Immersion - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, and welcome to the Immersion Corporation Q2 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, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us today on Immersion's second 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 ir.immersion.com. With me on today's call is Ramzi Haimas, 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 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-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 close, Immersion's annual report on Form 10 ks for 2019 and its most recent quarterly reports 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 beliefs and predictions 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 Ramzi. Thanks, Anne, and thanks, everyone, for joining us on the call today or listening via webcast.

I'm excited about the progress we've made executing our strategy to deliver new product and technology, lower operating expenses, lead development of industry standards and achieve sustained profitability. This quarter, we significantly improved our operating model and implemented further cost reductions to align with the current COVID-nineteen business environment. Immersion, like most companies, has been negatively impacted by COVID-nineteen, resulting in revenue of $5,700,000 for the quarter, which was down 35% from the total revenue of $8,700,000 in the same quarter last year. This was primarily driven by a decline in fixed fee revenue. I'm pleased to note that recurring revenue, which we have as a strategic objective to grow, was relatively stable year over year.

As I'll discuss this further, we are well positioned for growth as the economy recovers. We are confident in our future as demonstrated by over $30,000,000 of share repurchases this year. We've also continued to make strong progress towards improving our operational efficiency and reducing our operating expenses. We spent the past year working toward these objectives by more efficiently managing our patent portfolio, reducing litigation expenses, shifting resources to Montreal, where we have lower personnel expenses, exiting our San Jose facility and reducing other costs such as professional services. We remain very disciplined with expense management through the current economic environment and expect to achieve additional reductions in the second half of this year.

As part of this initiative, we continue to evaluate our investment decisions with the goal of aligning resources to the best opportunities and driving efficiencies in all functions. Our results in the second quarter demonstrate progress against these objectives. During the quarter, compared to the same period last year, we achieved an $8,100,000 improvement in operating income, an $8,200,000 improvement in non GAAP income and a total reduction of $11,400,000 in non GAAP operating expenses. We continue to believe we can reduce our total annualized operating expenses in line with our strategic initiatives and are making significant progress towards our goal of sustained profitability and generating meaningful free cash flow. In conflict with our focus on generating profit, free cash flow and maximizing shareholder value, Emergent's Board of Directors has recently appointed Eric Zener as Executive Chairman.

This change brings direct shareholder representation to the role. Sharon Holt, our previous Chairman, will continue to serve on our Board, and I would like to thank her for her many contributions and leadership over the past few years. Next, I'd like to provide an update of our progress in the automotive, mobile and gaming market segments. COVID-nineteen is impacting the automotive market, resulting in reduced vehicle shipments and activity in the near term. We expect, however, the market will gradually recover after 2020 and remain confident with our investment in automotive.

Despite the current environment, our new product strategy is resulting in stronger customer engagement with product and design teams who lead technology decisions on interfaces throughout the vehicle. We're building greater awareness of the value of haptics as well as emerging solutions. Last quarter, for example, we highlighted the adoption of emerging technology and software by Alps Alpine, a leading Tier one automotive supplier. We also highlighted the importance of our engagement with OEMs to inspire their design, generate demand for haptic systems from our Tier one licensees. This quarter, I'm pleased to share that Nissan recently announced its new Aria EV crossover vehicle with integrated haptic controls.

One of our existing licensed Tier one suppliers is providing the haptic systems for this vehicle, and therefore Immersion will receive royalties in the future from systems from the Nissan Aria. This illustrates our opportunity to grow revenue from existing automotive licensees as well as the proliferation of haptics beyond luxury vehicles and into the mid tier brands. The mobile market has also been negatively impacted by COVID-nineteen, so we believe it will undergo a recovery in the quarters ahead. As Samsung stated in its recent earnings announcement, it expects a gradual recovery in the demand for mobile devices in the second half of twenty twenty. Our revenue this quarter was in line with our expectations, and we expect growth in the second half of the year.

We continue to work with our channel partners to address the China market, and our revenue from this program has been stable quarter over quarter. The games market is providing more resilience to COVID-nineteen as the stay at home effect opens up more time and flexibility for gaming. We continue to anticipate the upcoming release of the Sony PlayStation five this holiday season and do not believe COVID-nineteen will have a materially negative impact on unit shipment. As previously announced, Sony Interactive Entertainment has a license, and the PlayStation five's dual sense controllers utilize Immersion technology. Immersion collects a royalty from each controller, and we expect more than one controller will ship per console over time to support multiplayer gaming and to replace Warnock controllers.

