Immersion Corp (IMMR) 2019 Q1 法說會逐字稿

Good day, and welcome to the Immersion Corporation First Quarter 2019 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jennifer Jarman of The Blueshirt Group.

Please go ahead.

Thank you, Brandon.

Good afternoon, and thank you for joining us today on Immersion's First Quarter 2019 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 Ramzi Haidamus, President and CEO; and Amie Peters, General Counsel and Interim CFO.

During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, litigation, anticipated future products, anticipated market demand or opportunities and other forward-looking topics.

These statements are subject to risks, uncertainties and assumptions.

Accordingly, actual results could differ materially.

For a 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, our 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, Ramzi Haidamus.

Ramzi?

Thank you, Jennifer, and thanks, everyone, for joining us on today's call or listening later on the webcast replay.

Today, marks a pivotal day for Immersion as I am pleased to announce 2 major deals that sets Immersion up well on the path to growth and profitability.

First, we have settled all patent litigation cases against Samsung.

This landmark deal for Immersion opens a new chapter with our partner, Samsung, as it gives them access to both our advanced haptics patent portfolio as well as our software and technologies for mobile applications.

We look forward to engaging with Samsung over the course of this agreement to help bring advanced haptics into the mobile market.

Over the last 4 years, the company has expended significant resources in litigation against Apple and Samsung to validate its position as a technological leader in haptics and the mobile space.

With that goal achieved and behind us, we can close that chapter of our history and move forward.

Second, today we announced the signing of a definitive agreement with Sony Interactive Entertainment to license advanced haptics.

This agreement is emblematic of Immersion's new strategy to partner with its customers by offering Sony not only access to Immersion's rich, deep patent portfolio, but also to grant them access to Immersion's haptics technology for gaming and VR controllers.

This agreement and partnership will open the door not only to a productive relationship with Sony, but also to the gaming and VR ecosystem where Immersion has been the leader in haptics.

Having just recently completed my 100th-day at Immersion, I'm excited to take this opportunity to speak with you about our progress in 2019 and the future of Immersion and haptics.

One of the things that has become clear to me in my initial 100 days is the versatility of Immersion's business model.

Haptic as a technology began with a prominence in gaming and medical markets moving into the mobile and automotive markets and now starting to proliferate in the IoT market.

In most of these markets, Immersion has played an important role in seeding the market early with technology, but also protecting its investment through the filing and granting of patents.

As a result, Immersion has been able to monetize its innovation effort through technology offerings and is in early stages of haptic adoption in each market and later as a patent licensor as technology matures.

Immersion now is at an inflection point where certain markets are poised for an introduction of new haptic technologies.

It is our job to deliver these technologies to our partners and customers to seed the market and the development of the next phase of haptics.

I will now provide an update on our momentum this quarter.

In automotive, we continue to see the proliferation of touch interfaces in vehicles.

We announced a license agreement with Alpine Electronics enabling them to access Immersion's patented touch feedback technology for in-vehicle touchscreens.

Alpine is the latest in a long list of Tier 1 automotive manufacturers who have recognized that haptics and automotive touchscreens and touchpad is rapidly expanding from luxury to mainstream vehicles, and that Immersion's touch feedback technology is central to its offering.

In the IoT vertical, specifically the smart office, the incorporation of high-quality tactile feedback creates a more intuitive interface for printers, scanners and copiers.

This quarter, we announced that Immersion technology is now enhancing Konica Minolta's latest multifunctional printers in their bizhub product series targeted at the office environments.

A key ingredient of all these experiences is the underlying actuator.

This quarter, we continue to support the haptic ecosystem by signing an agreement with TDK Electronics bringing haptics design and marketing to TDK's piezo actuators for use in automotive, industrial and other markets.

By collaborating with other members of the haptic ecosystem, we can more effectively bring the power of haptics to the end customers.

This quarter demonstrated that haptics is becoming a central part of the digital experience across multiple industries.

As we evolve our business model to a healthier mix of patented technology licensing, technology engagements will allow us to make targeted investments in the market that we believe are right for the introduction of haptics technology and have the potential for the highest ASPs.

As we further develop our strategy, we will look to making additional partnership similar to that of Sony where targeted investments can lead to the potential for significant growth for the company.

Looking forward, we are laser-focused on pursuing and maintaining profitability.

As such, we continue to focus on closing per unit agreements with our customers to build a recurring, sustainable revenue stream, while at the same time identifying potential areas to reduce cost, including a significant reduction to our planned litigation expenses.

