Immersion Corporation (IMMR) Q4 2010 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Immersion Fourth Quarter and Fiscal Year 2010 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday March 10, 2011. I will turn the conference over to Ms. Jennifer Jarman, of the Leisure Group, please go ahead, ma’am.

Thank you. Good afternoon, and thank you for joining us today on Immersion's fourth quarter and fiscal 2010 Conference Call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at www.immersion.com. With me on today's call are Vic Viegas, President and CEO; and Shum Mukherjee, CFO. 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 risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a list of the risks of that could cause this, please see our latest Form 10-K and Form 10-Q 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 Investor Presentations section of the company's Investor Relations website at ir.immersion.com. With that said, I'll turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks, Jennifer, and thanks, everyone for joining us this afternoon. Looking back, 2010 was a productive year for Immersion as we executed on the opportunity to realign our business and strengthen the overall organization to better position the company moving forward. As part of this process, we streamlined the company to a predominately licensing base model, transitioned at certain medical product lines, right sized our employee base and cost structure, concluded two lawsuits, and rebuilt our executive management team. On the Product and Innovation side, we made numerous enhancements to our technology offering, added several new licensee in multiple vertical and continued to build out the network of ecosystem partners, able to integrate our technology into their products. We saw solid growth from the mobile market and exiting the year Immersion’s haptics solutions have been deployed in more than 200 million phones worldwide on accumulative basis. Our financial performance in fiscal 2010 is a clear indicator that our shift to a scalable licensing model is working. Revenues for the year of 31 million exceeded the high end of our guidance range as royalties and licensing revenue grew 64% over the prior year. We generated positive adjusted EBITDA for the year of $2.6 million. Net loss for fiscal 2010 was 5.9 million or $0.21 per share. A significant improvement over a net loss of 28 million or $1.01 per share in the prior fiscal year. As you’ve seen from our announcements over the past several weeks, we have some exciting initiatives underway that reinforce Immersion’s position at the center of the haptics ecosystem and make it more compelling for device manufacturers and developers to leverage our technology. In addition, we are pleased to announce the nomination of two new members to our Board of Directors. In a few minutes, I will discuss these developments and the strategic direction of the company as we move through fiscal 2011. First, I’ll ask Shum to provide a more detailed review of our financial results for the fourth quarter and the year. Shum?

Thanks, Vic. I start with fourth quarter 2010 results. Revenues in the quarter were 6.4 million slightly below revenues of 6.9 million in the fourth quarter of 2009. Revenues from royalties and licenses were 5.4 million, up 35% from Q4 2009, primarily reflecting strong demand in the mobility segment. Revenues from sale of products were 768,000 down 1.6 million or 68% from Q4 2009, primarily reflecting the transition of certain medical product lines to CAE in the first quarter of 2010. Revenue generated from development contracts were 223,000 compared to revenue of 538,000 in the year ago quarter. Gross profit was 6.1 million, 95% of revenues compared to gross profit of 5.5 million or 79% of revenues in the fourth quarter of 2009. The increase in gross profit reflects the shift in business mix to licensing revenues which accounted for 85% of total revenues compared to 58% of total revenues in the same period last year. As we look at our long-term model, we expect licensing revenues to grow as a percentage of our overall mix, driving gross margins even higher. Cost of product sales in the fourth quarter was 314,000 compared to 1.4 million in the fourth quarter of 2009. Excluding cost of product sales, total operating expenses were 8 million compared to 10.9 million in the fourth quarter of 2009, primarily reflecting the transition of the medical product lines, reduction of headcount from 141 employees to 91 employees and other cost saving actions. The operating expenses of 8 million include non-cash charges related to depreciation and amortization of 840,000, and stock-based compensation of 980,000. Excluding these non-cash charges, OpEx was 6.2 million during the quarter, and is expected to trend in the 6 to 6.5 million range over the near term. We have lowered our expenses related to…