The haptics capabilities in the DualSense controller are getting rave reviews from developers and others who had early access. The creative director of Godfall, an upcoming game on the PlayStation five, recently called out the DualSense's advanced haptics as a particularly exciting feature and noted that it enables games to, for the first time, deliver sensations of weapons hitting other weapons and surface materials. This validates the value of our technology and reinforces our belief that the PlayStation five will catalyze other gaming and VR companies to pursue more advanced haptic capabilities in new products. Our continued innovation in VR was also recognized in the issuance of a new patent titled Haptic Effect Generation for Space Defendant Content, which covers methods and systems for authoring and rendering haptic haptic effects in video content such as three sixty degree, three d, and VR video. We are proud that our team continues to lead in innovation in this exciting field.

I also want to touch on our progress leading to the creation of haptic technology standards. Standards will improve interoperability between haptic content and devices, enabling broader proliferation and growth haptic across multiple markets, including mobile, gaming and VR. We believe standards can support continued growth for Immersion through expanded licensing opportunities of our patents as well as implementations on our software products. In Q2, Emergent submitted sector proposals to the Advanced Television Systems Committee, known as ATSC, and the Moving Pictures Experts Group, known as MPEG. Both ATSC and MPEG are influential standards development organizations that define media creation, delivery, and playback format across the consumer electronics ecosystem.

Our proposals specify the protocols and procedures needed to incorporate haptics into broadcast and online distributed to a range of devices, including smartphones and tablets. Our proposals are designed to deliver an optimal user interface based on the content, device type and the viewer's personal preferences. We're excited that our proposals have generated initial support and have passed the first phases towards standardization in both ATSC and MPEG. In addition, our newly formed Haptic Industry Forum designed to bring together leaders across the ecosystem now includes about 50 participants representing dozens of leading technology companies. The overwhelming support we've seen in Q2 validates industry interest and demand for haptics technology standards and our opportunity to lead these efforts.

In summary, while Immersion, like others, faced challenges navigating through an uncertain environment due to COVID-nineteen, I'm excited and encouraged by the progress we've made to execute our strategy and improve our financial performance. And with that, I'll now turn the call over to Aaron for a review of our Q2 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 Q2 twenty twenty financial performance. Total revenue of $5,700,000 for the quarter was down 35% from total revenue of $8,700,000 in the second quarter last year.

Revenue from per unit royalty arrangements was down approximately $100,000 or 3% compared with the prior year quarter. Revenue from fixed license fee arrangements was down 70% on a comparable basis, primarily due to $3,000,000 of onetime license fees from two customers in mobility and gaming recognized in the second quarter of twenty nineteen. Recurring revenues represented 98% of revenues in the second quarter versus 65% of revenues in the second quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the second quarter, a breakdown by line of business as a percentage of total revenues was as follows: 79% from Mobility, 10% from Gaming, 8% from Automotive and 3% from Others.

Gross profit was $5,600,000 compared to gross profit of $8,700,000 in the same quarter of 2019. Turning to operating expenses. GAAP operating expenses of $6,700,000 for the second quarter were down 63% or $11,200,000 from the comparable period last year. The reduction in expenses for the quarter reflected our disciplined focus on costs through our various cost reduction initiatives, which resulted in $8,200,000 of lower litigation and patents related costs, dollars 1,000,000 lower professional service costs as well as $1,300,000 lower salaries and benefits expenses in the quarter. With our continued focus on managing our cost structure for these difficult times, we expect to report further reductions in quarterly OpEx from this level in the coming quarters.

Looking at our net results. GAAP net loss for the second quarter was $700,000 or $03 per share compared to GAAP net loss of $8,600,000 or $0.27 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 expense. On a non GAAP basis, we had positive net income of $800,000 or $03 per share in the second quarter compared to non GAAP net loss of $7,400,000 or $0.23 per share in the same period last year.

We expect to see continued improvement in our profitability on a non GAAP basis in the coming quarter. Let's move to the balance sheet. Overall, our balance sheet remains strong with total cash and cash equivalents of $54,100,000 as of June 30, a $35,400,000 reduction from the $89,500,000 as of December 3139. One key driver of the cash reduction was the completion of our share buyback program under which we used $30,600,000 to repurchase 4,900,000.0 shares in the six months ended June 30. Secondly, as mentioned on last quarter's earnings call, on April 8, we made a provisional deposit to LGE of approximately $5,000,000 of withholding taxes LGE had to pay to the Korean tax authorities on Immersion's behalf.

