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Edited Transcript of IMMR.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

·18 min read

Q3 2020 Immersion Corp Earnings Call SAN JOSE Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Immersion Corp earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aaron Akerman Immersion Corporation - CFO & Treasurer * Jared Smith Immersion Corporation - Interim CEO & VP of Worldwide Sales ================================================================================ Conference Call Participants ================================================================================ * Anthony Joseph Stoss Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst * Charles Lowell Anderson Colliers Securities LLC, Research Division - VP & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Immersion Corporation Q3 2020 Earnings Call. This conference is being recorded. At this time, I would like to hand the conference over to Mr. Aaron Akerman. Please go ahead, sir. -------------------------------------------------------------------------------- Aaron Akerman, Immersion Corporation - CFO & Treasurer [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us today on Immersion's Third Quarter 2020 Conference Call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of our website at ir.immersion.com. With me on today's call is Jared Smith, our new Interim CEO. During this call, we may make forward-looking statements, which may include any expectations, projections or other characterizations of future events or circumstances and include statements regarding the impact of COVID-19 on our business and the business of our customers and suppliers as well as on the economy in general and also include projected financial results or operating metrics, business strategies, litigation or absence of litigation, anticipated future products, future expense reductions, anticipated tax expenses, anticipated market demand or opportunities, our operating model and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions, especially in light of the ongoing adverse effects of the COVID-19 global pandemic. Many of these risks and uncertainties are beyond the control of Immersion. For a more detailed discussion of these factors and other factors that could cause actual results to vary materially, interested parties should review the risk factors listed in the press release we issued today after market close, Immersion's annual report on Form 10-K for 2019 and its most recent quarterly report on Form 10-Q, which are on file with the U.S. Securities and Exchange Commission. The forward-looking statements mentioned on this call reflect Immersion's beliefs and projections as of today. Except as required by law, Immersion does not intend to update these forward-looking statements as a result of financial, business or any other developments occurring after the date of this release or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future, except as required by law. 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'll turn the call over to Jared. -------------------------------------------------------------------------------- Jared Smith, Immersion Corporation - Interim CEO & VP of Worldwide Sales [3] -------------------------------------------------------------------------------- Thanks, Aaron, and thanks, everyone, for joining us on the call today or listening via webcast. As we announced earlier today, Ramzi Haidamus has left Immersion, and I have been appointed as Interim CEO. I'm excited to take on this role, and I thank the Board of Directors for their support and confidence during this important transition for the company. I joined Immersion in June of 2019 as Vice President of Worldwide Sales because I recognize Immersion's central role in the development of haptic technologies and the adoption of these technologies across diverse markets. Haptic feedback is becoming essential to our interaction with the digital world, and its adoption is set to grow strongly in the coming years. Immersion's innovations, such as the adaptive trigger in the Sony PlayStation 5 dual sense controller, which we will discuss here, demonstrate how Immersion continues to enhance the haptic experience. Innovations like this and our active sensing technology are essential to growing our revenue in our target markets. We have done a lot of hard work this year in optimizing our operating structure, and my focus going forward will be on maintaining its operational discipline while driving revenue growth in the coming quarters as well as longer term through increased adoption of our innovations and attracting new customers and partners to the Immersion ecosystem. We are pleased to share our strong financial performance in the third quarter, during which we were profitable on both a GAAP and non-GAAP basis and generated positive free cash flow. With the improvements in our operating model, we expect to grow our profitability and free cash flow in the coming quarters. Next, I'd like to provide an update on our progress in the automotive, mobile and gaming market segments. In automotive, we are seeing signs of market recovery from COVID-19. This is reflected in strong royalty reports from our Tier 1 licensees and an increased level of customer and OEM engagements on new opportunities throughout the quarter. We're pleased to share that additional vehicle designs, including the forthcoming Jeep Wagoneer, will feature haptic interfaces. As we highlighted last quarter, increased automotive OEM adoption of haptic systems delivers revenue growth from our existing licensee base, both in the near and the long term. We continue to invest in product and technology innovation for automotives. In Q3, we developed an updated touchscreen reference