Immersion Corp (IMMR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Immersion Corporation First Quarter 2017 Conference Call.

Today's call 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, Lisa.

Good afternoon, and thank you for joining us today on Immersion's first quarter 2017 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, litigations, anticipated future products, anticipated market demand or opportunities, and other forward-looking topics.

These statements are subject to risks, uncertainties and assumptions.

Accordingly, actual results could differ materially.

For a listing of the risks that could cause this, please see our 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 now turn the call over to Chief Executive Officer, Vic Viegas.

Vic?

Thanks, Jennifer, and thanks, everyone, for joining us this afternoon.

These are very busy and exciting times for Immersion.

In addition to executing on our company's strategy and making progress in growing each of our key markets, we have reached a major milestone in our IP strategy today, with the conclusion of the hearing in the Immersion versus Apple case at the International Trade Commission court in Washington, D.C.

While we are pleased with the progress in each of these ongoing efforts, I am pragmatic about our financial results for the March quarter.

In the near term, the decisions we have made, the actions we have taken, and the opportunities we are pursuing can create challenges to delivering our optimal financial business model on a quarter-by-quarter basis.

However, these same decisions, actions and investments, allow us to capitalize on our culture of innovation and market-leading haptic know-how, while positioning us for future growth.

I continue to be excited by the breadth of opportunities in front of Immersion as we move through the year, and in a few minutes, I will share with you our recent business developments and outlook.

But first, I'll turn the call over to Nancy, to discuss the details of our first quarter 2017 financial results.

Nancy?

Thanks, Vic.

Revenues for the March quarter were $9.2 million, down 32% from revenues of $13.6 million in the year-ago period, primarily the result of a $3 million, non-recurring, medical contractual payment we recognized in Q1 of 2016.

Revenues from royalties and licenses of $9 million were down 33% from $13.4 million in the first quarter of 2016.

Of these amounts, in the first quarter of 2017, variable royalties based on shipping volumes and per unit prices totaled $6.5 million and fixed payment license fees totaled $2.5 million.

This compares to variable royalties of $8.5 million and fixed license fees of $4.9 million in the prior-year period.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2017, our breakdown by line of business as a percentage of total revenues was as follows: 32% for Mobility; 47% from gaming; 12% from auto; and 9% from medical.

Looking at year-over-year trends, mobility revenues were down 23% from the first quarter of 2016, principally due to a decrease in revenue related to shipment volumes from existing customers, slowness in the mobile market in China, and the nonrenewal of the Motorola license agreement.

As a reminder, we remain in the standstill period with Samsung, which was negotiated as part of the wind-down agreement completed in July of 2016.

Gaming revenues were down 4% during the quarter, primarily due to a decrease in revenue as a result of nonpayment by Sony, related to U.S. controller shipment.

This decrease was partially offset by revenue from Nintendo and other gaming peripheral licensees.

As a reminder, we are currently in an arbitration process with Sony in the U.S., and anticipate a resolution to this arbitration in 2017.

Automotive revenues were up 20% due to increased volume from our existing automotive licensees.

Medical revenues were down 80%, primarily due to the nonrecurring contractual payment we recognized in Q1 of 2016.

Gross profit was $9.2 million compared to gross profit of $13.6 million in the first quarter of 2016.

Turning now to our first quarter operating expenses.

Excluding cost of revenue, total GAAP operating expenses were $22 million in the first quarter of 2017 compared to $18.2 million in the year-ago period.

A significant portion of this increase was driven by higher legal expenses, primarily related to our litigation with Apple and various other legal matters.

Excluding litigation spend, our ongoing operating expenses decreased by $2.6 million from the prior-year period.

Operating expenses in the first quarter of 2017 included $1.8 million of noncash charges comprised of depreciation and amortization of $232,000 and stock-based compensation of $1.6 million.

Of the total noncash charges, $294,000 was included in sales and marketing; $410,000 in research and development; and $1.1 million in G&A expense.

Of the stock-based compensation charges, $210,000 was included in sales and marketing, $336,000 in R&D, and $1 million in G&A.

Now -- looking now at our net results.

GAAP net loss for the first quarter of 2017 was $12.9 million or a loss of $0.44 per share compared to GAAP net loss of $2.7 million or a loss of $0.09 per share in the first quarter of 2016.

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 non-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 per share as non-GAAP net income or loss per share.

Non-GAAP net loss in the March 2017 quarter was $8.7 million or $0.30 per share compared to non-GAAP net loss of $1.2 million or $0.04 per share in the same period last year.

Looking at the balance sheet.

We continue to be pleased with the strength of our balance sheet.

