Immersion Corporation (IMMR) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Immersion Second Quarter 2011 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, August 4, 2011. I would now like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you. Good afternoon and thank you for joining us today on Immersion’s second 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 difference 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. Well, we expected the second to be seasonally weaker than Q1; our reported revenue of $6.7 million was softer than anticipated. Several of our key verticals were impacted during the period based on specific customer issues, including a rebalancing of inventory by a key customer in the medical segment. In addition, we experienced some ripple effects from the disruption in the automotive market as a result of the earthquake in Japan. When combined with our first quarter financial performance, however, we posted solid first half of 2011 and are on track to achieve the goals we laid out at the start of the year. During the past quarter, we made further progress with the addition of several new licensees and release of an array of new Immersion enabled products across various markets. We strengthened our patent portfolio and are energized by the level of design engagements underway following the launch of our MOTIV haptic development platform. We’ve seen a clear uptick as compared to our design pipeline at this time last year, which we view is a positive leading indicator for our business and the broader adoption of haptic. In a few minutes, I will discuss recent developments and our view of the evolving market opportunity as we head into the second half of 2011. First, I’ll ask Shum to provide a more detailed review of our financial results for the second quarter. Shum?

Thanks, Vic. Revenues in the quarter were $6.7 million, compared to revenues of $8.5 million in the second quarter of 2010. As discussed in prior conference calls, revenues in the second quarter of 2010 included product revenues of $1 million in the medical segment related primarily to product lines that were transferred to our medical licensee CAE in early 2010. Also Q2, 2010 revenues included increased revenues of approximately $1 million, mainly in the gaming segment, primarily related to corrections and true ups to royalty reports from prior periods. Excluding these items, normalized revenues in the second quarter of 2010 were $6.5 million, consisting of royalty revenues of $5.3 million, revenues from the sale of products of $0.9 million, and revenue from development contracts of $0.3 million. Revenues from royalties and licenses for the second quarter of 2011 were $5.9 million, up 11% from normalized royalty revenues of $5.3 million in the second quarter of 2010, primarily reflecting continued demand in the gaming and mobility segments. Revenues from the sale of products were $546,000 compared to normalized revenues of $860,000 in the second quarter of 2010 and revenues from development contracts were $254,000, compared to $321,000 in the second quarter of 2010. While revenue mix per segment is expected to fluctuate on a quarterly basis due to seasonality patterns, in the second quarter of 2011, a break-down by segment as a percentage of total revenues is as follows; 44% from mobility, 33% from gaming, 13% from medical, 5% from auto, and 5% from chip and other. For the sake of clarification these percentages are based on total revenues, including revenues from royalty and licensing, product sales and development contracts. Gross profit in the second quarter of 2011 was $6.4 million or 96% of revenues, compared to gross profit of 7.7…

Thanks, Shum. Let me start with an overview of some of the progress we saw on our target markets during the quarter. In May, we attended the Display Week Conference hosted by The Society of Information Display. This industry event focused on the display ecosystem, was a great venue to highlight the flexibility of our business model to potential new customers as our network of partners and licensees provides manufacturers with multiple options for integrating Immersion haptic technology. This includes our System Integrator partners, who offer complete touchscreen solutions with haptic as well as our chip partners who provide manufacturers more flexibility and designing haptics into their solution. The response from attendees and potential customers regarding the number of design options for haptics was very encouraging and validates our approach of expanding access to Immersion haptic technology through different channels. We also announced a number of new licensees from Immersion’s technology across multiple verticals while at Display Week including, NRC, the National Research Council of Canada was looking on corporate haptics into their NeuroTouch virtual reality surgical simulator. Good, better, best, the manufacturer of the award winning geotech gaming peripherals in Europe and Valeo of the premier automotive system integrators who will be integrating Immersion’s technology into automotive touchscreens and control panel. Specifically in the automotive market we have seen a recent surge of design activity with automotive partners and looking at the pipeline of opportunities, we expect to see a number of new and innovative automotive interfaces enter the market next year that take advantage of Immersion haptics. We also saw a number of new products incorporating Immersion technology enter the commercial market during the quarter. This includes the new IP formed from ShoreTel, the Atmel capacitive touch controllers with integrated haptic support for button, sliders and wheels and…

