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Immersion Corporation (NASDAQ:IMMR)

Q1 2013 Earnings Conference Call

May 2, 2013 17:00 ET

Executives

Jennifer Jarman - Blueshirt Group

Vic Viegas - President and Chief Executive Officer

Paul Norris - Chief Financial Officer

Analysts

Jeff Schreiner - Feltl & Company

Charlie Anderson - Dougherty & Company

Mike Crawford - B. Riley & Co

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion First Quarter 2013 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 2, 2013.

I would now like to turn the conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please go ahead, ma'am.

Jennifer Jarman

Thank you, operator. Good afternoon and thank you for joining us today on Immersion’s first quarter fiscal 2013 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 are Vic Viegas, President and CEO, and Paul Norris, CFO. During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, 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 latest 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 now turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Victor Viegas

Thanks, Jennifer, and thanks everyone for joining us this afternoon. In the first quarter of 2013, Immersion made strategic breakthroughs and recorded record results. We earned $13.9 million in revenues for the quarter, our highest total ever and achieved strong profitability of $0.08 per share and $4 million of adjusted EBITDA.

In addition we made critical progress towards fulfilling our basic haptic licensing strategy entering into basic haptic patent licenses with Samsung and LG Electronics, two of our largest and most influential customers. Taken together with our earlier basic haptic license agreement with Motorola, we are now poised to capture a much larger share of the rapidly expanding worldwide smartphone market with basic haptics acting as a pricing floor that gives us the ability to sell more of our advanced technology software solutions at fair prices.

During the quarter, a number of market leaders including Samsung, LG and Pantech launched flagship products incorporating our touch enabling technology and as we demonstrated at February's Mobile World Congress, we continue to develop and introduce new technology solution that showcase the ways in which haptics can bring an increased sense of realism and rich communication capabilities to our customer's products.

Moreover even as we bring immersive haptic experiences to life today's cutting edge products, we are already envisioning tomorrow's advances in haptic technology and how they can enrich future generations of digital devices and new product categories and environments.

In a few minutes I will discuss our recent business developments, but first I will ask Paul to provide a detailed review of our financial results for the first quarter of fiscal 2013. Paul?

Paul Norris

Thanks Vic. As Vic mentioned, revenues in the first quarter of 2013 were $13.9 million, up 43% compared to revenues of $9.7 million in the year ago period. Revenues from royalties and licenses of $13.6 million were up 50% compared to revenues of $9.1 million in the first quarter of 2011.

While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2013, a breakdown by line of business as a percentage of total revenues was as follows; 56% from mobility, 19% from gaming, 11% from medical and 4% from auto. Please note that as large majority of our chip and other business relates to mobile products, we are now including these revenues as part of our mobility revenue percentage.

Gross profit was $13.7 million or 99% of revenues compared to gross profit of $9.4 million or 97% of revenues in the first quarter of 2012. Cost of revenues in the first quarter was $148,000 compared to $315,000 in the first quarter of 2012.

Excluding cost of revenues, total operating expenses were $11.5 million in the first quarter of 2013, compared to $9.1 million in the first quarter of 2012. This includes non-cash charges related to depreciation and amortization of $658,000 and stock-based compensation of $1 million. OpEx in the first quarter of 2013 included litigation-related expense of $3.1 million.

This litigation expense was higher than anticipated as we were preparing for the ITC hearing scheduled for April. Now that the HTC matter has been moved to the district court, we expect litigation expense to continue at a lower level and are forecasting that the expense for this litigation will be approximately $2 million over the remaining three quarters of 2013.

Net income for the first quarter of 2013 was $2.3 million or $0.08 per share compared to net loss of $219,000 or $0.01 per share in the first quarter of 2012. As you know, in addition to normal GAAP metrics, we use a metric called adjusted EBITDA to track our business. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, less share-based compensation.

Adjusted EBITDA in the first quarter of 2013 was $4.0 million, compared to adjusted EBITDA of $1.6 million in the same period last year. Our cash portfolio including cash and short term investments was 64.2 million as of March 31, 2013 compared to $43.5 million exiting 2012.

The cash increase relative to the December quarter is reflective of our recent license agreement and the fact that certain licensing payments we receive are not recognized at once but rather are treated as deferred revenue that is then recognized in future periods. Cash generated from operations during the quarter was $19.7 million.

