Immersion Corporation
Q1 2012 Earnings Call Transcript

Published: 4 May 2012

[Operator:]

Welcome to the Immersion Corporation first quarter 2012 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 3, 2012. I would now like to turn the conference over to Jennifer Jarman of the Blue Shirt Group.

[Jennifer Jarman:]

Thank you for joining us today on Immersion’s first quarter 2012 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. During this call we may make forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products, anticipated market demand or opportunities, and other forward-looking topics. These statements are subject to risk, uncertainties, and assumptions. Accordingly, actual results could differ materially. For a listing of the risks that could cause this please see our latest Form 10K filed with the SEC as well as the factors identified in today’s press release. 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 the company’s press release issued today after market close. With that said, I’ll turn the call over to Chief Executive Officer, Vic Viegas.

[Victor Viegas:]

The first quarter is typically our seasonally strongest quarter and our financial performance during the period illustrates the strength of our scalable and high margin license business and the success of our partner’s products in the market with our technology. We achieved positive adjusted EBITDA of $1.6 million during the quarter based on revenues of $9.7 million. Strong royalty revenues of $9.1 million for the quarter grew 9% over the same period last year. As you’ve seen from our recent announcements, we continue to focus on delivering innovative new product solutions to the mobile market while protecting our intellectual property and the interest of our shareholders, partners, and customers. Before I take a deeper dive into our financial results for the quarter, I wanted to call your attention to the announcement this afternoon that we have successfully completed the search for a new chief financial officer. We are extremely pleased that Paul Norris will join Immersion as CFO. Paul brings the perfect blend of financial and legal expertise through his in depth experience with publically traded licensing and IP oriented digital media companies making him ideally suited to support our sales and legal functions while rounding out our talented executive team. We believe that he will be a tremendous asset to the company as we work to grow our licensing business while also protecting our IP. While Paul doesn’t officially begin his role until May 14th, I’ve invited him to say a few words on the call today.

[Paul Norris:]

I’m very excited to be joining Immersion as CFO. To share a little bit about my background, I’ve been advising technology companies in legal and finance capacities for over 20 years in areas ranging from innovation and corporate strategy to IP enforcement and M&A. Until early 2011 I was CFO and general counsel of Sonic Solutions, a publically traded digital media software and entertainment solutions provider located here in the Bay area. In February 2011 we sold Sonic to Rovi Corporation, a digital entertainment technology solutions and IP licensing company. Since that time I’ve served Rovi as an executive advisor and have been a partner at Accanto Partners, LLC an investment fund focusing on technology and digital media companies. With its strong technology offerings and IP portfolio for touch based solutions, Immersion represents an exciting opportunity in a market that’s only just beginning to recognize the true value of haptics. I’m very eager to help the company shape and execute on its strategic goals during this important time in its development and I look forward to meeting many of our analysts and investors over the coming months. With that, I’ll turn it back over to Vic.

[Victor Viegas:]

In a few minutes I will discuss recent developments as we progress into 2012 but first I’ll provide a more detailed view of our financial results for the first quarter. Revenues in the first quarter of 2012 were $9.7 million slightly below revenues of $9.8 million in the year ago period. Revenues for the first quarter of 2012 included product sales of approximately $300,000 compared with product sales of approximately $1 million for the first quarter of 2011, consistent with our shift to a licensing model. Revenues from royalties and licenses were $9.1 million up 9% from the first quarter of 2011. While revenue mix per segment is expected to fluctuate on a quarterly basis due to seasonality patterns, in the first quarter of 2012 a breakdown by segment as a percentage of total revenues is as follows

[Operator:]

(Operator Instructions) Your first question comes from Jeff Schreiner – Capstone Investments.

[Jeff Schreiner:]

I guess if we could start, you reference the new Samsung Galaxy S3 and I believe you were in the Galaxy S2 and I’m glad to see some continual design wins there. I was actually wondering if you could talk maybe further about some other design wins or just the design win traction you’re seeing because at this point a lot of new Smartphones and tablet designs are just getting ready to ship for this year and I was wondering if you had anything to add in terms of maybe where some of your design shipment levels or design ins could be shipping throughout the year and how significant any one of those wins may in fact be for Immersion?