Thanks Shum. I’ll start by touching on a few recent developments. Today we announced the nomination of Carl Schlachte and John Ficthorn for election to our Board of Directors. We’re pleased to have nominees of Carl and John Sature and experience stand for election to our Board, and are eager to have their expertise, business leadership, and market knowledge as we move to the next phase of innovation and growth at Immersion. I’d also like to take a moment to thank our retiring Board members, John Hodgman and Emily Liggett who have been an integral part of our strategic business transformation through their many years of service. Moving on to development on the product and technology front. In December, we announced that we hit a milestone of 500 patents issued, bringing our worldwide portfolio to over 1,000 granted and pending patents. The most recent additions are directed at improving and broadening the control of haptics feedback for a variety of touchscreen devices and enabling next-generation haptic experiences for consumers. This combination of technology and user experience innovation aligns with our multi-pronged system-level approach to haptics where we are continuously evolving our technology while also inventing new contacts in which users benefit from haptic. Last month, we executed a licensing agreement with Bayer Material Science, or BMS for short. BMS is a technology provider in conjunction with its affiliate Artificial Muscle. This agreement allows BMS to bundle an Immersion patent license with its actuator providing a license solution to its customers. This includes BMSs Bayfol Reflex actuators for mobile phones and gaming devices. The first product of which are scheduled to be launched this quarter. While the underlining technologies that go into creating haptics sensations continue to evolve, there are many partners in the ecosystem such as BMS that require Immersion’s…

Thank you, sir. We’ll now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jeff Schreiner with Capstone Investments. Please go ahead. Jeffrey Schreiner – Capstone Investments: Gentlemen, thank you for taking my questions and congratulations on a solid year.

Thank you, Jeff. Jeffrey Schreiner – Capstone Investments: I wanted to just start, I’ve got to get this one in. But you know, Shum, you gave guidance for the full year of 31 to 33, what kind of revenue guidance or range could you give us for maybe the March quarter?

We weren’t planning to give any quarterly guidance, Jeff. We were just giving guidance for the full year and we also give guidance that we would have positive net income. Jeffrey Schreiner – Capstone Investments: Okay. And then, I mean, maybe to follow up on a statement you made. When you look at the model, you’re seeing, you know, the gross margin, you know, you see a solid ramp through calendar year 2010. And I’m just wondering, you know, how much further can this gross margin, you know, level get to and what is maybe the target here for gross margins during calendar year 2011?

You should use the run rate that we’ve had in the last two quarters and the – we expect gross margins, total gross margin of between 90 and 95% going forward. Jeffrey Schreiner – Capstone Investments: Okay. That’s helpful. I just want to talk about this MOTIV real quick. Very interested technology, Vic. You know, you stated it can be used across Android. I think that was stated in the press release. Could you help us understand just on a basic sense, is this something that you feel might be able to bring in new licensees, i.e. guys who are making Android phones right now that may have some less-than-TouchSense level haptics type technology in their phones and you might be willing now to offer this type of product to try to get that business? I mean, can you kind of position MOTIV for us and how you’re looking to take it to market with the Android players?

Sure, absolutely. We recently announced and launched a product at the Android developer conference; well attended, a lot of excitement that came out of this show. So the Android developer community, I think, appreciates the value, the benefits, the ease of use of our tools. So we’re really excited with the feedback we have already. As these developers incorporate haptic effects in their application, those applications will play with a very high level of fidelity on a TouchSense-enabled handset, obviously. But we’re also opening up this capability so that that same application will play very well on a non-TouchSense based phone based on the Android operating system. So we think that the best way to expose customers, prospectives, partners to haptic is to get it in their hand. And if you’re a user, a customer with an Android-based phone without TouchSense, you’ll be able to get that experience with that application and obviously you’ll look for richer applications from other partners. You’ll look for that experience throughout the operating system and throughout the various functionalities. So we see this tool as a great way to introduce haptics to a new community and to incent them to move toward working closely with Immersion, incorporating our TouchSense as well as the MOTIV platform across all these Android handsets. Jeffrey Schreiner – Capstone Investments: Just to clarify on that, let’s say I want to come use it but don’t want to use TouchSense. I mean, is there going to be a different compensation to Immersion between a company who license the full TouchSense platform and someone who maybe takes a MOTIV license?

No. I think, you know, we have our standard license agreement, which is being downloaded, you know, every minute now by developers. The pricing for this is clear at 5% of gross receipts and it is regardless of whether it’s an application played on a TouchSense handset or a non-TouchSense handset. Jeffrey Schreiner – Capstone Investments: Okay. You mentioned the artificial muscle win with BMS and that was certainly a solid win and congrats on the win and announcement there. I was wondering though how that impact – is seeing an impact from a competitor who is also, you know, has claimed that as a win and that they’re shipping products to that company? And just, you know, I was wondering if you could maybe step back, Vic, and talk to us know about how Immersion is viewing it’s IP portfolio versus, you know, the current haptic rule that was the world were in, versus maybe how you might have viewed it if there’s been any change, let’s say back in 2007 when things were a little bit different?

