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Executives

Jennifer Jarman - Investor Relations, The Blueshirt Group

Vic Viegas - President and Chief Executive Officer

Paul Norris - Chief Financial Officer

Analysts

Jeff Schreiner - Feltl and Company

Charlie Anderson - Sidoti and Company

Richard Magnuson - B. Riley & Company

Paolo Gorgo - Nortia Research

Richard Marshall - SunWest Capital

Immersion Corporation (IMMR) Q4 2013 Earnings Conference Call February 20, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Corporation Fourth Quarter and Fiscal Year 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, February 20, 2014.

I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Jennifer Jarman - Investor Relations, The Blueshirt Group

Thank you, operator. Good afternoon, and thank you for joining us today on Immersion’s fourth quarter and 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 will turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Vic Viegas - Chief Executive Officer

Thanks, Jennifer, and thanks everyone for joining us this afternoon. 2013 was a breakthrough year for Immersion. We successfully executed our Basic Haptics licensing strategy and saw the continued market success of cutting-edge products featuring our TouchSense software.

As the market recognized the strength and increasing value of our technology and solutions, we were able to execute at a higher level and achieve record revenues throughout 2013. I am very pleased to report that this trend continued in the last quarter of 2013 as we generated record fourth quarter revenues of $12.1 million, reflecting robust growth of 36% from the year ago period. Aided by these strong Q4 results, our annual revenue for 2013 totaled $47.5 million, which was at the upper end of our guidance range and represents an all-time high for Immersion. Adjusted EBITDA for 2013, excluding the impact of a change in accounting method adopted in the fourth quarter, was $12.8 million also within our guidance range. Paul will provide details regarding the accounting method change in his review of financial results for the quarter and year.

In 2013, Immersion also achieved key milestones that have established the foundation for future growth in the immediate and long-term. These milestones include extending existing licenses and securing additional new licenses with key mobile OEMs, including Samsung in Korea, Sharp in Japan, and Xiaomi in China. Building a strong team of Immersion sales and technical support staff in China to quickly serve the needs of customers and capture our growing opportunities in that region witnessing Cadillac, Aston Martin, Opel and Acura bring the very first haptically enhanced automotive touch surfaces to market signaling a bright future in which haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces.

Extending our license agreement with Sony to cover the use of Immersion haptics in the PlayStation 4 reinforcing the importance and popularity of haptics in gaming and setting the stage for Immersion to power haptic experiences in a new generation of game consoles, participating in the launch of Samsung’s first wearable device the Galaxy Gear smartwatch with Immersion’s TouchSense software and strengthening our senior management team through key hires including the appointment of Jason Patton as General Manger to lead and execute our content strategy, an area where we see great promise. In a few minutes I will discuss our recent business developments and expectations for 2014. But first, I will ask Paul to discuss the details of our fourth quarter and fiscal 2013 financials. Paul?

Paul Norris - Chief Financial Officer

Thanks Rick. Revenues for the December quarter were $12.1 million, a record for Q4 and up 36% from revenues of $8.9 million in the year ago period. Revenues from royalties and licenses of $11.6 million were up 52% from royalty revenues of $7.6 million in the fourth quarter of 2012. While the revenue mix for line of business is expected to fluctuate on a quarterly basis for the fourth quarter of 2013 a breakdown by line of business was as follows: 61% from mobility, 26% from gaming, 7% from medical and 6% from auto. Note that the increase in the relative percentage of our gaming revenues up from 16% in the September quarter in part reflect amounts we have recognized in connection with the expansion of our license with Sony to cover the new PlayStation 4 gaming console as well as normally strong preholiday sales. Gross profit was $12 million or 99% of revenues compared to gross profit of $8.5 million or 96% of revenues in the fourth quarter of 2012.

During the December quarter we adopted a change in accounting method relating to how we account for external legal fees incurred in applying for patents and maintaining our IP portfolio. Whereas our prior method was to capitalize these amounts and then amortize them over a 10-year period once the applicable patent was issued. Under the new method we simply have (expend) all of these amounts in the period incurred. We have adopted this change for several reasons. One, we believe it will make our financial statements more transparent in conveying the total amount we are spending to develop and maintain our patent portfolio and all such amounts whether external legal fees or internal technical resource expenditures will now be treated in the same way and expensed as incurred.

In addition, as we continue to grow the size of our global patent portfolio, the change will simplify the administrative and compliance burdens associated with tracking and amortizing these external IP-related expenses and eliminate the need for us to perform complex and subjective portfolio impairment analyses. Finally, we believe the change will also provide for a better comparison with our industry peers as the predominant industry practice is to expend external patent-related cost as incurred.

Turning now to our operating expenses excluding cost of revenues total GAAP operating expenses under our revised accounting method were $11.3 million in the fourth quarter of 2013 compared to $8.8 million in the year ago period. The impact of the accounting method change was to increase our December 2013 G&A expense by $1.1 million and to reduce amortization expense by $400,000 resulting in operating expenses that are $700,000 higher than it would have been reported under the prior method. Comparably in the December 2012 period, the changed accounting method increased G&A expense by $700,000 and reduced amortization expense by $500,000 leading to operating expenses that are $200,000 more than the amount previously reported for that period.