[Victor Viegas:]

Well, the Galaxy S3 is announced today. I think it will be available later this month or next month, so we’re very excited about that. We continue to be used in increasingly more engaging ways with Reverb launching with this Galaxy S3. We’re also excited with progress with LG and the roadmap of products that they have on tap. We mentioned earlier our relationships in Japan are growing substantially so we continue to see a number of new tablet opportunities for this year as well as new Smartphones and this includes both our current standard definition solutions as well as our high definition solutions. I think, as we announced earlier this year, we expect to be in the Cadillac product that will be shipping I believe later in Q3, I believe starting in July so we’re quite excited about that. And, during the quarter we had a really strong gaming revenue quarter and part of that is the growing increase in the number of OEMs using our technology not just for traditional console gaming and PC gaming but we’re starting to see some real interest and traction in peripherals for mobile devices. So a combination of continued use on the mobile side with a long line up of new product launches as well as momentum in the automotive and gaming space as well.

[Jeff Schreiner:]

Just coming back, you mentioned about some of the Japanese designs and maybe seeing some higher piezo HD type shipments. Have you seen many higher ASP piezo type shipments shipped as of today? And, what are your expectations in terms of where those could be in terms of your total shipments exiting the calendar year?

[Victor Viegas:]

Well currently we’re in the Pantech Element tablet so we’re enjoying that. As I understand, that product I believe was sold out, it was very well received by the marketplace. Following that I believe there are a number of other tablets from other OEMs that we expect to launch this year. We believe there’s a possibility there could be a few Smartphones as well shipping with our high definition. I think at this stage the volumes are still rather small and so I’m not sure I see a substantial increase in 2012 ASP for revenue purposes, but the design wins and the momentum that we’re creating, the support that we’re getting from our ecosystem partners is really inspiring and I would say 2013 will be a year where we should see a tremendous pickup in the use of high definition technology.

[Jeff Schreiner:]

Then you referenced something in gaming but it sort of looks to me like the last few quarters the medical royalty line has started to see a pretty good tick up, albeit from a smaller number. Anything going on there, anything shifting that has started to happen within that business?

[Victor Viegas:]

No, I think we communicated our plan to defocus product sales so I think you saw the impact of that again, in Q1. But the royalty based business does continue to steadily grow. Our partners, including Mayco, our licensing partners including CAE, [Mentis], Symbionics, and others continue to do well in the marketplace. It’s a very strong growth opportunity not only in the US and Europe but actually in Asia as well. So yes, it is growing and it’s becoming a more significant part of our revenue and we continue to expect it to grow going forward.

[Jeff Schreiner:]

Two more quick questions for me and I’ll jump off. Where do you currently stand with regards to the current licensee pool? I guess the big three that you’ve in the past disclosed or talk about at some point, I know there was a reup by one or two of those in the last year or two, I believe. Where are we standing in terms of when some of those may either need to be resigned or be coming up for expiration?

[Victor Viegas:]

The larger three or historically the three that we’ve spoken about would be Samsung, LG, and Nokia. Those have different expirations, they’re typically three years in duration. In just about every year you’ve got one coming up for renewal but we’re quite confident in their continued use of haptics and our ability to continue to do business with them. So there’s constant discussions around renewal of expiring agreements.

[Jeff Schreiner:]

Lastly for me, if you step aside and take out what you’re having to do to defend your IP with Motorola and HTC, organically how do things get kick started here for haptics given the expansion we’ve seen in the mobile market of Smartphones and tablets over the last few years? At this point Immersion hasn’t been able to keep up with those growth rates, at least at the market rate so how do we get the growth rate closer to a market rate to where you’re targeting? This year it’s like 30% plus for Smartphones on a year-over-year basis. Even ex what happens in courts which aren’t always the best way for certainty.

