Immersion Corporation Q2 2010 Earnings Call Transcript

Aug. 5.10 | About: Immersion Corporation (IMMR)

Immersion Corporation (NASDAQ:IMMR)

Q2 2010 Earnings Call

August 5, 2010 05:30 pm

Executives

Alex Wellins - The Blueshirt Group

Vic Viegas - President and CEO

Shum Mukherjee - Chief Financial Officer

Analysts

Jeff Schreiner - Capstone Investments

Matt Bendixen - Craig-Hallum Capital

Aaron Husock - Lanexa Global

Robert Kast - SunWest Capital

Chris Donnelly - Pacific Rock Capital

Shawn Boyd - Westcliff Capital Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Immersion Second Quarter Fiscal 2010 Earnings Conference Call. During today's presentation, all participants are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions). This conference is being recorded today, Thursday, August 5th of 2010.

Now, I'd like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead, sir.

Alex Wellins

Good afternoon and thanks for joining us today on Immersion Second Quarter 2010 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relation section of the company's website at immersion.com. With me on today's call is the company's President and CEO, Vic Viegas, and Shum Mukherjee, the company's CFO.

During this call, we may make forward-looking statements which may include projected financial results for 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-K and Form 10-Q filed with the SEC, as well as the factors identified in today's press release.

Additionally, please note that during the 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 the Investor Relations section of the company's website in the Shareholder Presentation section of the Investor Relation section.

With that said, I'll turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Vic Viegas

Thanks Alex, and thanks everyone for joining us this afternoon. I'll start by providing a high level summary of our performance for the second quarter. Then I'll turn the call over to Shum for a more detailed review of our Q2 results. I will then discuss recent developments and our thoughts on the current business environment before opening up the call to your questions.

Total revenues of $8.5 million for the second quarter were greater than anticipated. We achieved strong growth in our royalty and license revenue, driven by continued traction for our haptic solutions across a variety of end markets.

In addition, we benefited from a reconciliation of certain customers royalty reports in the gaming market and from non-recurring gains in the medical business of approximately $1.1 million.

Net income for the second quarter totaled $180,000 or $0.01 per share, as compared to a net loss of $8.9 million or $0.32 per share in the same period last year. We generated positive adjusted EBITDA of $2 million.

Stepping back for a moment, Immersion has had a busy first half of the year. We completed the independent financial investigation and successfully transitioned the medical products group to CAE, thereby shifting the company to a predominately-licensing model. We have signed new licensees, launched new products, significantly reduced expenses and achieved a very favorable outcome in a piece of litigation in the medical simulation area. We now have a dedicated CEO and CFO in place. With the prior headwinds largely behind this, our ability to focus on execution coupled with a strong value proposition and favorable industry trends are allowing us to post strong growth in our ongoing business.

I'll now turn the call over to Shum, for a more detail review of our financial results.

Shum Mukherjee

Thank you, Vic. Revenues in the second quarter of 2010 were $8.5 million, up 27% over revenue of $6.7 million in the second quarter of 2009 reflecting growth of 76% in royalty and license revenues, partially offset by a decline of 33% in product revenues primarily the result of the recent transition of certain medical products to CAE.

Growth in royalty and license revenues was strong across our various market segments. Mobile and gaming comprised more than two-thirds of total royalty and license revenues due to increase in touch screen phone sales and reconciliation of our customers gaming royalties, as Vic mentioned. In addition we saw strong results in royalties from the automotive and consumer market segment.

Product revenues in the second quarter were $1.9 million including approximately $900,000 of revenues from the three medical product lines that was sold to CAE Healthcare in the March quarter. We do not expect to generate any additional product revenue from the three product lines in the future.

Revenues generated from development contracts were $321,000 in the second quarter of 2010, in line with revenues of $330,000 generated from development contracts in the year ago quarter.