Immersion did not repurchase any stock in the first quarter; however, management and the Board remained very confident in our business fundamentals and future prospects -- continue to believe that our stock is attractively priced and expect to execute opportunistically on the $19.4 million remaining under our authorized stock repurchase program. We will continue to monitor our cash balance and stock price relative to any future buyback activity.

In regards to the guidance that we indicated mid quarter, based on our current outlook we expect revenues for 2013 to be in the range of $44 million to $48 million, an increase of between 37% and 49% over last year's revenues of $32.2 million. After factoring in the anticipated legal spend to support our efforts to defend and monetize our IP, we expect adjusted EBITDA for 2013 to be in the range of $12 million to $15 million.

With that I'll turn it back over to Vic.

Vic Viegas

Thanks Paul. As I mentioned earlier, in addition to achieving record revenues for the quarter, we entered into important contracts with Samsung and LG Electronics and set the stage for more complete monetization in our mobility business as a result of our Basic Haptics strategy.

The strength of our IT portfolio has now been widely recognized in the mobile marketplace, which should give us an opportunity to secure additional basic haptics licensees in the future as well as the ability to charge an appropriate premium for our advanced TouchSense and Integrator software solution.

During the quarter, we continue to see the launch of new devices incorporating our technology, for example, Samsung's eagerly anticipate Galaxy S4 smartphone and now 8.0 tablet each include our TouchSense 3000 solution and LG has recently announced flagship smartphone, the Optimus G Pro will also use TouchSense 3000. In addition, we saw Pantech roll out a highly popular phone with HD Haptics and the domestic (inaudible) market the Vega No 6, which uses TouchSense 5000 software.

Moreover, we gained further penetration in the Japan market with Panasonic releasing the Eluga phone, the first device that is launched with Immersion technology as a result of the newly signed license agreement between our companies. With leading mobile manufacturers signalling their continued commitment to haptics, we've garnered additional interest from companies that recognize the value of haptics and want to work with us.

This interest spans multiple market segments including mobile, but also a renewed interest in gaming, growing momentum in automotive and new thinking on how haptics can add value to the next generation of digital devices and content. On the gaming front, we are excited to see anticipation building as new consoles such as the Sony Playstation 4 near their expected launch in 2013 and while we anticipate increased opportunities associated with the new gaming console releases, we are also working closely with peripheral companies who are designing game controllers for the mobile market.

Gaming is crossing over into new form factors and we are encouraged by the renewed enthusiasm and innovation we are seeing across this transitioning market as gaming is an area that appreciates and requires haptics, Immersion is well positioned to capitalize on expanding opportunities in this space.

Much of the current work we are doing in automotive, will result in haptic interfaces in the market in 2015 and beyond, but with the success of the recent automotive interfaces that utilize Immersion Haptics, but leading manufacturers such as Cadillac, Aston Martin, Lexus and Acura, more manufactures and partners are now looking to us to provide guidance as to how haptic interfaces can increase driver confidence and improve safety.

Beyond automotive, consumer electronics companies are pursuing new product categories that can be enhanced by haptic's feedback including variable devices such as smart watches and fitness and health monitors. While these product areas are still in the development stage, we believe they offer real opportunity for our touch enabling technologies, particularly where it may be difficult to interact visually with products while engaging in activities.

We continue to innovate and build on what we believe to be the core values for haptics, such as reassuring touch conformation, increased realism and rich forms of communication. OEMs have responded very positively to integrated themes and tactile presence, the new product solutions we recently introduced at mobile world congress.

Integrated themes allows OEMs to reinforce their brands by incorporating Intertwine in consistent visual, auditory and touch elements into their products and tactile presence, we've touch interactions in the mobile communications. Allowing users to transmit tactile gestures or actions to friends and family members who can physically feel those gestures through haptics in their own mobile devices.

We are also excited by recent consumer research, which shows how haptics can bring a true sense of Immersion, excitement and greater enjoyment to mobile media, such as video and advertisements. As we pursue these new market opportunities and areas for advancements and haptic technology, we remain focused on continuing to build a valuable portfolio above intellectual property and solutions.

At the same time, we remain diligent in ensuring that we protect our intellectual property. We terminated the International Trade Commission's investigation of HTC Corporation for infringement of certain Immersion patents in order to proceed directly with our action against HTC in the U.S. district court to accelerate our demand for damages. The remedy available in the U.S. district court includes damages and attorney's fees.