[Victor Viegas:]

I guess I’d start out by saying we’re very exciting by the rapid adoption of haptics by the mobile market in general. If you look at Immersion as a company that introduced haptics to the mobile marketplace a number of years ago we’re thrilled and kind of flattered that there’s been a lot of copying that’s occurred in the recent past. In fact, if you were to look at basic haptics, the number of phones shipped in 2010 and 2011, you add those up and that’s about 200 million units, over 200 million units that used a form of haptics that did not include the Immersion technology. In 2012, that number is going to be north of 250 million and so we’re excited that the marketplace appreciates the value of haptics. Our job is first to continue to innovate and develop new and improved solutions which again, we’re happy with the adoption of our partners like Samsung launching the TS3000 with Reverb. So they’re using this to differentiate their products and they’re gaining market share as a result. Then the other portion would be to defend the IP as you mention and to monetize the fact that our IP is being infringed in the market place today. But if you were to look at how we grow the market, we could double or triple the market overnight just by getting paid on the infringing products that are being currently shipped.

[Operator:]

(Operator Instructions) Your next question comes from Darice Liu – National Securities.

[Darice Liu:]

Just a couple of questions, regarding your ITC complaint you added HTC back in March, are you planning to add any further defendants to your complaint?

[Victor Viegas:]

I would say that by adding anyone at this stage it would probably delay the current proceedings so I would say that it is unlikely to add anybody to this current complaint. However, we always have the opportunity to add additional defendants in other complaints in the ITC or in other venues. So it’s part of our strategy, we are aware of what’s going on in the market and we’re quite thoughtful about how we monetize the IP and how we pursue this litigation activity.

[Darice Liu:]

With the current complaint you are targeting for that June, 2013 preliminary determination, you don’t want to interfere with that timeline is what you’re saying?

[Victor Viegas:]

That’s right. If we were to add somebody now – we’re already in the discovery phase. We believe the case is progressing nicely, we’re very pleased with the progress and so I think we would not change the current case but as I said, we can always add other cases at the ITC or other venues.

[Darice Liu:]

From a market standpoint with Windows 8 slated to launch in the coming months, there’s been quite a bit of anticipation of bring touch beyond the Smartphone and tablet market. I’m wondering what you guys are seeing from the opportunity standpoint with Windows 8 and your haptics application?

[Victor Viegas:]

We continue to believe that the Windows 8 platform could be a very good platform for Immersion. We think we could help Microsoft substantially with our solutions and so we’re hopeful and look forward to their launching of that product.

[Darice Liu:]

Are you in any discussions with any OEMs for the non Smartphone non tablet market?

[Victor Viegas:]

I would say the bulk of our discussions would be through Nokia mostly on the Smartphone space with regards to the Windows platform. Other than that I would say most of our activity has been focused on the Android platform with the OEMs that we’ve already spoken about.

[Darice Liu:]

With haptics gaining popularity I’m wondering whether or not you’re seeing any new players coming into the market from a competitive landscape and I’m wondering if you have any thoughts regarding the top US Smartphone maker recently filing a haptics patent?

[Victor Viegas:]

Yes, I think you might be referring to the one that was published, I believe, it was today by Apple. We’re quite aware of their filings. That’s an application so it still has quite a ways to go in terms of surviving the PTO examination, especially in light of all of our prior art. I think even if that application were to be granted in some form, it does not aviate the need for the Immersion technology. That particular patent application, I believe it deals with piezo in a way that creates the formable surface and as we’ve probably spoken we’ve worked on that for probably over seven or eight years so we’ve got a lot of history, a lot of IP and a lot of issued patents in the formable surfaces in piezo. That particular application is focused mostly on hardware, it’s a way to implement a hardware solution and as you probably know, most of our most recent and our most valuable patents and the ones that are currently in the ITC action are really focused not on hardware but on the use of haptics in a touch screen interface. Regardless of how you create the haptic effect, we’ve got very strong IP in interactions with the GUI interface menu selection, multitasking, all with regards to interfacing on a touch screen. I think that solution probably has quite a long time to go before it’s commercially viable and I guess we look at it as another endorsement to the relevance of haptics and in particular Immersion’s role in the haptics field. So we’re actually pleased to see continued innovation that’s occurring.

