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Immersion Corporation (NASDAQ:IMMR)

14th Annual Needham Growth Conference Transcript

January 11, 2012 11:20 AM ET

Executives

Victor Viegas – Chief Executive Officer

Analysts

Victor Viegas

Okay. Great. Thank you very much. I’m Victor Viegas, the CEO of Immersion Corporation. Thank you for coming, and hopefully, I can give you a better sense of what Immersion does.

So, a few of the company highlights. Immersion is The Haptics Company. We are a company that licenses haptic technology. We’ve got world-class customer base. We’re established in large and growing markets. We’ve got a strong patent portfolio of over 1,200 issued or pending patents and we have a strong balance sheet with no debt $63 million in cash. But essentially a licensing company focus in the field of technology called haptics.

Let me tell you a little bit more about haptic. Haptic is just -- is a Greek derivative that means the signs of touch. So anytime you engage your sense of touch, tactile feel, tactile feedback, haptic, these are all descriptions for using your sense of touch.

In the real world, a thousand times a day you use your sense of touch to open up a door. You feel tension, contours, textures, pick up a cup of coffee. In the digital world you loose that physical engagement. Suddenly now, you have small controls, visual impediments, small devices, large fingers and you are trying to recreate a realistic experience but without your sense of touch it’s a dead experience really.

Haptic feedback enables keys on the keyboard, a virtual keyboard, you actually feel yourself pushing buttons and keys. You can create cool effects in games, you probably experienced that in the gaming space for many, many years, scrolling, swiping, textures, tension, all of these things engage a sense of touch.

In medical simulation, this is how doctors practice on a digital patient, but they use their sense of touch to feel a [cogdaughtary] or navigating through small tubes into to find tumors and so on. And so, haptic is something that is important in the user experience and one in which emerging in the digital world enables.

We operate as I said in large and growing markets and so these are few of the focused verticals that we operate in, mobile phones is the largest over 1.5 billion phones sold each year. Here is where you’re adding haptics to game play, GUI interfaces, texting, typing input.

Automotive, another large market where driver distraction is the key impediment a problem, so you want to be able to provide as much information whether it’s touching a screen, rotating a rotary knob or navigating a touch surface, all haptic enhancements and also large market.

Consumer markets, commercial markets gaming space, whether it’s gaming peripherals or gaming on mobile devices or handheld devices, and medical simulation surgery. So, again, these are all very large markets, all essentially benefiting from the migration of touchscreens to each of these areas and wherever you have touchscreen you have an opportunity for an engaging experience with emerging haptic technology.

These are the touchscreen deployments in the different markets. With that mobile as you can see is the blue category and the largest but the green also includes many other markets as well. So the growth in touchscreen is phenomenal and we are experiencing right now and we have a significant opportunity wherever there is a touchscreen is a need for emerging haptic technology.

Just focusing alone on touchscreen and mobile devices, you can see here we are penetrating in the 20% to 30% right now, obviously a lot of room for growth in the MOTIV mobility space and another markets. In 2010, we were in about 112 million phones, I believe in 2011 we’ll be in somewhere in the neighborhood about a 150 plus million phones.

Looking at our licensing model, you can see here the primary revenue for us is the royalty and licensing, we are about 88% year-to-date from this space, these are our partners, who ship products and pay us per unit royalties. In addition, we have a small amount of product sales, mostly components and kits for development purposes, as well as one medical product about 8% and then the balance is from non-recurring engineering.

If you look at the revenue from a vertical standpoint, the largest vertical for us is mobility, about almost half of our revenue comes from the mobility space, 30% comes from gaming, 15% from the medical and automotive is about 5%.

These are the customers, as well as our partners, so if you along the left hand side, you see our five primary verticals and you see our licensees in each of these verticals. In the mobility space, primarily Samsung, LG, Nokia, happy to say that at CES this week Pantech announced to launch a new tablet using our high-definition solution.

On the gaming set of space we work with Logitech, Microsoft and Sony. In the automotive space we work directly with Automotive OEMs, as well as the tier suppliers. In the medical space, robotic controls, medical simulation systems from people like MAKO, Laerdal CAE. And then lastly, commercial and consumer products sold by Samsung, Best Buy, Toshiba and host of other customers.

If you look on the right hand side, these are our partners and as a small licensing company of about a 100 people as I mentioned, we work closely with semiconductor companies to utilize our technology, they put our technology on to their touch controller chips and they sell those chips and pay us royalties, and they include Texas Instrument's, Cypress, Atmel.

We also work with component vendors these are people who make components, actuators, vibrating motors, various components used in our solution. And then finally, solution integrators, so especially in the automotive space, ALPS, Visteon and Methode, these are companies that have a strong and lasting relationship with automotive OEMs. They use our solutions and they sell components and modules to the automotive marketplace.