Our cash portfolio included -- including cash and short-term investments, was $76 million as of March 31, 2017, down from $89.8 million exiting 2016.

The $13.8 million decrease was driven by cash used in operations, including cash used in litigation-related services.

Our balance sheet also reflects the early adoption of ASU 2016-16, which simplifies the accounting for tax on intra-entity transfers.

As a result of early adoption, we wrote off $7 million of prepaid income taxes arising from the sale of IP to one of our foreign affiliates in 2015.

As a cumulative effect adjustment to our accumulated deficit as of January 1, 2017.

We have $33.7 million remaining in the currently authorized stock -- authorized share repurchase program.

We will continue to monitor our cash balance and stock price as well as market conditions, and take strategic factors into consideration as we consider any future buyback activity.

Taking into consideration our ongoing litigation with Apple and the current unlicensed status of Samsung, we are not making any changes to our previously-disclosed revenue guidance, and continue to expect 2017 revenues to be in the range of $38 million to $42 million.

Based on this forecast, we expect to generate bottom line results of between a non-GAAP net loss of $23 million and $32 million.

I will now turn the call back to Vic to provide a business update.

Thanks, Nancy.

During our last conference call, I outlined the 5 strategic markets that we remain focused on: mobile OEM and content; wearables; gaming, including VR and AR; automotive and mobile ads.

I also discussed the way we view each of these markets along our market engagement cycle, from innovation, to adoption, monetization, and finally, recognition.

We are encouraged by the continuing traction we are experiencing with existing customers that want to broaden their relationship with Immersion.

As a reminder, during the first quarter of 2017, we announced multiyear agreements with Nintendo and Grayhill, renewed agreements with Gionee and Meitu, and launched TouchSense Force for gaming and VR.

We also shared the successful results of the IPG study on the benefits of touch-enabled technology in video ads, and extended our partnership with AdColony.

Since our last conference call, we have had additional positive customer and market announcements that I would like to highlight for you.

Firstly, in our mobile OEM market, we're pleased to announce that Meizu Technology renewed its license agreement, which now includes the use of the Immersion TouchSense premium solutions, which offers the highest quality haptics available, including support for pressure haptics an emerging feature in many premium devices.

Meizu is also working with Immersion to achieve optimized haptic experiences through effect customization and UI analysis, hardware tuning and software integration services.

Secondly, we are excited to see Lenovo continuing to launch new products in the market with Immersion's TouchSense technology.

Lenovo's 2-in-1 tablets are well received by consumers and the industry.

The Lenovo Yoga Book, featuring TouchSense technology and its halo keyboard, was recently honored with the 2017 Silver Edison Awards for Computer and Workspace Design.

It's flat-screen, lighted keyboard is a well-designed implementation of TouchSense technology that bridges the gap between the flexibility of having a keyless keyboard and the functionality of a tactile interface.

Thirdly, Kyocera became the first licensee of TouchSense Lite technology, a turnkey, cost-efficient solution, enabling standard quality haptics, leveraging a predesigned library of tactile effects.

This agreement builds on a previous multiyear license agreement.

Finally, continuing to demonstrate the value that haptics bring to mobile advertising, Teads and Immersion announced a new agreement to offer and distribute TouchSense ads, "ads you can feel" in Latin America and Europe.

As a result of this partnership, Teads will serve TouchSense ads on its mobile web advertising platform, paving the way for its clients to leverage the power of touch in reaching audiences with their brand messages.

In addition to the broadening of our Teads relationship, we are happy that the Universal Studios' Jason Bourne trailer, featuring Immersion's haptic technology, has been nominated for a Drum Marketing on Mobile Award or MOMA, in the best use of technology category.

We're pleased that our technology has received this recognition from the mobile marketing community.

Another proof point of the demonstrated value haptics can bring to the mobile advertising market.

We are also encouraged by the breadth of our new customer pipeline.

During Q1, we showcased TouchSense Force to game developers and peripheral manufacturers at the Game Developers Conference.

The level of interest in our development tools and advanced controller technology, for many of the largest names in virtual reality, has continued into Q2, which although today not material in terms of revenue, demonstrates the future potential value, as we continue to drive innovation in the gaming VR and AR market.

Immersion's IPVD organization is also gaining traction by establishing a growing pipeline of new customers focused primarily in the mobile, automobile and wearables markets.

Recently the team closed a small agreement with a music hardware manufacturer.

Accessing markets where we have not otherwise developed solutions and further validating the broad applicability of our extensive patent portfolio.

In addition to our determined efforts to grow our business within targeted strategic markets, we remain focused and serious about protecting our intellectual property.

