Good day and welcome to the Immersion Corporation Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you, Carrie. Good afternoon and thank you for joining us today on Immersion’s fourth quarter and fiscal 2016 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company’s website at www.immersion.com. With me on today’s call is Vic Viegas, President and CEO; and Nancy Erba, CFO. During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, litigation 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 most recent Form 10-Q filed with the SEC, as well as the factors identified in the press release we issued today after market closed. Additionally, please note that during this call, we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today’s press release. With that said, I will now turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks Jennifer, and thanks everyone for joining us this afternoon. 2016 was an exciting year for Immersion as we broadened our customer base across our existing verticals with new strategic engagements and were also able to demonstrate the measurable value haptics is bringing to new and emerging markets. We remain focused on leveraging our three key strategic assets, our culture of innovation, our haptic know-how and our broad patent portfolio as we continue to execute on our long-term plan of driving broad adoption of our haptic technologies across existing and emerging markets. We were pleased with our fourth quarter and fiscal year results having achieved both revenue and non-GAAP net income in line with our full-year guidance. This is particularly significant as it demonstrates our focus on financial execution during the year when it was also critical that we dedicate resources and attention to protecting and preserving our intellectual property. We remain confident in our IP position and steadfast in our approach. I will provide a more detailed update on our business later in the call but at this time, I will turn the call over to Nancy to review our fourth quarter and fiscal 2016 financial results and outlook. Nancy?

Thanks, Vic. Revenues for the December quarter were $9.3 million, down 44% from revenues of $16.6 million in the year ago period, mainly reflecting the absence of revenue from Samsung and Sony. We remain in the standstill period with Samsung which was negotiated as part of the wind down agreement completed in July 2016. Revenues from royalties on licenses of $8.9 million were down 43% from $15.8 million in the fourth quarter of 2015. Of these amounts in the fourth quarter of 2016, variable royalties based on shipping volumes and per unit prices totaled $6.2 million and fixed payment licensees totaled $2.7 million. This compares to variable royalties of $8.7 million and fixed license fees of $7.1 million in the prior-year period. While the revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the fourth quarter of 2016 a breakdown of by line of business as a percentage of total revenues was as follows; 36% for mobility, 43% from gaming, 12% from auto and 9% for medical. Looking at year-over-year trends, mobility revenue were down 65% from the fourth quarter of 2015, principally due to the absence of revenue from Samsung. Gaming revenues were down 22% during the quarter, primarily due to a decrease in revenue from Sony, which was partially offset by revenue from new customers such as Nintendo. While we successfully resolved the Sony Japan arbitration process discussed in our second quarter call, we are now in an arbitration process with Sony in the US. We continue to have confidence in the strength of our IP and anticipate a resolution to this arbitration in 2017. Automotive revenues were up 7% due to increased volume from our existing automotive licensees as more vehicles sold today have incorporated haptic technology.…

Thanks Nancy. I would like to focus my comments on four primary areas; first, a look at the market engagement cycles of our strategy; second, a recap of highlights since our Q3 call; third, an update on our strategic markets; and fourth, an update on our litigation status and focus for 2017. Immersion as torchbearer for haptics employs a market engagement cycle with four stages. The first is innovation; we seek out and explore new value areas for haptics across our markets. This activity generates new IP, know-how and demonstrations of haptic value. The second is demand creation, in markets where there is substantial and recognizable haptic value as well as sustainable and growing business opportunities, we evangelize and see the market with new used cases and demonstrations of haptic value working through ecosystem partners, content creators and leading OEMs. The third is adoption and monetization, we leverage our products, IP, know-how and services through licensing relationships we allow leading customers in our markets to realize the value that haptics brings to their products allowing us to achieve a sustainable and growing revenue stream. And fourth, is leadership, in markets where IP and our solutions are fully recognized, leveraged and monetized, our shareholders benefit from the investments in market making efforts we have made. This also creates a platform upon which we can consider developing new and innovative offerings. These stages can vary in length depending on market maturity, customer engagement, and the ability we have to leverage our previous innovation. Today, we are facing a few companies who have chosen to copy our innovations, forcing us to take legal action in order to receive fair compensation. This can be costly and time consuming, especially since their approach leverages cost and time in an effort to gain the benefit of…

[Operator Instructions] We'll take our first question from Charlie Anderson with Dougherty & Company.

Yeah. Thanks for taking my questions. I just wanted to start with maybe the litigation expense, you guys mentioned 18 million to 22 million in ’17. Can you remind us what it was for the full year of ’16 and then Q4 as well? And then you mentioned that Q1 is going to be the largest OpEx, is that primarily driven by litigation. I wondered if you could frame for us how much of that 18 million to 22 million occurs in Q1 just so we don’t get our models wrong here.