We talked about licensing is a core, licensing really is for us based on a number of patents, you can see the growth in the patents where today we have about 600 granted patents. In addition, we have another 600 or so in the pending process and so, roughly 1,200 patents focused entirely in this area of technology of haptics.

So if you look at our business approach, out of innovation and our technical knowledge of haptics. We continue to innovate and as a result, we’re able to bring a couple of different benefits and values to our partners. One is patent licensing, just purely enabling them and allowing them to produce products using haptic technology. Or solutions and solutions can include software, integration tools, SDKs and a whole host of other enabling capabilities, so that it will allow our partners to build great products.

These are our customers, as we mentioned before and obviously, they adopt and build better products with haptics. They sell to their customers and that in turn creates way for us to monetize our IP, but there are hybrid, two ways, really its solutions, as well as licensing of IP.

Depending on the vertical, we have a preference in the mobility space, there is IP licensing, as well as a whole host of product solution. In the gaming and medical space primarily it’s a licensing royalty stream and an automotive and other it’s a hybrid, combination of our solutions, our technical knowledge help with OEMs integrating their solutions, as well as in some cases just purely patent licensing.

When I talk about solutions, here is a list of different solutions, we offer TS 1000, which is used for very large displays. This can include casino gaming, automotive controls, so they are large touchscreens or touch surfaces. The 2000 are typically smaller light-weight devices, this might include a touch pad on a microwave or another type of wide goods could be a digital camera.

The 3, 4 and 5000 series are software products that are marketed to the mobility space, using motor control, dual motor control or high-definition piezo control. And then lastly, 6000, is what we call our kinesthetic feedback. This is something that actually pushes, pulls or resist as suppose to vibration and we have a whole host of technologies in this category that we offer to the gaming community, as well as in our medical and automotives communities.

So how does this all work, well, there is an actuator here on the far left and that actuator can be a simple motor, all the way up to an electroactive polymer to create a very fidelity experience. But there is an actuator that creates vibration.

So in the mobile device, you touch the screen, the touchscreen controller recognizes simply the location. The application knows that location happens to be a letter or a number or an icon or a hyperlink. The appropriate haptic effect is turned on with our software, the motor turns on, creates the appropriate vibration and then moves on to the next task. So it’s quite simple and how it’s affected.

This is what we refer to as our ecosystem and there are really four key components. Upper left our actuators and control components and these are, as I mentioned before, offered by third-party companies, many cases we generate certification fees from our ability to certify these components and materials. But those typically we do not provide that. We enable and help our ecosystem partners.

We do however offer our software solutions, upper right, we offer SDK and we work closely with game developers and other third-party developers to include haptic commands in their software and their applications and then we offer easy integration tool. So this is how we refer to as an ecosystem and each of the four corners, we collect royalty streams, a licensing fees whether it’s certified components, software solutions, SDK or integration tools.

Business model in the mobility space ranges from basic haptics which is simple vibration where we provide patent licensing up to programmable haptics here in the middle driving actuators or motor base solutions to a high-definition, which is I mentioned, Pantech is the first to shift a tablet using our high-definition solution. So we offer a range whether it’s a license simply for basic haptics although up to software to control haptic effects for high-definition solutions.

Again, we offer as part of our ecosystem solution a MOTIV platform, this platform includes an integration tool for the OEM, so Samsung or LG or Nokia, to simply provides our [carnal] of technology and the products. It creates the right set of effects. It’s easy to integrate. It’s embedded throughout the Android operating system, no programming required at all in their part.

We work with the developers within SDK, again, they use this SDK, it’s downloadable and it’s a tool that allows you to embed haptic commands throughout your application. We have a library of effects, much like audio SDKs, if you want warm vibration number one, it’s already pre-programmed, you just cut and paste, and they get a part of your application. So these are easy to use tools that enable the experience by either the OEM or the development community.

So our roadmap to success requires ongoing industry adoption of haptics. I’m happy to say that in 2012 most analysts expect to about 600 million smartphones shipped around the world and out of those 600 million over 400 million will have some form of haptics. So haptic is continuing to grow and we see no reason why it shouldn’t penetrate a 100% of all smartphones or touchscreen enable phones to be more precise.

We continue to expand our IP portfolio, as we show earlier, you can see the continued adoption in new innovation solutions and we are careful to make sure that we file for the right and appropriate patents around the world. We continue to invest in new solutions to continue to elevate the experience. We leverage our partners in our ecosystem, adding new licenses and customers in each of our primary verticals and this allows us to continue to grow our revenue stream and monetize our IP.