With that in mind, I'd like to update you on the Apple litigation, first with respect to the inter-partes reviews or IPRs filed by Apple, and second with respect to the ITC proceedings.

Apple has now filed a total of 11 IPRs with the Patent and Trademark Office, challenging the validity of all 7 patents that we asserted in the litigation.

At this point, of the 11 IPRs, 4 have been instituted by the Patent and Trademark Offices; 2 have been denied; one has a select number of claims instituted; and 4 remain pending.

Regarding the ITC proceedings, I recently returned from Washington, D.C. where I attended some of the hearing before the Chief Administrative Law Judge at the ITC.

The hearing began on April 27, 2017, and was completed today.

Overall, while we are not in a position to predict the outcome, the hearing went smoothly, and we are pleased with the progress made to date.

The due date for the Chief ALJ's initial determination is currently scheduled for August 11, 2017.

The target date for the completion of the investigation is still expected to be December 11, 2017.

In summary, we remain focused on executing our strategy, which includes investment and the protection of our intellectual property as well as a determined effort to grow our business in targeted strategic markets.

We are excited about the opportunities in front of us as momentum for haptics in the mobile OEM and content, wearables, gaming, including VR and AR, automotive and mobile ad markets, continue to grow.

We will balance investments in these growth opportunities against investments and the protection of our IP, and we'll keep you informed of our progress as the year continues.

We will now open up the call to your questions.

Lisa?

(Operator Instructions) We'll take our first question from Charlie Anderson, Dougherty & Company.

I wonder if we could start with Samsung, just kind of roughly where we stand?

Do we still have the standstill in place?

And then, I also wondered, I think I heard the change in core OpEx, excluding legal, but I wondered if you had the exact litigation expense in Q1?

And then, I've got a follow-up.

Sure, Charlie.

So Samsung, as I think you know, we believe, requires a license for many of their mobile products that have launched in 2016 or later.

That standstill that we talked about, it does expire this year.

And we would expect to license or enforce our IP with Samsung.

And then, regarding the litigation spend, we're not specifically breaking out the quarter details.

But I can comment that we're still standing by the range that we gave at the end of last quarter of $18 million to $22 million for total litigation spend this year.

And that, that remains very heavily weighted to the first 2 quarters of the year, given the hearing.

Perfect.

And then, Vic, just I wonder if you could comment generally on how the year is tracking so far.

4 months in or so in terms of renewals that you expected in terms of new business development?

And then, you made a comment, I think, in your -- in the press release about sort of the decisions we made, and wonder if that's impacting your ability to convert anything?

Just general comments about ongoing businesses would be helpful.

Yes.

Sure, Charlie.

So I guess, I would say that, I use the word pragmatic.

It's difficult to grow your business when large companies choose to build and sell products that are unlicensed.

However, the existing relationship that we have with customers, in terms of renewals and engaging new customers, the demand has never been better.

The value of haptics is clearly identified and recognized in the marketplace.

And if you go through each of the markets, there's a trend to replace mechanical buttons on the mobile phone with a pressure-sensitive with haptically-enhanced interface.

That alone is driving substantial demand and interest.

The progress we're making on the content side, whether it's mobile gaming, 360 video, ads, social media.

There's a lot of exciting trends that are happening using haptics.

So I think as you're seeing, especially in China, the growth of those relationships, expansion of the products, the use of TouchSense technology continues to grow and give us a lot of optimism.

So I feel fairly bullish about the year.

I think we're confident in the guidance that we provided.

However, the pragmatic side also forces you to take a look at current spending, look at profitability, growth trends on the revenue side and all of those areas we’re very sensitive to making good decisions, not only for the short term, but also for the long-term health of the company.

We did say in the quarter, if you back out the litigation spend, the operating expenses compared this quarter to the prior year's quarter, we're down well over $2 million.

So we are sensitive about spending, preserving our assets and continuing the current strategy.

Next, we'll hear from Josh Nichols, B. Riley.

Just kind of curious, how much of a seasonal impact was there in Q1?

It's usually a little bit stronger with the unit-based royalties from Q4 kind of pulling in on Q1?

Yes, I think the compare this year to last year is a little bit challenging because of that $3 million one-time nonrecurring medical payment that we got in 2016.

But I would say, we did see a little bit of seasonal dip relative to some volumes in China, which seemed to be pretty widespread around the market.

Just an inventory adjustment.

All of that said though, as Vic mentioned, within China we're seeing great traction with our software and a lot of demand for people to ask us to help them in terms of implementing our technology and creating really great effects for them.

