Immersion Corp (IMMR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Immersion Corporation Fourth Quarter and 2017 Conference Call.

Please note, today's conference is being recorded.

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

Please go ahead, ma'am.

Thank you, Holly.

Good afternoon, and thank you for joining us today on Immersion's Fourth Quarter and Fiscal Year 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 Carl Schlachte, Interim CEO and Chairman of the Board; 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 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-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 like to turn the conference over to interim CEO, Carl Schlachte.

Carl?

Thanks, Jennifer.

Thanks to everyone for joining us this afternoon.

I'm pleased to be speaking with you at this exciting point in Immersion's 25-year history.

Today, we will share our fourth quarter 2017 and full fiscal year results and we will talk about the many opportunities in front of the company after having reached the settlement and license agreement with Apple.

Immersion has been and will continue to be the torchbearer of haptics.

Our focus on innovation and development of cutting-edge haptic technology remains at the forefront of our company's strategy.

Today, our employees are working on haptic technology solutions for fascinating and seemingly insurmountable challenges that will become mainstream in the market during the next 5 to 10 years.

This is the work we do here.

This is why our patent portfolio is exceptional, and this is why I'm so excited about the future of Immersion.

In December, we announced a restructuring of the company through which we have refocused our strategy and investments on about core competencies in the mobile, wearables and gaming and automotive markets.

In the mobile OEM market, we continue to innovate and work to provide end-users with an optimized haptic experience.

With Apple as the licensee, for the first time, we are now able to provide immersion-based haptic performance across the entire mobile ecosystem.

Between our proven patent portfolio and our leading haptic expertise, we are well positioned to expand our market presence and revenue stream by attracting additional mobile and wearable's OEM customers.

Turning to the automotive market.

We are pleased with the growth we are seeing both in terms of existing customer traction and the signing of new licensees.

As the implementation of haptics begins to expand from luxury car models to mainstream vehicles, we expect our revenue will increase in line with this adoption rate.

The gaming market, including virtual reality and augmented reality has historically been an important area of innovation for Immersion.

We continue to see revenue opportunities in this space both with the increased adoption of VR, but also the future AR applications that will benefit from the utilization of haptics.

Our research efforts, particularly, in AR are both foundational and cutting edge.

And I'm continuously amazed by the ingenuity of our team.

I can't emphasize enough that the innovation and research we are doing today at Immersion will become tomorrow's mainstream technology.

I'm confident in the strength of our haptic technology solutions and patent portfolio and believe we are well positioned to drive value for our shareholders.

I'll now turn the call over to Nancy who will discuss the financials, recent accounting changes and our outlook for 2018.

Nancy?

Thanks, Carl.

We definitely have a lot to cover today.

I'll start with our Q4 and full year results.

I will also cover the impact of the 2017 job -- Tax Cuts and Job Act and the implementation of the new revenue recognition accounting standard ASC 606 before sharing our outlook for 2018.

Revenues for the December quarter were $6.9 million, down 26% year-over-year, reflecting decreases in revenue from the gaming, medical and mobility lines of business, offset in part by increased automotive revenue.

Revenues from royalties and licenses of $6.7 million were down 25% from the prior year period.

In the fourth quarter of 2017, variable royalties, based on shipping volumes and per unit prices, totaled $5.3 million and fixed payment license fees totaled $1.4 million.

This compares to variable royalties of $6.2 million and fixed license fees of $2.7 million in the prior year period.

For the fourth quarter of 2017, a breakdown of total revenues by line of businesses was 39% from mobility, 37% from gaming, 22% from auto and 2% from medical.

Looking at year-over-year trends, gaming revenues were down 36% during the quarter, primarily due to a decrease in revenue from Sony, which was partially offset by revenue from new customers like Nintendo.

Mobility revenues were down 17%, principally due to lower volumes.

Automotive revenues were up 35% due to increased volumes from our existing automotive licensees as well as revenue recognized from new licensees.