Yeah. Hi, Charlie. Thanks for the question. The litigation in 2016 was 16.7 million and we aren't going to split quarter by quarter, but the litigation expense in 2017 will be more heavily weighted to Q1 and Q2 with the hearing occurring at the end of April and May. And in addition, it was -- the other comment on the first quarter was related to the stock comp. So that will hit more heavily in Q1.

Okay. Got it. And then are you guys, is this 18 to 22, I mean, we’re assuming this is mostly Apple and the IPRs or you’re also reserving some amount for potential other litigation, any color there would be helpful?

I mean, certainly, we have a legal strategy that we're executing to. We’re not going to break down what's included or not included in that litigation, but we’re looking at our strategy as a whole going forward and making sure that we have the balance sheet structure to be able to support that.

Perfect. And then a question for Vic. Vic, I don't know if I've seen more consolidation in IP than I have in the last 12 months. And I just wonder from your perspective, when you look at your ability to enforce and your size, what are some of the options that are available to you here beyond the litigation strategy, are there partnering activities, are there other things you could potentially do here to help along with your strategy? Thanks so much.

Sure. Yeah. There's quite a few options that we have. We're very confident in the strategy and that strategy can include the sale of patents. It can include partnering with other companies who can carry some of the heavier lifting of litigation. We can consider contingent, legal representation tied to success. There are clearly opportunities for us to favor upfront payments for new licensees. There's a pipeline, a very rich pipeline of new opportunities that we think will continue to bolster the balance sheet and give us all of the assets necessary to execute on the strategy. So a lot of options beyond just simply filing a lawsuit and then managing the execution of a lawsuit. There are a lot of other strategic options available and we're going to continue to consider those as we move through 2017 and beyond.

All right. And then just one quick housekeeping on tax rate for ’17 with what happened in Q4, is there any change to the tax rate?

Yes. Given the valuation allowance, we’ll probably what I'm going to guide you to as a just a nominal expense that will be our cash tax, so you can think of somewhere in the 5% range.

And we'll take our next question from Josh Nichols with B. Riley and Company.

Yeah. Thanks for taking my question. Real quick, just want to go over one or two of the underlying assumptions. Just really wanted to know what's included in guidance. It's already been inked, but more importantly really what's in guidance that’s kind of still on the come at this point?

The guidance we're providing, the 38 to 42, we see that as kind of our core business. The bulk of that is signed agreements, however, some of those agreements call for a quarterly royalty reporting. So it will be contingent on the units and volumes of our customers. We do anticipate entering into new agreements as well, but we have a lot of confidence in that that core number 38 to 42. We think there's still plenty of upside to that tied to the pipeline that I referred to. There is obviously Sony and Motorola stand out as two very real near term opportunities that we think should be manifested in 2017. But there's also another long list of candidates from our solutions and our IP business side as well.

Right. So any revenue you received from Sony regarding US controllers or Motorola if you were to get a license that would just be upside to the current guidance, correct?

The Sony revenue would be tied to our current arbitration proceedings that we think will be concluded here in 2017 and the Motorola renewal is not yet signed. We’ve not renewed the agreement with Motorola. So we're still trying to work through those, but either of those could continue in some form of enforcement where we hope to have those resolved and become revenue in 2017.

Great. And then historically, I know the company has been able to significantly increase mobile license fees whenever a lot of these agreements came up for renewal, but now that the market is getting a little bit more mature on the mobile front, is that still the case as haptics usage has kind of proliferated throughout most of the platforms or are we reaching a more steady state matured phase where longer term license agreements might be signed with maybe less increases than before whenever not as many devices used haptics?

I think you need to think about the continued innovation that's happening, so the technology and the licensing that is occurring isn't on the same technology that was in existence in the time period that you're referencing. So we continue to grow our portfolio, as you know, we’re the leader we believe in pressure and that will garner, that would give us the ability to continue on that trajectory where the royalty rates are increasing over time.

Josh, I'd also add that the value of haptics is growing substantially and so we do pass along those increases. And the value is generated through richer experiences, whether it's social media gaming, 360 video, these are applications features that people are asking for. We're developing solutions for and therefore we're providing more value. So we're not at the early introductory phase anymore, we’re not heavily discounting prices. We're at a truer value of our deals, but we're still able to pass along some increase in the pricing.

Thanks for clarifying that. And then last question, I believe you mentioned you're still in a standstill agreement with Samsung and that expires sometime this year, but you haven't mentioned exactly when? Was it still the case?

That’s correct. Yeah. That’s still the case.

[Operator Instructions] We'll take our next question from James Medvedev with Cowen and Company.