As noted in our previous filings, we believe that there are valid offenses to the claims raised by the Korean tax authorities in both the LGE and Samsung cases, and we are appealing these in the Korean court. On July 16, the Korea Administrative Court issued its ruling in which it ruled that the withholding taxes and penalties, which were imposed by the Korean tax authorities in the Samsung case should be canceled entirely with some of our litigation costs to be borne by the Korean tax authorities. That said, on August 3, the Korean tax authorities have formally indicated their intention to appeal such ruling to the Korea High Court. Excluding the impact of the stock buyback program and the provisional LG deposit, we generated positive cash flow from operations in the second quarter of twenty twenty and expect to continue to generate positive free cash flow in the coming quarters despite the tough business environment. Due to the uncertainty in the environment and the inability to predict the course of the current pandemic, we have decided to continue to suspend our practice of providing full quarterly guidance.

We remain committed to advancing our goals for profitable growth and our efforts to advance initiatives to improve operational efficiency. The structural changes we have made in our business already position us for significant decreases in total operating expenses on a year over year basis. In addition, we expect to maintain profitability in the third quarter as we continue to make progress on our long term operating model. Our non GAAP OpEx for the quarter was $5,200,000 down from $16,600,000 in the comparable prior year period. We expect to exit the year with a non GAAP annual OpEx run rate of between 17,000,000 and $19,000,000 Before we open up the call for questions, I'd like to note that given the circumstances, Ramzi 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 and A. Operator? Thank

Speaker 0

We'll take our first question from Anthony Stoss with Craig Hallum Capital.

Speaker 1

Hey guys, this is Mason on for Tony. First, just wanted to say great work on production, really impressive stuff there. Can you hear me? Yes, we are. Okay.

Thank you. Okay. Great. A couple of questions for me. First, and you talked about this a little on the call, but can you just remind us your thoughts on how big the overall PS5 opportunity is for Immersion?

And then as a follow-up to that, with the positive reception of the PS5 DualShock haptic features, Curious if you've seen any interest from other gaming customers that are looking to compete with Sony on controller features. And then I've got one more after. Sure. We don't break out individual customer forecast at this time. And along those lines, we're also not providing forward looking guidance based on COVID-nineteen.

That said, as stated in our script, we don't believe COVID-nineteen will have a materially negative impact on the PlayStation five and expect it to expect the PlayStation five controller shipments will contribute meaningful revenue from Q4 this year and beyond. We know that it's coming in on time. We do know that they revised their potentially revised their forecast up. And to your second question, yes, we do see interest from competing controllers to enter the market as the bar for haptic devices and haptic experience becomes higher and higher, meaning high definition haptics in handheld the devices become a much more interesting experience, we believe the entire market will have to follow. And we are well positioned to provide solutions for those types of third party providers and controllers.

Great. Thanks. And then with all of the costs that you've taken out of the model, can you just talk about the leverage on the expense side going forward? How much do you think you can grow revenues from here without adding any incremental expenses? That's it for me.

Thanks. So we remain committed to the strategy to deliver new technologies and products to support the growth in concert with continued app licensing. The cost reductions have been in areas of mitigation, more efficient management of our patent portfolio, G and A and moving some positions to Montreal. We have not scaled back research and development, which is one of the cornerstone of delivering that strategy. And the same goes for our sales efforts.

We have an intact sales team that continues to engage with customers. So overall, we believe our strategy continues to be intact and starting to pay off as highlighted by some of the design wins last quarter and this quarter. Aaron, did you want to add anything to that question? No, you said exactly the same thing. Right, perfect.

Thanks guys. I'll hop back in the queue.

Speaker 0

Thank you. We'll take our next question from Eric Soderbergh with Collier Securities.

Speaker 2

Taking Thanks my questions. I want to start with gaming and sort of build off the previous question on the PlayStation five. So Immersion has benefited from PlayStation console refreshes in the past. And as it relates to the five launch, can you maybe help us understand Emergent's positioning and content opportunity relative to those historical launches?

Speaker 1

I can certainly give you an overview of the license architecture without getting into too much confidential detail. Is that what your question is, Harry?

