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Immersion Corp (IMMR) Q2 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
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Immersion Corp (NASDAQ: IMMR)
Q2 2019 Earnings Call
Aug. 01, 2019, 5:00 p.m. ET


  • Prepared Remarks

  • Questions and Answers

  • Call Participants

Prepared Remarks:


Good day, and welcome to the Immersion Corporation Q2 2019 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.

Jennifer Jarman -- Director

Thanks very much, Dan. Good afternoon, and thank you for joining us today on Immersion's Second 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 are Ramzi Haidamus, President and CEO; Len Wood, Interim CFO; and Ellen Finnerty, Interim VP of Finance.

During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future 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. 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 2018, 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 emergence, beliefs and predictions as of today, except as required by law, Immersion's disclaims any obligation 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.

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'll now turn the call over to Chief Executive Officer, Ramzi Haidamus. Ramzi?

Ramzi Haidamus -- President & Chief Executive Officer

Thank you, Jennifer, and thanks, everyone, for joining us on today's call or listening via webcast. Today marks a major milestone for Immersion as we enter a new period with no ongoing IP litigation for the first time in almost two decades. For '17 years, Immersion has been mired in constant litigation, covering mostly patent infringement cases, which have been costly, distracting to management and provided unpredictable value to our shareholders. While Immersion will enforce its right to protect its IP, we anticipate a period of reduced litigation as the value of our IP has been tested and proven through litigation, and by the fact that so many industry leaders are now licensed.

With our model at a lawsuit settled and behind us, Immersion's new executive team and management will focus on launching a new strategy to drive sustainable growth, profitability and long-term value for our shareholders. On today's call, I would like to reflect back on some of the progress we have achieved in the last two quarters. I will then share with you in detail our revenue and operating model for the future. And finally, I will touch on the fundamentals underlying the development of our go-forward strategy, which is well under way.

Our strategic framework and operating model will give you a sense of the company's direction and guidelines as we focus our efforts on reaching profitability and sustained growth, and we look forward to providing more details regarding our new strategy beginning next quarter. As you know, we continue to search for a permanent CFO. Meanwhile, we have relied on interim consultants to fill this role. I am pleased to announce that Len Wood, who has worked with us as our Interim Controller, has been appointed Interim CFO, by our Board. I am confident Len will support our needs during this period while we are completing our search.

I will now turn the call over to Len for a review of our Q2 financial results.

Leonard Wood -- Interim Chief Financial Officer and the Principal Financial & Accounting Officer

Thanks, Ramzi. Immersion's revenues for the second quarter were $8.7 million, up $2.6 million or 42% from revenues at $6.1 million in the year ago period. This increase primarily reflects lump sum fees related to new license agreements that we entered into in the second quarter of 2019.

Revenues from royalties and licenses in the second quarter of 2019 included variable royalties based on shipping volumes and per unit prices, totaling $4.4 million and fixed license fees, totaling $4.3 million. This compares to variable royalties of $4.1 million and fixed license fees of $1.9 million in the prior year period. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the second quarter of 2019, a breakdown by line of business as a percentage of total revenues was as follows: 51% from mobility, 13% from auto; and 36% from gaming.

Looking at year-over-year trends, mobility revenues were up 86% from the same quarter last year, primarily due to a license agreement entered into in the second quarter of 2019, which contains both lump sum and variable revenue components. Gaming revenues were up 89% during the second quarter, primarily due to a renewed license agreement entered into in the second quarter of 2019, which also contains both lump sum and variable revenue components. Automotive revenues were down 33%, primarily related to certain per unit royalty agreements entered in the last year's second quarter that contain minimum royalty provisions for which we recognize the whole set of minimum royalties as revenue at the inception of such agreements. Gross profit was $8.7 million compared with gross profit of $6.1 million in the second quarter of 2018.

