Good day, and welcome to the Immersion Corporation Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn today's conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please go ahead, ma'am.

Thank you, Carrie. Good afternoon, and thank you for joining us today on Immersion's Third Quarter 2018 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 Tom Lacey, interim 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, 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 close. Additionally, please note that during this call, we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, our 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 Tom.

Thanks, Jennifer, and thanks, everyone, for joining us on the call. Or for those listening later on the website replay, thanks for joining us. We're very pleased to report our results for Q3 2018. As you will hear from Nancy and I, things are progressing well within the company. Before getting into the details of our business, given this is my initial conference call, I want to take the opportunity to share my observations on the company, specifically the people, organization, technology, patent assets and legal matters. To summarize, I like what I see so far. After I share my observations, Nancy will provide an update on our financials, followed by me providing an update on operational business, including legal matters, before turning the call over to the operator for questions. First of all, I'm very pleased to be on the board of Immersion. I'm equally pleased to be the Interim CEO, helping to get the company properly engaged and focused on the many substantive and exciting opportunities ahead. My timing of joining is good as we started and are making excellent progress on our multiyear strategic plan that we will review with the board in December. As many of you know, prior to Immersion, my most recent CEO job at Tessera, now called Xperi, included both technology and IP monetization. Thus, I am quite familiar with the markets and space where Immersion operates. I am pleased and pleasantly surprised with the internal state of the Immersion operations. The senior management team has done a very solid job keeping things moving forward, and I have a high degree of confidence in the internal management team. Similarly, the Immersion employees are very talented and long tenure is commonplace throughout the company. This is especially true in a technology organization, where we…

Thanks, Tom. Let me begin by referring you to this afternoon's press release for information regarding our Q3 financial performance, including tables that illustrate the comparison of our revenue for the third quarter to the same period a year ago, highlighting the impact of our adoption of ASC 606. Our revenue of $8.6 million for Q3 2018 was down 28% from revenue of $11.9 million in the year-ago period. As we have discussed in previous calls, we adopted ASC 606 on a modified retrospective basis, so a comparison to the same quarter a year ago may not be particularly meaningful. If you refer to the table, which depicts revenue on a comparable basis under ASC 605, you will see revenue from per unit royalty arrangements was down $600,000 or 13% compared with the prior year quarter, reflecting declines in reported royalty bearing shipments by medical, gaming and mobile licensees, offset in part by an increase in royalty bearing shipments reported by automotive licensees. Revenues from fixed licensee arrangements were down 45% on a comparable basis, primarily due to a nonrecurring fixed license fee from a mobility licensee recognized during the third quarter of 2017, offset in part by license fees from new customers, including Fitbit, recognized in the third quarter of 2018. For the 9 months ended September 30, 2018, total revenue of $100.1 million increased $72 million or 256%, compared to the 9 months ended September 30, 2017. This increase was primarily attributable to a $70.8 million increase in fixed license fee revenue. As we discussed in our previous calls, the treatment of fixed fee arrangements under ASC 606 is expected to drive lumpiness in our results and contribute to the lack of comparability with prior year results. I am pleased to see positive trends in our pipeline, with…

Thanks, Nancy, very well done. Now I'll provide an update on operational events during the quarter. Early in the quarter, we announced an agreement with Fitbit that was important to us as we have now set a baseline in the wearables market. We're in discussions to license others in the wearables market, comprised of smaller and more numerous potential customers. In automotive, as we announced earlier this week, we're extremely pleased to have signed a new agreement with Preh, a leading supplier of human-machine interface solution for automobiles, and a preferred partner for renowned OEMs in the field of haptics feedback, including Audi and others. With the addition of Preh, making our sixth automotive license signed this year, we are confident this is a fantastic market opportunity for us. Our current customers are comprised of important Tier 1 providers, driving haptics capability into premium cars. We've earned this significant customer penetration because of our know-how and because of our strong recognized position in the haptics market with foundational intellectual property. With accelerating momentum -- you like the car analogy there? With accelerating momentum, we plan to continue to focus our efforts in licensing all suppliers into the burgeoning automotive market, where features that start in premium vehicles ultimately waterfall into the mid-range and entry-level segments, thereby, dramatically increasing volumes and corresponding revenues. We're very excited and confident about our growth prospects in automotive in the coming quarters and years ahead. As a new initiative, during the quarter, we've explored and begun discussions with several driver IC manufacturers as potential channel for our technology in China and other places around the world. Although early in the process, there's substantial interest from this channel in part because of the breadth of our know-how related to haptics implementation, and in part due to…