Gross profit was $7.7 million in the second quarter of 2010, 91% of revenues, compared to gross profit of $4.4 million, 65% of revenues, in the second quarter of 2009. The increase in gross profit reflects higher revenues and also the mix shift in business to licensing revenues, which accounted for 74% of total revenues in the second quarter of 2010, compared to 54% of total revenues in the same periods last year. As we look at our long-term model, we expect licensing revenues to grow as a percentage of our overall mix driving gross margins higher.

Cost of product sales in the second quarter of 2010 were $751,000, compared to $2.3 million in the second quarter of 2009. Excluding cost of product sales, total operating expenses were $7.2 million in the second quarter of 2010, compared to $13.2 million in the second quarter of 2009, primarily reflecting the divestiture of the medical product business, reduction of head count from 157 to 96 employees and various cost saving actions.

The operating expenses of $7.2 million include non-cash charges related to depreciation of $285,000, amortization of $204,000 and stock-based compensation of $938,000. Excluding these non-cash charges operating expenses were $5.8 million during the quarter and as expected to trend in the $6 million to $7 million range per quarter over the near term.

We have lowered our expenses related to corporate admin and legal, but plan to continue to invest in sales and marketing and R&D in line with revenue growth. Net income in the second quarter of 2010 was $180,000, $0.01 a share, compared to net loss of $8.9 million, $0.32 a share within the second quarter of 2009.

As you know, in addition to normal GAAP metrics, we use the metric called adjusted EBITDA to track our business. We define the adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and share-based compensation, less non-recurring items such in internal investigation and restructuring costs and discontinued operations. In 2009, adjusted EBITDA also excluded change in fair value of warrant liability. Adjusted EBITDA in the second quarter of 2010 was $2 million compared to a loss of 5.5 million in the second quarter of 2009.

Revenues for the first half of 2010 were $18.2 million, 28% over revenues of $14.2 million in the first half of 2009. Once again reflecting strength in royalty and license revenues which grew 73% compared to the first half of 2009, partially offset by a decline of 20% in product revenues.

Gross profit for the first half of 2010 was $16.1 million or 88% of revenues compared to gross profit of $10.6 million or 75% of revenues in the first half of 2009. Operating expenses excluding cost of product sales in the first half of 2010 were $18 million compared to operating expenses in the first half of 2009 of $26.7 million which is a reduction of $8.7 million primarily reflecting the closure of the medical production business, headcount reduction and other cost saving actions.

Interest in other income was $142,000 in the first half of 2010 compared to $854,000 compared in the first half of 2009, which included $256,000 of interest income attributable to the enforced judgment with Sony. The interest income related the Sony arrangement was fully amortized by Q4 2009. Provision for income taxes was $762,000 in the first six months of 2010 compared to $391,000 in the first six months of 2009. These taxes are primarily related to withholding taxes payable in Asian countries and tend to rise in conjunction with the increase in business in these countries.

Net loss in the first six months of 2010 was $2.5 million compared to a net loss of $15 million in the first six months of 2009. Adjusted EBITDA in the first six of 2010 was $2.3 million compared to a loss of $10.1 million in the first half of 2009, an improvement of $12.4 million.

During the first six months of 2010, the company generated $150,000 of positive cash flow from operations, compared to cash usage of $9.4 million from operations in the first six months of 2009. Our cash portfolio including and investments was $63.9 million as of June 30, 2010, compared to $64.6 million on March 31, 2010.

In terms of guidance, we remain on track to meet or exceed the high end of the $25 million to $30 million annual revenue outlook that we have provided and to generate adjusted EBITDA for full year 2010, and for Q3 given our current visibility we see revenues coming in between $6 million and $6.5 million which is consistent with our historical seasonal trends.

With that, I will hand it back to Vic.

Vic Viegas

Thanks Shum. Turning to a discussion of our progress over the past few months, we are pleased to announce that Toshiba is a new licensee using Immersion's haptic technology in the new Toshiba Libretto W100, a dual touch screen Windows Mini Notebook PC. The recently announced ultra portable features two multi-touch screens that work independently or together giving users flexibility in how to use them. It's UI design include six virtual keyboard modes and a virtual keypad leveraging Immersion's haptics to provide touch feedback when keys are selected making typing fast, accurate and easy. Industry reviews have been very positive including the Engadget Reviewer stating and I quote "we're big fans of the haptic feedback."