Operating expenses in the fourth quarter of 2013 included non-cash charges related depreciation and amortization of $145,000 and stock-based compensation of $1.2 million. Of the non-cash stock-based compensation charges $300,000 were included in sales and marketing, $200,000 in research and development and $700,000 in G&A. Litigation-related expense for the quarter was $627,000, down from $1.9 million in the fourth quarter of 2012. Total operating expenses increased versus the prior year – quarter primarily due to increases in compensation related costs. The increase in compensation costs reflect in part a 17% year-over-year increase in our sales and marketing and research and development headcount, investments we have made to capitalize on key opportunities and strategic initiatives as well as a 51% increase in stock-based compensation expense. These increases were offset in part by the reduction in litigation-related expense.

As I mentioned last quarter, due to our consistent profitability in leasing periods, the success of the investment we made in protecting our Basic Haptics IP and the visibility and positive expectations we now have regarding future profitability, we have been evaluating the need to continue carrying a full valuation allowance for our deferred tax assets. We have now completed that evaluation and as a consequence have released substantially all of our federal deferred income tax valuation allowance in the fourth quarter of 2013. This release resulted in a non-recurring benefit for income taxes of $36.8 million in the December quarter.

Beginning in the first quarter of 2014 for financial statement purposes, net income will include a tax provision based on a 35% tax rate. However, we do not expect to be paying significant cash taxes in the near future as our net operating losses and other tax assets carry forward and will offset cash taxes on more than $65 million in future taxable income. We continue to maintain a full valuation allowance on certain other deferred tax assets, primarily relating to the state and foreign taxes.

Net income for the fourth quarter of 2013 was $37.4 million, or $1.26 per diluted share compared to net loss of $402,000, or $0.01 per share in the fourth quarter of 2012. The impact of the change in accounting method was to reduce net income for the fourth quarters of 2013 and 2012 by $800,000 and $200,000 respectively as compared to the amounts that would have been determined under the prior method.

As you know, in addition in normal GAAP metrics, we use adjusted EBITDA to track our business. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization less stock-based compensation. Adjusted EBITDA in the 2013 December quarter was $2 million, up from adjusted EBITDA of $610,000 in the same period last year. The impact of the change in accounting method was to reduce adjusted EBITDA for the fourth quarters of 2013 and 2012 by $1.1 million and $700,000 respectively as compared to the amounts that would have been determined under the prior method.

Turning now to our results for the fiscal year ended December 31, 2013. As Vic mentioned earlier, revenues were $47.5 million, up 48% from revenues of $32.2 million for fiscal 2012. Full year revenues from royalties and licensing were $46.2 million in 2013, up 59% from $29 million in 2012 driven primarily by increased mobility revenues, but also aided by revenue increases in our automotive gaming and medical lines of business. Revenues from product sales and development contracts in 2013 were $105,000 and $1.2 million respectively compared to revenues of $2 million and $1.2 million respectively in 2012.

For the full 2013 fiscal year, our breakdown by line of business as a percentage of total revenues was as follows: 56% from mobility, 21% from gaming, 8% from medical and 5% from auto. Gross profit for the year was $47 million, or 99% of revenues, up from gross profit of $31 million or 96% of revenues in 2012. Taking into account, the change in accounting method, GAAP operating expenses, excluding cost of revenues were $43.4 million in 2013 compared to $37.7 million in 2012. The impact of the accounting method change was to increase our 2013 and 2012 G&A expenses by $3.9 million and $3.1 million respectively and to reduce amortization expense by $1.7 million and $1.5 million respectively. And this translates to operating expenses that are $2.2 million greater in 2013 and $1.6 million greater in 2012 than those that would have been determined under the prior method. Due primarily to the patent infringement litigation against the HTC, litigation expense in 2013 was $4.9 million, down from litigation expense of approximately $8 million in 2012.

Net income for the year, including the non-recurring income tax benefit of $36.8 million from the partial release of our valuation allowance was $40.2 million compared to a net loss of $7.2 million in 2012. Adjusted EBITDA for 2013 was $8.9 million compared to adjusted EBITDA loss of $2.9 million in 2012. The impact of the change in accounting method was to reduce adjusted EBITDA for 2013 and 2012 by $3.9 billion and $3.1 million respectively as compared to the amount that would have been determined under the prior method.

Our cash portfolio, including cash and short-term investments, were $71.1 million as of December 31, 2013, up substantially from $43.5 million exiting 2012. The increase was driven primarily by $21.2 million in cash generated from operations during the year. In early 2014, we recommenced our stock repurchase program ending approximately $4.4 million during the month of January to buyback Immersion shares and leaving us with $15 million remaining under our authorized stock repurchase program.

Management and the board remain confident in our business fundamentals and future prospects continue to believe that our stock is attractively priced and expect to continue to execute opportunistically to buy back shares under our authorized stock repurchase program. As of January 31, 2014 based on ongoing operations and payments received under new and existing agreement taking into account or stock repurchases, our cash portfolio totaled $86.6 million.

We will continue to monitor our cash balance and stock price relative to any future buyback activity. Based on our current outlook, we expect revenue through 2014 to be in a range of $54 million to $62 million, reflecting growth of 14% to 31% over the prior year based primarily on expected in the mobile and gaming markets. As a reminder in the first quarter of 2013, we received a one-time benefit of more than $2 million due to an overlapping receipt of both tail period and new revenue under our former agreement that expired and was subsequently renewed.