Medical revenues were down 87%, in line with our expectations regarding our transitioning revenue mix.

Gross profit was $6.9 million or 99% of revenues compared to gross profit of $9.2 million in the fourth quarter of 2016.

Turning now to our fourth quarter operating expenses.

Excluding cost of revenue, total GAAP operating expense was $19.1 million in the fourth quarter of 2017 compared to $20.4 million in the year ago period.

A significant portion of this quarter's expense was driven by restructuring cost of $1.6 million as well as higher legal expenses, primarily, related to litigation and various other legal matters.

Operating expenses in the fourth quarter of 2017 included $2.2 million of noncash charges comprised of depreciation and amortization of $238,000 and stock-based compensation of $2 million.

Of the total noncash charges, $308,000 was included in sales and marketing; $276,000 in research and development; and $1.7 million in G&A expense.

Of the stock-based compensation charges, $217,000 was included in sales and marketing; $202,000 in R&D; and $1.6 million in G&A.

Looking now at our net results: GAAP net loss for the fourth quarter of 2017 was $12.3 million or $0.42 per basic and diluted share compared to GAAP net loss of $38.1 million or $1.32 per basic and diluted share.

In the fourth quarter of 2016, GAAP net loss for the -- I'm sorry, GAAP net loss for the fourth quarter of 2016 included a tax provision of $26.8 million, primarily related to a noncash charge of $28.1 million recorded to establish a full valuation allowance against the company's U.S. deferred tax assets.

As a result of the Tax Cuts and Jobs Act of 2017, we did revalue our deferred tax assets and liabilities in the fourth quarter of 2017 to reflect the reduction of the federal tax rate.

But due to our valuation allowance, no tax expense was incurred.

We continue to evaluate other aspects of the Act and may revise estimates in the future as additional guidance and interpretations become available.

In addition to normal GAAP metrics, we use non-GAAP net income and non-GAAP net -- 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% plus stock-based compensation and restructuring costs.

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

Non-GAAP net loss in the December 2017 quarter was $6.2 million or $0.21 per basic and diluted share compared to non-GAAP net loss of $7.9 million or $0.27 per basic and diluted share in the same period last year.

Turning to full year 2017 results.

Revenue was $35 million, down 39% from the prior year.

Revenues from royalties and licenses were down 39% to $34.1 million.

Of these amount, variable royalties totaled $21.5 million in 2017 and fixed license fees totaled $12.6 million, down from variable royalties of $25.6 million and fixed license fees of $30.4 million in 2016.

The decrease in variable royalties reflect the impact of expired contracts with certain OEMs and lower volumes reported by mobile, gaming and medical customers.

The decrease in fixed license fees was primarily a reflection of a one-time license fee of $19 million from Samsung, recognized in 2016.

For 2017, a breakdown of total revenues by line of business was 49% from mobility, 30% from gaming, 15% from automotive and 6% from medical.

Gross profit for 2017 was $34.8 million or 99% of revenues, down from gross profit of $56.9 million in 2016.

GAAP operating expenses, excluding cost of revenues, were $80.2 million in 2017 compared to $72.2 million in 2016 and included $24.8 million in litigation expense, primarily related to our unresolved enforcement action against Apple.

And cost of $1.6 million related to our previously announced restructuring activities.

GAAP net loss for the year was $45.3 million or $1.55 per basic and diluted share compared to GAAP net loss of $39.4 million in 2016 or $1.37 per basic and diluted share.

GAAP net loss for 2016 included a tax provision of $25.5 million for the year, primarily related to the noncash charge of $28.1 million as previously mentioned.

Non-GAAP net loss for 2017 was $28.6 million or $0.98 per basic and diluted share, compared to non-GAAP net loss of $5 million or $0.17 per basic and diluted share in 2016.

Now to address of our balance sheet.

Our cash portfolio, including cash and short-term investments, was $46.5 million as of December 31, 2017, down from $89.8 million exiting 2016.