Well, I think our patent portfolio continues to strengthen based on, you know, the innovation of our people and the target markets that we’re operating in. So I would say that our IP is getting stronger by the day. But in addition to IP, I think some of what we’ve talked about here with the MOTIV SDK and the MOTIV UI and Integrator, I mean, these are tools and products that really begin to establish Immersion as the leader, the go-to partner is what we’ve called it. And it really begins to separate us from so-called competition, let’s say. It’s hard to watch a haptics solution without the support of the development community and the tools that make it easy to integrate for OEM. So with that said, our relationship with AMI couldn’t be any better. They are innovators in an area of technology called electro-active polymer. If anything, that technology probably is an alternative or a competitor to fitting mass motors or other types of activation technology. We try not to differentiate between the merits of those types of actuation technologies. We’re a bit agnostic. We work closely with them as part of the eco system that we like to cultivate and we really hope that they’re quite successful. You alluded to maybe a competitor. I don’t know that clearly AMI is not a competitor or BMS, Bear. But if there are companies that provide certain componentry, maybe control circuits or chip technology that might drive these motors, again, I wouldn’t see them as competitive. I see them as providing an enabling capability to our partners. And so I think that that relationship is clear. Our IP is strong. Our tools are strong and we don’t view this as a competitive situation at all. Jeffrey Schreiner – Capstone Investments: Okay. Thank you very much. I will step of, gentlemen. Thank you for taking my questions and I’ll let some others get some questions in.

Thank you.

Thank you. Our next questions comes from the line of Darice Lui with Brigantine Advisors. Please go ahead. Darice Lui – Brigantine Advisors: Good afternoon, guys.

Hi, Darice.

Hi. Darice Lui – Brigantine Advisors: Hi. Can you provide an update on what’s going on with your IC controller partners, and when should we expect a joint product introduction to go to market?

So we are – continue to be actively engaged with them. We continue to bring them design opportunities. They bring us into certain accounts to begin developing solutions for their customers. As I understand it, they have products that incorporate their touch-controller technology with our Immersion haptics capability and that those are being showcased, presented to their customers. In terms of design wins, I don’t have anything today that I can announce. We would wait until the customer actually launches a product or allows us to communicate that design win. But we have a lot of activity going on and we’re pleased with those relationships. Darice Lui – Brigantine Advisors: Do all three of those partners, they all have incorporated their controller with your haptics product?

I know for sure that Renaissance has a shipping product. I do believe that ATNA and Cypress both are promoting an integrated solution to their customers. Now, whether they call it a distinct product and treat it as a separate SKU, I don’t know that for a fact, but I do know that there are working prototypes and demo units that they’re promoting on our behalf and they’re having quite a bit of interest from their prospects. Darice Lui – Brigantine Advisors: Okay. Very nice. There’s been a lot of focus on handsets, but you know, the big topic in CS is tablets. Can you talk about your opportunity and your pipeline activity for the tablet market?

Sure. Again, hopefully it came across, the enthusiasm we have around the MOTIV platform. And it is also very appropriate for the tablet market. So we have activity directly with prospect, customers. We’ve had success with the Galaxy Tab from Samsung. Toshiba has had quite a bit of recognition and success with the Libretto line and I believe have announced a family of products around that type of technology. So we’re seeing that success. We’re working closely with other partners as well as the chip partners who are also actively working towards, you know, design wins at these tablet manufacturers. So lots of activity, lots of interest. I think MOTIV has given them an easy integration into the Android OS that’s used on the tablets. So I think we’re pretty confident that we’ll see quite a few partners that we can announce with products in the market in 2011. Darice Lui – Brigantine Advisors: I guess following up regarding MOTIV, I mean, bringing the platform to the market, clearly we’re still in the beginning stages with development and building the library. When do you foresee generating, you know, revenues from the product?

Clearly in 2011 and I’d say over the next few quarters we’ve got a number of different development initiatives that we think can yield products in the market. So within the next couple of quarters, I’d say. Darice Lui – Brigantine Advisors: Okay. And just one quick housekeeping question for you, Shum. What should we be modeling amortization in fiscal 2011?

Amortization, a good model for the year would be in the order of 900,000 to a million. Darice Lui – Brigantine Advisors: Okay. Thank you very much.

You’re welcome. Thank you, Darice.

Thank you. Our next question comes from Charlie Anderson with Dougherty and Company. Please go ahead. Charlie Anderson – Dougherty & Company LLC: Good afternoon, everyone. Thanks for taking my questions. It sounds like an exciting year.

Thanks, Charlie.

