Immersion - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Immersion Corporation Q3 twenty twenty Earnings Call. This conference is being recorded. At this time, I would like to hand the conference over to Mr. Aaron Ackerman. Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us today on Immersion's third 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 Jarrod 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 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 k for 02/2019, 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 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 the 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.

Speaker 2

Thanks, Erin, and thanks, everyone, for joining us on the call today or listening via webcast. As we announced earlier today, Ramzi Heidemann has left Emergent, 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 Emergent in February as vice president of worldwide sales because I recognized Emergent's central role in the development of haptic technologies and the adoption of these technologies across diverse markets. Epic feedback is becoming essential to our interaction with the digital world, and its adoption is set to grow strongly in the coming years.

Immersion innovations such as the adaptive trigger in the Sony PlayStation five 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 this 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-nineteen. This is reflected in strong royalty reports from our Tier one 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 interface. 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 automotive. In q three, we developed an updated touch screen reference solution utilizing our active sensing technology firmware and automotive grade components in collaboration with our partners, Data Module, Microchip Technology, TDK, and Vireas. Our solutions are designed to make it easier for tier ones 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 q three, we executed a multiyear renewal with LG Electronics for continued use of our touchscreen software and haptic technology in its mobile devices. We also continue to address the China market through our channel partner program and continue to see revenue growth this quarter. In games, we remain excited about the PlayStation five launch on November 12. As previously announced, Sony Interactive Entertainment has a license, and the PlayStation five's dual sense control 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 worn out controllers.

The DualSense controllers are already available at retail ahead of the PlayStation five console launch. Sony is prominently highlighting the DualSense's haptic feedback capabilities and its dynamic adaptive triggers. These features deliver a more immersive experience and open up new creative gameplay possibilities. Consumers will be able to experience these new capabilities in a variety of PlayStation five titles. Marvel's Spider Man will let players feel webs on their fingertips with the adaptive triggers.

Gran Turismo seven, a racing simulator, will signal brake and accelerator pedal weight and dynamics in the adaptive triggers. In NBA two k '21, 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, quote, was blown away by the haptic feedback and adaptive triggers, unquote.

The positive developer reception, consumer excitement for the PlayStation five reinforces our belief that the gaming and VR industry at large will continue to seek innovative haptic technology. In Q3, Vuimo 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 Thrustmaster brand. While the while the terms of the license are confidential, it is a multiyear term and is based on typical immersion per unit royalty rates. EMO is an innovator in game pads and specialized controllers, such as sports 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 effort to lead development of industry standards. We recently presented additional proposals and information at the MPEG-one hundred thirty two meeting in October. We moved to the next stage of the process to establish haptics as a first order media type. Standards 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 in 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.

Speaker 1

Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q3 twenty twenty financial performance. Total revenue of $7,600,000 for Q3 twenty twenty was down 29 from total revenue of $10,600,000 in the same quarter last year. Revenue from per unit royalty arrangements was down approximately $100,000 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 $2,900,000 fixed fee from a mobility customer, which was recognized in the third quarter of twenty nineteen.

Recurring revenues represented 100% of revenues in Q3 twenty twenty 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 twenty twenty, 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 $7,600,000 compared to gross profit of $10,600,000 in the same quarter of 2019. Turning to operating expenses.

GAAP operating expenses of $5,000,000 for the third quarter were down 58% or $6,900,000 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 $2,700,000 lower litigation, patent related, and general legal costs, $1,500,000 lower salaries and benefits expenses, as well as $800,000 lower professional service costs in the quarter. Looking at our net results, GAAP net income for the third quarter of twenty twenty was $2,900,000 or $0.11 per share compared to GAAP net loss of $1,400,000 or $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 $4,100,000 or $0.15 per share in the third quarter compared to non GAAP net income of $200,000 or $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-nineteen pandemic. From a profitability standpoint, this was our best quarterly performance in the last two point five years, and we expect to see continued improvement in our profitability on both the GAAP and non GAAP basis in the coming quarters. Let's move to the balance sheet. Overall, our balance sheet remains strong.

We generated $1,900,000 of positive cash flow in the third quarter, which increased our cash and cash equivalents balance of to $56,000,000 as of 09/30/2020. For the nine months ended September 30, cash and cash equivalents declined by $33,500,000 primarily due to the completion of our share buyback program under which we used $30,600,000 to repurchase 4,900,000.0 shares in the first half of twenty twenty, as well as the provisional deposit of approximately $5,000,000 dispersed to LGE in the second quarter of twenty twenty but withholding taxes, LGE had to pay to the Korean tax authorities on the merchant'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 and A. Operator?

