015, compared to $11.6 million in the year-ago period. Operating expenses in the second quarter of 2015 included non-cash charges related to depreciation and amortization of $238,000 and stock-based compensation of $1.2 million. Of the non-cash charges, $349,000 were included in sales and marketing, $371,000 in R&D, and $744,000 in G&A. And of the stock-based compensation charges, $288,000 were included in sales and marketing, $264,000 in R&D, and $677,000 in G&A.

Looking now at our net results, net income for the quarter was $1.6 million, or $0.06 per diluted share, compared to $169,000, or $0.01 per diluted share, in the second quarter of 2014. Net income for the second quarter of 2015 includes a tax revision based on an effective tax rate of 30%.

In addition to normal GAAP metrics, we use 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 quarter was $2.8 million, or $0.10 per diluted share, compared to non-GAAP net income of $1.5 million, or $0.05 per diluted share, for the same period last year. Our cash portfolio, including cash and short-term investments, was $71.6 million as of June 30, 2015, up from $57.4 million exiting 2014. The increase was driven primarily by $16.7 million in cash generated from operations during the six months ended June 30, 2015.

During the June quarter we did not buy back stock under our authorized stock repurchase program. We will continue to monitor our cash balance and stock price as well as market conditions and strategic factors as we consider any future buyback activity.

Based on our year-to-date performance and current outlook, we are narrowing our revenue guidance to the high end of the previous range. We now anticipate between $58 million and $60 million in 2015 revenues, an increase of 10% to 13% over 2014.

Now that Immersion has achieved consistent profitability, we've started taking certain steps to reorganize our international operations to better serve our global customer base and more accurately reflect the geographic distribution of our worldwide revenue and income. We expect to complete the reorganization process by the end of 2015. After an initial transition period, and as we grow our revenues and realize the benefits of our scalable business model, this change in corporate structure should also result in a lower percentage of our income being subject to US corporate taxation.

We do not anticipate paying material cash taxes as a result of this reorganization, but do expect that our GAAP tax rate will fluctuate significantly during an initial transition period. These non-cash fluctuations will be driven by several factors, including the impact of differing statutory tax rates, differences between where we generate revenues and where we incur expenses, and the impact of US income resulting from the transfer of certain foreign licensing rights to international affiliates.

More specifically, we expect the following. First, that our third-quarter 2015 tax provision will include a one-time, non-cash GAAP tax expense of approximately $1.5 million. Second, over the next few years our tax provision will include approximately $2 million per year in non-cash transitional tax expense related to the transfer of certain foreign licensing rights to international affiliates. Finally, commencing in the fourth quarter of 2015 we expect that the tax rate on the majority of our foreign-sourced income will decrease to the low single digits, while our US source income will continue to be taxed at approximately the US statutory rate of 35%.

While the net impact of these factors will vary from period to period, we generally expect that our effective tax rate will decrease as we generate higher levels of profitability from our scalable licensing model. All of these assumptions are based on no material change in tax laws or rates.

With this in mind and assuming an effective tax rate of up to 78% for 2015 as a result of transitional fluctuations, we continue to expect non-GAAP net income for the year to be in the range of $4 million to $8 million, resulting in non-GAAP earnings per share of $0.13 to $0.27, assuming, for calculation purposes only, 30 million diluted shares outstanding.

We also continue to believe that our GAAP operating expenses will be between $13 million and $14 million per quarter with relatively little fluctuation between quarters, and that stock-based compensation will be between $1.2 million and $1.4 million per quarter during the remainder of 2015.

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

Thanks, Paul. Q2 was an exciting quarter for Immersion, as we reached a significant milestone with over 3 million devices having been sold into the marketplace using Immersion technology. This milestone not only illustrates how critical the sense of touch is to today's devices and interfaces, but also shows how companies are investing in haptics for more advanced user experiences. As we look forward over the next few years, we see three key market trends driving even greater adoption of haptics in consumer devices.

