Good day and welcome to the Immersion Corporation Q4 2018 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, ma'am.

Thank you, Brad. Good afternoon and thank you for joining us today on Immersion's fourth 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 Ramzi Haidamus, 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 closed. 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 Ramzi.

Thank you, Jennifer, and thanks, everyone, for joining us on the call live or for those of you listening later on the website replay. I'm thrilled to have this opportunity to speak with you on our first earnings call since joining Immersion as CEO on January 21. I will begin with a few comments on my background and early observation on the company before Nancy walks you through the financial results. By way of introduction, I’ve spent most of my career at Dolby Labs and Nokia Corporation where I focused on developing technologies centered around human-immersive experiences. At Dolby, my emphasis was on the development and licensing of surround sound high-dynamic range vision and high-fidelity voice technologies. In addition, during my tenure at Dolby, I founded and led Via Licensing Corporation, a patent-pool licensing company, which remains in operation today. At Nokia, I focused on launching the virtual reality program, the digital health and wearables program and the Nokia brand licensing program. I also led the growth of the Nokia patent licensing program, which centered on monetizing over 100,000 patents worldwide. Given my background and passion for sensory technologies such as audio and video, I see an opportunity to build a successful enterprise based on touch-sensory technology. As consumers demand richer experiences with surround sound and high-definition video, they will also expect their tactile senses to enrich their interface with the world around them. I look forward to applying my experience in licensing media technologies and bringing a fresh perspective to the haptics market. Today at Immersion, we believe the haptics market is still in its infancy and that our touch technology is just beginning to emerge in the marketplace and has a unique capability to bring people closer, create immersive and intimate experiences, and enable our customers' products to…

Thanks, Ramzi. Let me begin by referring you to this afternoon's press release for information regarding our Q4 and full year financial performance, including tables that illustrate the comparison of our revenue for the fourth quarter and full year to the same period a year ago, highlighting the impact of our adoption of ASC 606. Our revenue of $10.9 million for Q4 of 2018 was up 58% from revenue of $6.9 million in the year-ago period. We have discussed -- 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 $300,000 or 6% compared with the prior year quarter, reflecting declines in reported royalty-bearing shipments, by gaming and mobile licensees, offset in part by an increase in royalty-bearing shipments reported by automotive and medical licensees. Revenue from fixed-license fee arrangements was up 177% on a comparable basis, primarily due to license fees from new customers recognized in the fourth quarter of 2018. For the year ended December 31, 2018, total revenue of $111 million increased $76 million or 217%, compared to the year ended December 31, 2017. The increase was primarily attributable to a $71 million increase in fixed license fee revenue as a result of a large fixed fee agreement signed in the first quarter of 2018. 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 continue -- and contribute to the lack of comparability with prior year results. Turning to operating expenses. Operating expenses…

Thank you. [Operator Instructions] And our first question comes from Charlie Anderson with Dougherty & Company.

Yeah, thank you for taking my questions and welcome Ramzi. Maybe just want to start there Ramzi. I wonder if you could give us a little bit of a view from your side of the table in terms of why you joined Immersion, what you saw here, if you're successful what this all looks like at the end of the day. Maybe the size of the market from your perspective would be interesting? And then I'm also curious borrowing from your prior experience at Dolby and Nokia if there's some practices that you employed there that you could see bringing to Immersion that maybe they weren't doing before. And then I have got a follow-up for Nancy.

Sure. Thank you. My attraction to Immersion comes from my 20-plus years and interest in immersive technologies. I joined Dolby because of my love for audio, surround sound, the movies and technologies that get you immersed in the experience you're in. I followed that up with video investments at Dolby and then later on with more high-definition voice. Later on with Nokia as you know I launched the virtual reality program, which centered around AR and VR. And that history of mine will include my expertise in licensing, technology, intellectual property and equally importantly my personal passion for exciting immersive technologies. When I looked at the demonstrations and the demos and the technology from Immersion there wasn't a whole lot of difference in the excitement that I experienced before relative to the excitement I experienced when I played around with the -- for example gaming demos that we have here, which are truly outstanding and I could say some consumers have never seen anything like it. So these are all technologies that will be in the pipeline that we hope to bring to the market in the future. So that's as far as my personal interest. Now in terms of my experience and what I can bring to the table, what's clear to me is that Immersion is at the cusp of a significant growth and adoption of haptics broadly in the market whether it's automotive, feedback in steering wheels, and screens, and pads where automotive companies are realizing that for safety measures the tactile feedback is equally important to visual feedback. This is a significant play for Immersion equally. So in the mobile business, we are so far used to a very rudimentary type of haptics but there could be much smarter and high-definition haptics that we can experience…

Great. Thank you so much for that color. And then, Nancy, on the guidance, you mentioned -- I think, it's $27 million at the midpoint and you mentioned that it's going to be predominantly the per unit. You did almost effectively $27 million on the dot per unit in 2018. So, I guess, is the underlying assumption here that that is effectively flat and you're assuming zero for per unit? Or there's things that are going to be different about 2019 versus 2018 on the per unit line that are worth mentioning? And then, also on just the seasonality, we did get sort of a snapshot of the seasonality of per unit in 2018, I wonder if there's anything different to think about for 2019? Thanks.