Speaker 0

We'll take our first question today from Charlie Anderson, Collier Securities.

Speaker 3

Yes. Thanks for taking my questions, and it's great to see a bit of a rebound here in some of these end markets. First question is on OpEx. You outperformed, I think, the run rate you intended than the year with here in Q3, but you're still talking about ending the year. So we're learning sort

Speaker 4

of unique to Q3 to drive it lower.

Speaker 3

And just sort of curious, you know, how how that relates to the OpEx, view going forward? And I've got a follow-up.

Speaker 1

Okay. So I 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 Montreal team in q three, so that drove both salaries and consulting fees lower. We subled our San Jose facility late in q two. So in q three, we had the full benefit of that.

And we continue to optimize our patents and legal expenses and our patent portfolio and that drove OpEx in the quarter as well. With respect to our outlook we have, continue to maintain the guidance of 17 to 19,000,000, and that leaves some room to add some customer engagement activities, marketing and, you know, 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.

Speaker 3

Okay, great. And then a two part question for me on the end market. So first on automotive, it's been interesting to see some design wins you guys have highlighted in the last two quarters seemingly more of the midrange than the luxury. Just sort of curious what's going on there, and you feel like there's more momentum behind these first two that you talked about in the pipeline. And as it relates to gaming, it was interesting to see the result you had in gaming in the quarter.

Think it was higher than either of the

Speaker 4

quarters you had in the back half

Speaker 3

of last year. Curious what was going on there. Mostly curious if there's kind of a halo effect coming down from DualSense in terms of, customer conversations you're having until potentially other use cases out there. Thanks.

Speaker 2

So, this is Jared. In regards to your question on automotive, yeah, 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 and we have more tier ones 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 the 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're telling us that they see that's something that they can push down, like they do a lot of features, push down into the pit tier. And so we continue we expect to continue to see that type of adoption. In gaming, yeah, 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 mixture of effects.

Speaker 3

Okay. Great. Thank you so much.

Speaker 0

Next, we'll go to Anthony Stoss, Craig Hallum.

Speaker 4

Hey, Jared here. And a couple of things. I'm I'm curious. You know, Ramsey had put forth a a full year guide. There was nothing in the press release.

Anything you can share on your expectations for the December? I know it's gonna be tricky to guesstimate the number of PS5 royalties that would be owed to you in the December. I'm just curious 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 gonna go after or new ones that you think you're gonna go after. Thanks.

Speaker 1

So I'll make the first comment on q four. So we're not issuing any explicit guidance, although we have said in our comments earlier today, do expect growth in revenues and growth in bottom line profitability on both the non GAAP and GAAP basis as well as growth and and positive cash flow. So we're we're looking forward to q four. And as I also said earlier, we are expecting q four to be better than we expected it to be before the pandemic hit.

Speaker 2

Okay. And I'll I'll follow-up on your

Speaker 1

oh, yeah. I'll follow-up on my questions.

Speaker 2

Regard regarding strategy, so, again, very excited and honored to be appointed as 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 a 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 are our core markets. We're doing most of our technology development would be in automotive and gaming, 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 three core markets.

Speaker 4

Just philosophically, do you think you're more apt to go the same route you guys are approaching in China where you try to have distributors and other partners go after the China Mobile market? I mean, do you think that's pulling untapped other verticals that are out there that you guys can go after in that same way, you know, that's on the cheap, if you will?

Speaker 2

So so currently, that is our strategy, But I've been very close to this, obviously, 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 channel strategy so far is, as we said, we saw continued revenue growth. But we always want to keep our options open in terms of, you know, other paths we could take in terms of serving that market.

And so it's something that, as I said, we're focusing on channel right now, but we'll continue to look at that. Okay. Thanks, Gerard. Sure.

Speaker 0

At this time, there are no further questions. I'll hand the conference back to Mr. Gerard Smith for any additional or closing remarks.

Speaker 2

Thank you, operator, and thank you to all for joining us on this call today. As I noted earlier, I'm very excited for the opportunity to lead Immersion as the 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.

Speaker 0

And everyone, that does conclude today's conference. Thank you all for your participation today.