Apart from litigation, we are looking at other areas for cost reduction such as our R&D footprint.

Until recently, we have invested heavily in our San Jose office, which is one of the most expensive areas in the world to recruit high-quality talent.

This quarter, we made the decision to shift some of our hiring and resource allocation towards growing our footprint and investment in our Montreal office, where world-class talent in haptics is available at lower cost and employee turnover.

Accordingly, we have made the decision to create the new role of Senior Vice President of R&D, who will be located in Montreal and will report directly to me.

Another potential area for cost reduction is our patent portfolio of over 3,500 worldwide patents.

As with any mature company with a rich patent history, we have an opportunity to carefully prune our patent portfolio, reduce our patent maintenance cost and -- while remaining the leader in haptics ecosystem.

This is a long-term project, which we will initiate this quarter and may yield results over the next 2 years.

Next, I would like to share a few thoughts about our new 3 candidates for Board of Directors as we approach our upcoming shareholder meeting.

Sid Ganis comes to Immersion with a wealth of strategic marketing experience, a decade of public company directorship expertise and a deep Rolodex in the area of media and virtual reality, where Immersion plans to invest and grow.

Jonathan Visbal's expertise in helping Silicon Valley companies hire public company executives and Board members will be invaluable for Immersion as we rebuild the company.

Sumit Agarwal's Silicon Valley experience in technology and mobile products will be very relevant as Immersion looks to grow its mobile market penetration.

I look forward to introducing our Board candidates at our upcoming shareholder meeting.

I've had a productive first 100 days with the company getting to know the customers, shareholders, employees, the technology and the patents as well as completing the Sony deal and settling the Samsung litigation.

I continue to be impressed with the global Immersion team as evidenced by this quarter's execution, and I'm especially impressed with our R&D capability in Montreal.

I'm looking forward to the next few quarters as we complete our executive hires, onboard a number of new directors and share with you a well-articulated strategy for the company's future.

I will now turn the call over to Amie to discuss the company's financial news.

Thanks, Ramzi.

By now, you should have seen our press release and Form 10-Q and have had a chance to look over our numbers.

Immersion's revenue for the first quarter were $5.1 million, down $80.3 million or 94% from revenues of $85.4 million in the year ago period.

This decrease is primarily related to a material fixed fee license agreement that we entered into in the first quarter of 2018.

Revenues from royalties and licenses in the first quarter of 2019 included variable royalties based on shipping volumes and per unit prices totaling $3.3 million and fixed payment license fees totaling $1.8 million.

This compares to variable royalties of $9.6 million and fixed license fees of $75.8 million in the prior year period.

Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns.

And for the first quarter of 2019, a breakdown by line of business as a percentage of total revenues was as follows: 41% from mobility; 33% from auto; 24% from gaming; and 2% from medical.

Looking at year-over-year trends, mobility revenues were down 97% from the first quarter, primarily due to the previously mentioned Montreal fixed fee license agreement entered into in the first quarter of 2018.

Automotive revenues were down 75%, primarily related to certain per unit royalty agreements entered in last year's first quarter that contained minimum royalty provisions, for which we recognize the whole set of minimum royalties as revenue at the inception of such agreements.

Gaming revenues were down 34% during the first quarter, and medical revenues were up 75% resulting from license renewal with a certain medical customer.

Gross profit was $5.1 million compared to gross profit of $85.4 million in the first quarter of 2018.

Turning now to our first quarter's operating expenses.

Excluding cost of revenues, total GAAP operating expenses were $16.6 million in the first quarter of 2019 compared to $15.3 million in the year ago period.

This increase was primarily driven by professional service expenses, along with higher legal costs, including roughly $875,000 for legal fees paid as a result of the mediation directive by the Seoul Regional Tax Office or SRTO which I will discuss in a bit.

Looking at our net results.

GAAP net loss for the first quarter of 2019 was $11 million or $0.35 per share compared to GAAP net income of $69.9 million or $2.29 per diluted share in the first quarter of 2018.

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

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

Non-GAAP net loss in the March 2019 quarter was $8.8 million or $0.28 per share compared to non-GAAP net income of $71.5 million or $2.34 per diluted share in the same period last year.

Turning to the balance sheet.

On March 4, we received a determination from the Council of International Court of Arbitration where we were directed to reimburse Samsung Electronics roughly $6.9 million, plus $875,000 of court fees for withholding taxes that Samsung had paid to the Korean tax authorities on Immersion's behalf.

We recorded the $6.9 million on our balance sheet as both a long-term prepaid asset and a current liability in accounts payable.

