Immersion Corporation (IMMR) Q1 2011 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Immersion first quarter 2011 earnings conference call. During today’s presentation all parties will be in a listen-only mode and following the presentation the conference will be opened for questions. (Operator Instructions). I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you Douglas. Good afternoon and thank you for joining us today on Immersion’s first quarter 2011 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 listing of the risks that could cause this, please see our latest Form 10-K 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. Vic.

Thanks Jennifer and thanks everyone for joining us this afternoon. It’s been a year since Immersion completed the transition of certain medical lines of business to CAE. During that time, we are focused on creating a scalable, high margin licensing business that is driving bottom line results for the company. While the first quarter is typically our seasonally strongest quarter, our financial performance during the period illustrates the benefits that this model will deliver as haptic technology gains traction in consumer devices. We achieved bottom line profitability during the quarter, with net income of $1.4 million, based on revenues of $9.8 million. Record royalty revenues of $8.4 million for the quarter grew 30% over the same period last year. We generated positive adjusted EBITDA of $3.3 million and positive operating cash flow of $4.7 million. As you’ve seen from our recent announcements, we continue to focus on driving value to our platform to outreach to the development community and have some exciting initiatives underway to help foster creativity and encourage the option of our new MOTIV haptic development platform. In a few minutes I will discuss these developments in our momentum as we progress into 2011. First, I’ll ask Shum to provide a more detailed review of our financial results for the quarter. Shum.

Thanks Vic. Revenues in the first quarter of 2011 were $9.8 million, slightly above revenues of $9.7 million in the year ago period, which included $2.1 million of product revenues related to the transition of certain medical lines of business to CAE. Revenues from royalties and licenses were $8.4 million, up 30% from the first quarter of 2010. Growth in royalty and licensing revenues was driven primarily by the gaming and mobile segments, which grew 51% and 21% respectively over the year ago quarter. The increase from the gaming segment reflects the success of holiday sales bundles by certain of our OEM customers. While revenue mix per segment is expected to fluctuate on a quarterly basis due to seasonality patterns, in the first quarter of 2011, a break down by segment as a percentage of total revenues is as follows: mobility 44%, gaming 27%, medical 15%, auto 5%, chip and other, 9%. Revenues from products were $1 million, compared to $3 million in the same period last year and revenues from development contracts were $400,000 compared to $300,000 last year. Gross profit was $9.3 million or 95% of revenues compared to gross profit of $8.3 million or 86% of revenues in the first quarter of 2009. The increase in gross profits reflects the shift in business mix to licensing revenues, which accounted for 86% of total revenues, compared to 66% of total revenues in the same period last year. Cost of product sales in the first quarter was $474,000, compared to $1.4 million in the first quarter of 2010. Excluding cost of product sales, total operating expenses were $7.4 million in Q1 of 2011 compared to $10.8 million in the first quarter of 2010. This decrease primarily reflects the divestiture of the medical product lines, a reduction of average headcount…

Thanks Shum. Our results demonstrate continued strength in the mobile segment, where industry analysts continue to project strong multi year growth for touch enabled Smartphones in the 25% to 40% range. We are also pleased to see continued interest in gaming and other segments, including the emerging Tablet category. During our year-end conference call a month ago, we highlighted the first quarter launch of the MOTIV, haptic development platform, which we created to provide easier and more compelling ways for OEMs and developers to integrate haptics into their applications and devices. I’d like to update you on some of the engagements the team has had with both OEMs and application developers in implementing the MOTIV platform. During the quarter we successfully ported the MOTIV solution to demonstration devices for multiple, new and existing OEM customers. The ease of implementation, combined with the added benefit of a haptic enabled view eye, has further validated our approach of delivering automated haptic integration tools for device manufacturers. While these demonstrations represent the first step in the design process, we’re encouraged by how well the value proposition for haptics is resonating and the number of OEMs who are moving forward to the next stage of identifying target programs. On the developer front we’ve seen hundreds of downloads of our MOTIV SDK and the response from the development community has been enthusiastic. We have already made subsequent updates to our development tools based on developer feedback and judging by the level of response, I expect by our next conference call to be able to share a number of new gaming and other applications that are designed with the MOTIV SDK. Another element in our overall strategy to drive haptic’s adoption in the developer community, is the recent formation of Haptify Inc. This subsidiary is comprised…

Thank you, sir. (Operator Instructions). Our first question comes from the like of Jeff Schreiner with Capstone Investments. Please go ahead.

Yes, Shum, Vic, good day. Thank you very much for taking my questions.