The decrease primarily reflects cash used in operations, including expenditures related to enforcement actions against Apple and others.

As a result of recent restructuring activities undertaken and to streamline our operations and the settlement reached with Apple, we are confident in the strength of our liquidity position as we look forward to 2018.

We will continue to monitor our cash balance and our stock price as well as market conditions and strategic factors as we consider any nonoperational uses of cash, including future buybacks of our stock.

Regarding guidance for 2018.

In addition to normal considerations, we take into consideration the impact of the new revenue recognition and accounting standard ASC 606.

The resolution of our enforcement action with Apple and the continuing litigation with Samsung, Motorola and Fitbit as well as the effect of our recently announced restructuring activities on our operating expenses going forward.

Let me frame our revenue guidance by explaining the implications of the new ASC 606 accounting standards.

Effective Q1 2018, our royalty revenues will be reported based on estimates of the underlying shipments for the current period rather than reported 1 quarter in arrears based on royalty reports received from customers as has been our practice historically.

We will be required to estimate the royalty revenue for the period and record true ups as required when we receive royalty reports from our customers the following period.

We do not expect this change in the timing of royalty revenue recognition to have a significant impact on full year royalty revenue projections, but do expect a change in seasonality patterns versus prior year.

In contrast, we do expect that the effect on revenue recognition for of our fixed license fee arrangement to be significant.

Under ASC 606, we expect a substantial portion of the revenue from fixed license fee contract will be recognized upon contract execution, with the remainder likely recognized ratably over the contract term as future performance obligations are satisfied.

With this in mind, we expect there could be unpredictability in our revenue forecast, reflecting the difficulty in projecting when significant fixed fee license agreements will be executed.

In light of these changes, in the revenue recognition practices, we currently expect 2018 revenue as estimated in accordance with ASC 606 and based on our current expectations regarding existing and anticipated fixed license fee contracts of $80 million to $95 million.

I should also note that this outlook is independent of any possible litigation outcome.

On the expense side, we are currently assuming litigation expense of between $8 million and $10 million for 2018.

GAAP operating expenses outside of this litigation expense totaling $43 million to $45 million for the year.

And finally, stock-based compensation of between $5.3 million and $5.5 million for the year, with the highest expense expected to occur in the first quarter.

Due to the full valuation allowance and the change in tax regulations, we anticipate forecasting cash tax expense going forward, which for 2018 is expected to be approximately $300,000.

Beginning in 2010, we will define non-GAAP net income as GAAP net income adjusted to reflect cash tax less stock-based compensation.

Based on this forecast, we expect to generate bottom line results of between non-GAAP net income of $35 million and $46 million.

After all of that, I will now turn the call back to Carl.

Thanks, Nancy.

I would now like to provide a brief update on our current legal proceedings.

I'll begin with Apple.

On January 29, we announced the settlement of all litigations and the signing of a multiyear license agreement with Apple.

And on February 16, the ALJ issued an order terminating the ITC investigation.

In August 2017, we commenced patent enforcement proceedings against Samsung in District Court in the Eastern district of Texas and against Motorola in District Court in Delaware, alleging that Samsung and Motorola are infringing our basic haptics patterns.

For the Samsung case, the first day of jury selection will be in February 2019.

For the Motorola case, the trial date has been scheduled for September 2019.

Finally, we continue to make progress on our cases against Fitbit for patent infringement of our wearables portfolio in the Shanghai Intellectual Property Court and District Court of Northern -- Northern District of California.

The trial date has been scheduled for May 6, 2019.

We remain confident in our portfolio and look forward to making significant progress in these actions in the coming year.

In closing, I want to thank all of the Immersion employees for their tireless efforts in 2017.

Their hard work and commitment is bearing fruit, and we look forward to a profitable year in 2018.

As we have stated previously, we are unwavering in our focus to deliver value to our shareholders through the adoption and monetization of haptics.

The achievements this -- thus far in 2018 helped confirm the confidence we have in our patent portfolio and the innovative work that we do.