While we do continue to expect a certain amount of seasonality in our business, we expected as we transitioned to more contracts with fixed elements to generate recurring revenue, the effective seasonality will be lessened in 2014 and in future years. We expect the quarterly run rate for our OpEx, excluding non-cash charges, to be in the range of $10 million to $11 million. Next, in 2014, we will report two new non-GAAP measures, non-GAAP net income and non-GAAP earnings per share and we no longer report adjusted EBITDA. We define non-GAAP net income as net income, GAAP net income by stock-based compensation. We define non-GAAP earnings per share as non-GAAP net income per fully diluted share. We expect non-GAAP net income for 2014 to be in the range of $8 million to $15 million. Based on the two new shares outstanding of $30 million, we expect non-GAAP earnings per share to be in the range of $0.27 to $0.50.

With that, I’ll turn it back over to Vic.

Vic Viegas - President and Chief Executive Officer

Thanks, Paul. As I mentioned in the opening remarks, Immersion successfully executed our Basic Haptics licensing strategy and is performing at a higher rate leading to record revenues in 2013. We are now investing in critical programs to set the company up for continued growth in 2014 and beyond, which include establishing a sales and technical support team in China, investing in our mobile ads and entertainment initiative, expanding our support for the automotive market and driving demand for haptics in gaming and variables. I’d like to take this opportunity to dive into each of these initiatives in greater detail.

During 2013, Immersion announced its first direct mobile licensee in China, Xiaomi. As a technology innovator, Xiaomi is a high profile and well regarded OEM in China. Its use of Immersion’s TouchSense software to incorporate numerous customized haptic features into its flagship Mi3 product was highlighted by Xiaomi’s CEO in his keynote address at the products launch event. Our success at Xiaomi points to the value that Immersion can bring to China OEMs. We are looking to rapidly incorporate high impact technologies to differentiate their user experiences. During the fourth quarter, we continue to deepen our relationships with OEMs in the region, including being invited as a technology innovator at the China Mobile industry event in Guangzhou in December. As a result of the level of activity we have experienced throughout 2013, Immersion has established a regional headquarters in Shanghai and we will continue to build our technical support teams to meet the growing needs of Chinese customers.

As the value of haptics in mobile devices has expanded beyond reassuring touchscreen confirmation, we have been investing in novel ways that our touch feedback technologies can increase realism and open the door to richer ways of communicating with various forms of mobile content. For example, in the growing world of gaming apps, we first launched a Haptic SDK for game developers in 2011. Large and small developers have now used this SDK to create immersive and engaging mobile games that have proven to be the extraordinarily popular. In 2013 alone our analytics show that apps using our SDK were installed over 70 million times.

We are also making a substantial investment in our mobile content initiative. We believe that adding haptic feedback to mobile content, including rich media advertisements and premium video content represents a tremendous opportunity for Immersion. And we have been devoting between 35% and 40% of our technical resources as we build this new business. Our early usability research has shown that mobile ads and entertainment enhanced with haptics generate greater levels of consumer engagement and more positive levels of enjoyment and brand sentiment, while also improving long-term content recall.

As we move forward with our content business, we are measuring our progress in six principal areas. First, we are focused on the foundational IP and innovation that will define support and protect this initiative. As our technical and user experience teams have developed new and innovative use cases and technology for use in mobile ads and entertainment, we have been active in securing the resulting IP. While innovation is an ongoing process, we feel that we have already built a solid base upon which to build our content business.

Second, we have developed a flexible set of tools and software technologies to enable a successful encoding distribution and playback of haptic content. In developing these technologies, we have worked closely with professionals in the content industry to ensure that our offerings are easy-to-use and compatible with existing workflows. We have made great progress in this area and anticipate we will be performing test integrations with third parties in the near future with potential product launches to follow in late 2014.

Third, we have been pulling together a strong sales and marketing team to direct the content business moving forward. In January, Jason Patton, an experienced entertainment and technology executive joined us as Vice President and General Manager for content media. Jason will oversee are our ads and entertainment business and continue to assemble a team with the capabilities and experience necessary to make it a success.

Four, as we are increasingly able to quantify the value of haptics we will work closely with industry advocates to generate support throughout the mobile advertising and entertainment ecosystem. We will continue to meet with industry participants and work to forge relationships with partners like ad networks, content creators, media companies and mobile OEMs to ensure a high quality haptic experience across platforms, devices and applications.

Fifth, we will begin to enter the marketplace working with select partners to launch pilot programs and market tests. Our main focus at this stage will be to validate our technologies in a commercial setting, getting user feedback, quantify the benefits of haptic ads and entertainment content and gather insights through analytical data. We anticipate that we may initiate testing and pilot programs as early as the first half of 2014 with additional programs being launched throughout the remainder of the year.

Finally, we look forward to the commercialization and monetization phase of our content business. Based on our progress with the near-term activities I have just outlined, we now expect that we may achieve our first content revenue by the end of 2014 and that our content business could begin generating meaningful top line revenue by the later part of 2015. While many of our early stage efforts in the content area will be internal in nature, we will keep you posted on our progress and where feasible, announced specific milestones as we achieve them.

