Immersion Corporation
Q2 2016 Earnings Call Transcript

Published: 5 Aug 2016

[Operator:]

Good day and welcome to the Immersion Corporation Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarman. Please go ahead, ma’am.

[Jennifer Jarman:]

Thank you, Michelle. Good afternoon, and thank you for joining us today on Immersion’s second quarter 2016 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 is Vic Viegas, President and CEO and Interim CFO. During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, litigation, 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 Form 10-Q filed with the SEC, as well as the factors identified in the press release we issued today after market closed. Additionally, please note that during this call, we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today’s press release. With that said, I will turn the call over to Chief Executive Officer, Vic Viegas. Vic?

[Vic Viegas:]

Thanks, Jennifer, and thanks everyone for joining us this afternoon. Second quarter results were mixed as we continue to see positive momentum in our business and our IP enforcement actions tampered by certain OEMs or are either delayed in their reporting obligations or are taking more time to acknowledge the applicability of our intellectual property. We’re in a good position with new products entering the market, new customer wins, validation of our solutions that will broaden our footprint in the advertising ecosystem and significant proof points indicating the strength of our intellectual property portfolio. We continue to execute on our long-term plan to bring haptics to the market and monetize to our solutions in IP offerings. I’ll provide a more detailed update on our business in a few minutes, but first I’ll review our second quarter 2016 results. Revenue for the June quarter were $7.9 million, down 52% from revenues up $16.2% million in the year ago period, reflecting the absence of revenue from Samsung and other OEMs, who are either delayed in their reporting obligations or taking more time to acknowledge the applicability of our IP. Revenues from royalties and licenses of $7.6 million were down 52% from royalty and license revenues of $15.9 million in the second quarter of 2015. Of these amounts in the second quarter of 2016 variable royalties based on shipping volumes and per unit prices totaled $5.6 million and fixed payment license fees totaled $2.0 million. This compares to variable royalties of $6.3 million and fixed license fees of $9.6 million in the prior year period. While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns for the second quarter of 2016 a breakdown by line of business as a percentage of total revenues was as follows

[Operator:]

[Operator Instructions] And our first question we'll hear from Charlie Anderson with Dougherty and Company.

[Charlie Anderson:]

Yes, thanks for taking my questions. Hi, Vic.

[Vic Viegas:]

Hey, Charlie.

[Charlie Anderson:]

On the guidance, but there's a lot of moving parts there, right. You’ve added the $19 million from Samsung, I imagined that replaces the earlier number and then you were talking about this kind of delays and lack of acknowledgement of IP. So I wonder if you could talk about how much of it was gained by Samsung and the guidance of how much is lost by some of these issues you're referring to. So we can just think about the plusses and minuses here.

[Vic Viegas:]

Sure. So we – the Samsung wind down rights agreement generated $19 million and as I said it will be recognized in full in the third quarter. When you take in consideration the $19 million plus the rest of our business Q3 and Q4, I believe that that still is consistent with the guidance of $55 million to $65 million in revenue. So there is as I mentioned in the call, there was one mobile OEM report that was delayed. We have now received that. There is a number of other negotiations that were originally contemplated as part of that guidance that right now are at risk. We continue to work hard to try to bring those to closure, but it's a combination of the upside of Samsung, wind-down rights as well as some of the risks associated with the late reporting and negotiating new license agreements that leads you back to the $55 million to $65 million guidance.

[Charlie Anderson:]

And could you maybe speak to the driver because it doesn’t look like a convincible customers that derive why there is the lack of acknowledgement of that fee and what the remedies are?

[Vic Viegas:]

Well, obviously there is great adoption of haptics in the market in all of the markets that we serve. So we're pleased to see that. In many cases customers are coming up with their own solutions, we engage them many times, put together claims charts and other evidence as to the strength of our IP and those conversations are still taking time even though we're giving considerable evidence. I can't tell you if its result of our current activities with Apple and others feel that they’ll let Apple do the heavy lifting. But in any case we are taking all the appropriate actions that we think are necessary to enforce our IP. And obviously during the quarter we did license a number of new OEMs. And there are many more ahead of us that we think we can license as well. But at this stage, there are a few that are a little slower than what I had anticipated at the beginning of the year.

[Charlie Anderson:]

Okay. And then just two more quick from me. One is could you update us on just any conversations with Samsung around the longer-term license, we've got the wind-down rights. But in terms of pursuing from there longer-term just any updated thoughts there? And then secondly you've got this cash in the quarter, you have a better balance sheet. Any thoughts around use of cash is it more likely that we see that back in market buying back stock or are you finding that there's not many windows period to do that given all that’s coming on? Thanks.