Sure. So in 2018, as we were driving adoption and seeing adoption of haptics in certain markets some of our per unit agreements, as we talked about in the past, actually had minimum commitment components. As we're seeing the adoption become more mainstream and discussions with our customers are evolving we're finding that it benefits both of us, in certain cases, to move away from some of those minimums. So in 2018 you saw the impact of that in that royalty line that you're referring to. In 2019, we expect to see less of those types of minimum commitments. There may still be certain markets and certain agreements where we and the customer agree that a minimum is appropriate, but we believe the adoption, the rate it is today, that going per unit certainly provides us a more sustainable and predictable ongoing revenue.

Okay. And then, on seasonality?

On seasonality, I think, fairly consistently, Q3 and Q4 we expect to be much more heavily weighted. And that, again, with 606 we're estimating each quarter the number of units that our customers will ship. And as we look at the customer base and the markets in which they play, we think Q3 and Q4 are definitely going to be more heavily weighted this year.

Perfect. Thank you so much.

Our next question comes from Anthony Stoss with Craig-Hallum.

Hey, Ramzi and Nancy. Maybe on a comparable basis or factoring in 606, can you take us through, Nancy, on a year-over-year basis what you expect to be down? If the smartphone category is going to be down if auto's going to grow, gaming down, miscellaneous down? I'm just curious on what you expect to grow or be down? And then, I know, several attempts through multiple CEOs were to try to bring in a China-handset deal, now going the way of the driver IC guys. What do you think has led to this lack of ability to sign the Chinese handset makers so far? And then I have one more follow-up after that.

Okay I'll take the first and then I'll let Ramzi go and talk about China. So by market, certainly the mobile market in 2018 was very heavily weighted to an agreement we signed in Q1 with Apple. I would expect the mobile market to be certainly flat to down excluding any litigations that may come through, but down on a comparable basis. I am caveating that a little bit, because you saw today that we signed the agreement with Dongwoon and we are going to be needing to watch that agreement and others that we signed to see how quickly that adoption grows. So I'm going to say flattish on mobile until we understand more how those contracts evolve. On gaming, we are likely going to continue to be at about the same level we are today on a percentage basis, until and if we see new platforms coming out in the gaming market, which will then drive, as you're aware, controller refreshes from the tiered controller supplier set that we licensed. VR continues to remain a nascent market for us, as Ramzi mentioned, that we do have a lot of great technology in that market that we are going to be trying to bring to market and hopefully find a path forward there. But VR, as we're all watching, tends to be adopted a little bit more slowly than we had seen historically. Automotive, I would say, is really one that we're extremely excited about. We have licensed, we believe the majority or the vast majority of altered suppliers where you're seeing haptics today adopted in cars. As that market grows and as that adoption grows, we will grow along with it. We do have a good pipeline of additional customers we're looking to join forces with. So I would say automotive is one to continue to watch to look and grow. And as Ramzi mentioned, I think, the final market that we're excited about is IoT.

As far as the play into China, I think, it goes without saying that, historically, as most companies have attempted to license their patents into China have met with some difficulty at one level or another. It is different when you're bringing in actual technology solutions that the OEM need and want to differentiate with. But when you have a pure patent licensing play, it becomes quite challenging for reasons that are pretty well known in the marketplace. Our IC channel strategy is an experiment. It is the first time we do this. In fact, I could point out very few companies have done this before and so I have to congratulate the team at Immersion for this success. The goal here is to try to make the patent license very convenient and available through our IC channel partners, whom the Chinese OEMs must interact with anyway. So there's a cost savings measure here for us, so we don't have to create a sales force going after each one of these OEMs. Second, having a channel partner that provides this throughput license at a very convenient pre-negotiated rate and pre-negotiated term makes the acquisition by the OEM of the license very fast and convenient. We're going to have to have a wait and see attitude. This is an experiment. We hope that it yields the results we want. In the meantime, we do have a parallel strategy in the works. As we mentioned, we're going to be investing in creating technologies to be adding to the patent licenses so that there's tech value-add from Immersion. This is something -- this is how the company started and we'd like to go back to our roots of being innovative and bringing differentiable competitive technologies to save our customers, whether Chinese or otherwise, the cost of developing it themselves, that would go along with the patent licenses.