Turning to the automotive market, we recently entered into new agreements with leading suppliers. We are incorporating haptic technology into the interface systems they provide to automotive OEMs. Carmakers and their suppliers now realized that by incorporating haptics they can reduce glance rates and task completion times improving the safety and usability of their user interfaces. Under our recently announced multi-year licensing agreement with Tokai Rika, a leading supplier of automotive control systems and components, they will offer haptic enabled touchpads to their automotive customers.

I am also pleased to announce that we have recently entered into a multi-year licensing agreement with Continental, one of the world’s largest Tier 1 auto suppliers and a leading international provider of interface solutions for auto interiors. Under this agreement, Continental will offer Immersion haptics for its touch-screen, touchpad and button interfaces. The first design concept to come out of the Continental agreement is a recently previewed 2015 Mercedes touchpad for the C-class, which uses a unique backlit touchpad with haptics to navigate the automotive UI. As part of its solution development, Continental perform research to evaluate key safety metrics for touchpad interfaces with and without haptics, which generated some compelling results. Their published research shows that a driver’s gaze is diverted away from traffic, 23% less with haptic feedback. And the tasks were completed 33% quicker with haptics technology then without.

At January’s Consumer Electronic Show, we announced the launch of our automotive haptics web portal located at automotive.immersion.com. This resource provides information for OEMs and designers looking to implement haptics into their auto interfaces. The portal shares technical best practices based on Immersion’s years of mechanical, electrical and software experience and highlights key usability criteria OEM should consider when creating specifications for haptics in their interiors. The development of this portal was a direct result of the increased interest we have had from the automotive community.

By distributing these guidelines, we hope to educate automakers and suppliers to create the highest quality haptic experiences for consumers. As automotive OEMs view the car use interface as an extension of their brand and a key factor in the overall consumer satisfaction with car experience, we are now engaging directly with OEMs at a much higher level in the design and specification phase. This is an exciting elevation in our level of engagement and speaks to the value that OEMs are placing on haptic technology. While these engagements have long design cycles, the enthusiasm we are seeing leaves us feeling very optimistic about the future of haptics in the automotive interior.

On the gaming front, we are pleased to see the highly anticipated Xbox One and the PlayStation 4 both launched in 2013 using haptics. These new consoles have been well received in the marketplace, have generated enthusiasm for innovations and haptic feedback for the gaming market and have once again shown that haptics is an expected feature for any high-quality gaming experience. We were pleased to extend our licensing agreement with Sony during the year and are investing in ways to bring new haptic capabilities to the gaming market for both console gaming and the emerging mobile peripherals market.

Lately, as variable computing devices have been generating an increasing level of excitement, we have been working closely with manufacturers to bring haptic feedback to this emerging market opportunity. In launching its high profile GALAXY Gear Smartwatch, Samsung selected our TouchSense software to create high-quality haptic effects while reducing noise and battery consumption. Many companies are investing heavily in this area competing with each other to introduce the must have Smartwatch, fitness band, health monitor for other wearable devices. We are working with many of these companies and as our TouchSense technologies offer a silent, intuitive and compelling communications channel for all types of wearables. We expect to see our software design into new wearable products both in 2014 and beyond.

Lastly, as we discussed last quarter, we continue to move through the discovery phase of our lawsuit against HTC Corporation in the U.S. District Court in Delaware, which is scheduled to go to trial in March 2015. We are pleased to report that the reexaminations of two of the patents in the litigation that the PTO had initiated at the request of HTC have concluded. We have received reexamination certificates for both of the patents reflecting only minor amendments that do not change the substance of the patents. We remain extremely confident in our case and after the results of the reexamination extremely confident in the validity of our patents.

Looking forward to 2014, we are excited by our business prospects. As Paul noted earlier, we anticipate another record year for Immersion. In the near-term, we look forward to establishing agreements with new mobile licensees such as those in China as well as expanding existing agreements as our mobile and gaming OEMs look to adopt new higher value applications for Immersion technology. Longer term, we will continue to invest in the tools and technology needed to recognize the opportunities in the mobile ads and entertainment business as well as in the automotive market.

While our 2014 guidance does not include these long-term opportunities, we believe our initiatives in these areas will position us well for substantial growth in future years. For those of you who will be at the Mobile World Congress event in Barcelona next week, I invite you to come, visit Immersion’s booth in Hall 8. The booth was designed to highlight the user experiences we believe will drive haptics into new areas over the next few years. Demonstrations will include novel use cases for haptics enhancing today’s mobile apps, user interface and games. New concepts and user-created mobile video that allow tactile effects to be inserted into your mobile video automatically created through GoPro-style devices with intelligent sensors. We will have wearable demonstrations that capture our haptics can create a valuable and intuitive communication channel for advanced wearable interactions for the home, fitness and gaming. Finally, we will also have tactile ad and entertainment demonstrations with a sneak preview of the enablement tools we are developing for professional video editors to create their own tactile effects.