Thank you. We will not begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead. Charlie Anderson – Dougherty & Co. LLC: Good afternoon. Thanks for taking my questions. I’m sorry, I hopped in a little bit late, did you guys give the mix by end market on total revenue? Sumanta Mukherjee – Chief Financial Officer: Yes, Charlie, we did. I can repeat that you if you want. It’s 44% from mobility, 33% from gaming, 13 from medical, 5% from auto and 5% from chip and other? Charlie Anderson – Dougherty & Co. LLC: Great. And then in terms of the medical piece that was impacted, you said it was kind of a specific customer issue, you could – you maybe elaborate, give more color there in terms of the sustainability of that? Sumanta Mukherjee – Chief Financial Officer: It’s purely a inventory rebalancing with one customer, which caused that. Charlie Anderson – Dougherty & Co. LLC: Got it. So you think you’ll pump back to kind of where you’ve been, the level that you’ve been in that business? Sumanta Mukherjee – Chief Financial Officer: Yeah.

Yeah, I’d say there’ll probably be some continued weakness in Q3. But I think we see orders for Q4. One other things that we’ve recently done is we increased the language capability of the simulator, so it’s now able to be offer more broadly around the world. So we’ve already seen an uptick in Q4 orders. But I think you’ll continue to see some softness in Q3. Charlie Anderson – Dougherty & Co. LLC: Got it. And then, Vic, you mentioned working with six of the top ten mobile computing OEMs, three we know you have under contract, would the other three just be at sort of various levels of discussion and if you could offer any color there that would be helpful?

We have others that are our licensees, so they – those agreements have been put in place. But we’re not at liberty to discuss those until products launch. A number are in advanced development stages, pre-production efforts with fine tuning going on with their devices others are in the development phase and then some others are in the early prototype and demo phases. Charlie Anderson – Dougherty & Co. LLC: Okay. So the way you started that off is, they’re signed licenses or they’re not completely signed license, I just want to make sure, I’m crystal clear on it?

Yeah, we do have additional signed licensees. Charlie Anderson – Dougherty & Co. LLC: Got it, got it. Good. And then you mentioned Apple and Google and some of the endorsements of haptics they have been making. I understand Apple being pretty new, if you could just talk about Google a little bit more, because I think they sort of have them in the Andriod, API, was there something that changed there and kind of your view on that would be helpful?

Yeah, I would say nothing has changed there. They offer a basic capability as part of their API. The OEMs then are able to tap into that API and associate haptic effects with various user interaction. So there is really nothing new. What we’re highlighting is the fact that the capability is well received by consumers, but OEMs are recognizing that that’s essentially a basic haptic interaction and they are looking for more. They are looking for easier to use tools. They are looking for broader capability among the development community. They are looking for easy integration and a broader set of experiences within haptics. So it’s a teaser that is intrigued, but it has accelerated their discussions with Immersion. Charlie Anderson – Dougherty & Co. LLC: Got it. Thanks so much.

Thanks, Charlie.

Thank you. (Operator Instructions) And our next question is from the line of Jeff Schreiner with Capstone Investments. Please go ahead. Jeff Schreiner – Capstone Investments: Hey, good day, guys. Thanks for taking my questions. You kind of implied this for your ‘11 guidance of 31 to 33, is maybe a step up in the second half, I think that that’s seasonally your stronger part, but what are kind of the key drivers that maybe are driving that projected growth in the second half?

Well, let’s see – we look at mid year, here we’re about $16.4 million, so – and from a quarterly standpoint Q1 is seasonally our strongest, Q3, Q4 are typically good quarters that reflect increased sales from our gaming partners as well as our mobile market. So, expected business over the balance of the year gives us confidence in the range, and again, we’re seeing more recent gaming reports are starting to show positive upward trend. We’re aware of product launches that are scheduled for the latter half of the year. So combination of existing customers, new customers, and new product launches give us the confidence that back half of the year looks pretty strong. Jeff Schreiner – Capstone Investments: Okay. And, can you guys highlight today some of your IP, some of the patents that have come out recently and focused on that with the press release. And I was wondering that – given the -- this is going to become kind of maybe two questions, but given environment, we’re seeing with the value that are being now placed on patents with various IP options going on, is Immersion willing sell any portion of its patent portfolio or looking to explore that option?

