Immersion Corp (IMMR) 2018 Q2 法說會逐字稿

Good day, and welcome to the Immersion Corporation Q2 2018 Earnings Conference Call.

Today's conference is being recorded.

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

Please go ahead.

Thank you, Victoria.

Good afternoon, and thank you for joining us today on Immersion's Second Quarter 2018 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, 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 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.

And with that said, I'll now turn the call over to Carl.

Thanks, Jennifer, and thank you, everyone, for joining us this afternoon.

The company has weathered the most significant storm in its recent history, and we have emerged stronger and more energized than ever to seize the opportunities in front of us.

The Board of Directors and management are steadfast in our commitment to build a sustainable long-term profitable business, focused on driving shareholder value.

Immersion has demonstrated technology leadership and know-how.

And now with the financial strength and scale to grow, we are confident in our ability to do so.

We are very pleased with the progress made during our second quarter from a technology development perspective, which, coupled with new customer agreements, position us well for the remainder of 2018 and into next year.

We are excited by the scope of the addressable markets before us.

Our success with Apple has allowed us to change the focus of the conversation with other mobile OEMs.

The benefits of Immersion technology and our ability to add value to their products is now the subject of productive and encouraging discussions.

We are uniquely positioned to shape the ecosystem of the mobile OEMs, actuator and IC vendors, to present the best possible solutions for our customers.

We have just begun to tap into the automotive market where we estimate that less than 7% of the market has adopted haptic technology.

Our agreements with Tier 1 suppliers position us to grow and succeed as the adoption of haptics moves into more mainstream vehicles.

We are very happy to have announced several more automotive agreements this quarter, including Calsonic and Toyodenso in Japan.

Gaming, VR and AR remain core technology markets for us.

Our know-how is especially valued in this space, and we continue to drive innovation that will enable us to shape our future out 8 to 10 years.

The recently announced settlement and license agreement with Fitbit opens the wearables market for us.

And we expect to have more to share regarding additional license fees in the coming quarters.

Our development efforts are focused on enabling growth in our key markets, and discussions with new and potential customers have been collaborative, sharply focused on our innovation and how Immersion technology can help make them successful.

Nancy will now walk us through the financials and our current view for 2018, before opening up the call to your questions.

Nancy?

Thanks, Carl.

Let me begin by referring you to this afternoon's press release for information regarding our Q2 financial performance, including tables that illustrate the comparison of our revenue for the second quarter to the same period a year ago, highlighting the impacts of our adoption of ASC 606.

Our revenue of $6.1 million for Q2 of 2018 was down 13% from revenue of $7 million in the year-ago period.

As we discussed in our Q1 call, we adopted ASC 606 on a modified retrospective basis.

So a comparison to the same quarter a year ago is not particularly meaningful.

However, if you refer to the table, which depicts revenue on a comparable basis under ASC 605, revenue increased 23%, primarily driven by fixed license fee revenue.

This increase was in part due to revenue earned from 3 new customer agreements executed during the quarter.

For the 6 months ended June 30, 2018, total revenue of $91.6 million increased $75.3 million or 463% compared to the 6 months ended June 30, 2017.

This increase was primarily attributable to a $73.4 million increase in fixed fee license revenue.

As we discussed in our Q1 call, the treatment of fixed fee arrangements under ASC 606 is expected to drive lumpiness in our revenue and our results and contribute to the lack of comparability with prior year results.

Turning to operating expenses.

We continue to see the impact of the restructuring activity we took in December 2017, coupled with the reduction in litigation expenses, resulting from the settlement with Apple, as operating expenses for the second quarter were down 34% from the same quarter a year ago.

For the 6 months ended June 30, 2018, operating expenses were down 33%.

We continue to effectively manage the business at these reduced levels of spend, which is reflective in our sharpened focus on key markets and initiatives.

Moving on to income taxes and the effects of the Tax Reform Act.

We have made a reasonable estimate of the effects of the act for the second quarter and the 6 months ended June 30, 2018.