Note that we do not expect this determination to have any significant impact on our tax provision as we expect to be fully reimbursed if we prevail on appeal with the Korea Administrative Court, which we expect will more likely than not be the case.

Overall, our balance sheet remains strong with our cash portfolio, including cash and short-term investments, at $117.6 million as of March 31, 2019, down $7.3 million from when exiting 2018.

Taking into account both the Sony agreement, which we expect will have a greater impact starting in 2020, and the Samsung agreement, for which we will begin recognizing recurring revenue this quarter, we have upwardly revised our expected 2019 revenue range to be between $36 million and $41 million and a bottom line non-GAAP net loss between $6 million and $13 million.

From an OpEx standpoint, we now expect GAAP operating expenses between $55 million and $58 million.

Included in this number is litigation expense of between $10 million and $12 million and noncash stock-based compensation expense of between $6 million and $7 million for the year.

Due to the full valuation we continue to carry, we are forecasting cash tax expense for the year to be approximately $400,000.

We now like to open up the call to questions.

Operator?

(Operator Instructions) The first question will come from Tony Stoss with Craig-Hallum.

Congrats on getting the Samsung deal done.

Ramzi, is there a way that you're going to have to or is it going to be difficult for you to audit Samsung since it seems like it's a per unit basis?

Also was there any upfront payment that we might see in the June quarter in the cash balance?

And then, lastly, you talked about driving for a profitable Immersion.

What's your estimate on revenue for breakeven once you've made these further cost-cut moves?

What's the general range of revenue for you guys breakeven?

I don't foresee any problems with working with Samsung moving forward based on the structure of the deal and my history with Samsung.

So I'm not that concerned.

As far as -- we're not really putting out any revenue predictions beyond 2019 at this point.

As far as back payment or settlement number, it is a modest amount.

The architecture of this deal with Samsung has been focused on long-term value creation, and the best way to do that is a quarterly -- is basically a deal where all royalties are recognized on a quarterly basis.

So that is the bulk of the deal with Samsung.

As far as profitability, we are focused laser sharp on this.

It's going to take both revenue and deals like Samsung and Sony, but, more importantly, focus on our cost basis and continue to look at our cost structure over the next 24 months.

Some of it will take some time to reduce such as the patent portfolio.

Even if we decide to cut today, it takes a little bit of while for the revenue -- for the savings to take effect given the way the patent portfolio fees work out as well as the prosecution works out.

So it's going to take a little bit of time, but we believe it is within line of sight.

Then as a follow up, I'd love to hear, I guess, any additional information on your continued auto progress.

I know you've done quite well there and you announced another deal during the quarter.

And then my last question and I'll jump back in queue is now that you have Samsung done, I know the Chinese handset OEMs -- you've been having discussions with them.

Do you think this will help speed up the agreement with any one of those?

The automotive market remains to be one of our largest growth and opportunities moving forward, not only because the market is nascent and starting to adopt haptics, but the ASPs, as you know, are quite high.

So we continue to talk to large OEMs, to Tier 1s, and not only on the patent licensing side, but we are ready to launch some of our reference designs and software, which will be accompanying the patent licensing team.

So it will be a vertical sell over the next year or two.

Now having said that, it is a slow-moving market.

The cycle for automotive is slow, as you know.

So we don't foresee a big pop in the short-term, we do see this as a sustained growth for us in the long-term in a market that's going to yield a significant ROI.

As far as the Chinese OEMs, I'm not sure I can speak directly to the effect of Samsung on China, but I can speak that the IC strategy is certainly one experiment for us to try to penetrate the Chinese OEM market.

We do have Dongwoon, and we have others lined up to be announced in -- as soon as we sign them to try to get to the Chinese market using the IC strategy where the IC is licensed with the intellectual property, but it's still a bit too early to tell today on how that's going to be playing out.

The next question will come from Charlie Anderson with Dougherty & Company.

My congrats on getting the deals done as well.

Ramzi, some of your peers often talk about a royalty base based on the number of deals that they have signed, kind of, roughly where their revenue run rate is.

I wonder if you could speak to that.

Obviously, there sounds like past deals are modest, but I imagine also there is the upside in here of units that haven't shipped with your software yet.

I wonder if you could maybe just speak to what is the revenue baseline here that we're going to be talking about with this new deals in hand?

And then sort of in addition to that now that you have sort of a larger view of the market through this price discovery, do you have any updated views on the TAM for Immersion?

And then I've got a follow up.

Yes.

I'll take over the second one.