[Vic Viegas:]

Sure. In terms of Samsung the intent and the purpose of the standstill was to give us time to negotiate a renewal. So there are active engagements at various levels that, we're working. And our hope is to work closely with them and move to a license renewal. Obviously the products launched after the expiration of our prior agreement are no longer license then we obviously believe that they should be. So we're actively working that. And the other issue as far as cash, you’re right the influx of the $19 million has substantially increased our cash balance and as normal we will consider uses of cash including for the legal actions, as well as buyback opportunities. When we make those decisions we’ll make them public.

[Charlie Anderson:]

Great, thanks so much.

[Vic Viegas:]

Thanks, Charlie.

[Operator:]

And we’ll move on to Josh Nichols with B. Riley.

[Josh Nichols:]

Yes. Hi. Vic.

[Vic Viegas:]

Hey, Josh.

[Josh Nichols:]

I was looking at last 10-Q and I know that you won the arbitration with Sony. It looks like that was paid in Q2, right. So we should see that in the next quarter or in the current quarter once the Q is filed?

[Vic Viegas:]

So this was regards to the controllers they were selling in Japan,. I believe that was resolved and paid in Q2 and recognized as well.

[Josh Nichols:]

And it looks like according to the Q that you also filed an arbitration demand for their U.S. controllers as well in March. Is that correct?

[Vic Viegas:]

That’s correct. Yes, yes.

[Josh Nichols:]

So what's that pertaining to specifically any details you could provide?

[Vic Viegas:]

Well. We have 2,200 patents issued or pending. A number of those patents are covering technologies in the gaming space and in addition in the VR space, as well. And so we have lot of patents in this area. It appears that Sony in our litigation many years ago, there were two patents in suit [ph] those two patents have expired. And it appears that they're contesting our new patents. And so we are taking those through the arbitration process and have a lot of confidence in the strength of that that IP.

[Josh Nichols:]

Okay. And then I just want to clarify, because looking at revenue for the quarter. Some people or some customers or potential customers haven’t really acknowledge the company’s IP. Whenever you say that, are you referring to some new on license customers, or are you expecting to bring into the ecosystem faster, or are you talking about some existing customers who are now not paying?

[Vic Viegas:]

I would say primarily the new customers, we did have in the quarter rather unusual situation where an existing customer did not file a report. Subsequent to the quarter end, we did receive the report, but as a result we were not able to record that revenue until we received the report. So I would say the point I was making is that in discussions in various markets, we are providing them evidence of the strength of our IP and in many cases those conversations go well and we reach agreement, in other cases, they dispute the applicability of that IP and it takes longer than to show them the legal arguments as to why they need a license.

[Josh Nichols:]

And last question from me. So for the customer or customers there were late filing and they did file and it’s really just timing of revenue shift from Q2 to Q3. What's the dollar value impact that that would have had so would that be one way for us to help us optically look at it, right.

[Vic Viegas:]

Yes, sure. I was anticipating that the quarter would it come in around $8.5 million. And we ended up at $7.9 million the unreported revenue that we now have received more recently was for about $700,000. So the shortfall in anticipated revenue is attributed to that one late report.

[Josh Nichols:]

Thanks, Vic.

[Vic Viegas:]

Thanks Josh.

[Operator:]

And we’ll move onto Mark Argento with Lake Street Capital Markets.

[Mark Argento:]

Hey, Vic.

[Vic Viegas:]

Hey, Mark.

[Mark Argento:]

Just a couple of quick questions around the couple of key patterns that were reinstated do you think some of the activities saw in the quarter in terms of the willingness or I guess more of the unwillingness for guys to come to the table as a function of the kind of the state of those patents that have now been reinstated in those conversations maybe taken new life here given the fact those patents are now back on the – back invalid about some thoughts around that. And then if you could remind us about any key dates around your legal activities with Apple that would be helpful as well.

[Vic Viegas:]

Sure. So I think the basic haptics patents that you're referring to, we had a lot of confidence that they would be returned to Immersion. And as we said in the script that their battle tested I think they have all been challenged at the Patent Office and reissued. So we expected that it's obviously nice to have happen. I do believe that it shows we have the determination to protect our IP. We have the resolve and the ingenuity if you will that we truly are bringing innovative solutions to the market and as a result are gaining these patents. So we felt good about that. I would say that it’s probably had some impact. Our behavior and the fact that those patents are now back on board. I think it’s had some benefit to us for in the negotiations. But for some of the bigger guys, they want to try to force the issues through the courts. They are using that as a proxy for negotiating a fair price. And I think our mission here is to say resolute and make sure that we defend the IP, because it’s a great portfolio. In terms of key dates, the first key date is October 18 is when the Markman hearing in claims construction would be heard then the actual hearing itself April 27 and May 5, 2017, initial determination is August 11, 2017, and we'd expect completion of the investigation December 11, 2017.