solution, utilizing our active sensing technology firmware and automotive-grade components in collaboration with our partners, DataModul, Microchip Technology, TDK and Boreas. Our solutions are designed to make it easier for Tier 1s to adopt advanced haptics and improve system performance. We're also seeing signs of recovery in the mobile market and believe the worst impact of COVID on this market is now behind us. Our revenue continues to track our expectations. In Q3, we executed a multiyear renewal with LG Electronics for continued use of our TouchSense software and haptic technology in its mobile devices. We also continue to address the China market through our China partner program and continue to see revenue growth this quarter. In games, we remain excited about the PlayStation 5 launch on November 12. As previously announced, Sony Interactive Entertainment has a license and the PlayStation 5 dual sense controllers utilize Immersion technology. Immersion collects a royalty from each controller, and we expect more than 1 controller will ship per console over time to support multiplayer gaming and to replace worn-out controllers. The dual sense controllers are already available at retail ahead of the PlayStation 5 console launch. Sony is prominently highlighting the dual sense with haptic feedback capabilities and its dynamic adaptive triggers. These features deliver a more immersive experience that open up new creative gameplay possibilities. Consumers will be able to experience these new capabilities in a variety of PlayStation 5 titles. Marvel's Spider-Man will let players feel webs on their fingertips with the adaptive triggers. Gran Turismo 7, a racing simulator, will signal break and accelerator pedal weight and dynamics in the adaptive triggers. In NBA 2K21, players will feel increasing resistance on the triggers as their basketball player fatigues. These are but a few of the many new experiences made possible through advanced haptics. The haptic capability in the dual sense controllers are receiving rave reviews from the media outlets. Tom Warren from The Verge, a popular technology news website, stated he, "was blown away by the haptic feedback and adaptive triggers." Positive developer reception and consumer excitement for the PlayStation 5 reinforces our belief that the gaming and VR industry at large will continue to seek innovative haptic technology. In Q3, [Guimo] Corporation, a designer of interactive entertainment hardware and accessories, renewed its license with Immersion for use of haptic technology in its gaming peripherals and products under the [subs master] brand. While the terms of the license are confidential, it is a multiyear term and is based on typical Immersion per unit royalty rates. Guimo is an innovator in gamepads and specialized controllers, which is force feedback steering wheels. We're excited to renew our commercial partnership and look forward to continued collaboration in bringing haptic gaming products to market. Finally, I'd like to update you on progress in our efforts to the development of industry standards. We recently presented additional proposals and information at the MPEG 132 meeting in October. We move to the next stage of the process to establish haptics as a first order media type. Anders will support continued growth for Immersion through expanded licensing opportunities of our patents, as well as implementation in our software products. In summary, I'm pleased to share that we're already seeing signs of recovery from COVID across our business. We are excited about our opportunities in automotive, mobile, gaming and development of industry standards. We are proud to have achieved profitability in the third quarter and look forward to continued growth and profitability and cash flow in the coming quarters. With that, I'll now turn the call over to Aaron for a review of our Q3 results before opening up the call to your questions. -------------------------------------------------------------------------------- Aaron Akerman, Immersion Corporation - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q3 2020 financial performance. Total revenue of $7.6 million for Q3 2020 was down 29% from total revenue of $10.6 million in the same quarter last year. Revenue from per unit royalty arrangements was down approximately $0.1 million or 2% compared with the prior year quarter. Revenue from fixed license fee arrangements was down 70% on a comparable basis, primarily due to a $2.9 million fixed fee from a mobility customer, which was recognized in the third quarter of 2019. Recurring revenues represented 100% of revenues in Q3 2020 versus 73% of revenues in the third quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the third quarter of 2020, a breakdown by line of business as a percentage of total revenues was as follows: 74% from mobility, 14% from gaming 12% from automotive. Gross profit was $7.6 million compared to gross profit of $10.6 million in the same quarter of 2019. Turning to operating expenses. GAAP operating expenses of $5 million for the third quarter were down 58% or $6.9 million from the comparable period last year. The reduction in expenses for the quarter reflected our disciplined focus on cost through our various cost-reduction initiatives, which resulted in $2.7 million lower litigation, patent-related and general legal costs; $1.5 million lower salaries and benefits expenses; as well as $0.8 million lower professional service costs in the quarter. Looking at our net results. GAAP net income for the third quarter of 2020 was $2.9 million or $0.11 per share compared to GAAP net loss of $1.4 million or $0.04 per share in the same quarter of 2019. In addition to GAAP metrics, we use non-GAAP net income loss and non-GAAP net income loss per share to track our