The first is emotional communication. As we expand our modes of communicating, we move away from talking in person and miss the intuition and connection a sense of touch brings to our communications. Haptics will be used to create a sense of presence and a unique tactile language between users, creating more personal and meaningful digital interactions.

The second market trend is immersive entertainment. As we consume shorter, richer media on our personal devices, haptics can add value by amplifying action, enhancing user engagement and creating more immersive mobile movies, ads, games and social media experiences. This market trend extends beyond traditional mobile devices.

As we look at virtual reality being used to create experiences that remove users from the world around them and immerse them in a virtual environment, haptics is critical to making those experiences more believable. At this year's F8 conference, Oculus chief scientist Michael Abrash identified haptics as one of the key technologies for immersive virtual reality experiences.

Finally, the third trend is the connected world. Gartner has forecasted there will be 25 billion connected things online by 2020. This includes your mobile phones and tablets but also your car, wearables, smart home appliances, television -- the list goes on and on. With so many things online, the risk for information overload and distraction is real. This is something we already see in today's smart watches. Users can experience hundreds of notifications in a day, and the risk is that we are overwhelmed or annoyed and turn everything off, undermining one of the purposes of having a smart watch in the first place.

The importance of haptics in this connected world is that touch is instinctive. It doesn't require active thinking, so it's a unique channel to communicate information without distracting or overwhelming the users. Haptics can provide a system for prioritizing, recognizing and processing information, increasing user confidence and improving safety by reducing distraction.

An exciting example of this that is beginning to take hold is augmented reality. Augmented reality is usually thought of as a visual overlay of the world, something like Google Glass, providing visual information over what you see in front of you. But haptics offers another form of augmented reality by providing touch information through wearables. Haptic instructions like turn-by-turn directions provided through a wearable can augment the user's experience without causing distraction. And as haptic capabilities of the Internet of Things and wearable devices increase, there will be greater end-user value around contextualized haptics.

While these market trends are driving great innovations in technology today, our researchers, engineers and design teams have been focusing on the underlying issues for many years, and we have the IT solutions and know-how to bring these haptic capabilities to market as the technology matures. It is exciting for us to see these trends take shape, and we are working with partners to bring some of these new experiences to market.

During the quarter, we saw an increasing flow of news from developers, content creators and OEMs bringing new haptic experiences to market that reflect the trends that I just discussed.

During the last conference call, we talked about the launch of the Google Games You Can Feel promotion on the Android play store, with top-tier developers like Rovio and Ubisoft using immersion gaming STK to incorporate haptics into popular Android game titles. During the quarter, we continued our mobile gaming initiative, launching our TouchSense Engage solution for games in China. As a result of the high-profile Games You Can Feel promotion and the availability of our tools in China, we started working with a greater number of content creators who are interested in bringing tactile effects to their games.

Most recently, iDreamSky, the largest independent game developer in China, launched a haptic version of Fruit Ninja, a hugely popular mobile game which has been downloaded well over 500 million times. Games using Immersion's gaming SDK have now been downloaded over 300 million times worldwide.

As we have brought on new game developers, we've continued to receive positive analytic data showing some key results, such as users who play games with haptics play longer, users of games with haptics play more rounds and advance at a faster rate, and users are more willing to spend game currency to when tactile awards. This type of market validation backed by analytic data is helping us strengthen our value proposition by quantifying the value of haptics for mobile game developers.

With regards to our mobile video initiative, last quarter we discussed that LeTV, a leading Chinese entertainment company, was launching a pilot program with tactile video on their LeTV video application. I'm happy to announce that during the quarter LeTV expanded their pilot program with Immersion to include more haptically enhanced content. Tactile video available through the app now includes the previously announced Expendables 3 as well as the new James Bond trailer, Spectre, and Hotel Transylvania 2. We are pleased to say that the rollout of the initial haptic content has gone smoothly, and LeTV is adding additional videos as part of their pilot program.