Sure Jeff.

Shum, was there any catch up royalty payments in the quarter free to mobile gaming?

No.

No, okay great. And within the mobile area and the strength it seems was in mobile here on the royalty side, you know how much came from the direct type of the mobile versus maybe the integrated of licensed. I know you guys talked about the other semiconductor and you broke that out for us, but was there more strength in one or the other at this point or are you seeing more traction at one or the other at this point.

It predominately came from the direct customers.

From the direct? Okay. May this is more for Vic or for you Shum, but you know you guys obviously came knocked the ball out of the park. There doesn’t seem to be any hair on it, no royalty payments being caught up here. A lot of positive things on the comp, it seems to hear about from MOTIV Vic. Why not raise guidance at this time given that you’ve already kind of exceeded by a great deal what you though you might be able to do in the March quarter.

Sure Jeff. Well I think first of all the first quarter for us seasonally a strong quarter as its been in prior years. As Shum mentioned in some of our earlier remarks, there is also the uncertainty of the impact of the Japan tragedy, there is the overall economy we continue to monitor. Obviously we are influenced by the timing of our customer launches, so it seems premature at this time to increase the full year guidance, but we hope that we can beat our targets and set new higher targets somewhere down the road.

All right. Last question from me and I’ll step back into the queue. But can you talk just about how the strength you’re seeing in gaming now could be impacted from maybe some fallout, negative fallout from the recent online issues for a key customer of yours and Sony.

The Sony revenue for us is relatively fixed based on the agreements we’ve reached with them subject to the litigation. So there is really no exposure at all with our Sony revenue. In terms of other customers and the impact it may have, I don’t see that having any impact on our revenue forecast and in fact I see that the cloud computing as a platform for gaming opportunities with some of our current and new customers. So we see the gaming sectors potentially one that can grow substantial for us.

Okay. Thank you very much gentleman.

Thanks Jeff.

(Operator Instructions). Our next question is from the like of Charlie Anderson with Dougherty and Company. Please go ahead.

Good afternoon everyone. Thanks for taking my questions. You know Vic, I really appreciate all the color on the pipeline. It sounds like you guys have a lot going on there. I wonder if you can just kind of speak to, you know if you have any regions or particular strength there, any particular Tiers, whether they will be handset vendors, tablet vendors. Just a little bit more color on kind of where we could see some of these initial design wins for the next couple of quarters.

Well I would say Asia and I am probably not overstating by saying that that’s a market that’s just exploding. Lots of interest whether it’s Korea, Japan, Taiwan or China, Mainland China. So that is a sector and our geo area is growing rapidly for us. The interest levels are very high. We have not only customers there, but also significant number of ecosystem partners that are very active in promoting our technology. So I would say that from a geo standpoint is clearly exciting. CompuTax is a show that will occur here early June in Taiwan. I would expect to see a number of new tablets using Immersion’s technology. So I see that as a potential sector where we see design win opportunities growing. I think across the board this quarter was gaming and mobility, but across the board continues to be enthusiasm and the automotive, the medical our industrial markets. So I would say for right now with the rapid adoption of TouchScreens as a general technology and user interface, haptics is in great demand in lots of markets.

Great and then I wonder on the quarter itself, I think well this may be sort of the first quarter where you could tablet revenue, because you got the Galaxy Tab and then the well Brado (ph) how much that helped you guys and kind of how you see that, sort of tablet segment for you guys moving forward.

So from a design win standpoint we are excited. There is a lot great applications. In fact, I guess its probably worth while just quoting, there was a review done on PC World. I think it was April 26 when somebody was reviewing the Sony tablet, that’s one and there’s a person who was reviewing as Martin Williams said; his quote was “with no tactical feedback it feels a little strange.” So clearly the tablet space is a great showcase for our technology. It begs haptics as part of the user interface. Gaming used on mobile devices I think will become a great platform for the use of high quality haptics from Immersion. In terms of actually revenue, I think at this state its still rather immaterial, rather modest when you compare it to the monies that is coming in from the Smartphone segments.

Got it. Good, and then just a quick housekeeping from me. Shum when you gave the mix, was that on total revenue or was that on royalties?

No that was on total revenues.

On total revenues. And do I have it right; it was 44% mobility, 27% gaming.

Yes.

Got it. Good deal. Thanks guys.

Thanks a lot Charlie.

