Immersion Corporation
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to the Immersion Corporation First Quarter 2017 Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Jarman. Please go ahead ma’am.

[Jennifer Jarman:]

Thank you, Lisa. Good afternoon and thank you for joining us today on Immersion’s first quarter 2017 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 Nancy Erba, 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-K 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 now turn the call over to Chief Executive Officer, Vic Viegas. Vic?

[Vic Viegas:]

Thanks, Jennifer, and thanks everyone for joining us this afternoon. These are very busy and exciting times for Immersion. In addition to executing on our Company strategy and making progress in growing each of our key markets, we have reached a major milestone in our IP strategy today with the conclusion of the hearing in the Immersion versus Apple case at the International Trade Commission court in Washington DC. While we are pleased with the progress of each of these ongoing efforts, I am programmatic about our financial results for the March quarter. In the near-term, the decisions we have made, the actions we have taken and the opportunities we are pursuing can create challenges to delivering our optimal financial business model on a quarter-by-quarter basis. However, these same decisions, actions and investments allow us to capitalize on our culture of innovation and market-leading haptic know-how, while positioning us for future growth. I continue to do excited by the breadth of opportunities in front of Immersion as we move through the year and in a few minutes, I will share with our recent business developments and outlook. But first, I’ll turn the call over to Nancy to discuss the details of our first quarter 2017 financial results. Nancy?

[Nancy Erba:]

Thanks, Vic. Revenues for the March quarter were $9.2 million, down 32% from revenues of $13.6 million in the year ago period, primarily the result of a $3 million non-recurring medical contractual payment we recognized in Q1 of 2016. Revenues from royalties and licenses of $9 million were down 33% from $13.4 million in the first quarter of 2016. Of this amount, in the first quarter of 2017, variable royalties based on shipping volumes and per unit prices, totaled $6.5 million and fixed payment license fees totaled $2.5 million. This compares to variable royalties of $8.5 million and fixed license fees of $4.9 million in the prior year period. While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality pattern, for the first quarter of 2017, our breakdown by line of business, as a percentage of total revenues was as follows

[Vic Viegas:]

Thanks, Nancy. During our last conference call, I outlined the five strategic markets that we remain focused on

[Operator:]

[Operator Instructions] We will take our first question from Charlie Anderson, Dougherty & Company.

[Charlie Anderson:]

Yes. Thanks for taking my questions. I wonder, if I could start with Samsung, just kind of roughly where we stand, do we still have the standstill in place? And I also wondered, I think, I heard the change in core OpEx excluding legal, but I wondered if you have the exact litigation expense in Q1 and I got a follow-up.

[Vic Viegas:]

Sure, Charlie. So, Samsung, as I think you know, we believe requires a license for many of their mobile products that have launched in 2016 or later. That standstill that we talked about, it does expire this year and we would expect to license or enforce our IP with Samsung.

[Nancy Erba:]

And then, regarding the litigation spend, we’re not specifically breaking out the quarter details. But I can comment that we’re still standing by the range that we gave at the end of last quarter of $18 million to $22 million for total litigation spend this year and that that remains very heavily weighted to the first two quarters of the year, given the hearing.

[Charlie Anderson:]

Perfect. And then, Vic, just I wondered if you could comment generally on how the year is tracking so far, four months in or so in terms of renewals that you expected in terms of new business development? And then, you made a comment, I think in your press release about sort of the decisions we made and wonder of that’s impacting your ability to covert anything, just general comments about ongoing business would be helpful. Thanks.

[Vic Viegas:]

Yes. Sure, Charlie. So, I guess, I would say that I used the word programmatic. It’s difficult to grow your business when large companies choose to build and sell products that are unlicensed. However, the existing relationships that we have with customers in terms of renewals and engaging new customers, the demand has never been better. The value of haptics is clearly identified and recognized in the marketplace. And if you go through each of the markets, there is a trend to replace mechanical buttons on the mobile phone with a pressure sensitive with haptically enhanced interface. That alone is driving substantial demand and interest. The progress we’re making on the content side, whether it’s mobile gaming, 360 video, ads, social media, there is a lot of exciting trends that are happening using haptic. So, I think as you seeing especially in China, the growth of those relationships, expansion of the products, the use of TouchSense technology continues to grow and give us a lot of optimism. So, I feel fairly bullish about the year. I think we’re confident in the guidance that we provided. However, the programmatic side also forces you to take a look at current spending, look at profitability, growth trends on the revenue side and all of those areas were very sensitive to making good decisions, not only for the short-term, but also for the long-term health of the Company. We did take in the quarter, if you back out the litigation spend, the operating expenses compared this quarter to the prior year’s quarter were down well over $2 million. So, we are sensitive about spending, preserving our assets and continuing the current strategy.

[Operator:]

Next we’ll hear from Josh Nichols, B. Riley.

[Josh Nichols:]

Yes. Hi. Just kind of curious, how much of a seasonal impact was there and Q1? It’s usually a little bit stronger with the unit-based royalties Q4 kind of flowing in Q1?