We think this year, will likely be a little bit more back end-loaded than, maybe, the previous year, but at this point, we're not adjusting anything in our guidance.

Okay.

Yes.

I was just wondering how you -- if Q1 is kind of strong, usually, and if you look at the run rate for Q1, it won't get you to the even the low end of guidance.

So you have to assume that maybe there is a new license or 2 that comes into play.

I would assume that the top 2 candidates would be either Motorola or Sony for the U.S. controllers.

Is that kind of the right way to think about it?

Yes, I think -- we do expect to see resolution to Sony this year.

And certainly, as related to the mobile ad business, we're seeing good traction in terms of deals that are coming forward there, which would probably ramp later in the year as well.

So yes, I think you're looking at it the right way.

Okay.

And then, last question on the OpEx side.

I know you're not breaking out the litigation specifically, but still holding to the guidance.

Any kind of a ballpark you could kind of give us between the OpEx split between percentage-wise maybe Q -- the first half and the second half of 2017, just because it's so variable with the litigation, but seeing that that's over now with the ITC at least, do you think expenses would come in meaningfully in the back half?

I think -- so I think -- just to comment on the litigation.

So $18 million to $22 million for the year, we said heavily weighted to the first half of the year.

So certainly, Q1 and Q2.

And the expenses that came in this quarter were as we had planned internally.

I think you even saw looking at sales and marketing quarter-over-quarter, we saw some paring down there.

We're being very mindful of that OpEx.

But I think the back half of the year should be at a more, I'll say, normal run rate for us because those litigation expenses are going to be more heavily weighted to Q1 and Q2.

But Q2 would be down from Q1 presumably.

I would assume, right?

No.

I would not -- not necessarily.

I mean, the hearing is this quarter, right, think about it, occurring in Q2.

(Operator Instructions) We'll take the next question today from James Medvedeff from Cowen and Company.

So I wanted to dive into the revenue just a little bit also.

It looks like if you back out the $3 million from the Q1 of last year, that revenues are down 14% year-over-year in the quarter.

And I understand that's got a lot to do with mobile.

And the -- all the different moving parts there.

But I just wondered how do we get from there to sort of 18% to 20% growth for the year.

If I back out the -- also the Samsung settlement in Q3 of last year, it looks like the guidance calls for somewhere in the high-teens growth for the year.

So I'm just wondering, where that comes from?

From a down first quarter to a pretty strong rest of the year?

So just to clarify a little bit, exiting last year, removing the $19 million from the wind down, right, payment for Samsung, it was actually just about 11% growth year-on-year if you look at our range from $38 million to $42 million.

And the -- as we talked about in the last question, we are looking at some activities that are occurring now that we would expect to drive our revenue to be more heavily weighted to the second half of the year.

We still feel like the $38 million to $42 million is the range that we're comfortable with for revenue.

And our pipeline that we're generating, not just in mobile, but also in gaming, automotive, mobile ads, really across all of our markets is quite strong.

And as we do every quarter, we look at that pipeline and we try to determine timing on when we could get things closed and which quarters those will fall.

And in this particular year, it looks like the second half of the year will be the strongest for us.

Let me ask one more on the revenue, the -- how was the $9 million this quarter on royalty and license, how did that compare to what your internal expectations were?

Go ahead.

I would say it was about what we expected.

I think we've talked a little bit about the onetime payment last year in medical.

We've talked about Sony not paying on U.S. sales of controllers.

Talked about Motorola being unlicensed and not paying.

So those are things that we knew going into the quarter.

So we knew they would be down.

We also knew we had upsides with all the agreements that we've been signing recently, including Nintendo and a number of others.

So I think the number was about what we expected.

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

Sorry, I just dropped off -- or jumped on the call a little bit late here.

But I just wanted to follow-up on the ITC.

So just refresh my memory, obviously, have gone through the process and into the waiting now on some type of a verdict.

Is that accurate?

Yes, the hearing itself concluded today.

As I said in the prepared remarks, we felt that it went well.

We're pleased with the progress.

At this stage, I think there is a closing brief that will be submitted, and then the ALJ is currently scheduled to give a preliminary determination August, and then a final in December.

So it is pretty much on track and consistent with our strategy and our effort.

We're pleased with the way the team executed and the way that thing progressed throughout the hearing.

And typically, in the August, when they provide the preliminary in August, do they also -- at that point, do they indicate what the -- I guess, the penalty, really, is an injunction in terms of ability to sell product.

Is that -- will that be -- if it goes your way, is that typically when you would get that early indication in August?

Or do you have to wait until December, typically?

I believe that preliminary decision would potentially include an injunction.

Got it.