Turning now to operating expenses, excluding cost of revenues. Total GAAP operating expenses were $17.9 million in the second quarter of 2019 compared with $14.3 million in the year ago period. This increase was primarily driven by higher-than-expected litigation and legal expenses. Looking at our net results, GAAP net loss for the second quarter of 2019 was $8.6 million or $0.27 per share compared with GAAP net loss of $7.8 million or $0.25 per share.

In the second quarter of 2018, in addition to normal GAAP metrics, we use non-GAAP net loss and non-GAAP loss per share to track our business performance. As a reminder, we define non-GAAP net loss as GAAP net loss adjusted to reflect cash, taxes, stock-based compensation and restructuring expenses. Non-GAAP net loss in the second quarter was $7.6 million or $0.24 per share compared with non-GAAP net loss of $5.4 million or $0.18 per share in the same period last year.

Turning to the balance sheet. Overall, our balance sheet remains strong with our total cash portfolio, including cash and short-term investments at $101.6 million as of June 30, 2019. As noted last quarter, in March this year, we received a determination from the council of International Court of Arbitration, where we were directed to reimburse Samsung, roughly $6.9 million, plus $0.9 million in court fees for withholding taxes at Samsung had paid to the Korean tax authorities on Immersion's behalf. We recorded the amount to be reimbursed on our balance sheet as both a long-term asset and the current liability and accounts payable. We paid the reimbursement during the second quarter.

Note that we do not expect this determination to have any significant impact on our tax provision, as we expect to be fully reimbursed if we prevail upon appeal with the Korea administrative court, which we expect we will more likely than not. Other than this item, our total cash portfolio used during the second quarter was $9.1 million, up from $7.3 million in the second quarter, primarily due to legal expenses incurred in reaching the renewed license agreements with Samsung and Sony.

Our expected 2019 revenue range remains between $36 million and $41 million and our anticipated bottom line non-GAAP net loss remains between $6 million and $13 million. From an OpEx standpoint, our expected GAAP operating expenses remain between $55 million and $58 million, which includes non [Indecipherable] based -- stock-based compensation expense of between $6 million and $7 million, resulting in non-GAAP operating expenses of between $48 million and $52 million, including these numbers are approximately $11 million in litigation expenses. Due to the net loss we are expecting to incur domestically, we are forecasting cash tax expense for the year to be $0.5 million or less.

With that, I will now turn the call back over to Ramzi.

Ramzi Haidamus -- President & Chief Executive Officer

Thanks, Len. Reflecting on my six months at Immersion, the transformation of the company has been steadfast and continues today. In just two quarters, we have hired a General Counsel and Senior Vice President of Licensing; the Vice President of Products and Marketing; a Senior Vice President of R&D; a Vice President of Worldwide Sales and a new Head of HR, all reporting directly to me, immersion's new world-class executive team is already on its way to creating a new strategy for growth and value creation for our shareholders.

During the same period, we settled two major lawsuits with Samsung and Motorola. Settlements of these lawsuits, which costs the company over $11 million in 2019 alone, will make a substantial contribution to our return to profitability based on cost savings and new streams of recurring royalty revenues. The last six months have also seen progress in our sales and business development efforts. In our gaming business, we announced an agreement last May with Sony Interactive Entertainment to license our haptics patent portfolio and technology for gaming and VR controllers. This agreement is based on variable royalties, and we anticipate generating revenue from this deal when Sony ships its next-generation console platform.

In our automotive business, earlier this year, we expanded our customer base by licensing Seoyon and Alpine Electronics for in-vehicle touch interfaces, such as touchscreens, pads and related panels. This past quarter, we also signed a new license with Continental to include access to our patented haptic technology for use in its Accelerator Force Feedback Pedals. In addition, we licensed Panasonic Avionics for in-flight entertainment and Konica Minolta for multifunction printers. These deals further demonstrate the value haptics provides to screen-based user interfaces being adopted broadly across various connected-device categories. The majority of these deals all executed over the past six months are based on more predictable, recurring royalty models that scale with device shipments.