Looking at the financial highlights. So if you look year 2010, we did about $31 million in revenue that was a combination of licensing and product sales, many of those products we’ve transferred to other companies, so baseline there was about $26 million in licensing revenues that generated a margin of about 91%, EBITDA of 8% and a loss of about 20%.

In 2011, we have given guidance $29.5 to $30.5 in terms of revenue where 88% plus is coming from licensing and so as a result of margin increase, we expect greater than 95%. Gross margins, OpEx beginning to level off as we grow the revenue base, which increases our EBITDA and gives us a very small loss somewhere between I think $1 to $2 million is what we’ve provided guidance on.

When you look calendar 2012 with revenue growth we expect our margins to be north of 95%, 97% or higher actually, OpEx continues to flat line and become a smaller percent of the over P&L gives us a substantial increase to the adjusted EBITDA and substantial profitability. So highly scalable model.

When you look at Q3, which is the last reported quarter, were calendar quarter company, you can see here that while overall revenue actually decreased slightly, you’ll see our royalty and licensing revenue year-to-date continues to grow, it grew over 13%, but our product sales, these are the products that we transferred out of the company as we transition and so that’s where you can see a substantial decline, those are very low margin product sales.

As a result, you can see the changing nature of our royalty where royalty and licensing is about 88% for the year, 90% for the quarter and as that transition continues you’ll see that drives substantial profitability.

Just with the income statement for the quarter as compared year-to-date and to the prior year, you can see the changes, as I mentioned, reduction in revenue, which also have substantial reduction and expenses, and as a result, I think year-to-date we have at the EBITDA, net income level of small loss with the EBITDA level over $4 million in EBITDA this year as compared to $2.7 million last year.

Balance sheet at the end of the September $63 million in cash virtually no debt, very straightforward balance sheet, minimal amount of investment in inventory and property, plant and equipment.

So, with that, I will be able to open up the questions. But, again, reminding you, we are a licensing company, focused entirely on haptics, world-class customer base, large growing markets, strong IP and a strong balance sheet. Yeah. Question?

Question-and-Answer Session

Unidentified Analyst

Why the royalty grows only 13% or so last quarter, here is some just economy of scale or do you get paid less and less performance last year customer sell or [attribute]?

Victor Viegas

Yeah. Sure. So most of our licensing models do provide for reducing royalty payments based on increase volume, so that is true. We’ve had the same three licensees for a number of years now, Samsung, LG and Nokia. They are -- Samsung is doing great, they just had another great quarter. LG has had their struggles in the smartphone space, as well as Nokia pretty well understood difficulties there.

So, for us to grow our revenue we need to continue to elevate higher quality solutions, which give us high ASPs, increase volume from current customers and more importantly, new customers, new OEM, shipping new phone models, that will help us grow the revenue. Do you have a follow-up question?

Unidentified Analyst

Yeah. (Inaudible)

Victor Viegas

Yeah. That’s right. That’s.

Unidentified Analyst

(Inaudible)

Victor Viegas

We haven’t yet provided any guidance for 2012. Yeah. Question?

Unidentified Analyst

Can you talk more about (inaudible)?

Victor Viegas

Yeah. Sure. Towards the end of the year most companies go through a strategic planning process and then, we called AOP, Annual Operating Plan and as we went through that looking at the needs of the company going forward 2012 and beyond. Clearly, we are expanding our patent portfolio. We have what we believe to be a very fruitful opportunity in forcing that IP. There are quite a few customers -- potential customers licensees that we believe our infringing. And so we will be investing heavily and enforcement litigation.

Their current CEO has brought in back in, I think, it was early 2010, when I had rejoined the company, at that time the company was based with financial investigation and restatement. His skill sets strong controllership, internal controls. Does he really lend itself? He doesn’t have the interest really in IP management, licensing and enforcement. So, as we are wrapping up the year end plans, looking forward to skills that were really important to Immersion we both realize that it was just a bad fit for us right now.

Very amicable. We have a recruiting firm who is actively engaged and quite a few candidates. I think when I get home, have a few interviews, but I would expect probably at the end of the first quarter maybe early part of the second quarter we’ll have a CFO -- full time CFO on site.

We today have an interim -- I’m acting as the interim CFO and we have a consultant in, I believe it’s three or four days a week, who is a very experience CFO, who is operating as a contractor. So somebody who can really help us continue to grow the business. Yeah.

Unidentified Analyst

(Inaudible)

Victor Viegas

So our patent portfolio continues to grow and mature overtime. And as a result, recently we’ve announced we have six patents, I think now up to eight patents that have to do with almost any form haptic capability on a mobile device. One area includes using haptics in a menu selection, using haptic in a GUI interface, using haptics in a multi-tasking environment, you are playing a game and you get an incoming phone call.