[Operator Instructions] And our first question will be from Charlie Anderson with Dougherty & Co.

So I wanted to start with the sort of -- the change in the guidance, just the mechanics around the structure of the new deals, was that an Immersion-driven endeavor? Was that a customer-driven endeavor? Kind of what end markets are we talking about there? And as we look at that Q4 amount, does that sort of become a baseline to those new deals? Are they incorporated on there, sort of run-rate basis in the Q4? And then I've got a follow-up or 2.

Sure. So these were primarily auto deals, where we had anticipated originally, earlier when we were setting our guidance, that we would be coming to a higher level of minimums upfront. As part of the discussions with the customer, I can't say it's ours or theirs. I think it was mutually reached, the agreement, and some that are currently in conversation where it looks like there'll be more per unit, which means likely higher rates and more predictable over the license term. So I would say we're happy about it. It just -- sometimes, as you're in these discussions, they evolve and took a turn that was a little bit different than we originally expected. So as far as run rate, Q4 we'll see some, but I think you'll see that even growing as there are other customers that are still in discussion with this type of framework that would lead to those likely taking place either in Q4 or likely into Q1 of next year.

Great. And then, Tom, a question for you, in terms of licensee in the mobility market. From your perspective, how much of that is dependent on the outcome in Samsung versus not? How crucial is that? Maybe just your view on kind of the lay of the land, mobility generally and kind of where you stand with Samsung. And I've got one more follow-up.

Yes. So as you know, we reached an agreement with a very large cellphone provider earlier this year. And a lot of people were watching that. I think is the way I think about it, I thought about it from the outside and I think about that from the inside too. So does that help in additional conversations? Absolutely, definitely helps. And as I mentioned specifically with respect to Samsung, I really like -- I think we have a strong case there. I said it multiple different ways, that's what I said. Again, if we have to go to trial in May, we will. We're prepared to. If not, we can reach a settlement, that would be great, too.

And then lastly for me, just on the buyback...

With respect -- let me -- one other thing, Charlie, I'm sorry you didn't finish the question. With respect to mobility, the rest of the market, I think the simplest way to think about it is China, and I think there's multiple ways to pursue that, whether it's direct to some of it -- direct licensing discussions and technology engagement discussions with some of the -- primarily 2 big guys there, and/or through this driver IC channel that I talked about as an initial engagement here this quarter. So pretty excited about kind of multiple -- way I think about it is multiple prongs into trying to get the Chinese mobility market licensed. Nancy, do you have anything?

No.

Okay.

Yes, and then just in respect to potential buyback activity, it sounded like something you're open to in terms of what you do with the strong balance sheet. I wonder is there anything standing in your way. The common question we get from investors in terms of why you guys haven't repurchased shares, just any additional color on buyback generally would be helpful.

Yes, I mean, we are always open and looking to the best use of the cap. As you can imagine, earlier in this year and with litigation expenses, we were holding on to cash pretty tightly. We're still going to manage it very, very frugally, I'll say. But we are absolutely watching what's happening with the stock, and we'll evaluate any buybacks based on that, and also coupled with what else we have going as a company, right, and what the best uses of that cash is. We're always evaluating the market both from a stock perspective and also, as we mentioned, looking at potentially acquiring different assets that may be available. And if something comes up with a good ROI, we're also open to that.