I will now share with you the details of our go-forward operating model for both revenue and operating expenses, which will give you a line of sight to sustain profitability for Immersion. Starting with our revenue model, our revenues generally fall into one of two categories: One, fixed license fees. These are usually lump-sum settlements that cover back royalties, damages and initial license fees or release fees. These also include a time-based recurring fixed revenue component. Two, per unit royalties. These are generally determined by multiplying and agreed upon royalty rates per licensed products by the number of units shipped during the quarter and applying any volume discount, if and when applicable. The royalty rates varies based on the device type, features, volume and other factors and are generally lower for mobile products and higher for automotive products.

As I have indicated, over the last two quarters, our most-desired model and revenue mix is a high concentration of per unit royalties to ensure predictable, repeatable, high-quality revenue that grows with our customers, product sales and revenues, establishing win-win scenarios.

Additionally, per unit royalties allow a revenue recognition profile that reflects the true commercial value of our technologies and intellectual property on a quarterly basis as they are recognized the same quarter in which they are sold in the marketplace. While we strive to maximize our overall revenue base, our sales team will focus on maximizing the highest-quality revenue mix to support long-term predictable growth. And while Q2 of this year contains a higher proportion of fixed license fees, we expect the mix will shift toward ongoing and growing variable royalties, thereby maximizing long-term shareholder value.

Next, I would like to share with you in detail our OpEx structure and the metrics we'll be using to drive down our expenses to be in line with our desired company profile. As Len referenced earlier, on a non-GAAP basis, our forecasted expenses for 2019 are $48 million to $52 million, which include approximately $11 million of litigation fees. Today, we're setting an OpEx target of approximately $32 million on a non-GAAP basis for 2020. By setting and achieving this target in the near future, we will reach and maintain profitability for the long term. We will measure our progress targets -- we will measure our progress toward this target on a quarterly basis by focusing on four key metrics. One, efficient management of our patent portfolio. We incur ongoing expenses to file, prosecute and maintain patents. We see an opportunity to maintain a strong patent portfolio, but significantly reduced costs by being more selective and efficient. After careful consideration, we believe we can cut our annual patent prosecution costs by 50% from around $10 million to $5 million, while still ensuring our success in our target markets.

We also believe we can reduce our patent maintenance and annuities by 30% from around $1.3 million to $900,000. Additionally, by directing a world-class research team to focus their efforts on commercially viable markets, in line with our strategy, we can reduce the number of new patent applications and ensure costs are in line with our target patent expenses. Two, our real estate and employee footprint. We believe we can operate at a far more cost-efficient model by growing our presence and investments in our Montreal office. The area offers an abundance of top talent from which to bolster the high-quality team we already have in place. We believe our operating costs would be about 35% lower in Montreal in comparison to Silicon Valley. This is based on a combination of lower cost compensation and benefit structure, reduced employee turnover, lower competition for talent, less expensive real estate and Canadian R&D tax credits. While we do not contemplate a wholesale move to Montreal due to locally needed subject matter expertise, we will be diligent in optimizing our real estate footprint accordingly.

Three, our consulting and professional services were unusually high this year and partly related to the turnover in executive, management and our new strategic direction. These fees will drop significantly as our new employee base stabilizes and a new CFO joins Immersion. Our target is to reduce our consulting and professional services by 40% from $5.3 million to $3.2 million to achieve our overall yearly expense goal. And four, potential additional savings. With the future addition of our CFO, we will review opportunity for further reduction to operating expenses across the organization. We anticipate a ramp-down of expenses and notably, significantly lower litigation expenses in the second half of 2019. Excluding litigation, this will put us on a trajectory to reach our 2020 non-GAAP OpEx target run rate of $32 million, down from an estimated non-GAAP OpEx run rate of $41 million in 2019. We believe that our operating model and its anticipated savings can be carried forward as our business develops in the future.