[Darice Liu:]

Then are you seeing actually any competitors come out and start to try and do haptics as well on different interface systems?

[Victor Viegas:]

I don’t know that I would refer to them as competitors. We’ve seen a number of companies but they have been around for many years focused on electrical static friction, ESF, ultrasonic vibration, USV, other types of actuation technologies whether it’s using rotating mass, LRA, piezo, electrico active polymers, there are a lot of different ways; those are all ways to create a haptic effect but the use of the haptic effect either the control software, the algorithms, the tools that are required, the actual applications of any of those solutions would typically require access to the Immersion portfolio. So we do see things in the press. I think they’re sometimes confused as competitive. We see them potentially as complimentary or at a minimum they’re an enabling capability and they’re part of our ecosystem so we welcome their continued involvement. But, we really don’t see them as competitive.

[Operator:]

Your next question comes from Charlie Anderson – Dougherty & Company, LLC.

[Charlie Anderson:]

I wanted to start with legal expenses, it was pretty low in the first quarter relative to kind of where your guidance has been for the whole year so I was wondering if that was a surprise and if you kind of expect to see it ramp throughout the year? And, how would you kind of be thinking of that on a quarter-by-quarter basis here modeling out your legal expenses?

[Victor Viegas:]

Well, I’d like to think it was effective cost management. I think as the guidance I think the most accurate we can be is around $2 to $2.5 million per quarter. The $1.5 million was one of the – this is an early quarter and there was a lot of activity in terms of the filings and preparation for discovery as well as all of our other activities related to the case. I would say it was a pretty representative quarter but I do think overtime there will be other periods where the investment will go up, especially as we get closer to certain activities in front of the judge, so on and so forth. I think $2 to $2.5 million is the right range for the model. I think $1.5 to $2 million is something we would strive for but realistically I’m not sure we can achieve that for every quarter going forward.

[Charlie Anderson:]

Is it possible we could see any counter suits to your customers where you guys might get pulled in on that and that could bump that up potentially?

[Victor Viegas:]

I guess you never say never. I think as part of our strategy I think we’ve anticipated certain activities from the various parties including counter suits as well as efforts at the patent office. So I think we’ve anticipated that and are fully budgeted to handle those activities if they occur.

[Charlie Anderson:]

Then just lastly for me, we’ve seen so many law suits in sort of the Android iOS war and I wonder if you just could maybe step back and give us a little color on how the licensing conversations have changed in the last six months as those have continued to drag on and you’re sitting here with a really nice IP portfolio and some technology that is kind of important to this sector?

[Victor Viegas:]

I think Immersion, we’ve been careful in being creative and innovative in developing a strong patent portfolio. We constantly look for gaps, look for new areas that are ripe for innovation. I highlighted a couple of areas that we’ve begun focusing on in terms of a future roadmap. So I’d start out with the fact that we’ve been really careful in developing IP and innovating. Secondly, we’ve been careful about how we grant rights in terms of field to use, the rights, IP ownership, terms of agreements and so on and I do believe we’ve got a fairly pristine portfolio for haptics and I believe the world has recognized the importance of haptics. With that said, our current model is primarily focused on monetizing our IP through royalty arrangements. I think with the more recent activities that are going on in the marketplace the strategic importance of IP especially on mobile devices is one where we are recognizing there are multiple ways to monetize IP including selling some of our patent portfolios, especially those that may not be core to some of our future activities. So we look at this as a lot of strategic value. We do get lots of inbound interest and we continue to look at ways to maximize the value of the IP and the best way to monetize in favor of our shareholders.

[Operator:]

(Operator Instructions) Your next question comes from Mark McMahon – Raymond James.

[Mark McMahon:]

I had a follow up on a previous question and a couple of others, the first one had to do with your conversation about Windows 8 and Nokia, how was your previous settlement with Microsoft a number of years back, how would that affect the launch of haptics within Windows 8 and products that would be realized to the marketplace in terms of a licensing agreement?