[Operator Instructions] And our next question will be from Josh Nichols with B. Riley FBR.

Yes. I was going to ask, I mean things are progressing on the Samsung front, but I haven't heard much. Any update you could provide? I know you're also pursuing litigation in China. Any additional details that you can talk about on that front?

Yes, on Samsung overall, I think -- the way I think about these things in general, when -- without getting specific, we have nondisclosure agreements in place, obviously, and confidentiality that you have to respect and honor. But if I step back and if you think about any kinds of matters of this magnitude, you would expect that there would be dialogue between companies. You just -- that would be something you would normally expect. With respect to the China matter, it was originally scheduled for trial later this year in this calendar year, and our desire is to wait for what they call results of what they call invalidity matters. And so we decided to push that a bit.

Okay, so that's going to be more like a '19 situation, I guess. But is there a date on the books or no?

No. Yes, and no. Yes, you're right, like early '19, and no, there's not a date.

Got it. And then with a little bit more of a shift back to variable payment structures as opposed to fixed, how should we think -- how material would the seasonality impact potentially be? I know historically, like Q4 or Q1 has been a bit more seasonal than other quarters, just trying to think how to work through it as far as the model goes?

Yes, and I should -- so this isn't a matter of fixed versus variable, the contracts that we were discussing, if you recall, some of our auto deals have minimum structured into them. So you recognize that minimum amount in the quarter in which the agreement is signed. So this would be more that they would be more per unit in -- at the higher rates going over time. So it's not a shift from fixed to per unit. They were always per unit. It was a matter of how much would be negotiated as a minimum upfront. That said, that's the auto business, and so we'll follow auto cyclicality. Certainly, gaming more cyclical in the December quarter. We will now be estimating the unit shipments in the quarter in which they occur versus 1 quarter in arrears. So it's a little bit easier, I would say, to make the distinction between when a unit is shipped and the revenue is recognized. So Q4 for gaming will tend to be a little bit heavier. I think auto is more midyear, mid-fall and then Q4 as well.

And then, a last question for me. Like I saw the update guide that included $9 million to $10 million of litigation for the year. How much of that litigation is expected for 4Q?

We don't give the quarterly look, but I mean between $9 million and $10 million, it's going to be a small amount that will end up in Q4 at this point, probably.

The reason I just asked was because I know the company has talked about really one of the big longer-term priorities is getting to a point of sustainable profitability, where you could break even or generate even a little bit of cash even without one of these -- some of these large license wins. And I was wondering, do you think that that's something that ultimately would be achievable at these type of revenue levels with some OpEx cuts? Or what needs to happen to get the company where it's going to be able to achieve profitability on a consistent basis without some of these large deals?

I think really it's going to depend upon the waterfall in automotive, as Tom mentioned in his comments, how quickly do haptics waterfall out of just premium cars and into more midrange and entry-level automobiles. We will grow with that naturally because of our Tier 1 arrangements. And then our success in China, right? I mean, how quickly can we get sustainable ongoing revenue in China? It's certainly a market that is right for haptics and right for Immersion, which is great. If we're able to do that successfully in the first year versus longer term, that will obviously impact our financial results. And then it's adoption of new -- of haptics into new markets. We've talked a little bit about IoT. We're getting more interest there; if that begins to take off, that market can as well help to bring us to more sustained profitability. Certainly, these larger agreements are very important to us for many reasons, right, because they also impact the discussions. But there are paths for good revenue growth for us even without them. And it's just a matter of our ability to execute upon them.

I'm showing no further questions in the queue at this time. I'd like to turn the call back over to management.

Carrie, thank you. Again, I hope you can sense my optimism on the opportunities ahead for the company, and thanks for joining us on the call today, whether it's live or via webcast. As a side note, we look forward to meeting those of you in New York, joining us at the Dougherty NDR next week, or at the Needham conference in January. With that, Tom and Nancy are signing off. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.