Immersion Corp (IMMR) 2016 Q1 法說會逐字稿

Good day, everyone.

And welcome to the Immersion Corporation first quarter 2016 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jennifer Jarman.

Please go ahead, ma'am.

Thank you, Shannon.

Good afternoon, and thank you for joining us today on Immersion's first quarter 2016 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 is Vic Viegas, President and CEO and Interim CFO.

During this call, we may make forward-looking statements which may include projected financial results or operating metrics, business strategies, litigation, 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 list of the risks that could cause this, please see our 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'll turn the call over to CEO Vic Viegas.

Vic?

Thanks, Jennifer.

And thanks, everyone, for joining us this afternoon.

I am pleased with the results we achieved in the March quarter of 2016 in an otherwise challenging environment.

Despite the lack of any revenue from Samsung in the first quarter, and our announcement earlier today about the filing of a second patent infringement complaint against Apple, AT&T and AT&T Mobility -- both of which I will address in a few minutes -- our business continues to be healthy, with our revenue and bottom-line results in line with our previously articulated guidance.

While we remain diligent in protecting and preserving our intellectual property, our business and our ecosystem of customers and partners, we also continue to light the way for new and expanded opportunities for haptics.

During the quarter, we continued to see momentum in our business, including the launch of new mobile devices featuring our TouchSense software, multiple haptically enabled advertising campaign wins, and the addition of new content gaming partners, as we continue to expand our ever-growing haptic ecosystem.

In a few minutes, I will discuss our recent business developments and outlook.

But first, I'll discuss the details of our first quarter 2016 financial results.

Revenues for the March quarter were $13.6 million, down 16% from revenues of $16.3 million in the year-ago period.

Revenues from royalties and licenses of $13.4 million were down 16% from royalty and license revenues of $16 million in the first quarter of 2015.

Of these amounts, in the first quarter of 2016, variable royalties based on shipping volumes and per-unit prices totaled $8.5 million, and fixed-payment license fees totaled $4.9 million.

This compares to variable royalties of $8.6 million and fixed license fees of $7.4 million in the prior-year period.

Excluding Samsung from the comparison, revenues would have grown 21% over the same quarter a year ago.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2016, a breakdown by line of business as a percentage of total revenues was as follows -- 28% from mobility, 33% from gaming, 7% from auto, and 32% from medical.

Looking at year-over-year trends -- mobility revenues were down 60% from the first quarter of 2015, principally due to the nonrenewal of our Samsung contract.

Gaming revenues were up 11% due to increased sales of haptic gaming peripheral customers.

Automotive revenues were up 9%, driven by increased customer sales.

Medical revenues were up 135%, primarily due to a nonrecurring license fee.

Gross profit was $13.6 million or 99% of revenues, compared to gross profit of $16.2 million in the first quarter of 2015.

Turning now to our operating expenses -- excluding cost of revenues, total GAAP operating expenses were $18.2 million in the first quarter of 2016, compared to $16.2 million in the year-ago period, with a significant contributing portion of the increase driven by higher legal expense primarily related to our recent litigation filings against Apple and Samsung.

Operating expenses in the first quarter of 2016 included noncash charges related to depreciation and amortization, up $227,000; and stock-based compensation of $2.3 million.

Of the noncash charges, $289,000 were included in sales and marketing, $625,000 in research and development, and $1.6 million in G&A expense.

And of the stock-based compensation charges, $228,000 were included in sales and marketing, $526,000 in R&D, and $1.6 million in G&A.

Our headcount decreased from 156 employees at the end of December 2015 to 130 employees at the end of March 2016.

The decrease reflects a rebalancing of the organization to align our employee skillsets with our current operational and strategic outlook, including our focus on content initiatives and cloud-based design.

We continue to hire in marketing, sales and engineering to bring the right talent to our organization.

We also began our search for a new CFO to replace Paul Norris, who announced his retirement during our last conference call.

We have engaged an executive search firm and are now in the process of sourcing candidates.

In the meantime, I have taken up the post as interim CFO to ensure that our business continues to move forward without disruption.

Looking now at our net results -- net loss for the first quarter of 2016 was $2.7 million or $0.09 per basic and diluted share, compared to net loss of $59,000 or $0.00 per basic and diluted share in the first quarter of 2015.