So Charlie, I'll take the royalty base question.

We put out a range of $36 million to $41 million that's revised upward from $24 million to $30 million from last February.

I think you can sort of think of that as the run rate going forward with the base business with Samsung overlaid on top of that for 2019.

If you listen to my remarks, you would have heard that we're not expecting to see a large impact of the Sony agreement until 2020.

So you sort of have to think about that going forward.

TAM?

As far as the TAM is concerned, we don't have specific numbers as of yet.

I would like to wait until we roll out our strategy.

As I mentioned in the remarks, that's something that will happen over the next 90 days as I fill in the executive seats for the open positions.

And we're getting some new Board members to oversee the new strategy.

So when I do roll out the new strategy, I'll be rolling out some TAM numbers and potential penetration for Immersion.

Suffice it to say that, just a high level at this point, I can tell you that when the automotive market -- it's very early days.

We still see a significant growth ahead of us.

I would say the mobile penetration is we're at maturity with Samsung behind us, except for China.

That continues to be a challenge for us.

And one way to penetrate China could be the IC strategy we discussed, and another way would be to bring in new technology that would tip companies over from being pure patent licensees to technology and patents.

And that's where I've seen potential penetration be more successful than just with a pure patent license.

That's going to take time though in China, and I don't have much progress to report to on today.

Great.

And then for my follow up.

I know we have a history of doing deals with Samsung here at Immersion.

Ramzi, this is your first large deal with them and also with Sony.

It seems you've got a few big ones now under your belt.

I'm just kind of curious philosophically what you were trying to achieve with these deals.

Maybe what might be different than the approach that we've seen in the past?

Any color on that would be helpful.

Yes.

For sure.

I've done deals with both Sony and Samsung over the last 2 decades.

So I'm quite familiar with the companies as well as what makes sense for a licensing company.

I can confidently say that both Sony and Samsung fit well within our best practices of per unit royalty or quarterly revenue recognition moving forward.

That is the best value that we can get for our shareholders in recognizing value increasing over time and not be focused on deals where you have pops in single -- onetime recognition or back payments.

Not only this, but we do believe that a technology partnerships with both companies can yield us great value, not only in the sense of getting our technologies in those products, but participate in the product road map discussions, which could then feed into our R&D efforts, which will then give values back to these companies.

So looking at a long-term relationship in terms of joint technology partnership or bringing value in the form of technology and patent is what -- the focus here with both these companies as well as other companies moving forward.

(Operator Instructions) The next question will come from Josh Nichols with B. Riley FBR.

I did want to ask.

How should we think about the revenue cadence as far as Q2 versus the second half given that there was some payment for prior shipments for Samsung that I assume would be recognized entirely in 2Q?

Yes.

Josh, the revenue for -- so the Samsung agreement does have an undisclosed amount of back damages associated with it.

We are still reviewing the revenue recognition under that portion of the agreement.

But I believe that will result in a counter expense rather than hit the revenue line.

Going forward, I think, you can think about that we are still a little bit back-end loaded in terms of the revenue line, the royalty revenue line as well as the license revenue line.

We had indicated that in the last call, and we are still forecasting that to be the case.

And then as a follow up, I did want to ask.

I believe the company is -- used up all of its NOLs at this juncture.

Is that correct largely?

No, that is not correct.

No.

Okay.

So whenever you say that there's only -- anticipate cash tax of $400,000, the upfront payment that you're getting for the cash from Samsung is not going to be subject to a significant tax withholding?

No.

It will not.

Okay.

And then last question, I guess, is good to hear that the company is being pretty proactive on the OpEx side and doing some pruning as well on the patent portfolio.

Could you help frame a little bit for what you kind of may be targeting as far as a run rate for OpEx or for G&A or amount of expenses that you think could be cut by say like the end of this year?

So we did mention on the call we're targeting between $55 million and $58 million for OpEx for the year.

Still baked in that number is $10 million to $12 million in litigation expense, given that we did come up almost through trial with Samsung.

So we had to anticipate that.

And so we are expecting it to be down $2 million to $3 million from the prior year.

This concludes the question-and-answer session.

I'll now turn the call back to management for closing remarks.

Thanks, operator, and thank you, all, for joining us on this call today.

I hope you can tell by my comments, I am very enthusiastic about the increasing importance of tactile feedback technology into several important markets and our excellent position within the goal of growing the company.

I look forward to having the opportunity to meet with many of you in the near future, and thanks, again.

Bye.

Thank you, ladies and gentlemen.

This concludes today's event.

You may now disconnect your lines.