Now I would like to provide our analysts and investors with some thoughts on how you might view Immersion in the near term as well as over a longer term horizon. As I have emphasized throughout the call today, we are very pleased with the recent activity and successes with our new licensing arrangements and the momentum that they have created for us in the market.

We believe these efforts put us in a position to execute well on our current business initiatives and to grow our revenue as we move forward this year and beyond. Over the longer term, we recognize that innovation is the engine that got us here and that it remains pivotal to unlocking the additional substantial growth opportunities in front of us. We are excited by our prospects and continue to work on cultivating rich, new haptic experiences from our latest mobile product offerings to promising elements of our roadmap and other markets.

We are investing in future innovation and while certain initiatives make take some time to come to full fruition, we believe we are setting a stage for future haptics-based monetization opportunities in the years to come.

Before I conclude my formal remarks, I would like to provide a quick update regarding upcoming investor events. We will be attending the Jeffries Tech Media and Telecom Conference on May 9 in New York, the JMP Securities Conference on May 15 in San Francisco the B Riley 14th Annual Investor Conference on May 21 in Santa Monica and the Credit Suisse communications technology conference on June 10th in Boston. We look forward to seeing some of you there.

With that said, I'll now open up the call to your questions. Lily?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Jeff Schreiner with Feltl & Company. Please go ahead.

Jeff Schreiner – Feltl & Company

Yes. Thanks for taking my call gentlemen. Just had a couple of questions here. I guess one Paul or Vic, could you talk about the spending in legal? It seems like it was a little bit higher than the prior estimate, even when you look at the kind of full year run rate and may be help us to understand what's going on there and then is the company looking to start making some investment spending? It seems in sales and marketing and R&D were both up about $0.5 million sequentially. Is the company now looking to start investing a little bit more on the OpEx side as we move through fiscal year '13?

Paul Norris

So Jeff, I'll take those. I guess the -- first on the litigation expenditure, it was a little high in the quarter, but again we were getting right up to the trial in the case before we switched over to the district court. So it was a little bit on the high side, but it was well within the overall range we looked at for the case and again as we look at the remainder of the year going forward, it should -- it should really come down pretty substantially as we look at the going forward quarters as I mentioned in the prepared remarks may be $2 million over the remainder of the year for that litigation.

And as far as the OpEx goes and expenditures they are a little bit higher this last quarter. They really were three factors that play there. It's -- first our stock price has gone up and as that brings up our stock comp expense calculations rise as well. Also our headcount has kicked up just a little bit. We had a 101 employees through the end of 2012 and we were up by may be five or six at the end of this quarter, but we are not expecting to add on any substantial number of new employees over the future months.

And then finally I guess if you are looking at a quarter-over-quarter, keep in mind that our OpEx for the last quarter was a little bit on the lower side because we do close down over the yearend holidays.

Jeff Schreiner – Feltl & Company

Okay. May be one or two more questions for me. I appreciate your time, just in terms of the calculated gross margin that equals about 99% if I am not mistaken in the March quarter versus typically being somewhere around 96%, 97%, is this the run rate for the company in terms of its calculated gross margin?

Paul Norris

Yes, I think you can [take] it about that 99% going forward and that's clearly a reflection of how we are having transitioned the remaining part of our medical product business in the fourth quarter last year and that was the Laerdal virtual IV product business that we've converted to a strict licensing fee arrangement going forward.

Jeff Schreiner – Feltl & Company

Okay. And then I guess Vic if I may, you talked about at the end I think of your prepared remarks just listen to the investors and shareholders to think about the company, how should we think about given the fact that it looks like there is a lot of drivers of growth in fiscal year '13 from these recent licenses, both may be on the unit and even on the per unit royalty side. What are the drivers that are going to keep this kind of growth that Immersion is seeing and certainly saw in the March quarter going into 2014?

Vic Viegas

Sure well, clearly if you kind of walk through the various elements, there are additional patent licensing opportunities for basic haptics as well as advanced haptics. So there is still a number of unlicensed OEMs and there are also new applications that people want to invest in to develop their own solutions for example variables is an area where patent licensing is an opportunity for us.

We think there is tremendous upside in further penetration on the standard definition offerings, moving our Chinese customers from a TS2000 chip based revenue to the TS3000 plus further migration from basic haptics up towards standard definition solutions.

