Immersion Corporation
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Good day, and welcome to the Immersion Corporation Q2 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Aaron Akerman, Chief Financial Officer. Please go ahead, sir.

[Aaron Akerman:]

Good afternoon, and thank you for joining us today on Immersion's Second Quarter 2020 Conference Call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of our website at ir.immersion.com. With me on today's call is Ramzi Haidamus, President and CEO. During this call, we may make forward-looking statements, which may include any expectations, projections or other characterizations of future events or circumstances and include statements regarding the impact of COVID-19 on our business and the business of our customers and suppliers as well as on the economy in general and also include projected financial results or operating metrics, business strategies, litigation or absence of litigation, anticipated future products, future expense reductions, anticipated tax expenses, anticipated market demand or opportunities, our operating model and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions, especially in light of the ongoing adverse effects of the COVID-19 global pandemic. 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, Immersion's annual report on Form 10-K for 2019 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 beliefs and predictions as of today. Except as required by law, Immersion does not intend 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, except as required by law. Additionally, please note that during this call, we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today's press release. With that said, I'll turn the call over to Ramzi.

[Ramzi Haidamus:]

Thanks, Aaron, and thanks, everyone, for joining us on the call today or listening via webcast. I'm excited about the progress we've made executing our strategy to deliver new product and technology, lower operating expenses, lead development of industry standards and achieve sustained profitability. This quarter, we significantly improved our operating model and implemented further cost reductions to align with the current COVID-19 business environment. Immersion, like most companies, has been negatively impacted by COVID-19, resulting in revenue of $5.7 million for the quarter, which was down 35% from the total revenue of $8.7 million in the same quarter last year. This was primarily driven by a decline in fixed fee revenue. I'm pleased to note that recurring revenue, which we have as a strategic objective to grow, was relatively stable year-over-year. As I'll discuss this further, we are well positioned for growth as the economy recovers. We are confident in our future, as demonstrated by over $30 million of share repurchases this year. We've also continued to make strong progress towards improving our operational efficiency and reducing our operating expenses. We spent the past year working toward these objectives by more efficiently managing our patent portfolio; reducing litigation expenses; shifting resources to Montreal, where we have lower personnel expenses; exiting our San Jose facility; and reducing other costs such as professional services. We remain very disciplined with expense management through the current economic environment and expect to achieve additional reductions in the second half of this year. As part of this initiative, we continue to evaluate our investment decisions with the goal of aligning resources to the best opportunity and driving efficiencies in all functions. Our results in the second quarter demonstrate progress against these objectives. During the quarter, compared to the same period last year, we achieved an $8.1 million improvement in operating income, an $8.2 million improvement in non-GAAP income and a total reduction of $11.4 million in non-GAAP operating expenses. We continue to believe we can reduce our total annualized operating expenses in line with our strategic initiatives and are making significant progress towards our goal of sustained profitability and generating meaningful free cash flow. In concert with our focus on generating profit, free cash flow and maximizing shareholder value, Immersion's Board of Directors has recently appointed Eric Singer as Executive Chairman. This change brings direct shareholder representation to the role. Sharon Holt, our previous Chairman, will continue to serve on our Board, and I would like to thank her for her many contributions and leadership over the past few years. Next, I'd like to provide an update of our progress in the automotive, mobile and gaming market segments. COVID-19 is impacting the automotive market, resulting in reduced vehicle shipments and activity in the near term. We expect, however, the market will gradually recover after 2020 and remain confident with our investment in automotive. Despite the current environment, our new product strategy is resulting in stronger customer engagement with product and design teams who lead technology decisions on interfaces throughout the vehicle. We're building greater awareness of the value of haptics as well as emerging solutions. Last quarter, for example, we highlighted the adoption of Immersion technology and software by Alps Alpine, a leading Tier 1 automotive supplier. We also highlighted the importance of our engagement with OEMs that inspire their design, generate demand for haptic systems from our Tier 1 licensee. This quarter, I'm pleased to share that Nissan recently announced its new Ariya EV crossover vehicle with integrated haptic controls. One of our existing tier – license Tier 1 suppliers is providing the haptic systems for the vehicle, and therefore, Immersion will receive royalty in the future from systems from the Nissan Ariya. This illustrates our opportunity to grow revenue from existing automotive licensees as well as the proliferation of haptics beyond luxury vehicles and into the mid-tier brands. The mobile market has also been negatively impacted by COVID-19, though we believe it will undergo a recovery in the quarters ahead. As Samsung stated in its recent earnings announcement, it expects a gradual recovery in the demand for mobile devices in the second half of 2020. Our revenue this quarter was in line with our expectations, and we expect growth in the second half of the year. We continue to work with our channel partners to address the China market, and our revenue from this program has been stable quarter-over-quarter. The games market is providing more resilience to COVID-19 as the stay-at-home effect opens up more time and flexibility for gaming. We continue to anticipate the upcoming release of the Sony PlayStation 5 with holiday season and do not believe COVID-19 will have a materially negative impact on unit shipment. As previously announced, Sony Interactive Entertainment has a license and the PlayStation 5 DualSense controllers utilize Immersion technology. Immersion collects a royalty from each controller, and we expect more than one controller will ship per console over time to support multiplayer gaming and to replace worn out controllers. The haptics capabilities in the DualSense controller are getting rave reviews from developers and others who had early access. The Creative Director of Godfall, an upcoming game on the PlayStation 5, recently called out the DualSense's advanced haptics as a particularly exciting feature and noted that it enables games to, for the first time, deliver sensations of weapons hitting other weapons and surface materials. This validates the value of our technology and reinforces our belief that the PlayStation 5 will catalyze other gaming and VR companies to pursue more advanced haptic capabilities in new products. Our continued innovation in VR was also recognized in the issuance of a new patent titled haptic effect generation for space dependent content, which covers methods and systems for offering and rendering haptic effects in video content, such as 360 degree, 3D and VR video. We are proud that our team continues to lead in innovation in this exciting field. I also want to touch on our progress leading to the creation of haptic technology standards. Standards will improve interoperability between haptic content and devices, enabling broader proliferation and grows haptic across multiple markets, including mobile, gaming and VR. We believe standards can support continued growth for Immersion through expanded licensing opportunities of our patents as well as implementations in our software products. In Q2, Immersion submitted sector proposals to the Advanced Television Systems Committee, known as ATSC, and the moving picture experts group, known as MPEG. Both ATSC and MPEG are influential standards development organizations that define media creation, delivery and playback format across the consumer electronics ecosystem. Our proposals specify the protocols and procedures needed to incorporate haptics into broadcast and online distributed to a range of devices, including smartphones and tablets. Our proposals are designed to deliver an optimal user interface based on the content, device type and the viewer's personal preferences. We're excited that our proposals have generated initial support and have passed the first phases towards standardization in both ATSC and MPEG. In addition, our newly formed haptic industry forum, designed to bring together leaders across the ecosystem, now includes about 50 participants representing dozens of leading technology companies. The overwhelming support we've seen in Q2 validates industry interest and demand for haptic technology standard and our opportunity to lead these efforts. In summary, while Immersion, like others, face challenges navigating through an uncertain environment due to COVID-19, I'm excited and encouraged by the progress we've made to execute our strategy and improve our financial performance. And with that, I'll now turn the call over to Aaron for a review of our Q2 results before opening up the call to your questions.