[Mark Argento:]

Great. Thanks, Vic.

[Vic Viegas:]

Yes. Thanks Mark.

[Operator:]

We’ll move onto James Medvedeff with Cowen and Company.

[James Medvedeff:]

Hi, good afternoon, and thanks for taking my call. So most of my questions have been answered, but let me ask the mix between variable and fixed licenses about 74% variable this time. Is that normal that we should expect going forward and that some of these contracts are signed especially the Samsung. How that might change?

[Vic Viegas:]

It's going to be hard to tell. Many of our customers start out launching multiple products on a per unit royalty basis and they'll fall into that bucket. When they get to a point where they've broadly adopted in a line of models and products, then they we may negotiate a more fixed payment stream. The Samsung renewal and I would imagine that like in the past it was a fix. So I would imagine that a renewal would be a fixed payment, but it could also be per unit depending on how those negotiations go. So a little hard to predict, but I would say the bigger ones are going to tend to be in the fixed and the smaller ones are going to continue to be on a per unit royalty.

[James Medvedeff:]

So, is that happens is more and more become as the bigger contracts become fixed, this phenomenon of people reporting late it becomes less of an issue. Would that be fair to say?

[Vic Viegas:]

Yes, absolutely. The fixed are typically payments due – as a result of the contract as opposed to determined by quarterly activity. So, yes, those fixed agreements would take that risk out.

[James Medvedeff:]

Okay. My final question is on the – it’s kind of a two part question on the pipeline for some of your – just on the pipeline of new business, new customers and on the – our new business from existing customers. And also when the content piece – start to deliver some revenue. The advertising content…

[Vic Viegas:]

Yes, the pipeline is significant as I mentioned before we’re building business development resource capability on the IP side. We’ve always been focused on selling the value of our solutions. We’re getting a lot of interest on our IP. So we’re spending more time and energy bringing those solutions and having the value evidence and analytic evidence of that. So we’re putting that together in packages that that we can offer. So I would say the pipeline in terms of new licensees in all the markets we serve or the existing licensees that are growing and renewals that that pipeline is very significant and rich. In terms of the content, it is definitely growing we are increasing the use of haptics in mobile video and ads in particular. The revenue stream is still, I think this year will be $100 million, next year I’d imagine that will be something north of $1 million, but I think before it becomes many millions of dollars, it could be another few years. So right now, I think we’re still establishing a value, building the relationships, launching the products, and building the foundation for a healthy business.

[James Medvedeff:]

All right. Thank you.

[Vic Viegas:]

Okay, thanks.

[Operator:]

We’ll move onto Matthew Galinko with Sidoti.

[Matthew Galinko:]

Hey, Vic, thanks for taking my questions. First one is…

[Vic Viegas:]

Yes. Hi, Matt.

[Matthew Galinko:]

You announced two tier strategy for TouchSense yesterday. Can you talk about what motivated, how you evolve that strategy was driven by what you hearing from existing or potential customers. Or is it just an interpretation from your end of how the device market is evolving.

[Vic Viegas:]

Sure, the premium – TouchSense solution is targeted at the premium handset market. That are typically using a linear resonant actuator, LRA motor. So these are higher quality motors and that software has been designed to be optimized for those types of actuators. We’ve added new features including support for pressure sensing, which has become a very popular feature from a number of OEMs in multiple markets. So we’re tailoring that solution to the high end market and then the mid to low end markets typically use a lower cost actuator a little less fidelity and those are called centric rotating mass or ERM. And so the light product actually is optimized for those types of actuators it’s also an easier solution to integrate. It can be integrated directly into the application, whereas TouchSense Premium is typically integrated at the OS level. So a lot easier to use by our customers, it’s tailored for the mid to the low end market, and by offering the two which has been requested by the marketplace. We think we grow the markets substantially.

[Matthew Galinko:]

Got you. And then I guess, secondly on the new products you touched on TouchSense – I’m sorry, the design cloud I guess just recently. So can you talk about how that evolves your monetization strategy for that piece of the business.

[Vic Viegas:]

Sure. So as I’ve said now for a number of quarters the content space is growing dramatically for us in terms of the usage and more importantly the interest level throughout the industry. So you do need to design good quality haptics and the design tool is what we’ve now called the design cloud. We’ve been creating the content typically in-house and building up post production capability. We’re starting to exceed the capacity of Immersion doing all of the creative work and we want to provide the tools to the customers and the creators. And we’re getting a lot of interest from ad agencies and creative networks that want to begin offering this capability to their clients or their advertisers. So we’ve actually productized this tool and we’ve given it a lot of flexibility by having it delivered through the cloud that allows you to create the content, edit the content and then host the content in the cloud until the point at which you’re ready to release the product to the marketplace. So this gives us control, gives more capability for the marketplace and gives us a better opportunity to monetize the value we bring to the advertising community.