To conclude my formal remarks, Immersion has achieved a record 2013 successfully establishing the value of its technology and software. In addition, we have the teams in place to execute on new growth opportunities worldwide. We look forward to updating you on our progress in the coming year. As we close out the year, I’d like to thank our dedicated employees around the world who help make 2013 a success. I’d also like to recognize our customers, partners, and valued shareholders for your continued support. We look forward to seeing some of you this quarter at Mobile World Congress, the JMP and Sidoti investor conferences in March or out on the road.

With that said, we will now open up the call to your questions. Colton?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Jeff Schreiner with Feltl and Company. Please go ahead.

Jeff Schreiner - Feltl and Company

Yes, thank you gentlemen for taking the time to answer my questions. I have two here just some housekeeping items that I wanted to go over. One is, is Immersion going to provide a historical reconciliation for the adjustments that were made within G&A and amortization expense that happened probably on a quarterly basis and have been changed to be in accordance with GAAP? Is there going to be some type of reconciliation that we can to update our models?

Paul Norris

Yes. When we file the 10-K report in the next week or so, we will include a set of reconciling tables that basically show you the roadmap of the adjustments from the old – the new method.

Jeff Schreiner - Feltl and Company

Okay, nothing that could be released today in terms of getting that into the analysts’ hands and investors’ hands?

Paul Norris

No. We don’t have anything today although I will be happy to answer any questions you may have at this time.

Jeff Schreiner - Feltl and Company

Okay. Well, I will pass on that and take questions for later. But I’ve also wanted to just understand what was going to be the add-backs to non-GAAP net income that you’re now reporting from GAAP. I didn’t hear anything talked about in terms of what the offsets were going to be?

Paul Norris

We’re going to be adding back in just the stock-based compensation.

Jeff Schreiner - Feltl and Company

Okay. Thanks for giving those the other way there. I guess the first thing I’d like to understand is (fair to call) why did mobile decline sequentially, that is not seasonal by any means, it’s typically an up quarter sequentially. What – can you tell us about mobile and what was going on there?

Vic Viegas

Mobile is very healthy and we’re excited with the performance and the outlook. If you look at it over the prior year which I think is the right comparison because you do have some seasonality, you’ll see healthy growth over the prior year’s quarters. As you mentioned sequentially it was down a little bit and I guess I would say that there are certain quarters where there are catch-up payments, contract timing and other types of seasonality that impact the revenue. But we have in the past also had other sequential revenue declines in mobility again just because it can’t be lumpy. So I still think it’s a very robust healthy growing business and our 2014 outlook is very positive.

Jeff Schreiner - Feltl and Company

Okay. And then can you just talk about the recent acquisition by Lenovo, a Immersion licensee Motorola. First, is the license is transferable and is there any risk to revenues from this transaction in calendar year 2014?

Vic Viegas

I don’t believe that, that transaction is actually occurred yet. So that’s still subject to the normal closing process. We see that as a net positive for Immersion. We don’t see it as a significant risk with our Motorola relationship. We think that Motorola has a bright future and if anything Lenovo probably helps support their growth effort. So we see this as a net positive. Obviously with the relationship directly with Motorola we’d like to think that we can continue to work with Lenovo and eventually sign into a license agreement for Lenovo-branded products. So to be clear the Motorola agreement I don’t believe is transferable and really is covering the Motorola branded products.

Jeff Schreiner - Feltl and Company

Okay.

Paul Norris

Jeff, it covers Motorola branded products and it’s been IP license so as we go forward talking currently with the Motorola group and in the future to the extent the acquisition goes through with Lenovo will be focused on opportunities to expand the license scope and to shift the attention from IP to higher quality TouchSense solutions as well.

Jeff Schreiner - Feltl and Company

And then last one from me. I was just wondering within mobile – within gaming revenues what’s the reasonable assumption we’ve seen such volatility in terms of the contribution we just saw last quarter went from 16 to 26 in one quarter. What’s the range in terms of level of sales that we think gaming could be in 2014?

Vic Viegas

Well, I guess I would say that the whole gaming industry I think is excited by the launch of these two successful platforms. And so we’ve benefited as well as the number of others. There is also this growing mobile gaming opportunity that we believe could also be substantial. So net-net I believe many in the industry are benefiting from some of those successes that they’re having. In terms of quantifying our gaming business I don’t think we’re able to break out the specific vertical from the guidance but we obviously expect gaming to be growing in a bigger part of our 2014 revenue as a result of these new platforms launching and the new initiatives we have underway.

Jeff Schreiner - Feltl and Company

Alright. Thank you gentlemen.

Vic Viegas

Thanks, Jeff.

Operator

Thank you. And our next question comes from the line of Charlie Anderson with Sidoti and Company. Please go ahead.

Charlie Anderson - Sidoti and Company

Yes, thanks, good afternoon. Thanks for taking my questions. I want to make sure I heard this right Vic. Are you talking about on content revenue, it’s possible but you’re probably not included in guidance to any degree in terms of some of the probabilities?

Vic Viegas

That’s correct. Yes, I think we’ve made enough progress more recently that we believe we will generate some revenue in 2014. We have not included any of the content revenue opportunities in the guidance.

Charlie Anderson - Sidoti and Company

And then frame for us what’s happening in content that’s going to drive revenue, just give us some examples of some things and how that might be structured?