[Aaron Akerman:]

Thanks, Ramzi. Let me begin by referring you to this afternoon's press release for information regarding our Q2 2020 financial performance. Total revenue of $5.7 million for the quarter was down 35% from total revenue of $8.7 million in the second quarter last year. Revenue from per unit royalty arrangements was down approximately $0.1 million or 3% compared with the prior year quarter. Revenue from fixed license fee arrangements were down 70% on a comparable basis, primarily due to $3 million of onetime license fees from two customers in mobility and gaming recognized in the second quarter of 2019. Recurring revenues represented 98% of revenues in the second quarter versus 65.7% of revenues in the second quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the second quarter, a breakdown by line of business as a percentage of total revenues was as follows

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Anthony Stoss with Craig-Hallum Capital.

[Mason Anderson:]

Hey guys, this is Mason on for Tony. First, just wanted to say great work on the production. Really impressive stuff there. A couple of questions for me. First, and you talked about the full-on deposits, can you just remind us your thoughts on how big the overall PS5 opportunity is for Immersion? And then as a follow-up to that, with the positive reception of the PS5 Dualshock haptic features, curious if you've seen any interest from other gaming customers that are looking to compete with Sony on controller features. And then I've got one more after.

[Ramzi Haidamus:]

Sure. We don't break out individual customer forecast at this time. And along those lines, we're also not providing forward-looking guidance based on COVID-19. But that said, as stated in our script, we don't believe COVID-19 will have a materially negative impact on the PlayStation 5 and expect it to – expect the PlayStation 5 controller shipments will contribute meaningful revenue from Q4 this year and beyond. We know that it's coming in on time. We do know that it will revive their – potentially revive their book up. And to your second question, we – yes, we do see interest from competing controllers to – into the market as the bar for haptic devices and haptic experience becomes higher and higher, meaning high-definition haptics in the – and handheld devices become a much more interesting experience, we believe the entire market will have to follow. And we are well positioned to provide solutions for those types of third-party providers of controllers.

[Mason Anderson:]

Great. Thanks. And then with all the costs that you've taken out of the model, can you just talk about your leverage on the expense side going forward? How much do you think you can grow revenues from here without adding any incremental expenses? That's it for me. Thanks.

[Ramzi Haidamus:]

So we remain committed to the strategy to deliver new technologies and products to support the growth in concert with continued patent licensing. The cost reductions have been in areas of litigation, more efficient management of our patent portfolio, G&A and moving some positions to Montreal. We have not scaled back research and development, which is one of the cornerstone of delivering that strategy. And the same goes for our sales efforts. We have an impact sales team that continues to engage with customers. So in overall, we believe our strategy continues to be intact and in starting to pay off, as highlighted by some of the design wins last quarter and this quarter. Aaron, did you want to add anything to that question?

