Immersion Corp (IMMR) 2016 Q3 法說會逐字稿

Good day and welcome to the Immersion Corporation third-quarter 2016 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jennifer Jarman of The Blue Shirt Group. Please go ahead.

Thank you, Karina. Good afternoon and thank you for joining us today on Immersion's third-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 Nancy Erba, 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 opportunity 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 most recent 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-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 Chief Executive Officer, Vic Viegas. Vic?

Thank you, Jennifer, and thanks, everyone, for joining us this afternoon. I would like to take this opportunity to introduce and welcome Nancy Erba to Immersion. Nancy joins us from Seagate Technology where she held executive positions in finance, corporate development and sales and business operations.

During her tenure at Seagate she served as the division CFO for two of Seagate's strategic businesses. Nancy brings with her broad financial experience, the ability to work cross functionally across teams and a demonstrated commitment to driving profitable growth. Welcome, Nancy.

Third-quarter financial results were generally in line with expectations and we exited the quarter with a strong balance sheet and positive momentum as we continue to expand our customer base. Haptics are being adopted more broadly than ever across existing markets and into new and emerging spaces as well.

Our business is built on a solid IP foundation which, coupled with our innovative software solutions, makes us uniquely positioned to lead in the market. We remain confident in this leadership position and, as importantly, our customers and partners are experiencing the measurable benefits of having Immersion's haptics in their phones, games, cars and mobile ads.

I will provide a more detailed update on our business in a few minutes, but at this time I will turn the call over to Nancy to review our financial results and outlook. Nancy?

Thanks, Vic. And I would like to take this opportunity to say how excited I am to be joining Immersion. I've enjoyed getting to know the management team and have been very impressed with the strength of the finance organization.

I have also had the chance to be on the road to meet some of our analysts and investors and I appreciate the depth in which you follow the Company and understand the complexities and underlying fundamentals of our business model. To those I haven't yet met, I look forward to speaking with you and meeting you over the coming weeks and months.

I would now like to turn to the results of the quarter. Revenues for the September quarter were $26.3 million, up 84% from revenues of $14.3 million in the year ago period. This is primarily a result of the recognition of the $19 million nonrecurring license fee from Samsung which we detailed during our second-quarter earnings call. We remain in the standstill period with Samsung which was negotiated as part of the wind down agreement completed in July 2016.

Revenues from royalties and licenses of $26 million were up 87% from $13.9 million in the third quarter of 2015. Of these amounts in the third quarter of 2016 variable royalties based on shipping volume and per unit prices totaled $5.2 million, and fixed payment license fees totaled $20.8 million. This compares to variable royalties of $6.2 million and fixed license fees of $7.7 million in the prior year period.

Gross profit was $26.3 million or 100% of revenues compared to gross profit of $14.2 million in the third quarter of 2015. While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the third quarter of 2016 a breakdown of line of business as a percentage of total revenues was as follows: 85% from mobility, 9% from gaming, 4% from auto and 2% from medical.

Looking at year-over-year trends, mobility revenues were up 146% from the third quarter of 2015 primarily from license fees recognized from Samsung. Automotive revenues were up 9% as more vehicles had haptic technology incorporated into their center consoles. Medical revenues were down 46% and, as growth in the other lines of business outpaces the medical market, we expect this transition in our revenue mix to continue.

Gaming revenues were down 27% during the quarter primarily due to a decrease in revenue from Sony. During the second quarter call we discussed the fact that we are in the arbitration process with Sony and we continue to have confidence in the strength of our IP.

We remain optimistic about the future monetization opportunities in the gaming market. Our broad IP portfolio uniquely positions us to be the leaders in gaming VR/AR. And we are encouraged that the industry continues to realize the need for physical experience that haptics brings to gaming and entertainment environments.

Turning now to our operating expenses. Excluding the cost of revenue, total GAAP operating expenses were $16.1 million in the third quarter of 2016 compared to $12.9 million in the year ago period, with a significant contributing portion of the increase driven by higher legal expense primarily related to our litigation with Apple and various other legal matters.

Operating expenses in the third quarter of 2016 included non-cash charges related to depreciation and amortization of $230,000 and stock-based compensation of $1.2 million. Of the $1.4 million non-cash charges, $396,000 were included in sales and marketing, $360,000 in research and development and $687,000 in G&A expense. And of the $1.2 million stock-based compensation charges, $335,000 were included in sales and marketing, $257,000 in R&D and $622,000 in G&A.