Then you have a whole high definition area where we are just at the very early stages of this very rich capability that enables new experiences, we call it rich communication and realism where you move to Piezos or Electroactive Polymers, you can take advantage of those new capabilities.

We've made some investments with our tactile presence and themes, so you can see with that new solutions such as these or enhanced games, enhanced chat, other kinds of applications could be a big opportunity and then as we grow our market share, higher ASPs or obviously something will be driving and then you have the non-mobile opportunities and gaming automotive and medical.

So I think if you look across the gamut of either IP or solutions or future opportunities there is lots of ways for us to win. In fact you kind of look at today and say we had a good quarter and we are making progress clearly with their business strategy, but I think that we really believe we are at the very early stage of broader haptic adoption and value creation cycle.

So when you look at this financial strength and the investments we've made, pretty clearly we will have a meaningful impact on user experience and if you look at that and what do we believe we can do, we think we can influence eCommerce and content consumption and if we can do that and we've got evidence, we've got white papers and other evidence of user studies that show people want an Immersion experience and if we can bring that to the marketplace and package it correctly, it's a massive opportunity.

Jeff Schreiner – Feltl & Company

All right. Thank you, Vic. One quick question for me before I jump off, could you just let us know if you haven’t in the past what is the percentage of the standard to high definition contribution within the revenue on a haptic side.

Vic Viegas

I don’t know that we've ever broken that out. It's not really something we track right now, but clearly there is four or five products in the market that use our high definition versus thousands of products with our standard definition. So I would be thinking it's 95% plus based on either our IP or our standard definition versus the high definition.

Jeff Schreiner – Feltl & Company

All right, gentlemen. Thank you very much. I appreciate your time.

Vic Viegas

Thanks Jeff.

Operator

Our next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead sir.

Charlie Anderson - Dougherty & Company

Good afternoon. Thanks for taking my questions. You guys have sort of a different quarter than you've had in the past here in terms of business mix and things that are going on and I wondered if we just think about Q2. I know you don’t guide quarters, but just that we don’t get it wrong here in terms of how this impacts your sort of normal seasonality that we would see Q1 to Q2?

Vic Viegas

Yes I think we have in the past and we expect to continue in the future to have some seasonality that benefits our Q1 revenue. Those are the results of gaming products and mobile devices that are sold typically in the fourth quarter year which is our first quarter revenue. So we saw some of that seasonality benefit us as well.

But if you look at the guidance that we provided and the outlook that we have, we believe very much in the guidance of $44 million to $48 million and so I think we expect that you will see the same kind of trend, the same type of revenue growth for the balance of the year.

Paul Norris

And I would add that the relative mix to the extent that changed I think you will see a fairly comparable profile in the next remaining quarters of 2013. And then the last thing I was saying, this is just to clarify there were no onetime events that occurred in Q1 that resulted in the growth in revenue. So what we are seeing is a general trend and broader adoption of 2nology and the recent license agreements as built the space of revenue that we see growing and continuing through the balance of the year.

Charlie Anderson - Dougherty & Company

And then I noticed the deferred revenue jumped up and so the cash lay quite a bit. I wondered of other some fixed elements now in revenue that were -- and then when you just think about modelling for just kind of how we have been for gaming may be in mobility perhaps.

Paul Norris

Yes, you can see that our short term deferred revenue is at about $19 million plus now, so you can assume that we will be recognizing that over the -- that's money that we received and that we will be recognizing that over the next 12 months. We do have some fixed elements. I think we've mentioned that before. We may as we get into different geographies, consider even additional fixed arrangements as part of our ongoing contractual negotiations.

So yes, I think the fixed elements are part of the mix that you will see going forward. Overall though as Vic has indicated we are expecting to see our revenue growing. So long term we will be replenishing -- as we periodically will get the fixed payment, so that will perhaps move the deferred revenue back up periodically and then that will be amortized over time as we recognize.

Charlie Anderson - Dougherty & Company

Yes but then in terms of the cash you said you guys are believers that Immersion have a pretty good investments, good use of cash, is there anything else that you might consider in terms of use of cash?

Paul Norris

Well, we are always monitoring for opportunities. There are a lot of exciting in business areas that are opening up. Right now we are not planning on any major investments in terms of personnel, but we will look -- we keep our eyes open and we also are a licensing company. So we don’t like to litigate. Periodically that becomes something that we may invest in, but nothing else specifically that we think we can point there.