[Aaron Akerman:]

No, you said it exactly.

[Mason Anderson:]

All right, perfect. Thanks guys. I’ll hop back in the queue.

[Operator:]

Thank you. We'll take our next question from Derek Soderberg with Colliers Securities.

[Derek Soderberg:]

I want to start with gaming, sort of build off the previous question on the PlayStation 5. So Immersion has benefited from PlayStation console refreshes in the past. And as it relates to the 5 launch, can you maybe help us understand Immersion's positioning and content opportunity relative to those historical launches?

[Ramzi Haidamus:]

I can certainly give you an overview of the license architecture without getting into too much confidential details. Is that what your question is here?

[Derek Soderberg:]

Yes. That would be nice. Just – it would be nice to, I guess, get your thoughts on this launch versus the ones in the past.

[Ramzi Haidamus:]

Sure. So I just want to say first that we – when we say content, just going to highlight, I mean I think you know this already, we don't generate any revenue from content related to the gaming. It's all related to the sale of hardware, certainly with regards to Sony. So I just want to put that out there for clarification. But that aside, taking a look at this platform relative to previous platform, it is quite interesting to see how much focus and how much marketing and messaging was coming around the idea of haptics. We believe that Sony has done a wonderful job delivering an amazing surround sound experience over the years. That experience is pretty much maximized. In other words, it's kind of hard to increase it by a significant amount. And the same thing with video, the incredible graphics on the PS4 will be improved with the PS5. But we're getting to that point where it is quite an outstanding experience. And therefore, the question is where do you go next, which is why we believe Sony and other gaming consoles are starting to focus on haptics. It's kind of the third experience to get you more immersed in that game. And more importantly, it is an experience that has been substandard so far. I mean we all know what haptics has been so far. It's just a vibrating device. What Sony has done is increase that experience so much that the immersiveness of the haptic controller gets you an extra feel of being immersed in the content of the game based on technology and IP. So just as was quoted by one of the game developers, they believe this is the first time where you can actually feel the kind of surfaces that you are touching, not just a vibration, but you can actually get a different feeling, whether you're hitting a weapon or hitting a different kind of surface. That is a brand-new experience, and that is singularly differentiated by haptics. And we're very excited about this, not just because Sony is doing it, but we believe that kind of experience will be the norm and the standard going forward. And these types of – as you know, we get paid for every one of these controllers, whether you have one or you buy a second one later, either because you have somebody playing with or because your controller is worn out, we believe this is going to be a continued source of revenue for us. And if the VR controllers for the Sony end up taking off, that will be additional source of revenue. So the content side, to answer your question, is very exciting because there's a lot of emphasis on haptics. We're very excited that we're well positioned to monetize it as well as through third-party providers.

[Derek Soderberg:]

Great. So I guess, would it be safe to assume that the license fees, I guess, per controller this time around relative to prior launches would be greater?

[Ramzi Haidamus:]

We have not discussed the per controller pricing at all. We're under confidential terms with Sony, so I can't really comment on that.

[Derek Soderberg:]

Okay. That's fine. And then in automotive, now that sales are sort of recovering off April lows, can you remind us where your per unit exposure is in terms of geography and vehicle type?

[Ramzi Haidamus:]

By and large, our pricing doesn't change by geography nor does it change that vehicle type. We fell into the Tier 1s, which create products that sometimes go across different vehicles and across peers. So we have a fairly simple, straightforward pricing to make the life of our Tier 1s fairly straightforward, and that's also on their request. We continue to enjoy ASPs from $1 to $3 per car, depending on how many products are in the car. And what I mean by product, it could be, for example, a display, that's considered one licensed product, a track ad, that's another license product or let's say, buttons in the side panel. So these tend to be additive, and therefore, you have a range of royalty depending on how many of the instances you have in the car. In its most basic form, you can see a car where the display that might come in somewhere around $1 to $1.50 per car. Those types of pricing are pretty standard across geographies and across most vehicles.

[Derek Soderberg:]

Okay. And then just generally speaking, can you expand on sort of where your exposure is geographically right now with your wins?

[Ramzi Haidamus:]

So currently, we have licensed about 80% of Tier 1. So we are in very good shape in terms of getting the vast majority of companies designing haptic, head ends and haptic technologies and providing them to the OEMs. Therefore, we're in a position where our Tier 1 ship systems to a range of OEMS, including BMW, Mercedes, Audi, Lexus and others. That said, our pipeline has additional Tier 1s in progress as more companies seek to supply haptic system. We also engaged the OEMs directly to push the adoption of haptics, so – which drives demand to our license suppliers. We are making good progress, as evidenced by the Nissan Ariya and Mercedes new MBUX large pane interface, which will give you in the 2021 S-Class. So we're fairly evenly spread between Europe, U.S. and Asia this moment.

[Derek Soderberg:]

Great. I appreciate the color. Thanks.

[Ramzi Haidamus:]

Sure.

[Operator:]

Thank you. This concludes today's question-and-answer session. We appreciate your participation. You may now disconnect.