Looking now at our net results, net income for the third quarter of 2016 was $7 million or $0.24 per basic and diluted share compared to net income of $184,000 or $0.01 per basic and diluted share in the third quarter of 2015. Net income for the third quarter of 2016 includes a tax provision of $3.8 million that includes certain non-cash benefits and expenses associated with our international tax structure.

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 adjusted to reflect an expected long-term effective tax rate of 19% less stock-based compensation.

We define non-GAAP earnings per share as non-GAAP net income per share. Not gap net income in the September 2016 quarter was $9.9 million or $0.34 per diluted share compared to non-GAAP net income of $2.2 million or $0.08 per diluted share in the same period a year ago.

Now to address our balance sheet. We are pleased with the strength of our balance sheet and the improvement in our cash position during the quarter. Cash and short-term investments were $94.9 million as of September 30, 2016, up from $56.3 million as of June 30, 2016. The increase was primarily driven by the Samsung payment received during the quarter as well as a meaningful increase in deferred revenue during the September quarter.

We used $729,000 for share repurchases under our authorized share repurchase program to buy back 106,000 shares and we have $33.7 million remaining in the currently 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.

At this time we continue to expect 2016 revenues to be in the range of $55 million to $65 million which we now anticipate generating bottom-line results of a net loss between $11 million and $800,000 and between a non-GAAP net loss of $6 million and non-GAAP net income of $4 million. I will now turn the call back to Vic to further discuss the current business environment.

Thanks, Nancy. We are excited to see momentum build as we expand the scope of our offerings beyond software and tools sold through direct customer engagement to now include a streamlined approach of licensing our know-how and intellectual property as we build out our IP business development function. This hybrid model allows us to broaden our customer base and participate in markets where we may not otherwise have a solution to offer and also allows for deeper penetration at our solutions-based customers.

We have already begun to see the benefits of this model, which is evident in the growth in deferred revenue from new customer agreements entered into during the quarter. We are engaging new customers to discuss licensing opportunities and we are already seeing synergies as our IP BD team partners with our sales force to offer creative business solutions to our customers.

This week we announced our Haptic Ad Service, the industry's first comprehensive service that offers advertisers the ability to add touch feedback effects to their premium HTML mobile video ads. Based on TouchSense Design Cloud and TouchSense Campaign Manager, our cloud-based solution makes use of industry standards and allows advertisers to create engaging and immersive brand experiences.

As part of this announcement we shared quantifiable results regarding the benefits of haptics in mobile advertising. In partnership with Teads, a global outstream video advertising network, a joint A/B trial was conducted by Research Now which revealed that video ads enhanced with haptics had an impressive increase in purchase intent and positive brand opinion.

The results indicated that 71% of users in the study agreed that haptics made the ad more interesting and 72% wanted to feel haptics in other video mobile ads. Users experiencing video ads with haptics were also 51% more likely to turn off their mute function in order to engage more fully with the content.

We are encouraged by the positive results we are seeing from our partners and this new business opportunity is an example of how the broad adoption of haptics is providing new paths to monetization.

In September we announced TouchSense SDK for mobile apps. This new cross-platform haptics solution unifies the functionality from the TouchSense SDK for mobile gains and TouchSense SDK for mobile video into one easy to use SDK for Android app developers. The solution enables developers to differentiate themselves among their competitors by delivering engaging and impactful mobile experiences for their users. We will continue to innovate and develop new solutions and design tools for our customers to advance the proliferation of haptics.

During the quarter we continued to see our technology adopted in the mobile gaming market by Hero Interactive, Perfect World and Rock Star. There were also new products launched by our OEM customers including the Lenovo Yoga Book, Fujitsu's FO4H tablet and Meizu's MX6 phone all utilizing haptics to bring more immersive experiences to their customers.

As mentioned earlier, we are seeing the growth in adoption of haptics in our existing markets including Apple's recent iPhone 7 release, the replacement of the mechanical home button, the use of haptics within their phone's applications, and the opening of their API to allow the development of new applications utilizing haptic effects. In addition, Google launched their two new pixel smart phones which both utilize the benefits of haptics. These are further exciting examples of the expansion of haptic use across the mobile market.