We also saw continued progress with mobile OEMs. During the quarter Immersion announced a multi-year license with Kyocera, a leading mobile phone manufacturer from Japan. Fujitsu renewed its license agreement with Immersion and launched the Arrows NX F-04G handset. And Gionee, a mobile phone manufacturer out of China, launched their first device, the E8, using Immersion TouchSense technology.

Beyond mobile, we were also pleased to see renewed interest in haptics from the next-generation gaming market which was reflected in excitement and industry buzz about haptics at E3, the industry-leading gaming conference. As virtual reality technologies are beginning to enter the market, the need for compelling haptic interfaces is clear, as evidenced by the announcement of the Oculus Rift using the Microsoft Xbox controller, which uses Immersion haptics. We anticipate the interfaces for virtual reality experiences will continue to evolve, and Immersion is developing exciting new technologies to create a high-fidelity tactile experience for both game controllers and virtual reality environments. We have been demonstrating those technologies to select partners, and the industry is clearly eager for more innovation in haptics.

Finally, while we settled a patent infringement case with HTC last quarter, we reserve the right to appeal the court's decision to invalidate three of our patents. We filed our notice of appeal, and under the current schedule the parties will file their briefs in late summer and early fall. We don't expect to receive a final decision until sometime in 2016.

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

(Operator Instructions) Charlie Anderson, Dougherty & Company.

Thanks for taking my question, and congrats on the solid results.

Thanks, Charlie.

Thank you. I wanted to start with the mobile. It was really strong in the quarter. Was there a seasonal impact? Was there any sort of one-time licensing from a new customer, or does that feel like a good run rate going forward?

I would say that we anticipated a good strong quarter, and it's based on the licensing activity that we had going on for some time now. I think you can see through the guidance that we expect the first half to be stronger than the back half, and that -- I think that is consistent, as it has been in the past.

So I wouldn't necessarily look at the Q2 as a fourth-quarter run rate, but it was a strong quarter and so we are still looking at a good, solid Q3/Q4. The quarter did benefit from continued increasing ASPs, increased volume of devices shipped with our technology, and there was some additional revenue booked in the quarter tied to a fixed-license contract that did benefit the quarter. So all in all, it was a great quarter and, I think, consistent with what our expectations were.

Is there anything in there in the revenue that you would describe as one-time in nature, Vic?

You know, there's always timing issues, Charlie. So depending on the timing of royalty reports, compliance activities, deliverables, there's always some amount of unique activity in a quarter. We did benefit in this quarter, I think, to the tune of a couple million dollars from a license arrangement that we were able to record in the quarter, so there was some benefit from that. But overall, it was across-the-board increased growth in most of our sectors. I think everything but medical was up and contributed to a great quarter.

Great. And then class one for me -- you are sitting on a very nice balance sheet, no buyback. Just wondered if you could update us on use of cash and how you look at the buybacks since you have authorization.

Hi, Charlie. It's Paul. We are -- we still feel like our stock price is very favorably -- very favorable for a buyback in general. But we are happy to have a strong balance sheet. We were looking at a variety of different things. We do tend to get a lot of cash in the beginning of the year from some of our fixed-payment agreements and then use some of that as the year goes on. We see a lot of different opportunities coming up.

So right now, we're not actively in the market for our shares, but we may well get back into the market at some point in the future. And as a licensing company, again, it's nice to have a strong balance sheet both to deal with any kind of licensing activities or even litigation that might be necessary, and there is a signal to prevent it from being necessary in the first place.

Great. Thank you so much.

Thanks, Charlie.

Tony Stoss.

Jeanette (inaudible) in for Tony Stoss.

Hi, Jeanette.

A couple of questions from me. Could you guys give a little more color on how you see revenue growth from new customers versus growth from existing customers? Let's say, both near-term six to 12 months out and then looking a bit further out here?