[Nancy Erba:]

Yes. I think the compare this year to last year is a little bit challenging because of that $3 million onetime non-recurring medical payment that we got in 2016. But, I would say, we did see a little bit of seasonal dip relative to some volumes in China which seems to be pretty widespread around the market, just an inventory adjustment. All of that said though, as Vic mentioned, within China, we are seeing great traction with our software and a lot of demand, if you will, to ask us to help them in terms of implementing our technology and creating really great effects for them. We think this year, we will likely be a little bit more backend loaded than maybe the previous year. But at this point, we are not adjusting anything in our guidance.

[Josh Nichols:]

I was just wondering how you -- if Q1 is strong usually and if you look at the run rate for Q1, it won’t get you to even the low end of guidance. So, you have to assume that maybe there is new license or two that comes into play. I would assume that the top two candidates would be either Motorola or Sony for the U.S. controllers, is that kind of the right way to think about it?

[Nancy Erba:]

Yes. I think, we do expect to see resolution to Sony this year. And certainly as related to the mobile ad business, we are seeing good traction in terms of deals that are coming forward there which would probably ramp later in the year as well. So, yes, I think you are looking at it the right way.

[Josh Nichols:]

And then, last question on the OpEx side. I know you are not breaking out the litigation specifically but still holding to the guidance. Any kind of a ballpark you could give us between the OpEx split between percentage wise, maybe the first half and the second half of 2017, just because it’s a variable with the litigation but seen that that’s over now with ITC at least. Do you think expenses will come in meaningfully in the back half?

[Nancy Erba:]

So, I think just a comment on the litigation. So, 18 to $22 million for the year, we said heavily weighted to the first half of the year, so certainly Q1 and Q2. And the expenses that came in this quarter were as we had planned internally. I think you even saw looking at sales and marketing quarter-over-quarter we saw some pairing down there. We are being very mindful of that OpEx. But I think the back half of the year should be at a more I’ll say normal run rate for us because those litigations expenses are going to be more heavily weighted to Q1 and Q2.

[Josh Nichols:]

Q2 would be down from Q1 presumably, I would assume, right?

[Nancy Erba:]

No, not necessarily. The hearing is this quarter, so I think about it occurring in Q2.

[Operator:]

[Operator Instructions] We will take the next question today from James Medvedev, Cowen and Company.

[James Medvedev:]

So, I wanted to dive into the revenue just a little bit also. It looks like if you back out the $3 million from the Q1 of last year that revenues are down 14% year-over-year in the quarter. And I understand that’s got a lot to do with mobile and the -- all the different moving parts there. But I just wonder how do we get from there to 18% to 20% growth for the year. If I back out also the Samsung settlement in Q3 of last year, it looks like the guidance calls for somewhere in the high teens growth for the year. So, I am just wondering where that comes from -- from a balance for this quarter to a pretty strong rest of the year?

[Nancy Erba:]

So, just to clarify a little bit, exiting last year, removing the $19 million from the wind down rights payment from Samsung, it was actually just out 11% growth year-on-year, if you look at our range from 38 million to 42 million. And as we talked about in the last question, we are looking at some activities that are occurring now that we would expect to drive our revenue to be more heavily weighted to the second half of the year. We still feel like the $38 million to $42 million is the range that we’re comfortable with for revenue and our pipeline that we’re generating not just a mobile but also in gaming, automotive mobile ads really across all of our markets, it’s quite strong. And as we do every quarter, we look at that pipeline and we try to determine timing on when we can get things closed and which quarters those fall. And in this particular, it looks like the second half of the year will be the strongest for us.

[James Medvedev:]

Let me ask one more on the revenue. How was the $9 million this quarter royalty and license -- how that compare to what your internal expectations were?

[Nancy Erba:]

Go ahead.

[Vic Viegas:]

I would say, it was about what we expected. I think, we’ve talked a little bit about the one-time payment last year in medical; we’ve talked about Sony not paying on U.S. sales of controllers; talked about Motorola being unlicensed and not paying. So, those are things that we knew going into the quarter. So, we knew that would be down. We also knew we have upsides with all the agreements that we have been signing recently including Nintendo and number of others. So, I think the number was about what we expected.

[Operator:]

[Operator Instructions] Up next is Mark Argento, Lake Street Capital Markets.

[Mark Argento:]

So, I just jumped on the call a little bit late here. But I just wanted to follow-up on ITC. So, just refresh my memory. Obviously you’ve gone through the process and waiting now on some type of a verdict, is that accurate?

[Vic Viegas:]

Yes. The hearing itself concluded today. As I said in the prepared remarks, we felt that it went well. We’re pleased with the progress. At this stage, I think there is closing briefs that will be submitted. And then the ALJ is currently scheduled to give preliminary determination August and then final in December. So, it is pretty much on track and consistent with our strategy and our effort. We’re pleased with the way the team executed and the way the thing progressed throughout the hearing.

[Mark Argento:]

Then typically in the August, when they provide the preliminary in August, do they also at that -- do they indicate what I guess the penalty really is injunction in terms of ability to sell product? Is that -- will that be -- that goes your way, is that typically when you would do that and the early indication in August or do you have to wait till December to a degree?