(Operator Instructions) Our next question is from the like of Kerry Kelly (ph) with Conquest Capital Group. Please go ahead. Kerry Kelly (ph) - Conquest Capital Group: Hi, thanks guys. I had in my notes from last quarter that you had expected to resume the buyback. I didn’t see any evidence this quarter. Was there a reason behind that and I guess could we expect it to start another soon. Thanks.

Yes, sure Kerry (ph). So our Board has authorized the resumption of our stock buyback program, which is currently in place. The mechanics of setting up the program itself are currently being put together as we speak, but during the quarter there were no stock repurchases by the company. Kerry Kelly (ph) - Conquest Capital Group: Okay, so its just a matter of getting a plan in place with your broker and execute on that, but we should obviously have the balance sheet to do it. Should we expect you to be aggressive or is it going to be just enough to cover the stock comp or what should we expect throughout the year?

Well, I think we are still having those discussions. So I would say we probably won’t be aggressive, but it will depend on the pricing on the stock, how aggressive we use the program. But its defiantly something we intend to execute on. Kerry Kelly (ph) - Conquest Capital Group: All right, thanks. Operator Our next question comes from the line of Robert Katz (ph) with Sunvest (ph). Please go ahead. Robert Katz (ph) - Sunvest (ph): Hi Vic and Shum. Excellent quarter, congratulations on the beat.

Thanks Robert. Robert Katz (ph) - Sunvest (ph): I have a question about when do you expect to put the K-Zone (ph) products, base products to shift and what segment. Do you expect that to appear first in the tablet, a phone or some other type of device?

I would say that the first would be on the Smartphone segment, probably followed by the tablet and sometime shortly after that, mobile gaming I think is a great platform for queuing the technology, so those will be the platforms. In terms of timings its really something that we are depended on our customers and their launch plans, but we are building out what we think is a terrific ecosystem platform with amp vendors, chip suppliers, actuator vendors. We’ve been certifying a number of these components. So the ecosystem is stating to round out nicely and then we are anxiously trying to support our customers and have them launch their product soon. We are still shooting for something this year, but it could easily bleed into early part of next year. Robert Katz (ph) - Sunvest (ph): So in terms of product shipped in this year, royalty recognition most likely Q1 next year.

TS 5000 platform, yes I believe that’s correct. Robert Katz (ph) - Sunvest (ph): Okay, excellent. And you have the product segmentation for last quarter as well, the royalty segmentation.

The product is primarily medical product and that constitute most of our product and product sales were $1 million this quarter. Robert Katz (ph) - Sunvest (ph): I mean from the royalty breakout for last quarter.

You want the royalty breakout for Q4 of 2010. Yes, give me a minute. Robert Katz (ph) - Sunvest (ph): Sure.

Yes, so the royalty breakout for Q1 of 2010 was, mobile was 36%, gaming was 18%. I recall that last quarter in 2010 we had the bulk of the medical product line. So the total medical segment was 29%, touch and other segment was 9% and the balance was auto, around 5%.

Robert, can I ask you though just to clarify. So what we gave you as part of our script earlier today, that was a segment percentages of the total revenue. Robert Katz (ph) - Sunvest (ph): Okay.

What Shum just gave you was revenue as a percentage of royalty. Robert Katz (ph) - Sunvest (ph): I understand, okay. Yes, I will circle back with you guys, we will try and straighten that out.

Good. Robert Katz (ph) - Sunvest (ph): We can solve that too. Thanks guys, great quarter.

Thanks Robert.

(Operator Instructions) Our next question comes from the line of (Inaudible) with Monroe Investment Advisors. Please go ahead. Unidentified Participant Good afternoon gentleman. Did you mention that you are going to be reinvesting in the marketing? I want to know if you can put a dollar amount or a percentage of revenue and secondly, do you anticipate on applying the same people or are you looking in to hiring a company or hiring more people. Thank you.

Sure, thank you for the question. I would say we are continuing to invest in our people. So within our company we are moving, brought in a new person to handle our developer relations activity. We are moving some of our technical talent over into the marketing area as well to support the product marketing team and their efforts. We are already engaged and have outside consultants and a PR firm that supports us in these efforts and if I remember correctly, our advertising and promotion budgets this year is considerably if I remember correctly, something in the neighborhood of 60%, 70% higher than it was last year.

Wonderful, thank you so much.

Your welcome. Thank you. Operator (Operator Instructions) And at this time I am showing no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you Douglas. So thank you everyone for being with this on the call today. We appreciate it. We look forward to updating you again on our next quarterly call. Good afternoon and good day. Ladies and gentlemen, that does conclude our conference for today. We like to thank you for your participation and you may now disconnect.