Immersion Corporation (NASDAQ:IMMR) Q3 2019 Earnings Conference Call November 6, 2019 5:00 PM ET
Jennifer Jarman - The Blueshirt Group
Ramzi Haidamus - President and Chief Executive Officer
Len Wood - Interim Chief Financial Officer
Conference Call Participants
Charles Anderson - Dougherty & Company
Anthony Stoss - Craig Hallum
Good day and welcome to the Immersion Corporation Q3 2019 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Ma'am, please begin.
Thank you, Corey. Good afternoon and thank you for joining us today on Immersion's Third Quarter 2019 Conference Call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the Company's website at www.immersion.com. With me on today's call, are Ramzi Haidamus, President and CEO; and Len Wood, Interim CFO.
During this call, we may make Forward-Looking Statements, which may include projected financial results or operating metrics, business strategies, anticipated future litigation or absence of litigation, anticipated future product, future expense reduction, anticipated fact expenses, anticipated market demand or opportunities, our operating model and other forward-looking topics.
These statements are subject to risks, uncertainties and assumptions. Many of these risks and uncertainties are beyond the control of Immersion. For a more detailed discussion of these factors and other factors that could cause actual results to vary materially interested parties should review the risk factors listed in the press release we issued today after market close, Immersions annual report on Form 10-K for 2018 and its most recent quarterly report on Form 10-Q which are on file with the U.S. Securities and Exchange Commission.
The forward-looking statements mentioned on this call reflect Immersion’s belief and predictions as of today, except as required by law Immersion disclaim any obligation to update these forward-looking statements as a result of financial, business or any other developments occurring after the date of this release or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Additionally, please note that during this call, we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed our presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today's press release.
With that said, I will now turn the call over to the CEO, Ramzi Haidamus. Ramzi?
Thank you, Jennifer and thanks everyone for joining us on the call or listening via webcast. We're very excited today to provide a glimpse of the new Immersion. As you know we've been focused on establishing a growing and highly visible base of recurring revenue that is starting to materialize. Combined with the cost reduction efforts we have initiated last quarter, I'm very pleased that as of Q3, Immersion has already transitioned out of cash burn mode and into a new era of sustained profitability. Our strong and experienced management team has been hard at work formulating our strategic plan.
And today, we will share highlights of our focused, inform and excite growth vision that will provide the platform for our future success. First, Len will provide an overview of our Q3 financial results. Then, I will review our progress across the operating goals we outlined last quarter before highlighting key elements of our strategic initiatives moving forward. In addition we plan to provide a deeper dive into our go forward strategy as an Analyst and Investor Day to be held on the morning of November 18 in New York.
With that, I will turn it over to Len.
Thank you, Ramzi. Immersion's revenues for the third quarter were 10.6 million, up 2.1 million or 24% from revenues of 8.5 million in the year ago period. This increase primarily reflects increases in royalty revenues related to lump sum fees, stemming from new agreements that we entered into during the second and third quarters of 2019, partially offset by decreases in variable royalties due to lower shipping volumes.
Revenues from royalties and licenses in the third quarter of 2019 included variable royalties based on shipping volumes and per unit prices totaling 6.4 million, and fixed license fees totaling 4.1 million. This compares to variable royalties of 4.1 million and fixed license fees of 4.3 million in the year ago period.
Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the third quarter of 2019, a break down by line of business as a percentage of total revenues was as follows, 79% from mobility, 15% from automotive, 6% from gaming.
Looking at year-over-year trends, mobility revenues were up 50% from the same quarter last year, primarily due to license agreements entered into in the second and third quarter of 2019, which contain both lump sum and variable revenue components, partially offset by decreases in variable royalties due to lower shipping volume.
Automotive revenues were up 9% primarily related to certain per unit royalty agreements with revenues in excess of annual minimum royalty provisions, which we recognized this revenue during the third quarter of 2019.
Gaming revenues were down 53% during the third quarter 2019, primarily due to lower shipping volume. Gross profit was 10.7 million, compared with gross profit of 8.6 million in the third quarter of 2018.
Turning now to operating expenses, excluding cost of revenues, total GAAP operating expenses were 11.8 million in the third quarter of 2019, compared to 13.7 million in the year ago period.
Sales and marketing expenses were 1.7 million for each of the third quarters of both 2019 and 2018.
Research and Development expenses of 1.9 million in the third quarter of 2019 decreased 0.2 million or 8%, compared to the same quarter last year. This decrease was primarily driven by lower compensation cost as a result of our cost reduction efforts.