Net loss for the first quarter of 2016 includes a tax benefit of $1.7 million that includes certain noncash tax benefits and expenses associated with our international tax structure.

In addition to normal GAAP metrics, we use non-GAAP net income loss and non-GAAP earnings and loss per share to track our business performance.

We define non-GAAP net income or loss as GAAP net income or loss adjusted to reflect an expected long-term effective tax rate of 19%, less stock-based compensation.

We define non-GAAP earnings or loss per share as non-GAAP net income or loss per share.

Non-GAAP net loss in the March 2016 quarter was $1.2 million or $0.04 per basic and diluted share, compared to non-GAAP net income of $1.7 million or $0.06 per diluted share in the same period last year.

Based on our current outlook, we are making no changes to our financial guidance and continue to expect 2016 revenues to be in the range of $55 million to $65 million, generating bottom-line results of between a non-GAAP net loss of $8 million and non-GAAP net income of $3 million.

Our cash portfolio including cash and short-term investments was $60.8 million as of March 31st, 2016, down from $64.9 million exiting 2015.

The decrease was driven primarily by cash used for operations, along with the timing of receivables.

Turning now to the business -- we're excited about the continued momentum we see in our OEM and content businesses but remain focused and serious about protecting our valuable technologies, including taking legal action as necessary to protect the interests of our business, employees, customers, partners and stockholders.

In that context, we announced earlier today that we filed a second complaint for patent infringement against Apple, AT&T and AT&T Mobility with the US International Trade Commission, alleging that the Apple iPhone 6s, Apple iPhone 6s Plus, the MacBook and the MacBook Pro with Retina Display, infringed certain Immersion patents, including patents covering pressure-related haptics.

We have over 2,200 issued and pending patents worldwide.

And we believe this is an important and appropriate step to protect and preserve our intellectual property, our business, and the ecosystem that we have built around haptic technologies.

We also filed a corresponding patent infringement complaint in the US District Court for the District of Delaware.

The Immersion patents included in the complaints are listed in the press release that we issued earlier today.

Similar to our last complaint, we are requesting that the ITC Institute and Investigation into the importation of Apple devices in the US by Apple, AT&T and AT&T Mobility that infringe our patents, and issue an exclusion order prohibiting the entry into the US of these infringing devices.

We expect that this action will not slow the progress of our first action against Apple and AT&T Mobility, but will follow a similar timeline.

We are also seeking damages in the corresponding complaint filed with US District Court for the District of Delaware.

The time for a decision in this case will depend upon the schedule set by the District Court and whether a request is made for a stay pending the outcome of the ITC proceeding.

We are pleased with the progress of our first action against Apple and AT&T Mobility.

The ITC instituted the investigation on March 14th, 2016.

And we have a scheduled claim construction hearing on July 20th, 2016; a hearing before the ITC on November 14th through the 18th, 2016; an initial determination date of February 17th, 2017; and a target date for completion of the investigation of June 19th, 2017.

The District Court action has been stayed until the determination of the ITC becomes final.

We continue to believe that the merits of both of our cases are strong and substantial.

On a related matter -- on March 29th, 2016, a petition for inter partes review, or IPR, challenging the validity of one of the patents asserted in our first action against Apple and AT&T Mobility was filed with the Patent Trial and Appeal Board, or PTAB, at the US PTO by an individual unrelated to either Apple or AT&T.

Our preliminary response is due on June 27th, 2016.

The PTAB will decide whether to institute the IPR no later than three months from when we submit our response.

We plan to vigorously defend the validity of our patent.

Turning next to Samsung -- Samsung remains unlicensed as of the end of 2015.

In a now-expired agreement with Samsung, Samsung had the right to purchase wind-down rights prior to the expiration of the contract but did not do so.

They continue to ship products that were licensed under the agreement without a wind-down right, and we have filed an arbitration proceeding against them with the International Chamber of Commerce seeking damages.

In addition, Samsung remains unlicensed for any new products launched after the end of 2015.

Any future license with Samsung is dependent on resolving the current issues in arbitration.