[Vic Viegas:]

I believe that preliminary decision would potentially include an injunction.

[Mark Argento:]

Got it. Then just looking a little bit bigger picture in terms of some of the other opportunities out there. So, it seems like virtual reality is finally starting to commercially become viable. Do you guys have any exposure in the VR space? And then also it seems like the whole Internet of Things space as well is in particular has a lot of sensors and the ability to add haptics to it. Have you got any exposure as well to the IoT space?

[Vic Viegas:]

Yes, sure. So, covering kind of the gaming, VR and AR space first, largest trade show is the GDC that occurred in Q1. We presented advanced haptics in the form of tools that can help create content; with advanced haptics we also presented advanced controller technology using high fidelity actuators. So we were quite visible at that show. And as I said in the prepared remarks, in the Q2 timeframe right now, the engagements are picking up, people understand the value we bring to the table. It’s amazing when somebody says you have got 15 years of tool development that you can create a game with advanced haptic effects in literally minutes. And it’s already available on standard platforms that the design community is already using. So that really -- that ease of use, the quality of experience and then all supported by strong IP as well, that’s something that that community’s recognized. And that’s leading to great discussions. And again as I think we said it, it hasn’t yet generated any meaningful uptick in revenue but the relationships that are being discussed and the potential for that opportunity is substantial. So, we are feeling really good about that. In terms of IoT as you probably know from various demonstrations, there is going to be lots of information coming at you. And so, wearable technology, mobile phone technology that is using advanced alerts and notifications becomes even more important, so that you can wait through the clutter and know what you really need to view or how to react. We have developed a haptic language. We have mapped effects and notifications in a way that allow people to recognize a broad range of information coming at them. So, we are seeing a lot of interest. We are even seeing other people create videos, showing what we have done years ago. So, we are pleased to the market starting to recognize this innovation that have been doing for years.

[Operator:]

Next up from Sidoti is Matthew Galinko.

[Matthew Galinko:]

First one being when do you expect the conclusion on the entirety of the IPR processes? And what can we conclude from Apple’s decision to pursue IPRs on all the IP that you are asserting?

[Vic Viegas:]

I would say that it’s a standard practice by most defendants in an IP case that whether you have good evidence or not, you challenge the patents at the Patent Office. In a number of cases, those requests have been denied. So, at least at this stage, those are final determination decisions. In other cases, they have accepted or instituted an examination. And so, we would expect them to take a look at the evidence submitted by Apple. We would make arguments as to why we think that those arguments aren’t valid or appropriate. And so, there will be discussions that will occur at the PTAB and we are confident that we have good valid patents. I think the hearing and the ITC case assumes those patents are valid. And so the decisions and the process that it goes through isn’t really changed in any way by the IPR process. However, it could be at some point an opportunity, the question, the validity of patents, if the Patent Office chooses to rule in a different direction. But it’s pretty standard practice; it’s nothing that we didn’t expect, the arguments we’re familiar with and feel very confident in the strength of our IP.

[Matthew Galinko:]

Got it. I appreciate that. And then, you touched on mobile ad revenue ramping in the second half of the year. It sounds like that’s material recognizing that without Samsung, it takes a little bit less to be a material in the mix. But, I was wondering, if you could go a little bit deeper into where you are in development of that market.

[Nancy Erba:]

I think what I’d point you to right now in terms of how to watch our progress are the number of agreements being signed, the number of independents, whether those be studies or awards or demonstrations that we’re seeing in the marketplace. All of that is driving, as I mentioned, I think in an earlier question, driving a lot of demand for us to partner with whether they’d be the creators or even the brand themselves to look at how they put haptics on their ads, they’re seeing that measurable value. So, I would think about the second half of the year. What we’ve said previously and we’re standing by at this point is, we would expect the revenue from mobile ads to be $11 [ph] million this year. Certainly that can sway very quickly depending upon uptake, but right now, we’re looking at the back half of the year is when we really expect to see that start to ramp.

[Vic Viegas:]

And I would say qualitatively, Matt, I mean, we’re seeing ad agencies, networks, we’re seeing brands coming back over and over. So, they see the value in early campaigns and they want more of it. The agreements are calling out for CPM pricing, which is something that we’ve always felt was the right way for us to participate in the success of the campaign. So, we’re pleased with the business model and the engagement. And it’s moving forward as we had hoped it would be. We just now need to scale and get this in high volume activity.

[Operator:]

And that does conclude the question-and-answer session. I’ll hand things back to management for any additional or closing remarks.

[Vic Viegas:]

Well, thank you everyone for being on the call with us today. On a separate note, Nancy and I will be presenting at the B. Riley Annual Investor Conference in May in Hollywood. I look forward to seeing and speaking with many of you there. And I thank you and we look forward to updating you again on our next call. Good day.

[Operator:]

Once again ladies and gentlemen, that does conclude today’s conference. Thank you all for your participation. You may now disconnect.