Vic Viegas

Well as I said there is a series of kind of metrics that we measure our own internal progress were moving quickly through a number of them. I would say that one of the next key events would be to conduct pilot studies with a number of different ecosystem partners, using that data then we believe if we wanted to predict that data we believe it will show meaningful increase in an engagement as we’ve done in our own test. So if we can prove that in the marketplace with our partners then we believe those relationships quickly convert over to revenue generating and they will be actively promoting this capability to their customers and that’s what gives us some confidence that the content business can generate revenue in 2014. Specifically the kinds of revenue generating relationships that we’re looking at would be the typical ad business which is measured in cost per thousand impressions and we’d like to participate at that level. There are also opportunities maybe to participate per campaign, revenue sharing or time-based. So these are the kinds of revenue generating relationships that could trigger meaningful revenue for us.

Charlie Anderson - Sidoti and Company

Great. And then question for Paul on the OpEx guidance I think you’re going to be up maybe $6 million or so in absolute dollars over 2013. Could you help me what sort of the puts and takes between legal expense, the change in accounting and then the increase in headcount that maybe driving some of that?

Paul Norris

Yes, I think as I mentioned in the prepared remarks legal expense associated with the litigation was around $5 million last year. And our trial with HTC is scheduled for March of 2015. So assuming we don’t have all that, we’ll see legal expenses continuing for HTC throughout the year probably ramping up a little bit towards the end if we – as we get nearer to the trial date. Overall though, I would expect litigation expense to be down relatively substantially from 2013, maybe a couple of million lower.

And then going forward looking at the change of accounting policy you’ll see rather than the run rate of around 400K or so of amortization you’ll see a very minimal amount of amortization, but you’ll see a full expenditure on patents and outside legal fees to either maintain or file the initial applications for patents to go into G&A expense. And that generally – you can look at our prior cash flow investments in capitalizing IP, but call it around $1 million a quarter. And then beyond that we’re – in the last year our headcount went from 101 employees at the beginning of the year to 112 at the end of the year. We’re going to continue to invest in some of these real opportunities that we’re seeing. We’re going to try to do that very smartly so that we’re tying the investment to revenue that is within site as we make the investments. But we’ll continue to grow I would say at the same pace or even a little bit more as we ramp up on content throughout 2013. So those are the main drivers I would say in the OpEx picture for the coming year.

Charlie Anderson - Sidoti and Company

Perfect. Thank you so much for that color. And then I wonder if you now that you’re moving to have the greater percentage of revenue coming from fixed deals. If you’re able to breakout first at all, what percent of revenue came from fixed in 2013 versus what’s your expectation is in 2014 that would be helpful?

Paul Norris

It’s very difficult actually to do that because in some cases we have the fixed elements in the same relationship as in which we’re generating variable revenues as well. And so we haven’t done that and we can certainly try to give you as much color as we go forward as possible but right now we don’t have that kind of a breakout.

Charlie Anderson - Sidoti and Company

If I look at close – sorry go ahead Vic.

Vic Viegas

I was just going to add that our fixed portion of our mobile revenues is exceeding 50%. So, it’s a bigger percentage of our total mobile revenue.

Charlie Anderson - Sidoti and Company

Got it. And then a way to ask the question on gaming in the quarter, was any of the, I mean, Sony didn’t start shipping until I guess in Q4 which makes me think more like Q1 royalty as opposed to a Q4 impact. So help me understand sort of what happened in Q4 with that relationship that had an impact on revenue and anything sort of one-time upfront license type payments versus what was just happening in the market to drive it if we stripped out the new Sony relationship?

Vic Viegas

Sure. I think we have characterized in the past that the relationship with Sony for the PS4 is coming in really two fashions. One is a license payment that allowed them this option to extend the license and then the other is a per unit royalty. So, clearly the per unit royalties are typically reported a quarter in arrears. And as you said, most of their shipments occurred in Q4. So, we will be picking up the variable portion in Q1 of 2014, but there was some revenue generated in 2013 as a result of this option exercise. And I might add that that revenue continues for quite sometime. So, this is not front-end loaded just in the fourth quarter revenue, it’s something that I think you will see on a recurring basis.

Charlie Anderson - Sidoti and Company

Got it. So both the fixed and the recurrent element there and we only saw the fixed in Q4?

Vic Viegas

Exactly.

Charlie Anderson - Sidoti and Company

Got it. And then did you have 10% customers that you can talk about in Q4?

Vic Viegas

We also have one or two I think. And I imagine that during the quarter, we probably I think we’ll disclose in the K, the number of customers, but I would imagine that in the fourth quarter we probably have one or two as we usually do.

Paul Norris

We did have one, Charlie. And the odd thing about the way you report your 10-K result is you don’t actually break out that and report that quarter’s 10% customers you go back to the whole year. And so what you will see when we file the 10-K is our disclosure of our 10% customer for the year.

Charlie Anderson - Sidoti and Company

Fair enough. Thanks so much.

Vic Viegas

Thanks, Charlie.

Operator

Thank you. And our next question comes from the line of Richard Magnuson with B. Riley & Company. Please go ahead.

Richard Magnuson - B. Riley & Company

Hello, thank you for taking my question. Yes, regarding the recent announcement with the Tokai Rika, you mentioned some multi-year licensing agreements and of course you didn’t give the amount, is there any way you can give us maybe an idea of how many years and how soon we can see some of that revenue?