But as discussed on our call last quarter, the impact of the act is not significant due to the full valuation allowance we carry against substantially all of our deferred tax assets.

We continue to assess factors related to the realizability of our deferred tax assets to determine if or when an adjustment to our valuation allowance is appropriate.

As a reminder, the valuation allowance does not impact our ability to utilize our deferred tax assets, including net operating loss carryforwards.

GAAP net loss for the quarter was $7.8 million or $0.25 per share.

GAAP net income for the 6 months ended June 30, 2018, was $62.1 million or $2 per diluted share.

Turning to the balance sheet.

We are pleased with and maintain our focus on the strength of our balance sheet.

Our cash portfolio, including cash and short-term investments, was $136.7 million, down only slightly from the $139 million at the end of March.

We remain vigilant in our focus on cash management and continue to closely monitor discretionary spend to ensure utilization of cash is aligned with key strategic initiatives.

As we move forward into the second half of 2018, we will continue to carefully monitor our cash balance and stock price as well as market conditions and strategic factors as we consider any nonoperational use of cash, including future buybacks of our stock.

Taking into consideration results for the first half of 2018 and our recently announced settlement with Fitbit, we remain comfortable with the previously provided annual revenue guidance range of $108 million to $118 million.

As discussed in our Q1 call, revenue for the second half of the year could fluctuate based on the timing and structure of new customer agreements and the related revenue treatment under ASC 606.

Regarding expenses.

For the year, we now estimate litigation expense between $9 million and $10 million; GAAP operating expense, excluding litigation, of $48 million to $50 million; and stock-based compensation of $8 million to $9 million.

Due to the full valuation allowance, we are forecasting cash tax expense going forward to be approximately $200,000.

As a reminder, we define non-GAAP net income as GAAP net income adjusted to reflect cash tax less stock-based compensation and restructuring expenses.

We continue to expect non-GAAP net income to be between $59 million and $67 million for 2018.

Finally, we would like to emphasize that our outlook is independent of any additional possible litigation outcomes currently ongoing in our largest mobility line of business.

We continue to believe, post-litigation settlements, our current business model positions us well for operations that generate sustained positive cash flow in the future.

I will now turn the call back to Carl for some final comments.

Thanks, Nancy.

In closing, we look forward to sharing more with you in the coming quarters regarding our progress in haptic innovation and our success in growing our market penetration.

Immersion now holds in excess of 3,000 issued and pending patents in our portfolio, which is a tremendous accomplishment.

We continue to highly value our ability to monetize our portfolio through our hybrid approach to the market.

Our culture of driving change and enabling the haptic ecosystem is one that will push us to challenge ourselves and think innovatively in order to bring the best technology to the market for our customers.

We'll now open the call to your questions.

Operator?

(Operator Instructions) Our first question comes from Charlie Anderson with Dougherty & Company.

Carl, I really appreciate the detail on auto penetration at 7%.

I wonder if maybe you could elaborate a little bit on what you see as the total potential for that market.

Is it all vehicles?

Is it a portion of vehicles?

And you certainly have been signing a lot of agreements there.

I wonder if you had any thought on sort of rough coverage of the market via some of your partners right now today.

And then I've got a follow-up.

Yes.

So -- yes, sorry, didn't mean to cut you off, Charlie.

Yes.

So I'll tackle the question kind of in 2 fashions.

One is that we're working with a lot of the Tier 1 suppliers in the marketplace, and we feel that gives us the best leverage into multiple automotive suppliers per contract signed.

So that emphasis in working through the tiers has been very successful for us.

The second fashion in which I'd answer the question is that within each vehicle, there are multiple haptics opportunities.

And I think I mentioned this on a previous call.

This aspect of driving and not being distracted, being able to get some level of feedback while you're -- from touching a button while your eyes are focused on the road becomes very important.

So within each vehicle, there are multiple haptic opportunities.

If you sit down in a car and you just stare at the sheer number of buttons that are available, we look at that as part of our total available market.