We recently announced our new TouchSense 2100 solution to power touch feedback effects in user experience designs for mass market touch-screen enabled applications. This solution broadens our offerings for chip vendors and it's designed for custom ICs to provide a rich array of haptics effects to inject feel in to touch screen. The TouchSense 2100 solution is tailor-made for a broad range of applications and supported integrated and advanced UIs and touch gesture based interaction. It may be implemented to provide feedback in touchpad, capacitor buttons, touch screens and virtual keyboards.

As we've indicated in the past, integrated offerings are one of the best ways for Immersion to cast a larger shadow and quickly address the growing demand for our haptics technology in a broad range of markets. Additionally, it's a highly leverageable model providing us with access to thousands of FAEs while minimizing our own sales and marketing spend. We are working diligently to support our chip partners with solutions like TouchSense 2100 and we are starting to see evidence of our technology at work within the larger ecosystem. For example, in May, our partners Cypress Semiconductor launched their first haptic product.

Immersion also continues to make headway in the medical market recently adding two new licensees. The first reflects continuing momentum for our company in the growing robotics surgery market through partner SOFAR, a leading Italian manufacturer of medical devices for minimally invasive surgery.

SOFAR will use our TouchSense technology in its ALF-X telesurgical robot system. Immersion solution will provide haptic feedback in the cockpit and console from which surgeons control and manipulate the system engaging the sense of touch to assist in device navigation and laparoscopic procedures. The system is intended for use in hospitals, universities, medical training centers, and research organizations worldwide.

SOFAR joins MAKO Surgical as a key licensing partner of Immersion in the surgical robotics equipment market which is forecasted to reach $14 billion by the year 2014, according to market researcher Piribo. We view the medical segment as a key long-term growth area for our company moving forward. In addition, we have achieved the positive outcome to our litigation with Simbionix.

As you may recall, Immersion initiated a patent infringement suit against the company in April of 2008 related to medical simulation products. While the details of the agreement were not disclosed, the settlement resulted in a non-exclusive worldwide license for Immersion's extensive patent portfolio for medical training and simulation, which is expected to be used across a number of Simbionix's product line.

Along those lines, during the quarter, Immersion was also recognized for our extensive IT portfolio as the recipient of the Clarus Innovation Award from MDB Capital Group, an investment research firm focusing exclusively on company that possess market changing, disruptive intellectual property. We were selected out of a pool of thousands of companies including over 75 nominees to a receive the award, which recognized the technology leadership and was presented to the top company in each industry with the highest tax score within their proprietary models and number of patent grants. As a company, we remain committed to continued innovations and unlocking the full potential of our patent portfolio.

Relative to corporate update, on July 15th, we've filed a motion to dismiss the consolidated securities class action against the company. A hearing on this motion is currently scheduled for October 29.

To conclude my formal remarks, we continue to make steady progress across our growth initiatives targeting increased volumes from existing and new licensees, increased penetration of our haptic solutions across a wide range of end markets through both our in house effort and network of ecosystem partners, and continued innovation and technology leadership through product development.

As evidenced in our results, we have made significant progress in reducing our operational expenses and have set the stage for a more normalized run rate relative to our ongoing business moving forward. The industry clearly is in the midst of a very favorable technology trends that are expected to drive strong adoption of haptics. As we move to the back half of the year and complete our three-year strategic plan, the opportunities in these large and rapidly growing markets provide a level of excitement we've never experienced before.

We are focused on effective and efficient execution with strategic focus in a few key areas: one, being driving the adoption of high definition haptics into the market, two, refining our IP strategy, three, scaling our chip partner market penetration, and four, growing our design pipeline.

I'd like to thank you for your continued interest and support and Immersion. We'll now open up the call to your questions. Akela?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question comes from the line of Jeff Schreiner with Capstone Investments. Please go ahead.