Finally, I would like to share with you the strategic planning process that has begun this quarter under our new executive team. The goal of our strategic planning is to ensure that all of our resources are fully optimized and allocated to create long-term shareholder value. Our overall executive team brings over 150 years of technology and licensing experience from industry-leading companies such as Dolby Laboratories and ARM Holdings, and we are focused on delivering value in both patent and technology licensing.

On the path to create our growth strategy, we will use the following strategic guidelines to drive sustained profitability: One, reduced Immersion's non-GAAP OpEx to our $32 million target for 2020. Two, generates a compelling product and technology roadmap to support growing and recurring revenue, while optimizing Immersion's worldwide patent licensing business from current and new licensees. And three, communicate a capital allocation policy for the market, in line with our new strategy. These strategic imperatives will be instrumental in launching our long-term strategy, which we look forward to sharing with you next quarter.

I would like to close in saying that we are very pleased with the new Board of Directors we now have in place. We always appreciate the opportunity to communicate with the investment community and continue to engage with our shareholders on a regular basis. Along these lines, our goal is to further round out and enhance our Board by adding more direct representation.

With that, we'd like now to open up the call to questions. Operator?

Questions and Answers:


Thank you, sir. [Operator Instructions] And our first question comes from Charlie Anderson, Dougherty & Company. Please go ahead.

Charles Anderson -- Dougherty & Company -- Analyst

Yes, good afternoon, and thanks for taking my questions. And Ramzi, thanks for all the detail on OpEx and the strategy. So I wanted to start just maybe the outlook for the rest of the year that you guys are sort of implying in the guidance at the midpoint is a little bit more than $12 million a quarter in revenue. That's obviously a step-up from where we were in the first half. I wonder maybe if you were able to articulate kind of roughly how much of that is of a recurring nature versus some of this episodic or lump sum nature. So we just sort of establish what is the kind of the run rate of the business. And then on OpEx, sort of targeting that $8 million a quarter run rate next year, I wonder if you achieve that by Q4 this year? Does that happen gradually over 2020 such that you actually exit the year a lower number? Any color on that would be helpful. Thanks.

Ramzi Haidamus -- President & Chief Executive Officer

Sure. Thanks, Charlie. Yes, let me take the OpEx question, then I'll turn it over to Len for the revenue piece. We foresee that the OpEx will be a linear drop. The work has already started. We don't foresee that hitting that $32 million run rate until 2020. But the work, as I said, already started, because the bulk of the work pertains to patent prosecution, stopping, applications and annuity that just takes -- things taking effort on our side, the team is already at work patent by patent to visit all 3,600 patents. So as we continue down that path, the law firms that we work with will be putting down their pens and that savings will basically be materialized over time and over that period.

The work toward shifting toward Montreal has already started. We have several open positions that have now been located in Montreal, so we're on our way there. And the fees that pertains are mostly professional consulting, there's a lot of that has to do with our search firms. As you know, we already have a team in place. The only search we have going on is the CFO, so it's a big chunk of it. Once that's behind us, we'll be on our way. So as you can see most of it is going to be linear over the next two quarters, but I don't foresee a full $32 million until 2020.

As far as the revenue, I'll turn it over to Len.

Leonard Wood -- Interim Chief Financial Officer and the Principal Financial & Accounting Officer

Great. Thank you, Ramzi. Thanks, Charlie, for your question. On modeling revenue, for the majority of our revenue, which is structured on a quarterly basis with Samsung and Motorola, are now part of. We expect it to be heavily back-end loaded toward Q3 and Q4, maintaining the upwardly revised revenue guidance provided last quarter. As far as the mix of the revenue, we're going to be more highly weighted toward the per unit revenue in the mix than in the first half of the year. Motorola will be a lump sum payment in Q3, but we don't have further information on that. Thank you.