Vic Viegas

Well, Tokai Rika is a world leader in automotive component supply. And the typical auto relationship is multi-year, I would say, five years and in some cases even longer than that, because of the time it takes to design and launch a vehicle. So, whereas in the mobile space our agreements tend to be shorter in duration may be two to three years so, Tokai Rika definitely five years or longer and some of their efforts will generate revenue here in the near-term, specific quarters of product launches are not able to really disclose, but we also mentioned today continental and continental already has the design win in the 2015 Mercedes so, the timing of license agreement doesn’t necessary dictate the beginning of development relationship that maybe documenting and existing relationship with the design efforts have occurred for some period of time. So, we expect Tokai Rika to be a very meaningful part of our business as we go forward.

Richard Magnuson - B. Riley & Company

Okay. And just to be clear near-term that would mean we like we see some revenue in 2014?

Vic Viegas

Again, I don’t really know the design schedule and the product launches. So, I couldn’t tell you if it’s going to occur in 2014.

Richard Magnuson - B. Riley & Company

Okay, fair. Thank you very much.

Vic Viegas

Thanks, Richard.

Operator

(Operator Instructions) And our next question comes from the line of Paolo Gorgo with Nortia Research. Please go ahead.

Paolo Gorgo - Nortia Research

Thanks for taking the questions and congratulations on the quarter.

Vic Viegas

Thank you, Paolo.

Paolo Gorgo - Nortia Research

Thank you. I just noticed a report from Frost & Sullivan talking about the impact of haptics, can you comment on that, are you aware of this report?

Vic Viegas

I am aware they just released it. I can’t say that I have actually read it however.

Paolo Gorgo - Nortia Research

Well, they are talking about haptics implementations in ATM kiosks and industrial monitors, which is something you haven’t touched in this conference call, is it quite to be kind of a longer term opportunity for the company or do you believe that this would be marginal in terms of revenues?

Vic Viegas

Well, I would probably characterize it as marginal at least in the near-term. We are quite familiar with Frost & Sullivan and have worked with them in the past numerous times as they educate themselves around the haptic industry. These particular verticals and these opportunities, we have historically looked to our partners such as Atmel, Cypress, Microchip and others who have had success in getting design wins in these other verticals. And so we see longer term the opportunity for home, office, appliances and other types of devices to incorporate haptic touch-screen. So we are quite excited by that opportunity, but I believe that, that will take some time. And at this stage, I’d say it would be marginal impact on our revenue.

Paolo Gorgo - Nortia Research

Okay, thanks. And just a quick comment, if you can, there is a rumor that Samsung – the next Samsung watch launch might not have Android, but Tizen as the OS, would this change something as to haptics or your relationship with Samsung related to this vertical?

Paul Norris

We have worked with Samsung on both the Tizen OS and the Android OS and there could be certain reasons why they would launch one product with one operating system and another with another, but from our standpoint, each represents an opportunity.

Paolo Gorgo - Nortia Research

Okay, great. And just a quick comment on the Mercedes and Continental win, can we really see like I kind of said in the past that Mercedes is really endorsing haptics and we might expect it included in most of their products?

Vic Viegas

I don’t know if I make the statement that most of their products, but clearly they appreciate the value that haptics brings to the interface, the user interface as well as the safety aspects of incorporating haptics in the touch interaction. So Continental obviously has published some very interesting research, which is consistent with the research that we have conducted and the other technical literature that’s out in the marketplace. So, yes, I think in general the industry understands the value of haptics. Continental has done a really good job of promoting it. And we hope that they are successful with Mercedes and other OEMs. Specific trends and adoption rates within Mercedes is something we are just – we don’t know ourselves, we wouldn’t be able to predict that.

Paul Norris

Yes. We understand it involves the C-class. And typically at this stage, the types of packages that include the touch-screens are optional navigation packages, how Mercedes decides to offer those to its customers is a little hard to say. It certainly seems like those are becoming more commonly selected options, if not universally chosen in the luxury automobile class as the time has passed.

Paolo Gorgo - Nortia Research

Okay, great. And just the last comment if you had to hit the high end of guidance basically the company would have doubled revenues in a couple of years, that’s basically correct, I believe?

Paul Norris

Yes. I believe almost. Couple of years ago, we were at $32 million. So if we hit the high end, it would be $62 million.

Paolo Gorgo - Nortia Research

Yes, thanks a lot.

Paul Norris

Thank you, Paolo. Thanks very much.

Operator

Thank you. And we have a follow-up question from Jeff Schreiner with Feltl and Company. Please go ahead.

Jeff Schreiner - Feltl and Company

Yes, thanks gentlemen. I am going to try to come at this a different way, I think you might have answered it, Vic, but I was wondering now given that you have these fixed and fixed plus agreements and some are mixing with variable and obviously we are kind of in the dark about what is what, I was just wondering if you might be able to provide to us a base level of revenues per quarter right now that Immersion has (you are able find) through fixed or fixed plus type agreements?

Vic Viegas

It’s hard to really give you that sense because in some cases agreements come up for renewal, so you would have to assume that these agreements would continue to renew that’s our expectation. But to give you a percentage of revenue which is fixed, it would only be for a period of time and there would be some variations to those. So I am not sure I can give you a percentage of what’s fixed on a given quarter.