Jeff Schreiner - Capstone Investments

Just to stick with some of your comments at the end, Vic, I noticed that in my model at least in the way we track EBITDA which is just restructuring, amortization, depreciation stock comp, correct me. It's a first time that EBITDA is in positive since March '07. Is this now maybe a little bit of a change in term of what you said in terms of a norm that we should start seeing this adjusted EBITDA number start to trying to a little bit more positive?

Vic Viegas

Well, clearly, that's our focus and we're existed to be through that hurdle for the first half of the year as we've committed will be positive adjusted EBITDA for the full year. I think you're seeing not only great revenue growth in all our markets, you're seeing new customer, new products, new programs, so we're capitalizing on the tremendous growth in the touch transition in the marketplace. We're also I think being quite prudent and efficiently operating the business reducing expenses adopting what we think is a more appropriate business model. So, the combination of revenue growth cost controls is one that portends great for our profitable future.

Jeff Schreiner - Capstone Investments

Obviously guidance was a little bit, I think flatter, while some of this was expected but it seems like you've still feel that's you can reach your targeted goal that you laid out before of 25 to 30 and I think maybe correctly from wrong the language changed a little bit where you think you can hit the high end of that. In fact to do that to hit the high end or great as that I believe it says in the earnings release you likely to be the large step up in the December quarter. What gives you the confidence seen here today to made that kind of assumption?

Vic Viegas

Yes, we are comfortable at the high end of the range even higher. I think recently we've signed a number of new licensees. As you probably well aware we've mentioned CAE Simbionix and SOFAR just name a few. We've got new products with the Immersion haptic technology launched in the Toshiba Libretto is one. There is a quite strong line up a phones coming from Nokia, Samsung and LG. so, that gives us a lot of confidence.

We've got chip partners launching their touch controllers with the Immersion haptics we hope to have solutions in the market this year from Renaissance and Cypress and possibly even Admel[ph], so that's also positive. Auto design wins that we believe were in a pipeline from our ecosystem partner should also contribute. So, when you add up the line up of customers products and programs, we believe revenue is looking pretty healthy.

Jeff Schreiner - Capstone Investments

There's a new kind of form factor coming out in the PC market that incorporates very large touch screens, tablet-based designs when we seen products such as the Apple iPad. Has Immersion secured any tablet based design wins either direct or maybe though chip competitors? Is there any timeline in which over the next 6, 9, 12 months we might be able to expect royalties from this new segment?

Vic Viegas

So the first one is the Toshiba Libretto that we mentioned that I think we have great fans here in the marketplace. They are originally showcased at as a technology advancement and one that they to migrate into products. So we expect to see great success with the Toshiba Libretto. Behind that, as you are aware, there are number of others that are also considering and utilizing the Immersion technology whether direct from Immersion or through our chip partner, so we do expect to capitalize on that trend.

Operator

Thank you. Our next question comes from the line of Matt Bendixen with Craig-Hallum Capital. Please go ahead.

Matt Bendixen - Craig-Hallum Capital

Quickly was that Toshiba deal broader license deal (inaudible) that they bringing out licensee type of deal?

Vic Viegas

Its license with Toshiba, it's a per unit deal.

Matt Bendixen - Craig-Hallum Capital

Okay. Perfect. And then just one other question, there was 1.1 million of non-recurring revenues there. Can you break that out between medical on royalty adjustment?

Vic Viegas

The 1.1 is actually all medical. What had occurred is we have product shipments that were captured in the deferred revenue line prior to the transaction with CAE subsequent to that transaction activities occurred that allowed us to recognize that revenue. So, the net of it is we have cleared out all of our medical product deferred revenue and, as Shum said, we'll not be recording any more medical product sales for the three product lines transitioned to CAE going forward.

Operator

Thank you. Our next question comes from the line of Aaron Husock with Lanexa Global. Please go ahead.

Aaron Husock - Lanexa Global

Great. Thanks for taking my questions. I've got a couple, maybe just first on operating expenses. You have guided operating expenses of $7 million for the quarter and now coming in at 5.8, which is great. So, as I look at the guidance for drawbacks of $6 million to $7 million in September, and my impression was that you still have a little bit more streamlining of G&A, kind of bringing that down in September. Can you walk me through, I mean where $700,000 increase in OpEx is going to come from sequentially or there is some conservatism built in there?