Hi. Charlie Anderson – Dougherty & Company LLC: So I want to start with just sort of the guidance on the top line, the 31 to 33. I’m just kind of curious, you know, what kind of assumptions are you guys making for tablets? You know, you’ve got off to a good start here with a few name brand tablets that are in the market. You know, did you assume much in your guidance for ’11 on that or are you staying pretty conservative there? If you could just give us a little color there. And then also I’m kind of curious what you guys are thinking in terms of new licensees, you know, either coming from the MOTIV or elsewhere and how that’s factored into the guidance. That would be helpful. Thank you.

Sure. So Charlie, 2011 on the tablet side, I think, our focus really is on design wins and launching products with our customers. We do not anticipate significant revenues from those. It’s still too early to say which one will be successful and which will be average. So the guidance does not include much revenue, very, very modest amounts for tablet wins. On the OEM side, the current forecast does not anticipate any significant design wins with new OEMs, although our efforts are to close a number of new OEMs and we’re optimistic that that will be achieved. But the forecast and guidance anticipates virtually no revenue from new OEMs on. Charlie Anderson – Dougherty & Company LLC: And just in terms of supporting MOTIV on the operating expense side, I mean, there’s different versions of Android that come out everyone once in a while. How are you guys doing that? Are you doing that internally or are you doing that with contract workers, and kind of how that impacts OpEx would be helpful.

Yeah, most of the effort, I’d say probably almost all of the effort is going to be internal. We – along with, I think, most others are probably anticipating the Honeycomb for the tablet market and Gingerbread and then the follow on I guess is called Ice Cream. So we’re working towards, you know, tracking those product launches and we’ve got teams that are ready to work on those solutions. The heavy lifting, I think, a lot of that has been done and so as we see new versions launched, it’s not obvious to us that it will be a significant investment. So it is really included as part of the cost estimate that Shum’s given you of I think 6 to 6 ½ million for OpEx. Charlie Anderson – Dougherty & Company LLC: Great. And then Shum, just a housekeeping questions from me then. In terms of the income tax provision in ’11, you know, to get to your positive net income, what would we be thinking about there?

The income tax for the full year, you should be about between 1 to 1.5 million. Charlie Anderson – Dougherty & Company LLC: Great. Thanks so much, guys.

Thanks, Charlie.

Thank you. Our next questions comes from out of Matt Bendixen with Craig Hallum Capital. Please go ahead. Matt Bendixen – Craig-Hallum Capital: Hey, guys.

Hi, Matt. Matt Bendixen – Craig-Hallum Capital: Just in terms of extending that [inaudible] Electric deal for another four years, do they represent a sizable amount of your automotive licensing and are the economics on that deal pretty similar?

Yes. They are a very important partner-customers of ours for quite a few years. They’ve achieved quite a few design wins and are a significant partner for us in the automotive space. The agreement extends the terms and it expands to cover a broader set of rights within the automotive space. And I would say the terms, the financial terms are very similar to the existing, or the prior terms in the prior agreement. Matt Bendixen – Craig-Hallum Capital: Great. And then just lastly I was wondering for the quarter, what percentage of royalties and licensing did the chip partners contribute?

I think the last time looked I think it was right around 10% maybe, somewhere between 9 and 10%. Matt Bendixen – Craig-Hallum Capital: Okay, perfect. Thank you.

You’re welcome. Thank you.

Thank you. Our next question comes out of Aaron Husock with Lanexa Global. Please go ahead. Aaron Husock – Lanexa Global: Great. Thanks for taking my questions. If you look at your 2011 total sales at the midpoint of 21%, apples to apples, can you kind of look at that in terms of mobile, gaming and in general touch? Can you just kind of frame for us how fast each of the segments you think will grow, or which will grow meaningfully faster or meaningfully slower than the 21%?

Well, we’re looking at, as you say, the midpoint of growth of around 21%, the other is slated to grow around 20 to 25% and there is slightly slower growth in the chip business, which as you know started from nothing last year and had a big ramp up this year. Aaron Husock – Lanexa Global: Okay. And what about gaming?

Gaming, again, will grow, you know, will be flat to about 5 to 10% growth. Aaron Husock – Lanexa Global: Okay. And then if you’re just looking, on MOTIV, it seemed like MOTIV was well received at Mobile Load Congress. You kind of touched on how fast it can come to market a little bit, but is it something where existing Android handsets vendors who have models that can already – are relatively far along in the design process. How easy is it for them to incorporate MOTIV in kind of in the last few months of handset design or it’s something they have to be contemplating much earlier in the lifecycle of the handset design?