In our appeal of the invalidity ruling affecting three of our basic haptics patents and the patent infringement litigation brought by us against HTC, the Federal Circuit will hear oral arguments on this case tomorrow.

The USPTO filed an amicus brief in support of our position and will participate in the oral argument.

We continue to feel confident that the invalidity ruling will be overturned and that the three basic haptics patents will return to our portfolio.

Finally, I'm happy to report that on January 20th, 2016, we received a final award in an arbitration proceeding that we initiated against Sony in October of 2014 to resolve a dispute around whether the Sony DualShock 4 wireless controller products made, sold or distributed in Japan are covered by one of our Japanese patents and therefore are royalty-bearing products under our license with Sony.

The arbitrator ruled that the controllers infringe our patent.

On April 26th, 2016, we received a District Court order granting our petition to confirm the award and denying Sony's motion to vacate the award.

We see this win as a proof point that our gaming intellectual property portfolio remains relevant despite the expiration of some of our earlier gaming patents.

While we remain committed to protecting and preserving our intellectual property, we are excited by the prospects for new and expanded opportunities for haptics.

During the first quarter, we continued to seek momentum in our OEM business with the launch of new phones by Kyocera and Meizu featuring our TouchSense technology.

In addition, we continued to see heightened interest from OEMs in using pressure haptics to differentiate themselves in the market.

We have a deep and rich background around pressure haptics, including our work with Fujitsu in launching the first pressure-sensitive phone with haptics.

Since then, we've developed a number of new use cases haptics with pressure to intuitively navigate through the user interface on a mobile device and to create interactive experiences that simulate a change in pressure in touching the screen.

We continue to engage with OEMs across various markets who are interested in adopting this technology.

We also saw good traction in our content business during the quarter, with the delivery of eight haptically enabled advertising campaigns spanning multiple industries including consumer brands, automotive and entertainment, through the Opera MediaWorks ad network and TF1, the largest broadcast network channel in France.

This is a dramatic increase from last year, when we delivered a total of eight campaigns in all of 2015.

We also saw great progress with content gaming partners including Tencent and CRI Middleware.

Tencent, one of the largest internet companies in China, launched Kowloon Wars, featuring TouchSense tactile effects.

CRI, a leading provider and audio and video solutions for the gaming industry in Japan, integrated our TouchSense SDK into its mobile game developer platform.

As adoption of our technology by content creators and distributors accelerates, we are exploring monetization opportunities with these partners.

We continue to invest in expanding our content business ecosystem and developing tools and technology to allow for the easy implementation of haptics and the creation and distribution of content.

In addition, as more haptically enabled content becomes available in the marketplace, we expect to be well positioned to demonstrate the playback value of this content to our OEM customers.

Today, thanks largely to our groundbreaking innovation and evangelism, the use of haptics across multiple markets is increasing at lightning speed.

Not only do the mobile, gaming and automotive markets consider haptics to be a must-have feature to bring realism to touchscreen interfaces, but most recently, virtual reality has become the next market to demand haptics as an integral part of its platform.

With our worldwide portfolio of approximately 2,200 issued and pending patents and our ability to bring targeted solutions to the marketplace, we are well positioned to help this fledgling industry realize its full potential by incorporating the sense of touch in the user's experience to suspend a user's disbelief and make the virtual world a reality.

In closing, I want to reiterate that we are excited about our prospects as momentum for haptics across multiple markets continues to grow.

We remain in a strong financial position and are confident in our ability to execute effectively during the remainder of the year.

Our success depends upon remaining fiscally responsible and investing wisely in our business growth, preserving our capital to enforce our intellectual property when necessary.

With a strong team in place, a broad and growing portfolio of IT and products, and a resolute focus on our strategic initiatives, I believe we have what it takes to execute well.

We will now open up the call to your questions.

Shannon?

(Operator Instructions) Charlie Anderson, Doughterty & Company.

I wanted to ask about the Samsung arbitration.

I wonder if you have any timelines on that that you'd be able to share.

Or just any general view of that would be helpful for everybody.

And then, in terms of the new Apple case, just kind of roughly the strategy there -- is it simply a case of new infringing products, or a new IP?

I mean, just any more color on the strategy with adding another case would be helpful.