So when we talk about 7%, we're kind of really covering it from the standpoint of, I'll call it, the traditional viewpoint of how many vehicles are out in the marketplace.

But I want to be clear that within each vehicle, we see multiple opportunities on top of that.

Perfect.

And then a question for you, Nancy, on OpEx.

Can you remind us maybe what sort of spending on litigation has been sort of first half and maybe Q2 as well?

And then just bridging the gap on, I think, maybe a little bit increased OpEx for the rest of the year on a per quarter basis relative to Q2, just where do we see the increase between the segments?

Yes.

And we haven't given the quarterly split out of litigation; we've given the full year.

But I can say that the first half of the year was -- like I said, litigation expense was weighted towards the first half of the year with closing out of Apple and then the Fitbit litigation as well.

So the $9 million to $10 million, we feel very comfortable with that range.

Obviously, it's very narrow.

On the OpEx side, to be -- we've talked about the increase in stock-based comp.

We've seen that much higher than traditionally and what we had originally expected, given the fact that the stock has performed so well in the beginning of the year.

And we saw people taking advantage of that from an options perspective.

Got it.

And then just last...

The rest was the more traditional spend -- I should comment, the rest was the more, I'll say, traditional spend on salaries and other R&D, sales and marketing and G&A, we're keeping very tight.

And it is either at or under budget in those other areas.

Excellent, perfect.

And then just on the variability of revenue in the back half of the year.

Could you maybe speak to how much of that is contracted versus contracts you still need to sign?

What seems to be the key swinging factors in terms of what's going to influence whether Q3 is larger or Q4 is larger?

Just helping us understand that a little bit.

Well, I think from -- back half of the year, obviously is going to be stronger than Q2.

Q2 is a pretty good example of the lumpiness that we've been talking about relative to the adoption of ASC 606.

But we are not changing our full year guidance based on visibility that we have in our pipeline on things yet to be signed and then certainly, at this point, things that we have signed already in Q3.

I know that it's been difficult for the sell side and -- to predict that just as it's challenging for us to forecast it.

But as we get into the second half of the year, I would expect to see less variability between Q3 and Q4 to close out the remainder of 2018.

(Operator Instructions) We'll take our next question from Marc Wiesenberger with B. Riley.

When you provided guidance in Q1, it was noted that it excluded possible litigation outcomes.

And while you're maintaining the guidance, does that imply that the Fitbit license is not really material or that something else might have failed to materialize?

It characterizes it that the range between $108 million and $118 million is still valid for us.

Obviously, Fitbit now would be included in that range.

We believe that not only the value of getting Fitbit done both, from a revenue perspective but also the ability now for the wearables market to be opened up for us, provides us even more opportunities through the end of '18 and into '19, but I wouldn't read too much into the fact that the range hasn't changed.

But Fitbit certainly now is included and will be included in our 2018 revenue for Q3 and Q4.

I can comment that similar to other fixed fee agreements, we would expect to recognize a portion of that in Q3 and then the remainder of it over the term of the agreement.

That's helpful.

Can you talk about your cash or your capital allocation strategy and where you're seeing the best opportunity to deploy cash right now?

Well, we're watching cash very carefully, as we commented on.

We will be evaluating the investments through both this year and next year as we look forward in innovation and in our innovation strategy.

We've talked a lot about how we've refocused with the restructuring in 2017 on our core markets and our core competencies.

And that's where we are expecting the best returns and therefore focusing our investment dollars.

We still have 2 litigations that are ongoing with Samsung and Motorola.

We -- from my own perspective and Carl can comment further, I certainly want to see those play out and make sure that we have the strength in our cash position if we move through those litigations, but right now, feel very comfortable and confident in the strength of the balance sheet.

And we'll evaluate uses of cash on an ongoing basis, both from a core competency R&D investment perspective, from a strategic perspective and then, of course, just maintaining our ability to execute on the litigation strategy that has already started.

Excellent.

And last one, are you seeing any increased interest from nontraditional potential customers looking to license the technology?

And if so, does that point to any potential trends for future monetization efforts?