Speaker 2

Yeah, that'd be nice. It'd be nice to, I guess, get your thoughts on this launch versus the ones in the past.

Speaker 1

Sure. So I just want to say first that when we when we say content, just kinda highlight I mean, I think you know this already. We don't generate any revenue from content related to the gaming. It's all related to the sale of hardware, certainly in regards to Sony. So I just wanna put that out there for clarification.

But that aside, taking a look at this platform relative to previous platform, it is quite interesting to see how much focus and how much marketing and messaging was coming around the idea of haptics. We believe that Sony has done a wonderful job delivering an amazing surround sound experience over the years. That experience is pretty much maximized. In other words, it's kinda hard to increase it by a significant amount. And same thing with video, you know, the incredible graphics on the PS four, you know, would be improved with the PS five, but we're getting to that point where, it is quite a outstanding experience.

And therefore, the question is where do you go next, which is why we believe Sony and other gaming consoles are starting to focus on haptic. It's kind of the third experience to get you more immersed in that game. And more importantly, it is an experience that has been substandard so far. I mean, we all know what haptic has been so far. It's just a vibrating device.

What Sony has done is increase that experience so much that the immersiveness of the haptic controller gets you just gets you that extra, feel of being immersed in the content of the game based on technology and IP. So, just as was quoted by one of the game developers, they believe this is the first time where you can actually feel the kind of surfaces that you are touching, not just the vibration, but you can actually get a a different feeling, whether you're hitting a weapon or hitting a different kind of surface. That is a brand new experience, and that is singularly differentiated by haptics. And we're very excited about this, not just because Sony is doing it, but we believe that kind of experience will be the norm and the standard going forward. And these types of, as you know, we get paid for every one of these controllers.

Whether you have one or you buy a second one later, either because you have somebody you're playing with or because your controller's worn out, we believe it's gonna be continued source of revenue for us. And if the VR controllers for the Sony end up taking off, that will be additional source of revenue. So the content side, to answer your question, is very exciting because there's a lot of emphasis on haptic. We're very excited that we're well positioned to monetize it as well as through third party providers.

Speaker 2

Great. So I guess would it be safe to assume that the license fees, I guess, per controller this time around relative to prior launches would be greater?

Speaker 1

We have not discussed the per controller pricing at all. We're under confidential terms with Sony, so I can't really comment on that.

Speaker 2

Okay. That's fine. And then in automotive, now that sales are sort of recovering off April lows, can you remind us where your per unit exposure is in terms of geography and vehicle type?

Speaker 1

By and large, our pricing doesn't change by geography nor does it change by vehicle type. We sell into the Tier 1s, which create products that sometimes go across different vehicles and across tiers. So we have a fairly simple, straightforward pricing just to make the life of our Tier 1s fairly straightforward, and that's also based on their request. We continue to enjoy ASPs from 1 to $3 per car depending on how many products are in the car. And what I mean by product, it could be, for example, a a display that's considered one licensed product, a trackpad, that's another licensed product, or let's say, in the side panel.

So these tend to be additives, and therefore, you have a range of loyalty depending on how many of these instances you have in the car. In its most basic form, you could see a car with a display that might command somewhere around $1 to 1.5 per car. Those types of pricing are pretty standard across geographies and across most vehicles.

Speaker 2

Okay. And then just generally speaking, can you expand on sort of where your exposure is geographically right now with your wins?

Speaker 1

So currently, we have licensed about 80% of Tier 1s. So we are in very good shape in terms of getting the vast majority of companies designing haptic head ends and haptic technologies and providing them to the OEMs. Therefore, you know, we, you know, we we're in a position where, our tier one shift systems to a range of OEMs, including BMW, Mercedes, Audi, Lexus and others. That said, our pipeline has additional Tier 1s in progress as more companies seek to supply haptic systems. We also engaged the OEMs directly to push the adoption of haptics, which drives demand to our licensed suppliers.

We are making good progress as evidenced by the Nissan Aria and Mercedes new MBUX large screen interface, which will debut in the 2021 S Class. So it's fairly evenly spread between Europe, U. S. And Asia at this moment.

Speaker 2

Great. I appreciate the color.

Speaker 1

Thanks. Sure.

Speaker 0

Thank you. This concludes today's question and answer session. We appreciate your participation. You may now disconnect.