Shum Mukherjee

No, absolutely, we expect a sequential increase in OpEx because we've got marketing and R&D programs that we plan to launch next quarter. So, there would be a sequential increase in OpEx. Going forward we expect OpEx to be in the $6 million to $7 million range excluding depreciation and amortization per quarter.

Vic Viegas

Aaron, I would, just to clarify, I think our previous guidance, there is really two ways to measure operating expenses, one is under the GAAP recognition and under GAAP, I think for the quarter we were around 7.2, so that's probably a little lower than we had originally planned. When you back out the non cash expenses, as Shum has already identified then you are down to the 5.8. So I just wanted to clarify that, I want to make sure we're comparing apples-to-apples here.

Aaron Husock - Lanexa Global

So, is your 6 to 7, is that GAAP or is that cash?

Vic Viegas

No, that's cash.

Aaron Husock - Lanexa Global

Okay, okay. So at the midpoint cash OpEx goes up $700,000 sequentially.

Vic Viegas

Yes.

Aaron Husock - Lanexa Global

Then we should expect it to hold relatively flat in that range for the next several quarters?

Vic Viegas

Yes.

Aaron Husock - Lanexa Global

I know you don't really want to get into the business of breaking out revenue by end market anymore. Can you tell us, it's my impression that you have guided mobility sales to be down seasonally in your June quarter to reflect the March quarter handset market seasonality? Did your mobility sales end up being down sequentially in June or has touch screen adoption been strong enough your lead customers that mobility sales were actually flat or up sequentially in your June quarter?

Vic Viegas

So, we did get a healthly growth and increase in the mobility revenue. They are having success in the marketplace and so we benefited from that.

Aaron Husock - Lanexa Global

Sequentially, is that a health growth?

Vic Viegas

I believe so, yes.

Shum Mukherjee

Yes.

Aaron Husock - Lanexa Global

Can you walk me through what you mean by seasonality for the September quarter given that mobility, which is the biggest piece of your business, if seasonally the handset market was up in the June quarter, you are kind of lead customers, you reported mixed results, but in general talked to a higher touch screen adoption in the June quarter. Where is the seasonality, the negative seasonality coming from in the September quarter guidance?

Vic Viegas

So, I would say that historically in all the other markets that we operate in, gaming, automotive, medical, those markets typically do affect, have some seasonality because a lot of consumer based products are geared up for Q3 shipments and Q4 sales, new automotive product launches occurred later in the year. Medical products are typically budgets are filled and some products are delivered later in the year in the fall as the new training programs kickoff. So, I think the seasonality would affect the non-mobility market historically and that's what we're anticipating going forward.

Aaron Husock - Lanexa Global

I mean if I just look back at your gaming revenue as you guys have broken down on your SEC filings, historically it looks like at least the last three years it's been up sequentially in the September quarter, and medical hasn't been up every year, but it's been up quite a few years in the September quarter. I mean, is there something more pronounced in auto, or something that you see? Is part of it is one-time catch-up payment in gaming going away, is that part of the seasonality or the negative impact we are talking about?

Vic Viegas

Well again, I think if you look at, historically, it's typically been seasonally down in Q3. There maybe in any given year a product launch or a customer launch of a particular successful products that might affect that to some degree. From where we sit as we look out, I think we would expect it to still have some seasonal weakness in those markets.

Aaron Husock - Lanexa Global

Okay. What was the amount of the catch-up payment in gaming?

Vic Viegas

So in the gaming space, it's actually all of our markets, all of our licensees they typically report based on product lines, volumes, royalty rates, and periodically our licensees make corrections either they identify new product lines covered under the license or they do their own audits to capture additional volumes, adjust the royalty rates, if you will. So as a result, these occur pretty much on a frequent basis. It just so happens in this quarter, in the gaming sector the amount actually turned out to be a little larger than normal, something slightly above 500,000 total.