Charlie Anderson - Dougherty & Company

And then Vic, you did a really good job in the last question talking about the future opportunity and you mentioned sort of the media opportunity enhancing content, I wonder if you could just frame up for us what that might look like in term so revenue contribution down the line, if you guys are successful in that area?

Vic Viegas

Sure. The haptically-enabled media and content is a category -- is an area that we are very excited about. We've been working in this space for some time, building out IP tools, product solutions, spent a fair amount of time demoing and working with potential partners on how they might incorporate this in their content or in their distribution channel.

One of the things that I would highlight for you and for anyone else who has an interest, we recently conducted a user study where we enhanced media with our Reverb technology and the results were very promising, they are quite amazing in fact if you look at the quality and improvement, the band sentiment and the product recall that we were able to achieve. So it's a study we've written on white paper, it's entitled Reverb - User Experience Value Investigation and I think that is what we refer to in terms of creating this Immersion experience that will influence eCommerce and content consumption.

So this is an area that could be huge, not only as a revenue generating opportunity but obviously it's further value that we bring to our OEM partners and so monetizing it from content and monetizing it from the handset side are two opportunities and it would be an area that if we see a way to enhance this, grow this and speed the adoption, it could be an area that we might want to invest in.

But as Paul mentioned, we are mindful of our scalable model. We like profits. We are going to be driving high margin profitability as we make these selective investments, but I would point you to this Reverb study and as I said, it really is pretty compelling and our partners and potential partners are really excited by the potential.

Charlie Anderson - Dougherty & Company

And then just last question for me, just housekeeping, do you guys made the re-class sort of the other touch into the mobility bucket. Would that have been just a few hundred thousand dollars like we've been seeing in the last few quarters?

Vic Viegas

Just about right, yes.

Charlie Anderson - Dougherty & Company

Okay. Perfect. Thanks so much.

Vic Viegas

Thanks Charlie.

Paul Norris

Thanks Charlie.

Operator: our next question comes from the line of Mike Crawford - B. Riley & Co. Please go ahead sir.

Mike Crawford - B. Riley & Co

Thank you. I can’t wait to feel the crack of the bat on my I-Pad as a margin of baseball game...

Vic Viegas

We love it and so there to serve our potential partners like it as well.

Mike Crawford - B. Riley & Co

Great now that kind of three solutions are by and large out of the market, so you have kind of a there, how quickly do you see adoption of your proprietary software solutions?

Vic Viegas

Well when you capture both the IP and our proprietary, I think we are now approaching half of the world's smartphones. So we are gaining rapid adoption and we have the ability to bring compelling experiences not only to our proprietary but also to this basic haptics capability. As we continue to gain market share, show the capabilities and these applications, the realism, the rich tact of communication, people want more than button formation and as consumers come to expect that from their content, it puts tremendous pressure on the OEM to up-level the experience by adopting our TS3000 and then our TS5000. So we are very optimistic that we can convert Basic Haptics license to TouchSense license.

Mike Crawford - B. Riley & Co

Okay. Great and for your partners that are taking a proprietary software, is this typically some kind of upfront, life is plus, unit based royalty and if so are you always going to report royalty and licensing and one more, would you ever break that out into more detail.

Vic Viegas

We don’t have any plans to break it in more detail and it's a mix there. We've got some arrangements that are purely per unit, royalty is being reported and then as you saw in this month's result, there is some where we get some fixed elements where that is received and then recognized over time. So I don’t -- we don’t have any plans there right now to try and parse that out and in fact in some contracts you may have a little bit of each. So it would be probably very difficult to do so anyhow.

Mike Crawford - B. Riley & Co

And are you contracts typically in dollars or might they be in yen or other currencies?

Vic Viegas

For the most part we work with dollars.

Mike Crawford - B. Riley & Co

Okay. Thank you very much.

Vic Viegas

Thanks Mike.

Operator

Mr. Viegas there are no further questions at this time. Please continue with any closing remarks.

Vic Viegas

Okay. Thank you. Thank you, everyone for being on the call with us today and we look forward to hopefully seeing you at one of our events and we will look to update you again on our next quarterly call. Thank you.

Operator

Ladies and gentlemen, that concludes the Immersion Corporation First Quarter 2013 conference call. Thank you for your participation. You may now disconnect.

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