Sure. Jeanette, we have active engagement with many of the leading OEMs that are currently unlicensed, and those activities are all the way from demoing our capability to porting our technology to platforms to enable them to launch products, all the way to business negotiations and sharing of technical information. So there's a lot of activity ongoing to bring in new OEMs.

I would say the bulk of our revenues, we look out, and the basis for our guidance is really primarily around existing customers and the confidence we have in their existing products for their new design launches that we anticipate over the next few quarters. So given our visibility, the bulk of the revenue that we expect over the next few quarters are based on mostly existing customers and launching of current products as well as new products.

And I would add that as we look further out we are really pleased that there are so many different opportunities for haptics. It seems like they are gelling and coming to market. So if you are looking longer-term, then we might start seeing results from our content initiative. There are all kinds of new types of products -- wearables and others -- that are coming in and new parties who are coming to the table with haptic implementations that offer opportunities for us. So I think there's going to be a good opportunity for us to grow the breadth of our licensing platform over time as well.

Perfect. Thanks. And just as a follow-up, could you give us a sense maybe on which segments in the overall mobility market you see the most opportunities to monetize your patent IP and TouchSense software?

I think it's clearly the smart phone sector is the biggest mobile opportunity, and we don't really distinguish between smart phones and tablets. We don't currently anticipate high volume of wearable devices, but we are very excited by the promise of the wearables not only as a platform that really benefits greatly from haptics but a new way of delivering rich information. So we are excited by that as a platform. But I don't look to that as a near-term, high-volume revenue generator.

In terms of overall revenue and the impact it has on our P&L, clearly Samsung continues to be a large customer of ours. I believe in the quarter they were somewhere in the neighborhood of around 30% as a customer, so they continue to be a significant revenue source. LG is also an important customer in terms of revenue. And then from there, we see tremendous opportunities with the new relationships we have in China -- Xiaomi, Huawei and a number of others.

So, geographically there are a couple of key areas that seem to be having real success in the marketplace, and we are benefiting because they are active and satisfied customers of the Immersion TouchSense solution.

Perfect. That's all for me. Thanks, guys.

James Medvedev, Cowan.

Good afternoon, gentlemen, and thanks for taking my questions.

You're welcome, James.

Hi. So the first question I have has to do with the second-half revenue profile and trajectory. To hit the midpoint of guidance, it looks like about 55% of revenue took place in the first half. And with the greater than impact -- if you're above consensus performance in Q2, I guess the question would be would we see the normal seasonal trend of Q3 higher than Q2 and then Q4 higher than Q3? Or how should we think about that?

I guess if we took out the $2 million that you mentioned and think about $14.24 million for Q2, how should we think about the trajectory for Q3 and Q4? Sorry, long-winded question.

No, James, I think it's a good question. We usually have the seasonal benefit of Q1 which picks up the shipping volume of the previous year's fourth quarter. We had that this year. We also signaled last quarter that we saw a fairly strong Q2. We had enough visibility to see that our royalty reports were coming in at or above our forecast that we were looking positive in terms of new licensees. So we felt like we had a somewhat unusual Q2 that would be stronger than it has seasonally been in the past.

Now, with that said, I think what we are saying is that the back half of the year is usually seasonally slower than the first half. We continue to see that. And I think if you do the math you are looking at something in the neighborhood of roughly $14 million a quarter in the third and fourth quarter. And we feel pretty confident, comfortable that that is the trajectory which, again, reflects the typical early-year seasonality and then lower levels in Q3 and Q4.

The only thing a bit unusual this year is Q2 was just a really strong quarter. And, again, it was for multiple reasons, but across-the-board solid in most areas.

Okay. And then my other -- my follow-up question is on the tax rates. I wasn't clear exactly on are you guiding us to use a 78% tax rate for the second half of the year?