We'll now open up the call to your questions.

(Operator Instructions) Of our first question today will come from Anthony Stoss from Craig-Hallum.

Congrats in your settlement with Apple.

Quite a few questions.

I'm curious and just want to confirm your guide that you're not assuming anything from Samsung or other litigations in that $80 million to $95 million at this point?

That's correct.

Okay.

And then wanted to hear more on the auto side that's really starting to grow for you folks.

I'm curious, how much you think you've penetrated the auto market?

Are you touching all the major OEMs?

What are you finding?

Is it migrating more to the dashboard?

Just love to hear a little more on that and then I have one last follow-up?

Sure, this is Carl.

We think we've penetrated it just at the beginning part of this market.

If you in modern cars, certainly luxury and higher-end cars, the dashboard is becoming more and more yet another screen.

And the whole aspect of distracted driving and the ability to know when you're touching something without taking your eyes off the road is a big area for growth for us going forward.

So we're pleased with the progress so far, but we're just at the start.

And then late last year, you shed some expense, you stopped going after the advertising opportunity.

In light of the settlement with Apple and your cash balance, is that something that you would look back to put back on?

Or I'm curious your thoughts on that?

Yes.

I don't think it's something that we're looking to add back on.

We generated a really -- some really interesting intellectual property along the way.

One of the things that we learned as it relates to advertising, especially with the company of our size is that despite the success that we were seeing and we were seeing good traction and good success, the amount of money that we would have to spend in order to scale along with that just didn't make prudent fiscal sense for us.

So I don't see us adding that back in, but I do think that we've got avenues for having discussions with partners in that space that might make sense.

Great.

Final question, Carl.

Following the announcement of the settlement with Apple, have you noticed any uptick in terms of consumer interest -- customer interest, was there anybody that you feel were sitting on the sidelines and now they're moving ahead quickly?

I don't -- we haven't engaged in discussions with folks within actually referenced that particular settlement as a reason for engaging in discussions with us.

I think it's a very nice validation and the strength of the intellectual property that we've developed.

And that kind of public validation always helps when it comes to talking to customers.

Our next question will come from Josh Nichols with B. Riley FBR.

I was curious, just looking at 2018 guidance, ballpark about what amount of revenue is assumed for growth that not currently signed?

Not currently signed?

I would say, as a percentage, it would be -- I'll just say small.

We feel good about the revenue forecast.

There's always pipeline that we're taking into consideration.

So every year when we do our forecast and you're well aware of this Josh, we look at our full pipeline and see where things are in different stages.

And we make some assumptions that some will achieve what we need and some won't.

And we also have the variability of our royalty-based agreements where we're dependent upon our customers' volumes.

So there's some judgment that has to take place there.

But certainly we feel good about the range that we've given.

Over the year, we may be able to tighten that a little bit as we see things come through.

But for right now, that's where we feel comfortable.

And then how should we think about seasonality throughout the business?

Historically, there's been some in the gaming and handset space, particularly in Q4 and Q1?

I think given the new rev-rec, we will likely see that seasonality, particularly in gaming move into more Q3 and Q4 versus Q4 and Q1 since we won't be recognizing in arrears.

But I would also say that for 2018, you should expect overall for revenue to be front-end loaded this year.

And historically, the company has provided it before, what's the company's current cash balance?

Well, we've decided to -- we're giving you the 12 31 balance, which is 4 6.5.

We're not going to disclose our current balance as of today.

You'll get that with the Q1 numbers, but I will say that we are very pleased with the health of the balance sheet and where we sit with cash.

(Operator Instructions) Our next question will come from Charlie Anderson with Dougherty & Company.

So I wondered if you could talk a little bit as it relates to the 2018 guidance, if there is any episodic or nonrecurring revenue in there?

I am thinking about often there's a past sales element in deals.

And then with ASC 606, you mentioned recognized at the time of execution.