Then, just looking a little bit bigger picture in terms of some of the other opportunities out there.

It seems like virtual reality is finally starting to commercially become viable.

Do you guys have any exposure in the VR space?

And then, also, it seems like the whole Internet of Things space as well is one that in particular, has a lot of sensors and the ability to add haptics to it.

You've got any exposure as well to the IoT space?

Yes.

Sure.

So covering the kind of gaming VR and AR space first.

The largest trade show is the GDC that occurred in Q1.

We presented advanced haptics in the form of tools that can help create content with advanced haptics.

We also presented advanced controller technology using high-fidelity actuators.

So we were quite visible at that show.

And as I said in the prepared remarks, in the Q2 time frame right now, the engagements are picking up.

People understand the value we bring to the table.

It's amazing when somebody says you've got 15 years of tool development that you can create a game with advanced haptic effects in literally minutes.

And it's already available on standard platforms that the design community is already using.

So that really -- that ease of use, the quality of experience, and then all supported by strong IP as well.

That's something that, that community is really recognized.

And that's leading to great discussions.

And again, as I think we said, it hasn't yet generated any meaningful uptick in revenue, but the relationships that are being discussed and the potential for that opportunity is substantial.

So we're feeling really good about that.

In terms of IoT, as you probably know, from various demonstrations, there is going to be lots of information coming at you.

And so wearable technology, mobile phone technology that is using advanced alerts and notifications becomes even more important so that you can kind of wade through the clutter and know what you really need to do or how to react.

We have developed a haptic language.

We have mapped effects and notifications in a way that allow people to recognize a broad range of information coming at them.

So we're seeing a lot of interest.

We're even seeing other people create videos, showing what we have done years ago.

So we're kind of -- we're pleased to see the market starting to recognize this innovation that we've been doing for years.

Next up, from Sidoti, is Matthew Galinko.

First one being, when do you expect the conclusion on the entirety of the IPR processes?

What can we conclude from Apple's decision to pursue IPRs on all the IP that you're asserting.

Well, I would say that it's a standard practice by most defendants in an IP case, that whether you have good evidence or not, you challenge the patents at the patent office.

In a number of cases, those requests have been denied.

So at least, at this stage, those are final determination decisions.

In other cases, they've accepted or instituted an examination.

And so we would expect them to take a look at the evidence submitted by Apple.

We would make arguments as to why we think that those arguments aren't valid or appropriate.

And so there will be discussions that will occur at the PTAB.

And we're confident that we have good valid patents.

I think the hearing and the ITC case assumes those patents are valid.

And so the decisions and the process that goes through isn't really changed in any way by the IPR process.

However, it could be, at some point, an opportunity to question the validity of patents if the patent office chooses to rule in a different direction.

But it's pretty standard practice.

It's nothing that we didn't expect.

The arguments we're familiar with and feel very confident in the strength of our IP.

Got it.

I appreciate that.

And then, you touched on mobile ad revenue ramping in the second half of the year.

It sounds like that's material, recognizing that without Samsung, it takes a little bit less to be material in the mix.

But I was wondering if you could get a little bit deeper into where you are in development of that market?

I think what I'd point you to right now in terms of how to watch our progress are the number of agreements being signed, the number of independent, whether those be studies or awards or demonstrations that we're seeing in the marketplace.

All of that is driving, as I mentioned, I think in an earlier question, driving a lot of demand for us to partner with, whether they'd be the creatives or even the brands themselves to look at how to put haptics on their ads.

They're seeing that measurable value.

So I would think about the second half of the year, what we've said, previously, and we're standing by at this point is, we would expect the revenue from mobile ads to be around $1 million this year.

Certainly, that can sway very quickly depending upon uptake.

But right now we're looking at the back half of the year is when we really expect to see that start to ramp.

And I would say, qualitatively, Matt, I mean, we're seeing ad agencies, networks.

We're seeing brands coming back over and over.

So they see the value in early campaigns.

And they want more of it.

The agreements are calling out for CPM pricing, which is something that we've always felt was the right way for us to participate in the success of the campaign.

So we're pleased with the business model and the engagement.

And it is -- it's moving forward as we had hoped it would be.

We just now need to scale and get this in high volume activity.

And that does conclude the question-and-answer session.

I'll hand things back to management for any additional or closing remarks.

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

On a separate note, Nancy and I will be presenting at the B. Riley Annual Investor Conference in May, in Hollywood.

I look forward to seeing and speaking with many of you there.

And I thank you, and we look forward to updating you again on our next call.

Good day.

Once again, ladies and gentlemen, that does conclude today's conference.

Thank you all for your participation.

You may now disconnect.