Good day, and welcome to the Immersion Corporation First Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you, Brandon. Good afternoon, and thank you for joining us today on Immersion’s first quarter 2019 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 Ramzi Haidamus, President and CEO; and Amie Peters, General Counsel and Interim 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 Chief Executive Officer, Ramzi Haidamus. Ramzi?

Thank you, Jennifer, and thanks, everyone, for joining us on today’s call or listening later on the webcast replay. Today marks a pivotal day for Immersion, as I’m pleased to announce two major deals that sets Immersion up well on the path of growth and profitability. First, we have settled all patent litigation cases against Samsung. This landmark deal for Immersion opens a new chapter with our partner, Samsung, as it gives them access to both our advanced haptics patent portfolio, as well as our software and technologies for mobile application. We look forward to engaging with Samsung over the course of this agreement to help bring advanced haptics into the mobile market. Over the last four years, the company has expended significant resources in litigation against Apple and Samsung to validate its position as a technological leader in haptics in the mobile space. With that goal achieved and behind us, we can close that chapter of our history and move forward. Second, today, we announced the signing of a definitive agreement with Sony Interactive Entertainment to license advanced haptics. This agreement is emblematic of Immersion’s new strategy to partner with its customers by offering Sony, not only access to Immersion’s rich, deep patent portfolio, but also to grant them access to Immersion’s haptics technology for gaming and VR controllers. This agreement and partnership will open the door not only to a productive relationship with Sony, but also to the gaming and VR ecosystem where Immersion has been the leader in haptics. Having just recently completed my 100th day at Immersion, I’m excited to take this opportunity to speak with you about our progress in 2019 and the future of Immersion and haptics. One of the things that has become clear to me in my initial 100 days is the…

Thanks, Ramzi. By now you should have seen our press release and Form 10-Q and have had a chance to look over our numbers. Immersion’s revenue for the first quarter were $5.1 million, down $80.3 million, or 94% from revenues of $85.4 million in the year ago period. This decrease is primarily related to a material fixed fee license agreement that we entered into in the first quarter of 2018. Revenues from royalties and licenses in the first quarter of 2019 included variable royalties based on shipping volumes and per-unit prices totaling $3.3 million and fixed payment license fees totaling $1.8 million. This compares to variable royalties of $9.6 million and fixed license fees of $75.8 million in the prior year period. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the first quarter of 2019, a breakdown by line of business as a percentage of total revenues was as follows: 41% from mobility, 33% from auto, 24% from gaming and 2% from medical. Looking at year-over-year trends, mobility revenues were down 97% from the first quarter, primarily due to the previously mentioned material fixed fee license agreement entered into in the first quarter of 2018. Automotive revenues were down 75%, primarily related to certain per-unit royalty agreements entered in last year’s first quarter that contain minimum royalty provisions for which we recognized the whole set of minimum royalties as revenue at the inception of such agreement. Gaming revenues were down 34% during the first quarter and medical revenues were up 75%, resulting from license renewal with a certain medical customer. Gross profit was $5.1 million, compared to gross profit of $85.4 million in the first quarter of 2018. Turning now to our first quarter’s operating expenses. Excluding cost of revenues, total…

Thank you. [Operator Instructions] The first question will come from Tony Stoss with Craig-Hallum. Please go ahead with your question.

Hi, everybody, and congrats on getting the Samsung deal done. Ramzi, is there a way that you’re going to have to or is it going to be difficult for you to audit Samsung, since it seems like it’s a per-unit basis? Also, was there any upfront payment that we might see in the June quarter in the cash balance? And then lastly, you talked about driving for a profitable Immersion. What’s your estimate on revenue for break-even once you made these further cost cut moves? What’s the general range of revenue for you guys to break-even?

I don’t foresee any problems with – working with Samsung moving forward based on the structure of the deal and my history with Samsung. So I’m not that concerned. As far as – we’re not really putting out any revenue predictions beyond 2019 at this point. As far as back payment or settlement number, it is a modest amount. The architecture of this deal with Samsung has been focused on long-term value creation and the best way to do that is a quarterly – is basically a deal, where all royalties are recognized on a quarterly basis. So that is the bulk of the deal with Samsung. As far as profitability, we are focused – laser-sharp on this. It’s going to take both revenue and deals like Samsung and Sony, but more importantly focus on our cost basis and continue to look at our cost structure over the next 24 months. Some of it will take sometime to reduce, such as the patent portfolio. Even if we decide to cut today, it takes a little bit of while for the revenue – for the savings to take effect given the way the patent portfolio fees work out, as well as the prosecution works out. So it’s going to take a little bit of time, but we believe it is within line of sight.

Maybe as a follow-up, I’d love to hear – I guess, any initial information on your continued auto progress? I know you did quite well there and you announced another deal during the quarter? And then my last question, I’ll jump back in queue is, now you have Samsung done, I know the Chinese handset OEMs you’ve been having discussions with them, do you think this will help speed up an agreement with any one of those? Thanks.

The automotive market remains to be one of our largest growth and opportunities moving forward not only, because the market is nascent and starting to adopt haptics, but the ASPs, as you know, are quite high. So we continued to talk to large OEMs to Tier 1s, and not only on the patent licensing side, but we are ready to launch some of our reference designs and software, which will be accompanying the patent licensing team. So it will be a vertical sell over the next year or two. Now having said that, it is a slow-moving market. The cycle for automotive is slow, as you know. So we don’t foresee a big pop in the short-term, but we do see this as a sustained growth for us in the long-term in a market that’s going to yield a significant ROI. As far as the Chinese OEMs, I’m not sure I can speak directly to the effect of Samsung on China, but I can speak that the IC strategy is certainly one experiment for us to try to penetrate the Chinese OEM market. We do have Dongwoon and we have others lined up to be announced in – as soon as we sign them to try to get to the Chinese market using the IC strategy, where the IC is licensed with the intellectual property, but it’s still bit too early to tell today on how that’s going to be playing out.