General and administrative expenses of 8.2 million decreased 1.7 million or 17%, compared with the same quarter last year. This decrease was primarily driven by a reduction in litigation and legal expenses, following legal settlements during the third and second quarters of 2019.
Looking at our net results, GAAP net loss for the third quarter of 2019 was 1.4 million or $0.04 per share, compared with GAAP net loss of 4.6 million or 40.15 per share in the third quarter of 2018.
In addition to normal GAAP metrics, we use non-GAAP net loss and non-GAAP loss per share to track our business performance. As a reminder, we define non-GAAP net loss as GAAP net loss adjusted to reflect cash tax expense, less stock based compensation and restructuring expenses.
Non-GAAP net income in the third quarter was 48,000 or $0.00 per share, compared with non-GAAP net loss of 2.2 million or $0.07 per share in the same period last year.
Turning to the balance sheet, overall, our balance sheet remains strong with our total cash portfolio, including cash and short-term investments at 95.6 million as of September 30, 2019.
Our total cash portfolio used during the third quarter was 6 million down from 16 billion in the second quarter, the latter of which included a $6.9 million reimbursement paid to Samsung. The sequential decrease was primarily due to higher cash collections and decreases in legal and litigation expenses, following legal settlements in the third quarter of 2019 as compared to the second quarter.
As noted last quarter, in March this year, we received a determination from the council of International Court of Arbitration, where we were directed to reimburse Samsung roughly 6.9 million plus 0.9 million in court fees for withholding taxes that Samsung had paid to the Korean tax authorities on Immersion's behalf. We recorded the amount to be reimbursed on our balance sheet as both a long term asset and a current liability and accounts payable. We paid the reimbursement during the second quarter.
As we approach year end, we have revised our expected 2019 revenue range to between 35 million and 38 million and our anticipated bottom line non-GAAP net loss to between 12 million and 15 million.
From an OpEx standpoint, our expected GAAP operating expenses remain between 55 million and 58 million, which includes non-cash stock based compensation expense of between 6 million and 7 million, resulting in non-GAAP operating expenses of between 48 million and 52 million.
Including these numbers are approximately $11 million in litigation expenses. Due to the net loss we're expected to incur domestically, we are forecasting cash tax expense for the year to be a 0.5 million or less. Our mix from the current revenue in Q3 was approximately 64%.
And as we continue to focus in on establishing more predictable recurring revenue streams, we expect this mix to increase to over 70% in Q4. Additionally, as Ramzi mentioned earlier, based on the success to date in implementing our corporate transition, we expect further expansion of our profitability on a non-GAAP basis in Q4.
With that, I will now turn it back over to Ramzi.
Thanks Len. As you can see from our financial commentary, we've already started to see a ramp down of expenses, including a 94 sequential decrease in litigation expenses. Last quarter, we also shared details regarding a revised effect structure and the levers to drive down expenses to be in line with our desired company profile. Specifically, in the areas we outlined during our last call, we have made the following initial progress.
One, regarding the more efficient management of our patent portfolio, we have already trained over 400 issued patents and over 300 patent applications from the pool, resulting in a 14% reduction in prosecution and maintenance fees from Q2 to Q3. We continue to focus our resources on the most valuable IP and to eliminate spending that is not tied to emergence long term success. This review process will continue and is expected to result in additional savings as we aim to cut our annual patent prosecution costs by 50%. And our patent maintenance costs by 30%.
Two, consulting and professional services decreased 23% from Q2 to Q3 and we continue to target an eventual 40% reduction from prior level. And three, we achieved sequential cost reduction on the order of 2% in engineering and G&A through the realignment of our employee footprint, including targeted resource migration to Montreal. The board has also approved plans to exit our Silicon Valley office facility as soon as practicable in favor of accommodations conforming to our reduced operating structure.
While this is expected to result in additional restructuring charges, we believe we can run the business more effectively with a smaller footprint and the lower ongoing costs with monthly savings and cash flow upon subleasing the facility. This progress demonstrates that we're already well underway toward our goal of reducing non-GAAP OpEx to below $32 million for 2020, which is a key underpinning of our strategy to drive sustained profitability. That being said, we do not intend for our cost cutting initiatives to eclipse our ability to capitalize on the growth opportunities in front of us, and we will continue to invest diligently in a responsible manner.
The next component of our strategy is to generate a compelling product and technology roadmap to support growing and recurring revenue while optimizing Immersion's worldwide patent licensing business from current and new license fees. Essentially, we are accelerating our transition from a patent licensing business to a combination of both patent and technology licensing, as such, investing in underlying haptics technologies and the promotion of the compelling experiences that those technologies enable remains key to our growth.