Great. And then as a follow-up. Ramzi, your willingness to enter in agreements without minimums, does that indicate in any way shape or form a waning demand for haptics? You were able to get that before and now you're willing to give that up. And then, Nancy, if you can just confirm or suggest whether or not you have anything in the 2019 guide from Apple?

I see the per unit with no minimum deal as a win-win for both us and our customers. For us we want to provide our shareholders with long-term predictable revenue increase. The minimum deals provide a very significant lumpiness, especially with 606, where you're recognizing the revenue in advance, you're recognizing it in short term and it provides for very lumpy and unpredictable revenue until all the minimums have been paid up. As long as cash is not a significant issue, which it isn't today for us, there's very little reason for us to push for these no-minimums. Remember, this is a patent license. This not a technology license where our channel is a marketing tool for our technology. If it was it would be a different dynamic. This is a strict patent license. Therefore, the marketing element here is less than what it would've been had it been a technology license. So it comes back to it being strictly a business finance decision to take on a royalty revenue profile that fits our desired long-term profile that fits with our long-term view with the shareholders as well. Our customers are frankly open to both. Dongwoon has taken a deal with minimum royalty. Others choose not to and we are flexible and we're not putting anyone in any one direction. We just want to highlight that our preference, if our customers agree to, is to have a per unit royalty with no minimum.

Nancy? Yes.

And then -- yes, on Apple, there is ongoing revenue in our AOP for 2019 from Apple, yes.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Josh Nichols with B. Riley FBR.

Yes. Thanks for taking my question. I wanted to ask a little bit. I know in the release you talked about moving a little bit over time towards more consistent profitability. How much of a needle mover can really be auto and gaming given the guide where you probably need to get to about nearly double the revenue -- the level of revenue to kind of be breakeven on a consistently basis excluding any large litigation settlements?

Let me take that and I'll take it over to Nancy. The automotive space for us is exciting for multiple reasons. First, the ASP on a per unit is significantly higher than the mobile which is -- that was about same but it's important to highlight it. So, the growth curve is going to be significantly more weighted on the automotive than mobile on a per unit basis. So, we're excited about this. Second, we -- as a Nancy mentioned earlier in the script, we are -- we have license over -- well over 50% of the providers into the mobile into the automotive channel. This provides for up and coming revenue over the next several quarters which should add to our topline. Thirdly, our R&D team is focused on providing technology solutions that will accompany the patent licenses in the future. Thereby having the company -- the automotive companies come to us for solutions. That excites consumers and bring value and is not just a mobile -- is not just a patent license. So that's really our strategy there for the -- with the automotive. I would say gaming is a bit further out. We are developing and have developed technology in gaming, but the cycle here is a bit longer term. As you know the gaming console launch every few years, so we need to wait for the next console launch for it to provide us with a ticker. But we have stated that we have very competitive technology that will differentiate us from what otherwise might be developed at these companies. And we believe they're going to want our exciting technology. With that, I'll turn it over to Nancy.

I think you covered it great. Josh anything--

Yes. Yes, that more than answers my question. I did want to ask -- so you gave good color regarding the cadence of the revenue for 2019. But should we expect that maybe the expense side is a little bit more front-half weighted as opposed to the revenue side given that the trial is approaching in May and that's probably going to be a highest portion of litigation spend?

Yes, that's a great point. The litigation spend definitely will be loaded to the front half of the year because of the May trial with Samsung. And then Q1 tends to have the majority of stock-based comp although that is a noncash charge.

And then last question for me. Any high-level commentary you could provide as far as the rationale given the upcoming trial? That also looks like expanding the pursuit to go after a new German patent as well as opposed to just in the U.S.

Sure. Our cases remain on track and we continue to feel confident in our portfolio and the strength of our position in each. As you know the next mediation discussion is scheduled for March 21 with Samsung. Furthermore, the German action is a newly is regarding a newly issued patent in Germany and this is the counterpart to the '051 U.S. patent added to the U.S. case and one we used in the Apple case. It is a matter, of course, that we would this patent to the overall litigation strategy. We continue to feel confident in our position and we're -- if -- and if we were unable to reach an agreement prior the jury selection is scheduled to begin in May 2019.

Thank you.

Thank you. And we have no further questions at this time. I would now like to turn the conference back to our management for any closing remarks.

Thank you. And thank you everybody for joining us on this call today whether live or via webcast. I look forward to having the opportunity to meet with many of you in the near future. Thanks again.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.