Aaron Husock - Lanexa Global

Okay, and that's not included in the 1.1 million number.

Vic Viegas

That's correct.

Operator

Thank you. (Operator instructions). Our next question comes from the line of Robert Kast with SunWest Capital. Please go ahead.

Robert Kast - SunWest Capital

I have few questions. On the revenue side, are we to assume that there are no more products sales going forward as far as no more development contracts or will there still be development contracts?

Vic Viegas

There will continue to be development contracts and product sales. The three product lines that we transitioned to CAE, we saw the last of those revenues in this quarter. But as we go forward you will continue to see sales of our virtual IV product. You will also see some very minor amounts of product sales, typically these are development kits, and in some cases components that we make available to our partners as part of their early launch plans.

Robert Kast - SunWest Capital

So in aggregate that dollar amount for both of those should be sub 500,000 in any given quarter in terms of modeling?

Vic Viegas

It just depends on the business, the volume and so on. I think this quarter what you saw is approximately a $1 million in extra product sales related to these three product lines which will not be going forward.

Separately they will be covered under the license agreement with CAE. So there will be revenue recognized going forward, but not from the product sales themselves. It will be from the licensing based part of our relationship with CAE.

Robert Kast - SunWest Capital

So give or take going forward if we back out that $1 million from this quarter's product sales and development contracts, that would be sort of the go forward run rate, the balance.

Vic Viegas

Again that's not a bad estimate.

Robert Kast - SunWest Capital

Okay. Which should mean that with your guidance, the royalty revenue, license and royalty revenue actually drops sequentially, more significantly from the June to September guidance?

Vic Viegas

Yeah, given the seasonality, if you were to compare the Q2 license and royalty to the Q3, we would expect the licensing and royalty revenues to decrease sequentially.

Robert Kast - SunWest Capital

Another a follow on question on the deferred revenue bucket. What is in there? How does it flow through into the income statement and what is that for?

Shum Mukherjee

Sure. So the deferred revenue, you will notice the total deferred revenue is in two components $5.6 million short term, $18.3 million long-term. $That 18.3 million, the bulk of it is from Sony and deferred revenue as you know occurs when we bill, but cannot recognize revenue according to GAAP because certain conditions are unfulfilled.

Robert Kast – SunWest Capital

That flow through the income statement.

Shum Mukherjee

That flows through the income statement, once those conditions are fulfilled, those deferred revenues become revenues.

Robert Kast – SunWest Capital

Okay and what are those conditions with respect to...?

Shum Mukherjee

It can be a variety of different conditions with a variety of different customers. There might be certain deliverable that has not yet been delivered. So, as long as you have deliverables that have not been fully delivered, you're not allowed to take that as revenue. Once you have delivered those they come into revenues from deferred revenue.

Robert Kast – SunWest Capital

Sure. How much of the revenues derived from this quarter came from, I guess transitioned from the deferred?

Shum Mukherjee

We don't track that information, but it's approximately about 40% or so would come from deferred.

Robert Kast – SunWest Capital

You'd have to get new deferred revenues to offset.

Shum Mukherjee

Yeah, so as every quarter, you have new billings and some of those are immediately recognizable as revenues and some of those aren't and they get into the deferred revenue on the balance sheet.

Robert Kast – SunWest Capital

Just another question about your new high definition haptics products, I was, I guess (inaudible) hemisphere and you are showing I guess the benefits of your newer product, and have you seen any adoption of that yet or increased interest in that?

Vic Viegas

Yeah, I think as you noticed there is a lot of enthusiasm at the show and since that time a lot of excitement around the benefits of our high definition solution. There is also quite a bit of design activity and engineering work and training and education ecosystem partner support all in preparation for those product launches.

Operator

Thank you. And our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

Shawn Boyd - Westcliff Capital Management

Just a couple, if I may, the conversation earlier regarding royalties and the reconciliation of royalties in gaming, if we pull out the $0.5 million, we end up at about $5.8 million, is that correct?

Shum Mukherjee

In terms of prices.