We believe haptics continues to be in an early stage with strong growth potential ahead. Currently there are no standards regulating the implementation and deployment of haptics whether mandatory or de facto. This has resulted in an industry wide challenge as to adopt and scale new high quality haptics experiences. Immersion may accelerate adoption of the haptic ecosystem by facilitating industry wide standards to enable easier adoption. We look forward to sharing more insight on this approach at our upcoming Investor Day.
Moving forward we plan to focus our product efforts on the following market segments; automotive, PC, gaming, VR, mobile and adult. For several of these markets, patents licensing will continue to be an essential component and our mandate is, A, to continue to work towards contract renewals as well as new licensing opportunities across our markets, including making our IP licensing program successful and B, to refine and strengthen our patent portfolio, which at the core helps drive Immersion's technology solutions an adoption.
So how do we frame our product solutions in order to target these areas and execute on the next tier of our growth strategy? We will focus on two product initiatives designed to deliver compelling touch experiences across multiple market verticals. We break these down into two categories that we refer to as inform and excite. Both initiatives are designed to deliver horizontal platform technologies to efficiently address multiple market verticals. The inform program will facilitate easy adoption of high fidelity cost effective haptics for touch interfaces, and will span touch based human machine interfaces for everyday use cases.
The program will help our customers deliver high fidelity reproduction of mechanical buttons and controls across markets such as automotive, PC and mobile. In markets such as automotive, we have a strong foundation of existing Tier-1 patent licensees such as Alpine Electronics, Preh and Continental who just renewed its license. Our inform product initiative provide a path to deliver and capture more value through reference designs, firmware and haptic design tools. In addition, we are partnering with the industry on bringing new innovations to market. This quarter for example, we entered into a collaboration agreement with Alpine to jointly develop new human machine interface technologies for cars.
Turning to our excite program, it is designed to enable spectacular immersive touch experiences. Think of it as lifelike touch experiences for digital content and markets including gaming, VR, mobile and a new category that will pursue within the adult market. The excite initiative which enables extensive creative control of experiences with the objective to enable haptics to play a central role alongside video and audio. We're already seen proof points in the market for these types of experiences. For example, Sony Interactive Entertainment, one of our licensees recently announced that the PlayStation five controllers will include higher fidelity advanced haptic features. We plan to share more details regarding our inform and excite initiatives including product approach, and our view of the market potential at our upcoming Investor Day.
Lastly, there is the inorganic component of our future growth. As I communicated last quarter, the goal of our strategic planning is to ensure that all of our resources are fully optimized and allocated to create long-term shareholder value. Our board is aligned with management in taking a prudent approach to OpEx, being resolutely focused on more predictable profitable revenue generation and determining the best direction for our capital allocation policy while supporting these goals. We are therefore taking an ownership mentality as it relates to our capital allocation and our efforts to maintain a healthy balance sheet, while also pursuing stock buybacks and tuck-in acquisition when appropriate.
As we look to scale our growth, we plan to explore highly strategic asset acquisitions that may help us accelerate or expand our initiative. We are taking a very responsible approach towards pursuing any opportunities as it relates to the size and accretive nature of any deal possible fit from a market, product and technology perspective, as well as management and geographic fit. Immersion has established a new baseline from which to carry out our vision for success. By accelerating the shift to a more Predictable Revenue mix, taking timely and decisive action and the realignment of our expenses, we have crossed the threshold and for profitability with the ability to sustain and expand it from here. So lots of exciting opportunities in front of us and a well analyzed fresh approach in place from which to profitability grow and capitalize on our target market.
Importantly, our go forward strategy does not require us to recreate the wheel. Rather, we will leverage the company's 20 plus years of innovation in making compelling digital touch experiences possible by advancing the art and science of haptics. This will be accomplished not just by licensing our underlying IP, but also through technology products, breakthrough innovations and ecosystem support. We've only just scratched the surface regarding our strategic path to success today. We look forward to seeing many of you on November 18 in New York to meet the new team, experiencing some of our product demonstrations and learn more regarding our plans for executing across our market.
With that would like now to open up the call for questions. Operator?
Thank you. [Operator Instructions] We'll take our first question from Charlie Anderson with Dougherty & Company.
Yeah, thanks for taking my questions and looking forward to the Analyst Day in a few weeks. Ramzi, I wonder maybe if you could just first address the down revision to the revenue for the year, taking the midpoint a couple million dollars, maybe just what changed relative to three months ago? And then maybe just to take on to that, how the pipeline looks in terms of licensing opportunities, as you look at the next year, and then I've got a follow up.