So let me just start with, I want to make sure I’ve got the math right on this. The 60 -- in terms of expenses, it’s 60 million to 63 million gap minus share based compensation and then plus on the order of $20 million for litigation. That’s the expense sort of situation for 2017, is that about right?

Yes.

Okay. I just want to make sure I got all the moving pieces correct. And you said that’s more H1, half one weighted, how does revenue track through the year, the $40 million midpoint revenue forecast.

The seasonality has historically been Q4 and Q1 are heavier weighted for our revenue, just given our tightness to the gaming market and mobile in terms of their seasonality of sales. So you can -- I would expect that to be about the same this year as well.

And Jim, I think on the guidance for expenses, I think all we've really said is that the litigation spending will probably be a little more heavily weighted to the front half of the year.

Okay. Understood. And that's of course as soon as things are wrapped up, assuming they get wrapped up, I guess we will just see things unfold. With the tax -- with the deferred tax valuation allowance, what are the rules on that? I know you do a look-forward into profitability, but how far does that look-forward go? In other words, if you don't see earnings coming off -- how many years forward do you have to do a look forward before you take the tax allowance?

It actually has two parts. It’s actually a 12 quarter and then about a year or two, a year and a half look forward, but because of the regulations, which say that it has to be objective and verifiable evidence, we were not able to include any revenue looking forward associated with any of the litigation that we’re in, but we had to include all of the expense. So really about what weighed the decision that we made to go with the full valuation allowance this quarter.

Okay. And just can you tell us how much NOLs, what's the total of the NOLs federal, state, foreign?

So I don’t have that in front of me. I could get that for you later, but I don’t have that in front to me.

Okay and then my final question if I could squeeze one more in. 0% to 11% core growth this year, does that represent the long-term trajectory, or should we expect some acceleration or some slow down past 2017?

No. I don’t think it’s reflective of our long term growth opportunities. I think it's taking a snapshot of where we're at, given some of the uncertainty that we have with Apple, Samsung, Sony and Motorola. We are building a base a business, obviously LG’s renewals, Meitu, Gionee, Nintendo, those are all adding to existing customers and an existing base of business, but right now, we're still trying to execute on that pipeline, trying to resolve what we believe should be fairly straightforward, legal enforcement with Sony and Motorola. So we think that once we've established that, that will get us back to a base of business that then can grow based on success in licensing people in the wearable space, mobile ads, gaming and VR, automotive and all the markets that show such great promise, but right now, we've kind of taken a step back, given some of the pushback from a few of these companies.

[Operator Instructions] And we'll take our next question from Matthew Galinko with Sidoti.

Hey, good afternoon, guys. My question is just around the design cloud that you launched a few months ago. How is engagement with that platform, and is it having the desired effect that you had when you envisioned it?

Yeah. It's a great part of our future strategy. The design cloud allows our ad partners and customers to create haptic tracks for their ads in the cloud, allows them to experience it real time on their mobile device. They can then share it within their community before they actually push the button to go live with the ads. So it's a great preview feature for the service and when you add some of the obvious positive studies that have been coming out from Teads and now most recently from IPG, it's having an impact on the advertising marketplace and we're getting lots of interest from not only the ad agencies, but the creative and brands to add haptics because of the measurable improvement it has in a lot of the retention and engagement metrics. So it's one piece of the overall solution, having the cloud delivery capability gives us the ability to deliver optimized experiences based on ad and whatever device is being played back. So you can offer across a wide range of platforms and devices, a very rich and powerful experience. So we're excited by the advances that we have made recently in this space.

Got it. And is that platform still a work in progress? Are you still putting a lot of resources into it, or is it fairly mature for its purpose?

That particular feature is, I think, fairly well established and we continue to add new capability to the ad offerings, for example, some customers need help in generating tags for the HTML delivery or serving the video itself. So we're building out that capability and offering a wider suite of solutions to a broader audience of mobile ads. So we're still making the investments, not only on the technical side, but then also on the market facing side in terms of building out our sales and our market support teams to engage their customers to build this very exciting new opportunity for us.

All right. And so not to put words in your mouth, but is that to say you would expect headcount to be ticking up on the sales and marketing line in 2017?

Yeah. We see continued growth at the level about 10% growth year-over-year from 2016 to 2017 and the bulk of that investment is going into the mobile ad space, going into the content initiatives, the gaming and VR space, the wearables, building out our IPBD capability and teams. So still making good investments. We're seeing the results of those investments and believe that continued investment is still appropriate.

It appears there are no further questions at this time. I’d like to turn the conference back over to management for any additional or closing remarks.

Well, thank you all for being on the call with us today and we look forward to updating you again on our next call. Have a great day. Thank you.

This concludes today's call Thank you for your participation. You may now disconnect.