I wonder if maybe you could help us with the impact there and, again, was something in that potentially nonrecurring as we think about, sort of, what's the consistent run rate of the business.

And then I've got a few follow-ups?

Sure.

So I will say that over the past couple of months, and we mentioned this in our last call, we've been working closely with our accountants as everyone in the valley has relative to the new revenue standard.

And where we have landed is that certain of our contracts will have almost a mixed component, meaning we will have some portion of that, that will be recognized upfront.

But due to ongoing performance obligations, there will also be a portion that is recognized ratably over the life of the agreement.

So what the guidance reflects is that interpretation and it is slightly different from what we had thought previously where we thought the majority we would be or that all of it would be recognized upfront.

Now we've have been able to come to alignment that a portion of it will actually be recognized over the term of the agreement.

And that's only for certain subset of our contracts.

It'll depend on the individual agreement.

Okay.

Can you be specific on how much is front-end loaded specifically on 2018 and maybe if not on the call is there -- is that something that would be disclosed in the K and the 10-Q?

Just help us understand how we'll look at through the base -- the baseline of the business, if that make sense?

We won't be disclosing that in the K. As part of the Q, we will do the modified retrospect and there will be a little bit more information at that point in time.

But as of now and what we'll disclose on -- in the K, we will not have that detail.

Okay, got it.

So share counts for the full year, I'm curious.

And then also you mentioned the $300,000 of tax expense or tax provision, how should we think about the long-term tax rate on the business?

Yes.

So full year 29.2 in terms of share count.

And because of the valuation allowance that we have on the books right now, we are going to be forecasting our cash tax expense going forward, which like I said was $300,000.

As we move through this year and continue to evaluate the impact of the Tax Act on Immersion, we may make some modifications to that during the year.

But as of now, with the valuation allowance, we're not seeing a huge impact.

Got it.

And then a couple of questions for Carl.

So Carl, now that you've got Apple done, I'd be curious your views on in terms of monetizing the rest of the portfolio going forward?

To what degree do you feel like there's -- enough there for other people sort of read into?

What's the right rate?

And I'm also curious, in general, given where the balance sheet, it sounds like a very comfortable there.

Do you feel like you've got enough on the balance sheet to most efficiently maximize the licensing program independently?

Does that make sense to do with partners over time?

I'm -- just your general views there?

And then I've got one more question.

Yes, I'll answer the second question first.

I think we feel really comfortable that with the status of our balance sheet as it relates to being able to handle what we see on our plate in the near- and mid-term future.

So not particularly worried about any of that kind of stuff.

As it relates to closing other license deals, these things are -- they're all individual by nature.

And that different things get pulled into different negotiations at different, different times.

Some people are interested in licensing in addition to things like getting access to our patents.

They're also interested in discussing different pieces of technology that we have that can actually supplement their own technology portfolio going forward.

Haptics, it turns out is one of the few areas in the mobile phone hardware ecosystem that is actually increasing in cost.

In the Android market, it's gone up something on the order, like, 200%, the actuators are.

So there's a lot of emphasis is been placed on that and how do you take advantage of that?

And that has an effect on the way you do these negotiations.

And this is kind of roundabout way of answering the question, do we have a rate in mind for each of these folks?

It's highly dependent on the suite of technologies and portfolios that they're interested in licensing.

Got it.

Sorry, I've just got one more.

Nancy you mentioned there would be a portion that's, sort of, fixed and then a portion that has future deliverable.

Can you maybe just help us understand what is the future deliverable?

And is that component larger or smaller than the fixed portion in some of these deals you're talking about?

Again, it will be specific to the particular agreement and they do vary depending upon the structure.

What I can say and we do describe this in the K is that it will be dependent upon what we deliver in terms of our portfolio and other deliverables in the solutions and technology over the life of the agreement.

So the amount upfront versus ratable in the future will be very specific by customer.

Ladies and gentlemen, this does conclude our question-and-answer session for today.

In addition to the conference, we thank you all for your participation.

You may now disconnect.