Paul Norris

One thing, I think you maybe able to gain a little bit of insight from is to take a look at our deferred revenue balances short-term and long-term and look at the – I think now we have had some movement in both of those accounts that’s been relatively substantial over a one year period and you can kind of see how those will go up. Certainly the short-term deferred revenue is all fixed revenue that we are expecting or its revenue that we are expecting to recognize within 12 months that we have now. So that would fall into your category. And I think you could look back a couple of quarters on that as well.

Jeff Schreiner - Feltl and Company

Okay that’s helpful. Thank you, Paul. You talked about being a couple of million less in litigation costs for ’14, could you just give us quickly on a housekeeping basis just what the litigation cost was for the quarter?

Paul Norris

It was $650,000 I believe I had that in my prepared remarks, hold on one second. I will give it to you exactly in just a minute. It was $627,000 in the fourth quarter.

Jeff Schreiner - Feltl and Company

Okay and you think its going go down this year a couple of million dollars?

Paul Norris

Yes, we had about $5 million in 2013. So that was the ballpark I gave you for 2014, down a couple million say for 2014. It’s very difficult as I am sure you are aware to be precise with litigation projections because we don’t control how the other party approaches the litigation. We do expect that they will be lower this year.

Vic Viegas

I will say Jeff we will spend what we need to win.

Jeff Schreiner - Feltl and Company

Okay.

Paul Norris

Yes, that’s absolutely correct.

Jeff Schreiner - Feltl and Company

And then just coming back to this OpEx, Paul maybe I missed – misheard or didn’t hear the full context of your statement, but you talked about it being $10 million to $11 million a quarter, that would basically suggest that OpEx is flat versus what you reported for ’13, is it maybe just $10 million to $11 million in the first quarter and then move up from there?

Paul Norris

I am going to look at the exact question, that’s excluding stock comp, so I am not sure it depends on which whether you are looking at non-GAAP or GAAP OpEx for 2013, but…?

Jeff Schreiner - Feltl and Company

On a GAAP basis what would it be?

Paul Norris

Well, you would add in the stock comp.

Jeff Schreiner - Feltl and Company

Right.

Paul Norris

So another $5 million above that for the year.

Jeff Schreiner - Feltl and Company

Stock comp is going to be $5 million for you guys this year after – I guess that’s kind of in line, so stock comp is going to $5 million this year?

Paul Norris

Yes, that’s I am using this year as a benchmark for going forward, so yes.

Jeff Schreiner - Feltl and Company

Okay, so just to be clear, you take the $10 million to $11 million and you add $10 million to $11 million is non-GAAP is what you are saying?

Paul Norris

That’s correct.

Jeff Schreiner - Feltl and Company

Okay. Thank you. Thank you for that. And then I guess that’s it for me gentlemen. I appreciate you taking the time answer to my follow-up question.

Vic Viegas

Great, thank you Jeff.

Operator

Thank you and our next question comes from the line of Richard Marshall with SunWest Capital. Please go ahead.

Richard Marshall - SunWest Capital

Hi Vic and Paul. How are you?

Vic Viegas

Hi Richard.

Paul Norris

Hi Richard.

Richard Marshall - SunWest Capital

Just on your guidance, Vic how much of that is growth from existing customers and how much is from new customers?

Vic Viegas

There is – let’s see, in the guidance maybe one way to answer this is kind of looking at the requirements to hit the high end we would need to be successful in some of our renewals. So some of the existing customers those agreements will come up for renewal and it also includes some additional new OEMs that we anticipate bringing on. And then there is other areas like growth in wearables, growth in gaming and potentially transitioning some of our current customers from basic haptics up to our full TouchSense. So those are kind of the sales initiatives. And that would give you a mixture of existing customers and growth within those relationships as well as bringing new customers on board.

Richard Marshall - SunWest Capital

Okay, but not much from those major initiatives that you sort of mentioned that might be up for in 2015, like the content?

Vic Viegas

Correct, the 2014 guidance includes nothing from content.

Richard Marshall - SunWest Capital

And Paul, you mentioned that towards the end of your remarks, you mentioned when you were talking about the buyback something about I remember $86 million, is that – and you said January 2014, is that your cash position or I misunderstood that?

Paul Norris

Yes, I was giving our cash position at the end of January 2014 and that balance is of cash and cash equivalents with $86.6 million and that takes into account that we did spend $4.4 million during the month of January repurchasing shares.

Richard Marshall - SunWest Capital

Okay, well so that – so you are aggressive buying shares in January and your cash was still up about $60 million from December?

Paul Norris

That’s exactly right.

Richard Marshall - SunWest Capital

That’s very encouraging, great, I thought I heard that, but I wasn’t quite sure. Anyway I will leave it that for now, but I will be seeing you guys in Barcelona.

Vic Viegas

Great, looking forward to Richard.

Paul Norris

Thanks Richard.

Operator

There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Vic Viegas - President and Chief Executive Officer

Well, thank you everyone for being on the call with us today. And we do look forward to updating you again on our next quarterly call. Thank you and good day.

Operator

Ladies and gentlemen, this concludes the Immersion Corporation fourth quarter and fiscal year 2013 conference call. Thank you for your participation. You may now disconnect.

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