Immersion - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, and welcome to the Immersion Corporation Q1 twenty twenty Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Aaron Ackerman. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us today on Immersion's first quarter twenty twenty 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 www.immersion.com. With me on today's call is Ramzi Haidamus, President and 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-nineteen 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 reduction, 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 nineteen 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 closed, 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 US Securities and Exchange Commission. The forward looking statements mentioned on this call reflect Immersion's beliefs and predictions as of today. Except as required by law, Immersion disclaims any obligation to update these forward looking statements as a result of financial, business or any other development 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, 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 Ramsey. Thanks, Aaron, and thanks everyone for joining us on the call today or listening via webcast. First, I'd like to say that our hearts go out to those who have been personally affected by COVID nineteen. At this time, maintaining the health and safety of our employees is paramount.

We have implemented a work from home policy for our employees worldwide and have suspended all travel. We are focused on enhancing productivity and work from home experiences by making certain lab and IT equipment accessible for home use and through connectivity enhancements to bolster our internal communications during this difficult time. I am pleased to report that Immersion's first quarter revenue grew 22% over the same quarter last year, while non GAAP operating expenses were down 40%. In addition, we continue to make strong progress in further optimizing Immersion's cost structure as part of our commitment to maximizing shareholder value. This includes identification of approximately $3,000,000 in additional savings in fiscal twenty twenty in areas including legal and litigation, travel and entertainment, and consulting and professional services.

We also continue to enhance shareholder value creation through our stock repurchase program. Since initiating buybacks in December, up until the close of market yesterday, we have repurchased close to 4,300,000.0 shares of common stock for an aggregate purchase of amount of approximately $26,000,000. We expect to continue to be active with regard to share buyback activity under the right conditions. Immersion's balance sheet remains strong, and we and we have approximately $7,100,000 remaining under our authorized repurchase program. We remain very confident in Immersion's strategy that are and are fortunate as a licensing company to have been able to maintain continuity in conducting our business despite the current environment.

We continue to lay the foundation for growth in several of our markets and see concrete signs that our strategy is working. First, as evident in this quarter's results, our mobility revenue positively reflects the addition of significant mobile OEM license agreement that materialized after the first quarter of last year. In auto, we recently expanded our product partnership with Alp Alpine. We're pleased that Alp Alpine took a software license to our active licensing technology for its touch feedback devices. Together, Immersion and Alp Alpine are developing solutions to deliver high quality, high fidelity, and quick to respond tactile effect for improved user experiences in automotive human machine interfaces.

Active sensing technology is an advancement beyond standard haptic software technology. It provides real time control over actuator vibrations enabling clean, crisp, and instant response to a user's interaction. It uses a robust algorithm to react to actuator's current state, making command decisions every sub millisecond to produce high fidelity haptic effect. As the first licensee of Emergent's active sensing technology, Apps outlined can provide advanced realistic touch feedback solutions to automotive HMI applications for buttons, dials, switches, and textures in suspended touch displays and services. We currently have over 10 tier one automotive supplier licensees.

Our existing licensees supply touchscreen, touchpad, button clusters, and related control interfaces to a range of OEMs for premium vehicle. To support growth, we will license additional tier one customers to expand the number of suppliers with haptic enabled solutions. We also are engaged with OEMs to demonstrate the value of haptics and influence their design decisions. We look forward to keeping you updated on how our partnership and activities are converting into additional design wins in the future. In gaming, we continue to be excited about the significant growth catalyst towards the end of this year with the anticipated launch of Sony's PlayStation five gaming console, where Emergent stands to benefit from Sony's license of our haptic technology for gaming and VR controllers.

We believe Sony's new controllers will catalyze increased market demand for advanced interactive haptic experiences, and this may lead to additional opportunities for immersion in the future. Lastly, as I mentioned on our call, during the first quarter, we were successful in forging a strategic commercial partnership with P Robotics, marking Immersion's foray into licensing our technology to the multibillion dollar global adult device market. This is just our first step towards monetizing this new market opportunity, and we look forward to seeing our efforts unfold over the coming months and years. As I said earlier, our management team is working collaboratively with our new board to optimize our new business and improve profitability to maximize value for shareholders. Until further notice, we do not intend to provide revenue guidance, and we are withdrawing prior guidance as we continue to move forward with these efforts.

Going forward, we expect to be profitable on a non GAAP basis for the fiscal year and intend to exit 2020 with an annual non GAAP operating expense run rate of approximately 21 to $23,000,000. I want to thank our employees for upholding our commitment to our customers and continuing to support our business initiatives while coping with the coronavirus pandemic. We remain confident in our strategy and are focused on executing across the opportunities to unlock Immersion's full profit and growth potential while delivering long term shareholder value. With that, I'll now turn the call over to Aaron for a review of our Q1 results before opening up the call to your questions. Thanks, Ramzi.

Let me begin by referring you to this afternoon's press release for information regarding our Q1 twenty twenty financial performance. Total revenue of $6,300,000 for Q1 twenty twenty was up 22% from total revenue of $5,100,000 in the same quarter last year. Revenue from per unit royalty arrangements was up approximately $1,600,000 or 48% compared with the prior year quarter, mainly driven by $2,500,000 in revenues recognized by mobile license fees signed in 2019 and partially offset by declines in reported royalty bearing shipments by automotive and gaming licensees. Revenue from fixed license fee arrangements was down 26% on a comparable basis, primarily due to a lump sum $500,000 license fee from one customer recognized in the first quarter of twenty nineteen. Recurring revenues represented 96% of revenues in Q1 twenty twenty versus 90% of revenue in the first quarter last year.

Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the first quarter of twenty twenty, a breakdown by line of business as a percentage of total revenues was 77% from mobility, 12% from automotive and 11% from gaming. Turning to operating expenses. GAAP operating expenses for the first quarter of twenty twenty were down 35% to $5,800,000 from the comparable period last year. The reduction in expenses for the quarter reflected the impact of $4,200,000 lower litigation costs, $1,700,000 lower patent maintenance and nonlitigation legal cost, as well as $1,400,000 lower stock based compensation expenses.

This was partially offset by $500,000 in restructuring cost related to the movement of administrative positions from San Jose to Montreal, and an incremental $800,000 of accelerated depreciation on leasehold improvements of our San Jose facility. Other income decreased by $800,000 versus q one two thousand nineteen, mainly due to unrealized foreign currency translation losses of $500,000 resulting from the impact of the weakening Korean won and Canadian dollar against the US dollar on certain balance sheet items, and $300,000 lower investment income due to lower yield and lower cash and short term investment balances in the first quarter of twenty twenty versus the same February. Looking at our net results, GAAP net loss for the first quarter of twenty twenty was $4,800,000 or 16¢ per share, a 54% improvement to the GAAP net loss of $11,000,000 or 35¢ per share in the same quarter of twenty nineteen. In addition to normal GAAP metrics, we use non GAAP net loss and non GAAP net 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 tax expense, stock based compensation, depreciation and restructuring expenses.

Non GAAP net loss in the first quarter was $2,600,000 or 8¢ per share, a 70% improvement over non GAAP net loss of $8,600,000 or 28¢ per share in the same period last year. Let's move on to the balance sheet. On 04/08/2020, we agreed to provide a provisional deposit to LGE of approximately $5,000,000 for withholding taxes LGE have to pay to the premium tax authorities on Immersion's behalf. The deposit will be recorded on our balance sheet under other assets, a long term asset in the second quarter of twenty twenty. As noted in our previous filing, we believe that there are valid defenses for the claims raised by the Korean tax authorities, and we are appealing these to the Korean courts.

Note that under our agreement with LGB, we will be reimbursed to the extent we prevail in the appeal in the Accrument Court, which we expect will more likely than not be the case. In the event that we do not ultimately prevail in our appeal in the Accrument Court, the deposit will be reported as additional income tax expense on our statement of operation in the period in which we do not ultimately prevail. Overall, our balance sheet remains strong with total cash and cash equivalents of $76,200,000 as of 03/31/2020. This is a $13,000,000 reduction from $89,500,000 as of 12/31/2019. The key driver of the cash reduction was $12,000,000 used in our stock repurchase program during the quarter.

Before we open up the call for questions, I'd like to note that the circumstances given circumstances, Ramsey 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 question and deliver answers in real time. We appreciate your patience. With that, I will turn the call over to the operator to start q and a. Operator?

Speaker 0

Thank you. If you would like to ask a question on today's call, please signal now by pressing star one on your telephone keypad. That's star one to ask a question. We will pause for one moment to allow everyone to signal. We can now take our first question from Derek Soderbergh from Dougherty and Company.

Please go ahead.

Speaker 1

Hi, everyone. Thanks for taking my questions. So given the substantial cuts to operating expenses, are there any strategies or goals that you guys laid out at last year's Analyst Day that will be any harder to achieve? And then I have a follow-up. Not at all.

Actually, the the this expense OpEx cutting plan has been in place for quite some time. And what has happened with the, you know, board changes, we pretty much accelerated a lot of the initiatives. These are initiatives that are, really in line with the strategy, but just are gonna be going on under much, significant cost reduction effort. For example, moving employees to Montreal, for the 35 to 40% savings, changing auditors, which which we may happen sooner than planned, and other very significant, changes that are gonna continue to pay off in the long term, all the while making sure that the strategy and as communicated at the shareholder day continue to be intact. Got it.

And then, you know, clearly, auto auto and mobile will be impacted by the pandemic. Are you seeing strength in gaming and then the pandemic the pandemic accelerated your prospects in the health market. K. I'm sorry. You caught up your your connection was a bit bad.

Could you please repeat the question? Yeah. So, really, auto and mobile are gonna be impacted by the pandemic. On the other side, you know, are you seeing strength in gaming? And then also the pandemic accelerating your prospects in the adult market.

So on the gaming side, there's a lot of excitement building on the new features set to launch with the PS five platform. It offers rich experiences leveraging haptics and controllers, and all the signals that Sony will plan to launch as planned and that there'll be uptick there. We're seeing the benefits of the shelter in place on software, on gaming software already, and we believe that there will continue to be a lot of stay at home activity that could benefit the hardware side as well. And so on gaming, we feel like we're well positioned. And as far as the adult market, our interaction with T robotics continues to be strong.

Our sales team is on daily communications with them, and, clearly, the market is growing significantly. So we are we're pretty much tracking plan in the gaming in the in the golf world right now. As far as the automotive is concerned, we have pretty much may met all our major milestones. We've signed up a lot of the tier ones that we plan to sign up in the year. We have been communicating with the OEMs, such as Audi, BMW, Mercedes, and the next step is to get the OEM more OEMs on board with increasing haptic adoption both within the high end as well as the mid tier.

We've hired a salesperson in Europe who will be engaged in both the tier ones and the OEMs to increase this adoption. So, again, if you take a look at internally at Immersion, we're tracking the plan, and we don't see any fundamental changes to demand on HAPPIC. Great. Thanks. Sure.

Speaker 0

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Press star one to ask a question. There are no further questions on today's conference. I would now like to conclude the call. Thank you for your participation.

You may now disconnect.