Charles Anderson -- Dougherty & Company -- Analyst

Okay. Great. And then for my follow-up, we did see a 13D filed after the close of the market today from a Acacia Research Corporation. I just want to see if you guys want to make any comments on that. Thanks.

Ramzi Haidamus -- President & Chief Executive Officer

Sorry, come again?

Charles Anderson -- Dougherty & Company -- Analyst

Acacia Research, 5%.

Ramzi Haidamus -- President & Chief Executive Officer

Yes, we don't usually comment on communications with our shareholder community, but I will highlight that we are, indeed, in constant communication with them. So -- but I don't really have much to add to that.

Charles Anderson -- Dougherty & Company -- Analyst

Okay. Thanks so much guys.

Ramzi Haidamus -- President & Chief Executive Officer

Thanks, Charlie. Thank you.


[Operator Instructions] And our next question comes from Tony Stoss, Craig-Hallum. Please go ahead.

Tony Stoss -- Craig-Hallum -- Analyst

Hey, guys. Thanks for taking my questions. First, just on the automotive front, I'm curious what traction you're seeing as far as CapEx penetration into automotive OEMs and different models? And would you say that the number of models featuring haptics is up materially year-over-year or flat? Just curious what you can say.

Ramzi Haidamus -- President & Chief Executive Officer

Sure. I mean -- the trend in haptic inclusion in automotive has been increasing right now. We are about mid-single-digit penetration into the market. It's about 100 million cars out there shipping, and with that market share, our revenue of low single-digit dollars reflect that penetration. So we're pretty steady in terms of attach rate and all of the automotive companies that have installed haptics. So feeling pretty good. So now we're pretty much riding along and observing the growth of that single digit to grow to higher, and we've signed up the majority of the companies providing haptic-enabled pads and display. So we're in a good position. And on top of that, I'd like to add that our R&D team is also working on providing technology into that market. So with that, we're feeling pretty good about our position.

Tony Stoss -- Craig-Hallum -- Analyst

Okay. Would you say that the majority of the haptics are still in kind of the high-end part of the market? Or have they started to trickle down into more of the mid-tier type models?

Ramzi Haidamus -- President & Chief Executive Officer

Yes, I'd say it's still in the high end, but the units -- the demo units we've been seeing as well as the components that I provided are dropping in price. So we do foresee a higher penetration in the mid-tier and later on in lower tiers.

Tony Stoss -- Craig-Hallum -- Analyst

Great. And then I'm just curious, what magnitude of growth do you expect in gaming from the new console launches, kind of coming up in the next few years, Sony, Nintendo and others? And then do you expect Sony to be the majority of any potential gaming-related growth? Or do you anticipate other customers possibly contributing to gaming growth as well?

Ramzi Haidamus -- President & Chief Executive Officer

The majority of the short-term growth or near-term growth is going to be from Sony, since we have 100% attach rate to all the controllers. So that's already in place, as you know. As far as additional revenue, there could be some potential accessories that will right along the launch of that console. In addition to this, in terms of mid to long term, of course, VR is still up ahead, and we still have some large companies that are not licensed, and we look forward to working with them on both technology and patent licensing.

Tony Stoss -- Craig-Hallum -- Analyst

Alright. Great. That is it from me. Thanks, guys.

Ramzi Haidamus -- President & Chief Executive Officer

Thank you.


Thank you. And now there are no more questions in the queue. I will now turn it back over to management for closing remarks.

Ramzi Haidamus -- President & Chief Executive Officer

Thanks, operator. And thank you all for joining us on this call today. I look forward to updating you again next quarter. Goodbye.


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

Duration: 27 minutes

Call participants:

Jennifer Jarman -- Director

Ramzi Haidamus -- President & Chief Executive Officer

Leonard Wood -- Interim Chief Financial Officer and the Principal Financial & Accounting Officer

Charles Anderson -- Dougherty & Company -- Analyst

Tony Stoss -- Craig-Hallum -- Analyst

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