Thanks, Ramzi.

Sure. Thanks.

Thank you for the question. The next question will come from Charlie Anderson with Dougherty & Company. Please go ahead with your question.

Yes. Thank you for taking my questions and my congrats on getting the deals done as well. Ramzi, some of your peers often talk about a royalty base based on the number of deals that they’ve signed, kind of roughly where their revenue run rate is. I wonder if you could speak to that. Obviously, there sounds like past sales are modest, but I imagine also there is the upside in here of units that haven’t shipped with your software yet. I wonder if you could maybe just speak to what is the revenue baseline here that we’re going to be talking about with these new deals in hand? And then sort of in addition to that, now that you have a lot – sort of a larger view of the market through this price discovery, do you have any updated views on the TAM for Immersion? And then I’ve got follow-up.

So, Charlie, I’ll take the royalty base question. We put out a range of 36 to 41, that’s revised upward from 24 to 30 from last February. But you can sort of think of that as the run rate going forward with the base business with Samsung overlaid on top of that for 2019. If you listen to my remarks, you would have heard that, we’re not expecting to see a large impact of the Sony agreement until 2020. So you sort of have to think about that going forward. TAM?

As far as the TAM is concerned, we don’t have specific numbers as of yet. I would like to wait until we roll out our strategy, as I mentioned in the remarks, that – something that will happen over the next 90 days as I fill in the executive seats for the open positions and would get in some new board members to oversee the new strategy. So when I do roll out the new strategy, I will be rolling out some TAM numbers and potential penetration for Immersion. Suffice it to say that just a high-level at this point, I can tell you that when the automotive market – it’s very early days. We still see a significant growth ahead of us. I would say, the mobile penetration is, we’re at maturity with Samsung behind us except for China that continues to be a challenge for us. And one way to penetrate China could be the IC strategy we discussed and another way would be to bring in new technology that is – that would tip companies over from being pure patent licensor – licensees to technology and patents. And that’s where I have seen potential penetration be more successful than just with a pure patent license. That’s going to take time though in China and I don’t have much progress to report to you on today.

Great. And then for follow-up, I know we have a history of doing deals with Samsung here at Immersion. Ramzi, this is your first large deal with them and also with Sony. It seems you’ve got a few big ones now under your belt. I’m just kind of curios philosophically, what you are trying to achieve with these deals, maybe different than the approach that we’ve seen in the past, any color on that would be helpful? Thanks.

Yes, for sure. I’ve done deals with both Sony and Samsung over the last two decades. So I’m quite familiar with the companies, as well as what makes sense for a licensing company. I can confidently say that both Sony and Samsung fit well within our best practices of per-unit loyalty or quarterly revenue recognition moving forward. That is the best of value that we can get for our shareholders in recognizing value, increasing over time and not be focused on deals where you have pops in single time – one-time recognition or back payments. Not only this, but we do believe that a technology partnerships with both companies can yield us great value, not only in the sense of getting our technologies in those products, but participate in the product road map discussions, which could then feed into our R&D efforts, which will then give values back to these companies. So looking at a long-term relationship in terms of joint technology partnership or bringing value in the form of technology and patent is what the focus here with both these companies, as well as other companies moving forward.

Great. Thanks so much.

Thank you. [Operator Instructions] The next question will come from Josh Nichols with B. Riley FBR. Please go ahead.

Yes, thanks for taking my question. I did want to ask, how should we think about the revenue cadences as far as Q2 versus the second-half, given that there was some payment for prior shipments for Samsung that I assume would be recognized entirely in 2Q?

Yes, Josh. The revenue for – well, so the Samsung agreement does have an undisclosed amount of back damages associated with it. We are still reviewing the revenue recognition under that portion of the agreement. But I believe that will result in a contra-expense rather than hit the revenue line. Going forward, I think, you can think about that we are still a little bit back-end loaded in terms of the revenue line – the royalty revenue line, as well as the license revenue line. We had indicated that in the last call and we are still forecasting that to be the case.

Thanks. And then as a follow-up, I did want to ask – I believe the company has used up all of its NOLs at this juncture. Is that correct marginally?

No, that is not correct.

Okay. So whenever you say that there’s only an anticipated cash tax of 400,000, the upward payment that you’re getting for the cash from Samsung is not going to be subject to a significant tax withholding?

No, it will not.

Okay. And then last question, I guess is good to hear that the company is being pretty proactive on the OpEx side and doing some pruning as well on the patent portfolio. Could you help frame a little bit for what you kind of maybe targeting as far as a run rate for OpEx or for G&A or amount of expenses that you think could be cut by, say, like the end of this year?

So we did mention on the call, we’re targeting between $55 million and $58 million for OpEx for the year. Still baked in that number is $10 million to $12 million in litigation expense, given that we would – did come up almost through trial with Samsung, so we had to anticipate that. And so we are expecting it to be down $2 million to $3 million from the prior year.

Great. Thank you.

Thank you. This concludes the question-and-answer session. I’ll now turn the call back to management for closing remarks.

Thanks, operator, and thank you all for joining us on this call today. I hope you can tell by my comments, I’m very enthusiastic about the increasing importance of tactile feedback technology into several important markets and our excellent position within the goal of growing the company. I look forward to having the opportunity to meet with many of you in the near future and thanks, again. Bye.

Thank you. Ladies and gentlemen, this concludes today’s events. You may now disconnect your lines.