Shawn Boyd - Westcliff Capital Management

Correct.

Shum Mukherjee

Yeah.

Shawn Boyd - Westcliff Capital Management

Adjusting for that. And then my next piece for that is should I really pull that out? I'm going back to Vic where what you said it happens frequently. So how often does it happen and should I really skew everything out?

Vic Viegas

Well, it's something that occurs on a regular basis. As I said, in this particular quarter looking back at prior quarters, I don't think we've had a quarter where the amount was quite as large. So I would say that some of that probably will not recur in Q3, but as our current licensees adjust their reports as products were added and so on that those minor adjustments occur on a pretty regular basis.

Shawn Boyd - Westcliff Capital Management

Okay. So, an order of magnitude if you get a $200,000 in reconciliation payments and royalties per quarter, that's too unusual.

Vic Viegas

Yeah, I would say that wouldn't be terribly unusual now.

Shawn Boyd - Westcliff Capital Management

Okay. And on the medical, I was hearing two different numbers, Vic, I thought I heard you say that the $1.1 million that was a downside on that press release with all medical, but then Shum I thought you mentioned there was $900,000 in product sales from medical, so can you just help me clarify that?

Shum Mukherjee

Rounding.

Shawn Boyd - Westcliff Capital Management

Rounding okay. So it's a million in the product sales. Okay, and I guess last question on this is in terms of these additional sales, were there any costs associated with them, I think COGS or in operating expenses in the quarter?

Shum Mukherjee

Yeah in terms of these $1.1 million of sales, the costs were about $300,000 to $400,000.

Operator

Thank you. We have a follow up question from the line of Aaron Husock with Lanexa Global. Please go ahead.

Aaron Husock - Lanexa Global

So now, you guys are a profitable company, congratulations. How should we think about the tax rate going forward?

Shum Mukherjee

While we've done a lot of NOLs and about $50 million of NOLs. So, from that point of view it will take us a very long time to utilize those NOLs. Now, having said that, we do sell to a lot of Asian markets and we would be incurring withholding taxes on those sales. So, for instance, this quarter we've recorded about $400,000 of income tax expense and going forward you should expect that same level of tax expense every quarter.

Aaron Husock - Lanexa Global

Vic, going in the past you've talked about hopefully signing a new handset licensee before the end of this year and having our product launched by the end of the market. Could you give us update on that? Are things on track? When should we expect to hear from you on that?

Vic Viegas

Well, you're here when we are able to announce it, but I think what I said is that we are working towards signing one to two new cell phone licensees by the end of the year and we'll hopeful that have a piezo based phone launched during this year. So, we're still working toward those in anticipation.

Operator

Thank you. Our next question comes from the line of Chris Donnelly with Pacific Rock Capital. Please go ahead.

Chris Donnelly - Pacific Rock Capital

Thanks guys for taking my call. Good quarter. I had a question as it relates to the OpEx going forward. I know you're talking about a little bit of an uptick in OpEx in the third and fourth quarter. Can you just kind of give us a sense how much revenue you think you can support assuming the business continues to ramp on those kind of OpEx levels to give us kind of a sense of the leverage in the model?

Vic Viegas

As we said, the OpEx we think we'll trend up slightly in Q3 although until the actual account, all of the expenses and bills you really don't know. We feel pretty confident given the estimate we did. That's a level that we think we can sustain quite a bit abroad as we go forward, so I would say that's the type of cost structure you would expect to see into 2011.

Chris Donnelly - Pacific Rock Capital

As you kind of look forward, have you identified what you think would be in your mind at least for the target operating margin indeed for the business?

Vic Viegas

Yeah, we have a kind of look at that and obviously there is near and long-term and I think as we move out an operating margin of 20% plus or something we think is achievable within the next few years.

Operator

Thank you. At this time there are no further in the queue. I'll like to turn the conference back over to management for closing comments.

Vic Viegas

Thank you for being on the call with us today everyone. We look forward to seeing you on the road and updating you again on our next quarterly call. Thank you and have a great day.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. At this time, you may now disconnect.

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