Sure, Charlie.

Very good questions.

So in the Samsung case, we filed that action on March 4th of this year.

They responded on April 12th.

We have a response that will also be filed on May 13th.

So it's moving along quickly, as appropriate in an arbitration filing.

And we're looking for a favorable result, let's say, sometime later this year, in the September timeframe.

So we're confident in our position there, and we think it'll move quickly.

And we think that we will be collecting damages on that issue.

The other issue with regards to Apple -- it is -- we've identified a number of our pressure-based patents.

We have essentially increased the products that we are targeting to include the MacBook product line of products and are moving -- our filing, I guess, on that one was today, and expect that to move through the ITC case, hopefully at the same pace as the first filing, which, as we said in the prepared comments, are moving quickly, and we're quite pleased with the progress there.

Other than that, I really don't have too much else I can add to the Apple case.

And then, just a quick follow-up on that, Vic -- as you've added that, was that already embedded in your thinking in the full-year guide?

I mean, you are reiterating that.

So I'm just curious how that influences the expense line.

Yes, I think we're still feeling, as we reiterated, the annual guidance revenue and bottom line.

We are still comfortable with the expense targets and the litigation budget that we initially identified, and feel that it can handle the funding for these cases as well as others, if need be.

Perfect.

Thanks so much.

Thanks, Charlie.

Mark Argento, Lake Street Capital Markets.

First question, on the medical -- looks like you had a decent license in the quarter there.

What was that all about?

And then, I think you mentioned there was a one-time event?

Yes, sure.

So as you probably noticed in the past, periodically we get catch-up payments, certain option rights, or other one-time events.

And that's what -- this falls into that category.

It was from a medical customer, and it was pursuant to an agreement that we had entered into a number of years ago.

So they exercised a certain option.

And as a result, we were able to record that revenue in the quarter.

Got it.

And then, pivoting back to the legal -- did you break out, or would you break out for us, in the quarter what you guys spent in terms of legal dollars?

No, I'm not able to give that kind of detail.

I can just say that our original guidance included $14 million to $16 million for the year.

And we feel confident that that's the right target for the full year.

We're on pace for that.

And then, the venue that you're arbitrating with Samsung, the International Chamber of Commerce -- I'm not familiar with that venue.

Maybe you could educate me or us a little bit on the ICC?

Sure.

So within the Samsung agreement that has now expired, it does capture a conflict resolution process.

And that would be through arbitration.

And that is -- the venue that we're using is the ICC.

I believe it's a venue that we're comfortable with, we're familiar with.

Typically, we would identify an arbitrator, Samsung would identify an arbitrator, and then those two arbitrators would select a third.

They would go through a process of disclosures and information, and we would expect that to be resolved, as I said, sometime in September of this year.

Great.

That's it for me, thanks.

Thanks, Mark.

Josh Nichols, B. Riley.

Good to see the Sony win, and there's still strength in the Company's patent portfolio regarding some of the gaming stuff, even for the legacy.

Anything you could mention about materiality, or any impact that that would have on a go-forward basis, with sales of future DualShock controllers in the region?

So the dispute is on the Japanese sales of those controllers.

I'm not able to give you a dollar amount, but it's a number that's large enough for us to go through the effort.

I would kind of add to your comment about the importance of this.

We have 2,200 patents.

And two of those patents were limited many years ago.

But that is a very small fraction of our gaming patents.

And as a result, Sony argued that beyond those few patents, they weren't going to agree or accept that they were valid or infringed.

And so that was the reason for the proceeding.

We have, in all of these markets -- whether it's gaming, virtual reality, mobile devices, pressure-based haptic -- we have a significant portfolio of which only a few patents have actually been identified in current actions or prior actions.

So I think it's important for us to defend the entire portfolio, because it is a formidable haptic portfolio.

And then, Apple and Samsung obviously watch each other pretty closely.

Do you think that there's any intertwining between -- you have an expedited timeline of maybe September for a potential Samsung resolution, at least as it pertains to the unwind agreements?

And any impact that you could have on Apple, or how you think those two play against each other potentially?

I'm really not able to speculate.

And I'm not sure I even have much of an opinion on it.

I think the matters are quite different.