There are a number of different factors which could be moving during this interim period as we transition into the new structure. But I do think it would be appropriate to use a higher tax rate than the statutory rate of 35% that we suggested in the past. And for modeling purposes right now, I do think also that the high 70%s might be a good place to look at it. That's what we are basing our annual guidance as far as non-GAAP net income right now. But, again, there could be some changes as we actually execute during the next couple of quarters and complete the transition into this new structure.

And then, James, I would point you to the data that Paul gave earlier in the script where we see a Q3 provision that will be higher than normal, and you will see a couple million dollars a year, roughly $500,000 a quarter, added to the tax provision. So I think if you do that calculation you will end up somewhere in the high 70% provision level.

And then looking into next year -- the same question looking into next year, I guess this transition period runs for how long?

That, too, depends a bit on some contemplated changes in the rules relating to these kinds of reorganizations. It could be for as long as five years, or it could end as early as 2017. But for the next couple of years at least, I would look at the $2 million as an additional tax for adding to our tax provision on an annual basis. The amount per quarter will vary a bit depending on the performance -- the relative performance in the particular quarter. But that will be on top of whatever the blended effective tax rate would otherwise be.

So you'll see to two trends going on. One is going to be the decrease on average of our tax rate due to the tax planning, due to the fact that we are going to have more tax at lower rates internationally and less tax of the high 35% rate in the US. And that will be a counterbalance just during the transitional period by this additional $2 million that we'll have for the next 1.5 to five years.

Now, I do want, too, that we have lots of deferred tax assets, and we are not expecting any of this to be cash tax.

Okay. And just -- sorry to beat a dead horse on this, but will you be backing out that $2 million for non-GAAP purposes for the non-GAAP (inaudible) results?

We weren't planning on doing that. We will have a -- obviously by the end of the year we'll have a little bit of a clearer picture of where we've ended up this year. And to the extent that more disclosure or even a different approach is appropriate, we will look at that. But at this point, no.

So James, I think we want to stick to the non-GAAP being a GAAP measure after tax adjusted for the stock-based compensation. But I think that, as Paul said, as we move forward we will be giving more color each quarter because it will depend on revenue and profit trends. But I think overall what you are seeing is a pretty efficient tax planning strategy and one that we will provide you more information as we know more about the results.

I think we said, for example, to give you the specific amount of the, call it, $2 million per year that is allocated to the particular quarter when we get the results.

Okay. And just finally on that, the underlying tax rate, where do you see that? What's the target for that a couple of years out?

Well, it depends a good bit on how the profile of our revenue geographically evolves over time. Right now, a large amount of our revenue comes from overseas -- Korea, in particular; we are looking at growing in China as well. And that international income should be subject to an effective tax rate in the low single digits, whereas our US-based revenue will be more like it currently is, more like 35%.

So it will depend on the breakdown. Right now, it's more than 50%, I would say, by some amount that is coming from internationally that would be subject to this much lower rate.

To the extent, however, we started generating a lot of revenue in the US because of customer relationships here -- because perhaps the content business has a number of ad tech clients in the US, and that would tend to shift it back toward the 35% rate. But, overall, I would expect the run rate to come down. If it were today, and barring the transitional effects, it would come down to less than 17%.

Okay. Well, thank you. That's all very helpful. Thanks.

David Williams, Ascendiant.

Hi, good afternoon, and congratulations on the quarter.

Thanks, David.

I wanted to touch on the ASP growth that you talked about. And just kind of curious, is that maybe more of a blended ASP if you look at maybe new sign-ups during the quarter? Are you talking about your new sign-ups actually being better ASPs? Can you kind of help me, I guess, to understand how that ASP -- what the magnitude is and then maybe how you are getting there? What you are able to move?

Sure. So it's from multiple, different paths. One is new licensees. We are quoting higher prices as we gain a bigger footprint in the marketplace and as our IP is being validated in court proceedings and new license agreements. So new agreements are typically getting signed at higher prices.

Then we have a number of existing licensees where they come up for renewal, and in the renewal process we typically offer more value, maybe more rights, access to our tools, more investment on the content side. And so as a result we are typically able to raise prices in the renewal negotiation.