[Matthew Galinko:]

Got it. So, if I might ask in a different way, is it simply you’re expanding your capacity or expanding really beyond your capacity to get trials into the market and to get testing and utilization in the market? Or is it something that you’ll actually be charging for and what’s the timeframe for collecting? If you do plan to charge for access to it, when do you plan to start that?

[Vic Viegas:]

Sure. So we took an internal tool and we created a product. The product allows people to create the haptic tracks for video, ad, and advertising. We will charge for it, but it won’t be a significant revenue stream, it’s a tool. The purpose really is to hand the capability, put the capability in the hands of the ad agencies and the creative brands. And then let them launch without having Immersion doing the creative work. It’s away for us to scale and leverage the technology.

[Matthew Galinko:]

Got it. Thank you.

[Vic Viegas:]

Yes, thanks Matt.

[Operator:]

[Operator Instructions] And next we move on Tony Stoss of Craig-Hallum Capital Group.

[Lucas Schwalbe:]

Hey, Vic. This is Lucas Schwalbe in for Tony Stoss.

[Vic Viegas:]

Yep, Hi.

[Lucas Schwalbe:]

Hey, how you going. So most of my questions of pretty much been answered at this point, but maybe could comment a little more on the deal with Lenovo. Do you think it could be material in the next year or two?

[Vic Viegas:]

Yes, sure. Well, Lenovo is a world class company. They offer a broad product line in multiple markets. And we believe that they are a significant leader in the marketplace. So having a relationship direct with them, it’s important as you probably know we have an indirect relationship with our arrangement with Motorola, which is a subsidiary of Lenovo. But having a direct relationship and being a part of their product roadmap is exciting. I think the early engagement will be around a number of products and as we build the value evidence and as those products succeed in the marketplace and I’d expect to expand the relationship into more models, more products, more markets. So we think that it’s a beginning of a great relationship, I can’t really provide you any near-term revenue targets, just simply say it’s a great relationship and one we think they could grow into something real meaningful.

[Lucas Schwalbe:]

Okay, Thank you. And then outside of mobility and media advertising, what – which area are you most excited about like by like gaming, medical, auto, where you’re seeing the most traction?

[Vic Viegas:]

Yes, I would say those are – auto is clearly an exciting area, as I mentioned bringing on board an IP BD function is going to allow us to target the auto market and the VR market in gaming space in particular, as well as wearables. So those are exciting markets for us. The base of business today is still very small. So it has the potential to be a meaningful part of our growth. And it’s one that I think we’re very focused on an IP licensing.

[Lucas Schwalbe:]

Thanks. I think that’s it for questions I have. Thank you.

[Vic Viegas:]

Thank you.

[Operator:]

And next we move on to [indiscernible] with LPL Financial.

[Unidentified Analyst:]

Hey, Vic, thanks for taking my questions. Which speaking about, they’ve all been pretty much answered. However I thought I’d share a thought jus to put this out there. With the uncertainty regarding a near-term deal with Samsung, which indicates that you – that’s has translates into some uncertainty with an existing customer. It’s coincided with the largest short position that I’ve ever witnessed in your stock over three million shares as of last count. Are there things that you can do to sort of show some additional confidence I know that you’re sort of saving firepower for your cases against Apple and AT&T, and so you’ve suspended the stock purchase program, but that were insider purchases. Could you just spend a signal to the investment community that you guys see a very strong outlook, despite the near-term uncertainty and I would just share with you that the people I work with are looking for those kind of signs, when you’re seeing this kind of weakness in the stock price.

[Vic Viegas:]

Okay, Mark, I appreciate the thoughts and the comments. I would say that we did not suspend the buyback program in order to have a plan in place that’s executable. We normally would put a 10b5 program in place. And there are times when we’re not allowed to do that because we’re aware of private and confidential information. I would say that, now that we’ve announced the Samsung in the quarter, I would say that we’re probably no longer precluded and we will take a serious look at the buyback program.

[Operator:]

And that will be all the questions, I’ll now turn the call back over to Mr. Viegas for any additional or closing remarks.

[Vic Viegas:]

Well, thank you again everyone for being on the call with us today and I wish you a good day. Good bye.

[Operator:]

And that will conclude today’s call. We thank you for your participation.