business performance. As a reminder, we define non-GAAP net income loss as GAAP net income loss adjusted to reflect cash tax expense, less stock-based compensation, depreciation and restructuring expenses. On a non-GAAP basis, we had net income of $4.1 million or $0.15 per share in the third quarter compared to non-GAAP net income of $0.2 million or $0.01 per share in the same period last year. As Jared pointed out, we are seeing the signs of recovery across all of our markets, and our current expectations for the fourth quarter surpassed the expectations that we had prior to the COVID-19 pandemic. From a profitability standpoint, this was our best quarterly performance in the last 2.5 years, and we expect to see continued improvement in our profitability on both a GAAP and non-GAAP basis in the coming quarters. Let's move to the balance sheet. Overall, our balance sheet remains strong. We generated $1.9 million of positive cash flow in the third quarter, which increased our cash and cash equivalents balance of -- to $56 million as of September 30, 2020. For the 9 months ended September 30, cash and cash equivalents declined by $33.5 million, primarily due to the completion of our share buyback program under which we used $30.6 million to repurchase 4.9 million shares in the first half of 2020 as well as the provisional deposit of approximately $5 million dispersed to LGE in the second quarter of 2020. But withholding taxes, LGE had to pay for the Permian taxabilities on Immersion's behalf. The next hearings for both LGE and Samsung cases are scheduled for mid-November. We expect to see increasing positive cash flow generation in the coming quarters. Before we open up the call for questions, I'd like to note that given the circumstances, Jared and I and the support team are all in separate locations. So please bear with us as we take a little extra time to process your questions and deliver answers in real time. We appreciate your patience. With that, I will turn the call over to the operator to start Q&A. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll take our first question today from Charlie Anderson, Colliers Securities. -------------------------------------------------------------------------------- Charles Lowell Anderson, Colliers Securities LLC, Research Division - VP & Senior Research Analyst [2] -------------------------------------------------------------------------------- It's great to see a bit of a rebound share on some of these end markets. First question is on OpEx. So you outperformed, I think, the run rate you intended then the year was here in Q3, but you're still talking about ending the year. So was anything sort of unique to Q3 to drive it lower? And just sort of curious how that relates to OpEx going forward. And I've got a follow-up. -------------------------------------------------------------------------------- Aaron Akerman, Immersion Corporation - CFO & Treasurer [3] -------------------------------------------------------------------------------- Okay. So I think I understood your question to be what drove our OpEx lower in Q3 versus Q2, and that was really a number of things. We completed our transition to our Montréal team in Q3. So that drove both salaries and consulting fees lower. We sublet our San Jose facility late in Q2, so in Q3, we had the full benefit of that. And we continued to optimize our patent and legal expenses and our patent portfolio and natural OpEx down in the quarter as well. With respect to our outlook, we have continued to maintain the guidance of $17 million to $19 million. And that leaves some room to add some customer engagement activities, marketing and some travel to customers, things of that nature, although we will continue to maintain strict financial discipline and keep our focus on the bottom line. -------------------------------------------------------------------------------- Charles Lowell Anderson, Colliers Securities LLC, Research Division - VP & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And then a two-part question for me on the end markets. So first, on automotive, it's been interesting to see some design wins you guys have highlighted the last 2 quarters, seemingly more in the mid-range than the luxury. Just sort of curious what's going on there. And do you feel like there's more momentum behind these first 2 that you talked about in the pipeline? And as it relates to gaming, it was interesting to see the result you had in the ending of the quarter. I think it was higher than either of the quarters you had in the back half of last year. So curious what was going on there. And I'm mostly curious if just kind of a halo effect coming down from dual sense in terms of customer conversations you're having and potential other use cases out there. -------------------------------------------------------------------------------- Jared Smith, Immersion Corporation - Interim CEO & VP of Worldwide Sales [5] -------------------------------------------------------------------------------- So this is Jared. In regards to your question on automotive, yes, what we're seeing is that since there's been some solid high-performance implementations of haptics in automotive for some years now for -- and we have more Tier 1s that are shipping that, we're seeing that there's good adoption being driven at the OEMs because -- well, first of all, we're selling it to them. But I mean, selling from the standpoint of promoting it to the OEMS, even though our licensees are to tiers. And the tiers are getting better at providing high-performance solutions. So as consumers get more used to haptics in the auto, that drives the OEM, and this is what they are telling us that they see that's something that they can push down like they do a lot of features, push down into the fit tier. And so we continue -- we expect to continue to see that type of adoption. In gaming, yes, there's a lot of interactive effects, but it's also just generally as we pull -- as the economy recovers from COVID, we're seeing some growth there, so it's a mix year of effect. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Next, we'll go to Anthony Stoss, Craig-Hallum. -------------------------------------------------------------------------------- Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [7] -------------------------------------------------------------------------------- A couple of things. I'm curious, Ramzi had put forth a full year guide. There was something in the press release. Anything you can share on your expectations for the December quarter? I know it's going to be tricky to guesstimate the number of PS5 royalties that would be owed to you in the December quarter. I'm just curious on your thoughts on not having a guide. And then, Jared, maybe if you can expand upon your plan in terms of the change of strategy, how it's different from the prior management team and what your thoughts are on different end markets that either you're no longer going to go after or new ones that you think you're going to go after. -------------------------------------------------------------------------------- Aaron Akerman, Immersion Corporation - CFO & Treasurer [8] -------------------------------------------------------------------------------- So I'll make the first comment on Q4. So we're not issuing any explicit guidance, although we have said in our comments earlier today, we do expect growth in revenues and growth in bottom line, profitability on both a non-GAAP and GAAP basis, as well as growth in positive cash flow. So we're looking forward to Q4. And as I also said earlier, we are expecting Q4 to be better than we expected it to be before the pandemic hit. -------------------------------------------------------------------------------- Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [9] -------------------------------------------------------------------------------- Okay, and I'll follow-up on your -- -------------------------------------------------------------------------------- Aaron Akerman, Immersion Corporation - CFO & Treasurer [10] -------------------------------------------------------------------------------- Go ahead. -------------------------------------------------------------------------------- Jared Smith, Immersion Corporation - Interim CEO & VP of Worldwide Sales [11] -------------------------------------------------------------------------------- Regarding strategy, so again, very proud and honored to be appointed as Interim CEO. And I have come -- I come from the management team, so already part of the company. I am not going to be driving the company in a different direction strategically, particularly on an interim basis. We have a really professional and -- the management team that works really well together. So we're going to continue to execute on the strategy that we have. And then in regards to end markets, we're going to continue to focus on automotive and gaming and mobile, our core markets. We're doing -- most of our technology development will be in automotive and gaming. And then we're looking at things that we potentially do in mobile. Other markets beyond that, we'll look at from more of an opportunistic basis, but we're going to continue to focus on those 3 core markets. -------------------------------------------------------------------------------- Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [12] -------------------------------------------------------------------------------- Yes. Just philosophically, do you think you're more apt to go the same route you guys are approaching in China where you trying to have distributors and other partners go after the China mobile market? I mean do you think that's really an untapped other verticals that are out there that you guys can go after in that same way that's on the cheap, if you will? -------------------------------------------------------------------------------- Jared Smith, Immersion Corporation - Interim CEO & VP of Worldwide Sales [13] -------------------------------------------------------------------------------- So currently, that is our strategy. But I've been very close to this, obviously, from -- in my sales role. And it's something that we continue to evaluate every quarter to see if there's other ways we can approach it. So I consider that to be always under review and dynamic, but the China strategy so far is, as we said, we saw continued revenue growth, but we always want to keep our options open in terms of other paths we can take in terms of serving that market. And so it's something that, as I said, we're focusing on China right now, but we'll continue to look at that. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- At this time, there are no further questions. I'll hand the conference back to Mr. Jared Smith for any additional or closing remarks. -------------------------------------------------------------------------------- Jared Smith, Immersion Corporation - Interim CEO & VP of Worldwide Sales [15] -------------------------------------------------------------------------------- Thank you, operator, and thank you to all for joining us on the call today. As I noted earlier, I'm very excited for the opportunity to be Immersion's interim CEO. I believe that we're in a great position to drive adoption of haptics in our core markets and continue to grow the company. We look forward to sharing updates on this effort in future calls. Thank you, and goodbye. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And everyone, that does conclude today's conference. Thank you all for your participation today.