Regarding our ongoing litigation with Apple, the Markman hearing took place on October 18. As a reminder, this is the claim construction hearing and, based on the judge's comments, we currently expect a ruling in January 2017. Our hearing before the ITC is currently scheduled April 27 to May 7, 2017 and the initial determination date is scheduled for August 11, 2017. The target date for completion of the investigation is still expected to be on December 11, 2017.

Apple has now filed IPRs against all the patents in suit with the exception of certain claims in one patent. In September the US Patent and Trademark Office denied the institution of the IPR filed by Amit Agarwal demonstrating the strength of our patent portfolio.

In closing, we are pleased with the results of the third quarter and the expansion of our customer base across all our markets. We remain encouraged by the demonstrated value haptics provides the mobile advertising and content and believe we are uniquely positioned to succeed in this new market. As we continue to work with our customers and partners to build the ecosystem for haptics, we believe our IP BD team will enhance our ability to reach an even broader set of customers.

Immersion's foundation of innovation and the strength of our patent portfolio gives us confidence in our ability to lead, execute to our strategy and be successful through the balance of this year and into 2017. We will now open up the call to your questions. Karina?

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

I was wondering -- very nice cash balance at the end of the quarter. For the long-term portion of the deferred revenue, over what period of time do you expect that to flow through to income?

So, Josh, as you know, the deferred revenue, there is a short-term portion which is recognized over -- expected to be recognized over the next 12 months and then the long-term is revenue that would be expected to be recognized beyond 12 months. So beyond that I would say it is some period longer than one year.

Okay. And then looking here, anything you could say regarding when the standstill period with Samsung might end?

No, Samsung continues to be unlicensed for the products that they have launched in 2016. There is a standstill in place, as we said. We expect that we will eventually reach a license agreement whether it is through negotiations or through some form of enforcement. But nothing further on the timing of the standstill.

Okay, thank you.

Charlie Anderson, [Hitachi] & Company.

Thanks for taking my questions. I will just ask another for revenue as well. Vic, I guess I am wondering why you are unable to disclose where that came from. Any color you could give, is it mobility -- just anything there would be helpful for us. Thanks.

Sure, Charlie. As you know, it's part of our normal business to enter into license agreements where cash collected in advance of revenue yields deferred revenue. So it's happened multiple times in the past covering periods as short as a couple years or longer.

During the quarter we entered into a number of license agreements, as a result picked up a considerable amount of cash, as you can see, on the balance sheet. And we are excited by the potential of these customers, these products. Not a lot we can say until we are allowed to. Usually we are restricted in terms of announcing customers related to product launches or some other limitation.

So at this point very excited. It shows good growth and momentum in the business, but just not able to give you any detail. Hopefully we will be able to give you more detail in the next couple of quarters.

Can you maybe speak to, Vic, the interplay between what you saw there in that level of activity and then the full-year guidance? Like was it contemplated in the earlier guidance or is this something new that has shown up? Just the interplay there would be interesting.

Sure. I guess as I mentioned before, there is always some number of licensing engagements, discussions that are ongoing. The timing of when you reach agreement and enter into a license arrangement is always up to a number of different variables.

So in the quarter obviously we were able to reach agreement with some new licensees and, again, the timing of when their products launch and when revenue recognition is triggered, at this stage it is sitting in deferred because those events have not yet occurred.

In terms of the interplay, you can see a big portion of the increase occurred in the deferred -- long-term deferred. So it is going to -- revenue will recognize over a longer period than one year. There should be some impact in the near-term, but it was always part of our expectation for the rest of the year.

Great. And then finally for me just on the Markman, I wonder if you could maybe just offer any commentary on how you felt that went. And then maybe sort of post Markman how that is influencing in the other licensing discussions. Were their people paying attention to the same -- just overall view of the licensing program in light of the Markman? Thanks.

Yes, sure. What I heard -- I wasn't there myself but what I heard from my team was they felt very good about the day, the results of the hearing. The judge did not ask any questions. And so really our team presented our case, the other side presented their case. Most of that we already were aware of based on the papers submitted. Not a lot that was gleaned from the event because, again, the judge didn't ask any clarifying questions.

We did hear that the judge expects to publish a ruling on the issue in January of next year. But other than that I don't think there was too much that you could derive from the day other than we obviously felt like our team did very well. We feel like we have got a strong case and we feel just as confident about our position as we ever have.

Great, thanks so much.

(Operator Instructions). Mark Argento, Lake Street Capital Markets.

Good afternoon and just want to change it up a little bit, maybe we could focus a little more on some of the other areas of potential -- the preliminary technology in revenue. And in particular I know you guys continue to focus on opportunities to enhance content.