In Samsung's case, it's really around a breach of contract and their continued shipment of products with our technology without paying.

It's just unacceptable.

And as a result, we have refused to engage them in any renewal discussions until we resolve this matter.

I don't think that has anything to do with Apple.

Maybe they feel a little more emboldened because we are in litigation with Apple.

But I assure you we have the resolve and the financial capability to manage multiple cases.

Some are going to be faster than others, and we think it's what we need to do to protect our business.

Then, last question for me -- I mean, things in the AR and VR space seem to be going quite well, and also content to media is kind of ramping.

Anything that you could add regarding timeline, where some of the stuff might materialize into some pretty material revenue in the next year or so regarding mobile gaming and some of the other newer arenas the Company is moving into?

I would say in all the three areas -- the AR/VR, content in general, and mobile gaming in particular -- I wouldn't look to any of those to be substantial in 2016.

We're getting all of the right indications in all those areas.

We're excited to see our own solutions being recognized in the market as we provide demos and engage customers.

We're excited to see existing controllers utilizing technology that we believe is covered by our prior inventions and our IP.

So we feel confident that there's a meaningful role for us to play in that space.

And in the VR world in particular, having haptics to create the immersive experience is essential.

It's not enough just to have visual and audio; you need the tactile cues as well.

So feel really good about that long term.

On the content side, as we said in the prepared remarks -- a lot of new campaigns.

Each of these campaigns starts to open up the industry's awareness of the capability.

And these are campaigns by large companies.

This is Lexus and Peugeot and Ford, and a number of others.

So it's getting a lot of industry recognition.

And as a result, it's expedited some of the discussions that we have with those players.

And then, on the gaming -- it doesn't get any bigger than Kowloon War and the Google category of games you can feel.

So we feel like we're really accelerating those areas.

We will and have been capturing some revenue within each of those discussions and relationships.

But I would say before it gets meaningful, it's going to be at least another year.

Thanks, Vic.

Thanks, Josh.

(Operator Instructions) Tony Stoss, Craig-Hallum Capital Group.

This is [Lucas Schwalby] in for Tony Stoss.

So quick question -- could you add a little more color on how things are progressing with Huawei?

Very important account for us in China.

They are actively using our TouchSense technology.

They see the value of advanced haptic capability.

And so we've got a team onsite there on a pretty regular and frequent basis.

It's also adding interest on the content side.

So for the Chinese content community to see Huawei and others launching new phones with new haptic capability, it just incents them to support and grow the content business as well.

So a great relationship and growing revenue opportunity for us.

Do you see them becoming a 10% customer in the future?

Absolutely, it's a possibility.

That's our goal.

They're a fast-growing company, and we want to grow beyond a handful of models and a broader lineup of products, and capture a larger percentage of their market.

So yes, we would love to have them as a greater-than-10% customer.

Okay, thanks.

And then, just outside of mobile and gaming and medical, what type of interest are you seeing on the auto side?

Well, I personally was at the CES conference earlier this year.

And if you were there, you would see entire halls full of automotive technology being showcased.

And haptics was quite prominent from a number of companies including Bosch; Continental, who is a licensee of ours.

So there's a growing recognition of what we have been promoting for years.

And that is that haptics enhances the user interface in a way that provides confirmation value and allows you to stay concentrated on the driving function and more quickly and more accurately engage your touchscreen interface.

So I think people are rallying around touchscreens and touch pads on the automotive front.

And haptics is a key part of that implementation.

Great.

Thanks, that's all I had.

Thank you.

And it does appear we have no further questions at this time.

I'll turn the conference back over to management for any additional or closing comments.

Well, thank you all for being on the call with us today.

And on a side note, I will present at several upcoming conferences during the month of May, including the Jefferies TMT Conference in Miami, the B. Riley Annual Investor Conference in Hollywood, and the Cowen Sid Display Week event in San Francisco.

In June, I will also present at the annual Craig-Hallum conference in Minneapolis and the Cowen TMT Conference in New York.

And I look forward to seeing and speaking with many of you at those conferences.

Thank you.

And we look forward to updating you again on our next call.

Have a great day.

And that does conclude today's teleconference.

We thank you all for your participation.