Sure, Charlie, while we don't provide the quarterly guidance, we did see some timing differences over Q3 and Q4. In Q3 we forecast certain customer deals in automotive and mobility, but those are going to occur in Q4 of 2019. And in Q3, we had forecasted – and customer deals are going to be pushed out into 2020. We don't see a letdown in the overall strategy or revenue trajectory, but we did see a somewhat of a delay in executing some deals or revenue coming in. Forgive me, Charlie, but what was the second question you asked?
The health of the licensing pipeline as you look at into next year.
Sure. The pipeline right now is consisting of automotive, mobile and adult and each of which we have a dedicated sales and marketing team focused on, some of it is new market, some of it is existing market. In the automotive market we have about 80% penetration in a Tier-1, we're going to continue to close the remaining ones, there's some larger ones that are in progress today. We are going to be hiring sales force in Europe to continue to manage that pipeline. In automotive our eye continued towards focusing on the non-Korean Android opportunities, mainly the Chinese OEMs, which we still need to address. The adult market is a brand new one for us. And that has been an incoming opportunity. Therefore, we do see some potential progress in the short-term, meaning 2020.
Okay, great. And then in your script for my follow up, you did mention in terms of capital allocation, buybacks, you also mentioned acquisition. So I wonder on the acquisition front of you maybe just elaborate some of the criteria you would look for in terms of what will be a good fit for you guys? Thanks.
Sure. Yeah, the goal here is to accelerate our current efforts, not to try to prevent the company to get into a whole new market. So we're going to take on a prudent approach which leads cash for either reserves or stock buybacks. We also want to pursue acquisitions that will increase our IP in a responsible way. So creating an acquisition – taking on acquisition that beefs up our technology as well as our IP position would be something that's important. The strategic fit's going to be critical. So it's going to have to be something that is very germane to our current quarters I have, as I've outlined it.
Perfect. Thanks so much.
[Operator Instructions] We'll take our next question from Anthony Stoss with Craig Hallum.
Definitely Ramzi and Len, couple questions, once you complete the OpEx shrink sometime in 2020, between now then do you have any sense of what it's going to take from a restructuring charge standpoint? Then also when you look out into 2020, I'm not asking for numbers, but given mobile is your biggest revenue generator. What do you think the growth rate might be for your mobile business? And do you think you could bring on another new customer in mobile?
I'll talk specifically to the restructuring piece. You'll see in the 10-Q that comes out there's a subsequent event, disclosure, specifically related to the lease. And what we talked to is that there's a $2.4 million right of use asset for the lease and the net book values of the leasehold improvements and furniture and fixtures are about 1.1 million. The restructuring charges associated with that will be timed towards Q4 and possibly Q1 depending on the amount of time it takes us to exit the facility here.
Okay. And beyond the facility restructuring charges as you shrink heads as cetera.
I think we've accounted for most of that already in our restructuring adjustment that we've made in the body of Q3.
And then Ramzi, mobile growth 2020 or thoughts on bringing on new customers for mobile?
I think the combination of our IP strategy which we continue to push forward, plus signing on new IP partnerships that we're currently working on. In addition, the excite initiative, bringing new technology that will be appealing to the Chinese companies as opposed to just a patent licensing but license and thirdly, a re-doubled effort in light of the latest – winds have changed in patent licensing in China. I'm not sure how significant that is, and we've all seen the ZTE settlement out there. But it remains to be seen if this is a trend or an exception, but we're definitely going to try to take advantage of this and push forward. So we have three elements of our China strategy, we're going to continue to push forward on.
And then you mentioned beyond just IP licenses, technology licensing, is there a market that too expensive for you to go after that you can license your technology too and let somebody else run with it? Is there a market or help us understand what other markets that you're not tapping into?
I would say the IoT market is the most fragmented and high maintenance market that we are not going to pursue from a technology perspective. The needs of the different IoT are so varied, even the definition of IoT is so varied, we don't even know where to start. So we're kind of leaving the IoT market for patent licensing both focusing strictly optimistically on any company that might be infringing our IP and going about it the old way so to speak.
And my last question, any guess in terms of what you might need it for litigation expense in 2020.
Not at this point. We are going to keep some reserves. As you know our business is IP. So protecting IP continues to be one of our top priorities. I do not have a number in mind. But we're going to continue to be on the lookout for any opportunities where we reach a dead end and therefore, we might have to pull the trigger on.
Okay. Thank you, best of luck.
Thank you. I will now turn the call back over to today's speakers.
Thanks, operator and thank you all for joining us on this call today. We look forward to seeing many of you soon at our Analysts and Investor Day. Have a good day.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.