Maybe talk a little bit more about how you guys see this market playing out. When could you see some material revenue from some of the ad-based, some of the videogames? I know you have been at it for a little while and I know you continue to be excited about it, but maybe drill down a little bit on that. Any new progress there?

Sure. Mark, as you know, when we rolled this out we talked about it being a long-term investment. It would take a number of years, I think I have always talked about three years or longer. We continue to show evidence that the haptics embedded in ads makes a difference in retention and engagement metrics.

The most recent study done around the Jason Bourne video trailer I think had about 8 million impressions, so it was a large-scale study and the results were terrific as they have always been. Our own internal studies and now as we do bigger scale studies they continue to show dramatic improvement in retention and engagement.

That has caught the attention of the marketing community. Teads is one of the larger ad networks and we are pleased to be working with them. There are a number of others also conducting their own studies. I'm happy to say we are entering into commercial agreements with many of these companies.

And so we are generating revenue today. I would expect it to continue to grow. I would expect next year to be $1 million or more and it could ramp very quickly because a lot of ad dollars being spent on a mobile platform and if you can show increased engagement then it is real dollars for a lot of people.

That is helpful. I know you bought a little stock back in the quarter. Obviously you guys are generating -- added a bunch of cash to the balance sheet here with the Samsung settlement. When you guys talk internally what is some of the criteria you think about when you decide if you are going to buy back stock or not?

And does it make sense at some point in time to -- I know you want to keep a healthy balance sheet, especially just given the business you are in, but do something more aggressive like a tender offer, something like that for some shares?

Yes, it is a balance. We take a look at the near-term cash flow. We look at the stock price, we look at the enforcement actions and where we are in those efforts and it is -- a lot of factors go into establishing a buying program.

During the quarter stock price hit a point at which the plan triggered and some shares were bought back. Based on today's decrease I hope we can buy some more here soon. But I think it will be opportunistic, it is not our primary profit driver. Our investments in the business and enforcing our IP are really the focus.

So we will be opportunistic as it makes sense, but we will also be cautious. As you said, we want to make sure that we have a strong balance sheet as we take these various enforcement actions to protect our business.

Yes, I mean obviously you are in kind of a unique environment just with the market not being overly kind to small cap stocks right now. And IP driven companies right now as well not getting the love they normally do. So yes, hopefully you guys can take advantage here because I think it is a bit of a gift. But good luck with everything and appreciate the time.

Thanks, Mark.

Mark [McHammond], LPL Financial.

Good afternoon, Vic. I had a follow-up question regarding your mentioning of the Google pixel phone and their employment of haptics and being manufactured by HTC. In the last quarter you guys had mentioned that you are having some issues with Motorola as a licensee and a little bit of a dispute regarding the settlement you guys had a few years back.

And I was wondering if you could tie in how that is going with the launch of this phone with Google having been a partner and HTC having recently settled for patent infringement. What is our expectations with the pixel phone and Motorola going forward?

Sure. Well, I am happy to say, as I did in the prepared remarks, that the Google products, the two pixel phones, I think they use LRA motors, they are using haptics. So we are taking a look at those phones and determining the right action to take.

In terms of the prior agreements, we did enter into an agreement with Google. This covered their Nexus phones that were sold quite some time ago, so the current products would not be covered by that old agreement.

In terms of Motorola, we had an agreement in place. It had a life to it. It came to an end. We continue to have discussions about renewing the agreement for their new phones and are optimistic that we can reach agreement. But today that agreement has expired and was not renewed. That would not have any impact at all on the Google phones.

And then in terms of HTC, that was a result of litigation settlement and that license covers the HTC phones. It is not clear that the HTC other agreement -- I doubt that it would have any impact or bearing at all on the Google phones as well. So this would most likely require a new license directly with Google for the sale of those phones.

Okay, so even though HTC is the exclusive manufacturer at this point and they are a licensee, that does not translate into a phone that is branded by Google?

I believe for the most part that is true.

Okay, all right, thank you.

At this time I would like to turn the conference back over to management for any additional or closing remarks.

Well, thank you again, everyone, for being on the call with us today. And we hope to see some of you shortly -- a scheduled non-deal road show we are having here on the West Coast. Look forward to seeing some of you and have a good day. Thank you.

Once again that does conclude today's conference. Thank you for your participation. You may now disconnect.