Well, I would say, I’m pretty to see the intellectual property and patents in particular recognized more of the economic and strategy value that they deserve. Our goal has always been to maximize shareholder value and to do that; we actively and aggressively work to monetize the patents. So monetization efforts could be using our patents and licensing arrangements or they maybe worth more to our strategic buyer. I’d say we’re open-minded about how we can maximize the value of this portfolio. So yeah, we’re open-minded. Jeff Schreiner – Capstone Investments: And just following on that I mean, given the commentary about patents today, I don’t want to say you went up level of King Kong and beating your chest so to speak, but you certainly are highlighting IP part of the business. And I’m wondering, when are you internally in terms of ready to explore any defensive IP litigation that you feel may be necessary to protect some of the IP your company has in fact generated?

Well, very clearly this is a big event for Immersion that’s more recent patent grants have substantially expanded the value of the portfolio. And as you know each patent has numerous claims, each one distinct and unique. But if you look at the three patents that we referenced, for example, the 288 patents, it covers the association of a haptic effect in a multi-testing environment. So, I can give you an example, if you’ve got a pre-selected haptic affect for incoming calls or text input or dialing. If you’re testing your friend and you receive an incoming call that generates haptic affects, that’s covered by that patent. The other two patents are more aligned with associating haptic effects with a graphical user interface or GUI on a touchscreen display. So, if you are using a soft keyboard dialing pad or an icon those are all GUIs. And if you touch that GUI, and you receive a pre-selected haptic affect that’s also covered by those pattern. So, I’d say that strength of our portfolio has grown dramatically over the last 90 days. And when we continue to monitor the landscape and look at how to best monetize the IP. Jeff Schreiner – Capstone Investments: Okay. Two final questions from me on the competitive landscape, because you educated just briefly in the time we have about Tactus Technology, it’s seems to be an up end cover and feedback perhaps there is a different implementation of their technology in Immersion and could you compare that for us?

I think you’re referring Texas Instruments, TI? Jeff Schreiner – Capstone Investments: There is another private company called Tactus.

Oh Tactus? Oh Yes, Tactus. Jeff Schreiner – Capstone Investments: Yes.

I think they are promoting is – I believe it’s a demo or it’s a concept of using some form of technology to create the deformable surfaces. If you look at our, patent portfolio, some of our existing solutions we’re working on deformable surfaces. We have a very strong portfolio in deformable surfaces, but I can tell you that the efforts are not insignificant. This is going to take time for a screen to transition and more, so that you can feel the ridges of buttons that are virtual. So deformable surfaces I think it’s an interesting demo. I don’t know that it’s ready for the market anytime soon. If you want to talk about Tactus Instruments who has been pretty active. Jeff Schreiner – Capstone Investments: Yes.

I think sometimes a misunderstanding about our relationship with TI. We believe that component vendors like TI and other solution providers are just critical to enabling our ecosystem and we work closely with them. We don’t see them as competition. Our IP in this area is really strong and we work with them to bring to the market pieces of our overall haptic solution. So, we’re really excited by TI’s investment in haptics products. We work closely with them in a number of areas including joint sales, calls, demos, reference design’s activities. In fact, two weeks ago, you may have seen that TI announced their DRV8662 Piezo Haptic Driver, and it’s part of our TouchSense 5000 high definition haptics reference design. It’s a key component in the ecosystem of enabling technologies. I am also happy to report TI as a new licensee and we’re encouraged by all their activity in space and we look forward to letting you know more about what they are working on and what products they have planned to launch in the future. Jeff Schreiner – Capstone Investments: Well, thank you very much. That was a great answer and gentlemen, thank you for your time.

Great. Thanks, Jeff.

(Operator Instructions) Our next question is from the line of Mark McMahon with Raymond James. Please go ahead. Mark McMahon – Raymond James & Associates: Afternoon, Vic. Quick question on something you mentioned earlier in the call, you had mentioned at the symposium you were in, I guess back in May, the integrated tablets prototypes that you were demonstrating, I was wondering if – will they just demonstration tablets that you guys designed on your own or with actual OEMs to try to sellthrough?