[Victor Viegas:]

The arrangement we have with Microsoft grants them patent rights in perpetuity royalty free for Microsoft branded products. It does not cover any of our technology or our solutions and we believe that we’ve developed some very innovative tools for the developer community, integration tools for the OEMs, and a number of other capabilities including this Reverb technology which I think is a tremendous value. It takes the audio signal and creates a corresponding haptic affect and you can imagine how that could be a really powerful tool for gaming, for video, or for music in fact. They have no access at all to any of those solutions. They’re an innovative company and I believe if they wanted to invest in haptics they probably could develop some pretty good solutions but this is a space that we’ve been in and focusing on for upwards of 15 or more years so we think that our solution has value. Obviously for products not branded by Microsoft there would be tremendous value and there are other specifics around the contract I wouldn’t want to get into that would also open up opportunities for us. We see the Microsoft arrangement as one which should be very positive and beneficial for Immersion and so the Windows 8 platform we would love to see it support touch, we would love to work with them and help them develop a suite of technology solutions for haptics in that platform and in others.

[Mark McMahon:]

I guess along those lines in terms of Samsung with their new product launches that you just mentioned, you had said they’re launching with your TouchSense 3000, the series 3000 so is that under the old licensing agreement? Because I know now that you have the high fidelity high definitions haptics that’s under a different licensing model. How is that affecting your launch and trying to get Samsung, LG or any other manufacturer, Nokia, to come out with your new high definition? Is it a question of pricing or just rolling out slowly over time? Can you talk a little bit more about that?

[Victor Viegas:]

Our current agreements with Samsung, LG and Nokia include both our standard definition with is our TS 3000 as well as our high definition TS 5000. So the current agreements anticipate and cover the rights that would be required. We work with them as well in terms of adopting the high definition technology. I think at some point they’re working through the details of the cost is higher for high definition, the size of the actual haptic module is still a little large for their Smartphone designs but it’s quite relevant for their tablets and we think there’s continued innovation from our ecosystem partners and they are looking at ways to reduce the size and the cost of the piezo module so we think that the high definition solution is imminently available and obviously Pantech has done well with their Element tablet and we expect a number of others. But, they have their own reasons behind product launches and adoption and we continue to sell and work closely with their development teams to sell them on the value and show them the ease of integration.

[Mark McMahon:]

Final question, this is one you’re always reluctant to answer but at an earlier investor conference this year a person in the audience had asked a question regarding Apple and why they haven’t been included in any of your lawsuits and what’s the status there. I believe your answer was that you were actually in ongoing discussion with Apple but you were very kind of vague in terms of what that meant. I was wondering if you could clarify what exactly you meant at that time?

[Victor Viegas:]

I’d be happy to clarify I’m not sure I can add any more specificity. We have periodic discussions with Apple and those include formal discussions, casual meetings, we see them at trade shows, we work hard to present to them new and innovative solutions. So depending on the time of year, or depending on the activity or event there may be discussions. In terms of their use of haptics it’s pretty clear that they’ve had some success in utilizing it in their development platform in their iOS 5 and the gaming community, the developers in particular are creating games with haptic effects. So they understand haptics, they’re using haptics. Our particular answer in terms of relevant IP and our strategy is one I just can’t get into at this time.

[Mark McMahon:]

Okay, but my takeaway would be that they are infringing but you guys are having casual to more formal talks and at this point you guys are content with how things are progressing with what you’re discussing with Apple and so they’re not part of the ITC and no plans on that in any near term?

[Victor Viegas:]

No, actually I wouldn’t say that. I would say they are clearly using haptics in their products. They have invested in some of their own patent filings. We continue to monitor their use and their filings and we have a strategy but I’m not prepared to go into any of the details of that strategy.

[Operator:]

At this time I will turn the conference back over to management for any closing remarks.

[Victor Viegas:]

Thank you everyone for joining us today. We do look forward to updating you again on our next quarterly conference call. Thank you very much.

[Operator:]

Ladies and gentlemen this does conclude the conference call. You may now disconnect. Thank you for your participation.