And I'll leave it there.

Yes.

This is Carl.

The short answer is yes, we do.

And I think if you look back, you'll see a press release that we did here recently.

I think it was on the 25th with Stanley.

And you'll see that, that was focused in on the printer marketplace.

The thing that I would direct your attention to in that is that's really one of our first forays into haptics in, I'll call it, the IoT sense.

It's not a market we've traditionally talked about before.

It's a space that we've been watching very, very closely, and it goes to the heart of something that we believe in as part of the vision of the company in terms of the market being more ready to accept the ubiquitous deployment of haptics.

So if you start to think about the -- just the sheer number of buttons and tactile types of things that you're touching on a day-to-day basis and you think about those interactions changing in a more haptically enabled sense, the first places you'd look to start to see that being enabled as it were or the leading economic indicators in that space would really start to happen in more of the industrial IoT marketplace.

So we're pretty excited about that one.

It's a limited agreement.

It's not anything that I'm pointing out as it's going to make or break us, but it's certainly a very good indicator of where the company's future is headed.

And I'm particularly excited to see that space open up for us.

(Operator Instructions) Our next question comes from Mark McMahon with LPL Financial.

I've got a follow-up, Nancy, from the question that was asked in regards to Fitbit, but in a more general instead of as focused on them.

I know that the performance obligation, the fixed licensing agreement is something that would lessen some of the lumpiness.

How are you proceeding with new licensees or even in the settlement with Fitbit in trying to encourage these customers to go with an obligation B instead of the A?

Well, the first rule there, I'll say, is that we are not allowing accounting to drive the business and the business structure.

We're going to sign the agreements that makes the most sense for Immersion in total.

That said, I certainly am working with the sales team as we're entering into new contracts to determine whether our -- whether there are opportunities for us to find ways to craft the language that allows us to have a more -- I won't call it ratable from the standpoint of a per unit but, on these fixed fee agreements, ways in which we can leverage either the term or an understanding of their objectives on the solution or the technology that would allow us to structure the contract so that a portion of it would be recognized over time.

We are certainly looking to find ways to add predictability and growth to the revenue model so that it is not quite as lumpy.

But just given the size of some of these agreements and the structure, at least in this first year as we've implemented 606, we are certainly seeing that in the revenue line.

Okay.

And a follow-up, Carl, to what you said at the start of the call in terms of the conversations since the Apple settlement has -- is changed.

Could you address how it's going with Chinese mobile OEMs?

Xiaomi used to be a customer.

They're fast growing.

A number of companies over there are fast growing, taking market share at an extraordinary rate.

How's the discussions specifically with the Chinese OEM market?

Could you give any color?

Sure.

I can give you some color.

I don't want to get into too many specifics because I want to really leave our discussions to be between us and those other parties.

But -- so I was back -- I was in Asia a couple of weeks ago, and we had a very successful tour through there.

I'm trying to make sure that what we were doing was positioned well for the market from a technology deployment perspective.

And really, the -- I wouldn't say the sea change in a lot of the discussions there relative to where -- the discussions that we had before versus the discussions that we're having now.

We've been primarily focused in our most recent discussions on the deployment of the technology served and supported by our intellectual property, not leading with our intellectual property and then saying, "Oh, you can get some technology along with it," but flipping the conversation around.

And really, what that requires is that we have a more in-depth understanding of what the customer needs from a technology perspective.

And the best way for us to support it with both limited resources -- the limited resources that we have internally and then importantly -- and this is a thing that I think tends to get lost a lot of times in these discussions, supporting it with our partners.

Enabling our partners to be a support for those same customers in the marketplace.

In other words, having the ecosystem help us scale.

I think that changes the dynamic of the conversations significantly.

I don't have anything concrete to report on that yet, and I don't want to make any promises in advance of success there.

But I feel very comfortable with where a lot of our conversations are going.

There are no further questions.

I would like to turn it back to management for any closing comments.

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

And we look forward to updating you again in the future quarters.

Thank you.