So I think Toshiba was the first to come out with the product. So this was their product and that they demonstrated. We have worked with them provided them a reference design, help and the tuning of the products that whether you build that and demo that. I think in addition we have three ODMs, pretty substantial companies that were showing platforms that they have planned to promote and are actively engaged with their customers and trying to sell that platform to them for their tablet solutions. Mark McMahon – Raymond James & Associates: Okay. So, its just Toshiba, that was the only one that’s a confirmed licensee that was demonstrating in prototype?

Toshiba is the only, yeah, they are the first on the market. Three ODMs are working with numerous OEMs would be following them, and when they launch, we’ll be able to tell you more about that. Mark McMahon – Raymond James & Associates: Okay. And on the mobility, when you had mentioned that there were I guess three handset manufacturers that are unannounced licensees at this point, but are in various stages of development. One, pre-production, would that be for launch in the fourth quarter of this year?

So, what I said was, there are currently six of the top 10 OEMs that we’re engaged with and of those we have three announced license agreements, Samsung, LG and Nokia. Of the other three, we have – some are licensed and others are not licensed, but we are in various stages of co-development, demo, prototype, pre-production kinds of efforts. So we expect to see as we – I think I’ve mentioned apart from Fujitsu here, soon the others will really depend on their own launch plans and strategy. Mark McMahon – Raymond James & Associates: Okay. And I guess finally, when you were talking about different new, I guess from your SDK that you put out for the Android marketplace and you mentioned a couple new apps like the Braille app, what sort of growth are you experiencing and interested in. You touched on it just for a little bit, but that got the marketplace pretty excited when you first announced Haptify and the SDK ability, have you seen exponential growth in terms of inquiries or actually people signing on and downloading your SDK or how is that progressing or was that – it got really strong in the beginning and has slowed down because you had announcements, I think about two months ago about or maybe a month ago, month and a half ago about I guess, eight new developers that have integrated your haptics into their programs, into their applications, but haven’t heard anything since then?

Sure. I think we said in the call earlier was, the number of downloads has doubled. The actually number I just check earlier this morning, we’re up to 1400 downloads. The activity, the interest level is very high. Recently, we put on a training program for the Android developer community here locally. And we opened it up for training where our engineers could actually provide training, as well as application support and we only had room for 150 developers and we had a waiting list of another 50. So in terms of the interest level and their downloads and their activities to develop applications and hopefully launch these applications is very, very busy for us right now. Mark McMahon – Raymond James & Associates: Okay. And just real quickly, I had watched a demo, I guess it was maybe two weeks ago on Tactus Instruments demoing their haptic solution. How long ago – they are a recent licensee, but how long go – just to have an idea – how long the channel is between your engagement to then actually coming out with the product, can you explain a little bit about when you first started talking with TI and then the development stage and then now, they are out there selling products?

Well, there’s a couple – there’s two different, let’s say, relationships. And answer your question more specifically; I think we’ve probably talk to TI for at least one to two years. They were extremely active with Nokia as a component supplier years ago, and so they were intrigued by the request, the demand, the interest level for haptic. So one part of the relationship is they develop this piezo driver. And for a customer to launch a product, you need not only a piezo component, but you need a driver, a bidirectional driver to drive the piezo module. And so one of the pieces of the relationship with TI is that they developed this driver and are marketing it – selling it and building billing prototypes, making sales calls and trying to win that part of the business. The other part is related to how we work with them to incorporate our technology in their future products. And so this would actually be our software integrated into their chip solutions. And that’s something that we will be launching, we’ve announcing and we’ll be communicating more definitively as they roll their products out. But they are for – I’d say, at least the last six to 12 months, have been actively using our demos, engaging major OEMs, extremely active in markets like China, and they have been a great partner for us. And they are significantly raising the awareness of not only haptics in general, but Immersion haptics in particular and the benefits for the high fidelity. Mark McMahon – Raymond James & Associates: Okay. Congratulations on the first half.

Thank you, Mark.

Thank you. Our next question is from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead. Shawn Boyd – Westcliff Capital Management LLC: Hi, gentlemen. Thanks for taking the question. I just want to follow here with a little bit of more discussion on the trajectory here. In terms of the quarter, the weakness being both the medical and in the auto production shutdowns due to the supply chain in Japan, is it--?