And then you have within any particular agreement, you may have revenue accelerators, increases per year or increases per unit that you implement throughout the contract.

Great. Thanks for that. And then secondly, I wanted to get your thoughts on the health of the Chinese handset market. It seems like some of the component vendors are seeing a slowdown there, at least maybe a pause and some softness. Wanted to get your thoughts, just thinking about your revenue split between the fixed and the variable. And then it looks like we are also seeing some share shift going on -- maybe Huawei picking up some, Samsung maybe coming down a bit. And just thinking about the backdrop of your fixed versus variable, can you talk about how you see that share shift and then obviously the health of the Chinese market as well?

Yes, I'll let Paul talk about the split between variable and fixed. But today the trends are moving in the favor of Immersion. Our per-unit royalties tend to be -- those customers are increasing their volumes over across the entire group of customers. There's a greater interest in haptics from Immersion, and so we are seeing more design wins with TouchSense. We are seeing more implementation of haptic capability in new-use cases. We are seeing broader adoption on the content side, whether it's games or in advertisement or video. All of these are creating pull and energy and excitement by our customers that use us in a higher number of their products.

So I do believe I've seen the same statistics probably that you have, that the market is flat to shrinking in China and in some other territories. But in general, I think the top end of the market for us is still growing. Still robust. There still seems to be a strong appetite for growing the adoption of more haptics in their devices to stay competitive and take advantage of this richer content that's now been enabled and out there.

Yes, and, David, I would add to that. As far as the split between fixed and variable, we've got some customers in China who are in fixed structures and some who have variable relationships. And we generally will look to maximize the benefit to us and to the customer in doing that. So in other words, we can -- we are flexible about that. We will do either structure if all of the pieces make sense.

We've got a renewal coming up with Xiaomi at the end of September. They are on a fixed basis right now. Were we to move to a variable relationship with them -- of course, they are shipping a lot more phones than they were when we signed the fixed deal. But comparably, if we were going to do a fixed structure with them as the renewal that would be based on their larger volume. So we should capture similar economics overall regardless of structure.

Other OEMs like Huawei are doing very well. I think you mentioned Huawei. They are on track to sell over 100 million phones this year. And so, to the extent that we are building a relationship with them, obtaining more design wins for a particular product, that should really benefit us quite a bit. So we were excited by China. We are seeing it generally growing, sometimes at the expense of other markets. And whether we end up with fixed or variable relationships, we think it should become an increasingly important part of our business.

Thanks. That's all for me, guys. Thanks.

Thanks, David.

Mike Crawford, B. Riley & Co.

Just to continue on that theme with Xiaomi and Huawei. Huawei clearly is benefiting you, giving their increasing units. And so the royalties -- the variable royalties that you recognize from Huawei in the September quarter, is that for handsets that shipped in the June quarter?

That's correct. Although, do keep in mind that we are not in large numbers of different models at this point. We started out with them in their Honor 6 phone, and from there we've been working to build the base. But it's an ongoing process, much the way we had with LG and Samsung some years ago. So we are seeing their phones that we are in selling very well, but it is not necessarily matching the overall growth profile of Huawei one-for-one.

Okay. And then with Xiaomi, that -- as you mentioned, that license ends at the end of September. So, given your guidance this year of a ceiling of $60 million of revenue for the year, does that assume that Xiaomi continues to a slightly higher rate, as you were just inclined in your earlier discussion of either entering into a variable-rate contract or a higher fixed-rate contract? Or are you being more conservative in your guidance in assuming that Xiaomi goes away?

I think the range that we provided -- $58 million to $60 million -- captures kind of the risk and the opportunity that we have with Xiaomi. It will only have an incremental difference for a short period of time, a few months. And so we will go into that renegotiation discussion as we always do, trying to maximize the value for Immersion. But the range that we provided, we think, captures the risk and the reward of capturing more from Xiaomi.