So much of what is currently used in today’s phone are covered by this group of patents. So as a result we’ve begun working with notifying a number of the companies that are producing haptic capability in their phones but it’s unlicensed.

So today we have licensees include Samsung, LG and Nokia, if I were to go through the top 10, other companies that have some form of haptics in their phones include, Apple, HTC, Motorola, Sony, ZTE, Huawei. I think those are the top 10. The only one who does not appear to have much in the form of haptics other phones would be [RIM].

Unidentified Analyst

(Inaudible)

Victor Viegas

Yeah. Quite substantial. So, the typical use in an unlicensed fashion we call it basic haptic. In some cases on the Android Operating System for example, when you’re powering up or down, when you are inputting text, dialing a number, there is a very limited set of effects, they all feel the same, they feel buzzy their arm for a rather lengthy period of time, you probably have it in one of your phones.

And in most cases people still like the user experience because there is a lot tactile information. But it is in this crisp. It is in as broadly deployed. It’s not as intuitive. It’s not as context specific. So, why don’t I should feel different than a hyperlink, should feel different than swiping or scrolling.

So to add that level of fidelity requires our software, our technology, but we believe our IP covers both. So we’ve been out selling high-end good experience and clearly, there is a big difference. And Samsung Galaxy uses this extensively throughout their phone system and they’re having a lot of success with it. So it does make a difference. It improves user experience. The basic haptics it’s not where it need, it should be, but nonetheless it should be a revenue generating event for Immersion.

Unidentified Analyst

(Inaudible)

Victor Viegas

So it’s interesting because if you go back we’ve been in the mobility space, let say, for better part of seven years. At the -- the first product launch was the N330 from Samsung and we’re quite proud of the experience. People saw that they set back and look that what kind of changes will occur in the haptic field.

And Apple in their first product launch had no haptics at all. Now they’ve begun integrating it in their iOS 5. It’s part of the standard tool kit that the developers are using, many popular games, a lot of games if you have an iPhone, you’ll get some amount of haptics throughout the game, you’ll feel the ball was draggling in the basket ball game, you feel the bat hit the ball in the baseball game, you feel the cobalt stones on the road as you are driving. So many of the iPhone applications are starting to benefit and use haptics.

And they also use it in an expressive alerts, essentially, if you want to feel calendar reminder or you want to feel an incoming text and you want to feel little different, they offer that kind of capability. So they started with nothing, they kind of watch the success we are having in the marketplace and now they are slowly integrating it into their system.

But if you go beyond Apple and you look at, that first product that we had, in fact, I think we showed couple of million phones were sold in the first year. This year, 2012, it’s expected over 400 million phones will have some form of haptics. So it’s one of those rapidly growing technology. Our challenge is to make sure that we’re continue to elevate the experience but also get paid when our IP is infringed. Yeah.

Unidentified Analyst

(Inaudible)

Victor Viegas

So, Kinect is another technology used I think in Microsoft’s game play, where it’s hands free and so there is a movement towards reducing your hands on experience. But, I think even in the Kinect experience they still offer a controller.

So in the Samsung case, I think there is lot of rooms for Immersion technology to enhance that product whether it’s a remote control, whether it’s a control panel on the TV itself. But it’s truly is hands off swiping, scrolling, pointing type of technology, haptics will have a limited opportunity there.

But, again, once you had a controller most people want to use their phone as a controller, which is kind of the new way or remote control or people want a touchscreen where they can navigate using their tablet to drive the TV, those are all devices that all benefit from haptics, from Immersion. Yeah.

Unidentified Analyst

(Inaudible)

Victor Viegas

Oh! Yeah. So, historically Immersion, while it license technology it was also building rather large simulators, these simulators $150,000 or higher used by doctors, in fact that’s how Medtronic teaches doctors how to do pacemakerly placements and so on and so forth.

So we had a very hardware specific business. In 2010, we transitioned out of that business. There is a small company, we really a great at innovating in haptics in obtaining IP and providing reference designs and solutions. I wouldn’t say we are very good at building hardware, big sophisticated systems that require a lot of installation and management.

So as a result we work with CAE, Canadian company that’s the leader in flight simulation, they want to move into medical simulation, we transfer that inventory, those products got aligned to them and we entered into a license agreement. So as they produce and sell those products, they pay us license fees.

That transition occurred 2010, I think we had couple of million -- what about $4 million in revenue that was non-recurring from them. So, that, this year we are down to about little over $2 million for the year and that’s about the steady state for product sales. So this is the transition year where it is providing a tough comparison. How did I do? We just asked 6 minutes for question. I get you back on time.

Unidentified Analyst

Thank you all and (inaudible).

Victor Viegas

Okay. Great. Thank you very much for coming.

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