Shawn, you are going to have to speak up. I am having a real hard time hearing you. Shawn Boyd – Westcliff Capital Management LLC: Sure. In terms of the weakness in the quarter, you said, there are two different issues. And it looks like from the revenue breakdown, we’re seeing a little bit more of a drop on the medical side, is it fair to say that was the bigger issue that brought us in below plan in the June quarter?

Yeah, when I look at that -- at the forecast, I’d say that our revenue was probably down by anywhere from $500,000 to $700,000. The automotive affect was probably closer to $100,000 medical rebalancing, so this was a single customer decided to cut back inventories and that probably affected our order and sales by about $300,000, 400,000. And then probably couple $100,000 weakness on the mobility side just based on lack of growth with one or two of our partners. Shawn Boyd – Westcliff Capital Management LLC: Got it. Okay. And in terms of auto, I don’t want to make a big point about this because it is fairly small. But that’s an area that we’re obviously hoping to grow going forward. With the way the shutdowns have hit, would you expect that to be down again next quarter? Or would you expect to see that start to rebound here with the September quarter?

From every indication, we think Q3 should be again relatively flat slightly soft, but we’re pretty confident we’re seen design wins and we know that production is ramping up for Q4 shipments, so – Q3 shipments which will be Q4 revenues. So, I would say Q3 revenue could be a little weak in the automotive space, but we definitely see a rebound in Q4. Shawn Boyd – Westcliff Capital Management LLC: Okay. So basically similar to medical?

Yeah, absolutely, yeah. Shawn Boyd – Westcliff Capital Management LLC: I mean, a different magnitude I imagine, but just in terms of direction?

Yeah, we’re only talking $100,000 and $200,000 utmost in terms of revenue that is being impacted, but Q4 should be a much stronger quarter in the automotive space. Shawn Boyd – Westcliff Capital Management LLC: Got, got it. Sorry to see it hit, but good to hear about additional design wins that we’re looking at this point. Congrats.

Thanks, John.

Thank you. Our last question is a follow-up from the line of Charlie Anderson with Dougherty & Company. Please go ahead. Charlie Anderson – Dougherty & Co. LLC: Actually my questions has been answered. Thanks.

And we do have a question from the line Robert Katz with Senvest. Please go ahead. Robert Katz – Senvest International LLC: Hi Vic, and Shum. If I can – you’ve kept your year guidance flat and you’ve had sort of a little message quarter, that means there is upside coming from your business in the second half, is that more upside on the gaming side or the mobile side of your business?

I would say both. Robert Katz – Senvest International LLC: On both?

Yeah, early indication where you have some royalty reports in hand that show gaming is picking up like we would expect seasonal benefits and then again knowing the trends in the mobile space, commitments to product launches, new customers new products, we feel pretty strong about the mobile space as well. Robert Katz – Senvest International LLC: And on the mobile space in particular are you customers shifting to any piezo product set, is the Galaxy 2 a piezo product or is it still old generation product?

No, it’s our TS3000; currently there are no TS5000 solutions in the market yet. Robert Katz – Senvest International LLC: And when do you anticipate the TS5000 shipping in market?

Well, our hope is to have multiple products in the markets this year. And Tactus Instruments driver solution is a being piece of that. So, we’re happy to see them actively promoting and marketing that. Lot of companies are investing great resources to bring solutions for the market with support of Immersion TS5000 solution, so it’s really going to just be a matter of the timing of our OEMs launch plans. Robert Katz – Senvest International LLC: Great. And would that impact the royalty per device typically versus your TS3000?

Yeah the TS5000 offers us a substantial increase in the ASPs. So, we’re excited not only with higher revenue potential; it also provides a much higher fidelity experience for the consumer and it separates, creates a bigger gap between products without haptics, and products with our high definition. So we think that it’s important to succeed here. Lots of interest, lots of design opportunities, it’s not just a matter of getting them launched in the market. Robert Katz – Senvest International LLC: And do you anticipate seeing some tablets in the market in the second half of this year? Or is that 2012?

No, we’ll see tablets and we may see tablets with piezo launched this year. Robert Katz – Senvest International LLC: Okay, great. Thanks guys and good job.

Thanks, Robert.

Thank you. At this time, I’d like to turn the call back to management for closing remarks.

Well, thank you everyone for being on the call today. We look forward to update you again on our next quarterly call. Good afternoon.