And so just to be clear, whatever that company ships in the September quarter, that will or won't affect December quarter revenues? Is that -- do you need a new license in place to recognize revenue in December, or was it actually in March where you would need a new license in place?

We have a fixed relationship right now. So what they ship in the September quarter, we will recognize under that fixed relationship. What happens to us in Q4 is that if we have a fixed agreement we would presumably, all things being equal, start picking up at the new fixed rate for that fourth quarter. I think what you are planning to is if we transitioned to a per-unit, you would actually see a lag time and you wouldn't see revenue from the customer in Q4 because the units that they would have shipped in that quarter wouldn't be reported to us until Q1.

Okay. Thank you. That's helpful. And then I think Vic, you mentioned that you are in active discussions with all unlicensed OEMs -- which the big one, we would think, is Apple. Apple, they're selling a watch that appears to use haptic effects to create things. Is this the situation where you are waiting for more intense haptics, more full-featured haptics to come in a subsequent handset from Apple? Or do you think we could see some kind of agreement between the two parties sooner?

Well, I don't know that there's any update I can provide you on the Apple front. I think things are as they have been in the past. They are beginning to invest in haptics. They've included it in a number of products, and we have a strategy around that engagement. And so I think when we have something to share we will be able to share with you. At this stage I'd say our current position is similar to what it's been in the past.

Okay. Thank you very much.

Mark McMahon, LPL Financial.

Congratulations on a great quarter, guys.

Thanks, Mark.

So just a quick question -- it had to do with the virtual reality handset that you mentioned earlier. And you did bring up the fact that it looks like they are going to be using the Xbox controller. Could you speak to the licensing agreement that you have with Microsoft and whether or not they are providing that to Rift without you having any part of the negotiations or say-so? How does that exactly work?

Sure. Microsoft is a unique agreement that we have. We provided them with a royalty-free license that's perpetual. So I would not anticipate generating any more revenue from Microsoft than we have already reported years ago. That license covers Microsoft-branded products. And so to the extent that you have products that include our technology or IP that are not Microsoft branded, then we would expect those to become royalty bearing.

So we would think that other OEMs that launch wearables or game controllers or other similar type devices, of which there's a large ecosystem opportunity for us, we would expect all those to be royalty bearing.

But specifically with the Oculus Rift, Facebook, I guess from what you are saying, is going to market this as an Xbox-branded controller that's compatible. And so thereby, it's not a Facebook product that you could go after them for.

Well, I don't know if it's what the product is going to ultimately be. If it's compatible, that doesn't affect the need for a license. So this would have to be a product that was branded by Microsoft in order for it to be covered under the existing Microsoft agreement. So if there were controllers produced by other companies that were not Microsoft branded, then they would be available for licensing and we would pursue licensing discussions with any of those companies.

Okay. So just to be absolutely clear, there is no discussions with you in regards to Oculus Rift at this point?

I wouldn't say that there are no discussions. I'm simply saying that if every controller is branded and sold under the Microsoft brand, then it may not be a great revenue opportunity for us. But to the extent that Microsoft is producing and selling Microsoft-branded controllers in conjunction with the Oculus Rift, that would not be a revenue opportunity for us.

But to the extent that there were private-labeled products or products built by other companies like Logitech or Sony or any of the other gaming companies or OEMs that produce wearables, all of those, regardless of if they are used on the Oculus Rift or built around some standard, if they are not Microsoft branded then they would not fall under the Microsoft agreement and therefore they would be an opportunity for us to license to that company.

Okay. Thanks. Thanks for the clarification.

Okay, Mark.

At this time it appears there are no further questions in the queue. I would like to turn the call back over to management for any additional or closing remarks.

Well, thank you for being on the call with us today. And as always, we look forward to continuing to update you again on our next quarterly call. With that, have a good day, please.

That concludes today's presentation. Thank you for your participation.