I think in the TouchSense, customers that already have TouchSense, the MOTIV integration is extremely easy. It’s – you’re talking, I think we said minutes. So the QuickPort, it’s available and you know, it provides a rich experience throughout the OS. So if you’re a TouchSense customer, I think you have an easy integration effort. If you’re an OEM that’s not an existing customer, then MOTIV will not really provide you – it’s not available. It requires underlying TouchSense technology to take advantage and drive the MOTIV. The one advantage or the one area I mentioned is if the developer is using our SDK, then the resulting application would play quite effectively on a non-TouchSense handset. Aaron Husock – Lanexa Global: Okay. So is this something where if we look at your, maybe your Korean customer base who are heavy users of TouchSense already, as they launch new Andriod phones, I mean then as early as Q2, could we see some phones with MOTIV?

You know, it’s hard to really predict what their launch plans are and when they make decisions in their process. I think, you know, is it possible? The answer is yes because our solution is ready to go. Will it be embraced and through a QA process in time to launch within Q2? That might be cutting it short, but clearly the value of MOTIV is well understood by our partners and probably equally as important as MOTIV’s capability is the further incentive and re-energizes discussions with non-customers because if they have an Android Strategy, haptics and broad and pervasive use of haptics through our MOTIV, it’s something that they’re quite keen to get access to. Aaron Husock – Lanexa Global: Okay, great. I think at the end of ’09 you told us that you shipped into 75 million handsets in 2009. I know you t like to talk about cumulative numbers, but can you kind of give us a sense for how many units you shipped into in 2010? Was it 100, 125 million?

It was definitely more than 100. You know, specifically, I don’t remember the exact number. I know that we’re, you know, something north of 200. I think we’re getting close to 230, 250 million. We’re kind of in the ballpark there. Aaron Husock – Lanexa Global: And just one more from me, just housekeeping. I thought in the prepared remarks you said gross margin will keep rising as licensing grows as a percentage of the mix. But then talked about 90 to 95% is the right gross margin range. I would think –

Yeah, 95% is approximately the right range. And as we grow and as our licenses become a higher percentage of total revenues, that should grow even slightly more. Aaron Husock – Lanexa Global: Okay, great. Thank you.

Thanks, Aaron.

Thank you. (Operator Instructions). Our next questions is a follow-up question from Jeff Schreiner with Capstone Investments. Please go ahead. Jeffrey Schreiner – Capstone Investments: Yeah, sorry guys. I was just wondering, Vic, if you could talk to us a little bit in the context of when you are looking at the business today and what you have in front of you, where is the health of Immersion compared to when you left the company a few years ago?

Well, I guess when I left it was April of 2008. We had a considerable larger cash balance. We had some early design wins in a number of the verticals that we’re currently operating in. And we were focused on building out products, marketing and sales teams. Fast forward to today, I’m extremely pleased to be working with I think a very good management team. I’m happy to say that the management team, in my opinion is much stronger today than where it was some time ago. I think that some of those early initiatives – I can remember when we launched the M330 with Samsung and kept our fingers crossed that people would like it and now 200-and-something-million phones later, you know, we’re having I think a lot more success. We’ve also benefited, I think, from the transition to touch screens as an acceptable user interface where back in 2007, 2008 there was a question whether that would really be successful. So I think the health of the management team and the business, our product offerings, and the market receptivity and acceptance of touch screens, all of those I think are really exciting, strong drivers and has me really excited to be back and really happy to see where we’re headed and to be able to provide guidance that we’re profitable, and 2011 is very satisfying.

Thank you. Our next question is a follow-up question from Charlie Anderson with Dougherty and Company. Please go ahead. Charlie Anderson – Dougherty & Company LLC: Yeah. Hi. I just had to hope back in with one that I thought about. The 31 to 33 million, Shum, is that, when you say positive net income, could you do it at 31 million or do you have to hit the midpoint for that?

Can I take that? We will do everything we possibly can to be profitable. So I believe the model, even at 31, we should be profitable. Charlie Anderson – Dougherty & Company LLC: Perfect. And then I’m just curious also on mix of business in ’11 between the three segments, if you could provide any color there, that would be helpful.

The mix of business is not going to change that much. Mobility appears to be our largest segment, followed by gaming and then you’ll have a combination of medical, auto and [inaudible]. Charlie Anderson – Dougherty & Company LLC: Got it. Thanks.

Thank you. And I’m showing no further audio questions at this time. I’ll turn the call back to management for any closing remarks.

Well, thank you everyone for being on the call with us today. We look forward to updating you gain on our next quarterly conference. Have a great day.

Thank you, sir. Ladies and gentlemen, this will conclude the Immersion fourth quarter and fiscal year 2010 earnings conference call. We thank you for your participation and you may now disconnect.