Immersion - Earnings Call - Q4 2019

Transcript

Speaker 0

Good day, and welcome to the Immersion Corporation Q4 twenty nineteen Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarman. Please go ahead.

Speaker 1

Thank you, Todd. Good afternoon, and thank you for joining us today on Immersion's fourth quarter and twenty nineteen 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 Hidemus, President and CEO and Aaron Ackerman, CFO. 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 ks 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 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 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, 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 Chief Executive Officer, Ramzi Heidemuth.

Ramzi?

Speaker 2

Thank you, Jennifer, and thanks everyone for joining us on the call or by listening by webcast. I'm pleased to speak with you again today to reflect on our accomplishments in 2019 and the significant changes we've undergone to realign Immersion for Success and shareholder value creation. We ended the year on a very positive note, achieving GAAP profitability in q four. This is an important milestone for the company and one that demonstrates our commitment to creating shareholder value in both the short and long term. I'm also pleased to note that based on the strong progress we've made in optimizing our operating profile, we expect to continue to improve non GAAP profitability on an annual basis moving forward.

In addition, we achieved strong growth in recurring revenue during the period, which increased 24% year over year. Today, I'll highlight the transformative steps we've taken over the past year to reshape the company and to create value for our shareholders. We remain focused on our goal to drive near term profitability and to strengthen our direction and execution in areas of expense management, strategy, corporate governance, and operations. First, I'll touch on one of the key initiatives recently achieved, completing the build out of our leadership team as we welcomed Aaron Ackerman as our new CFO last month. Aaron is a tremendous addition to our executive team based on the depth and breadth of his financial expertise, his operational leadership, and his strategic understanding of software and technology driven growth businesses.

He's based in our Montreal office and has already hit the ground running. I'm pleased to have him here with me today to provide an overview of our q four results and 2020 outlook. Following his remarks, I will continue with our annual recap and vision for the new year. And with that, I'll turn it over to Aaron. Thank you for the warm welcome, Ramsey.

I'm extremely excited to be

Speaker 3

part of Immersion and look forward to meeting many of you over the coming months. Let me begin by referring you to this afternoon's press release for information regarding our q four and full year financial performance, including tables that illustrate the comparison of our revenue for the fourth quarter and full year to the same period a year ago. Our revenue of $11,500,000 for Q4 twenty nineteen was up 5% from revenue of $10,900,000 in the year ago period. Revenue from fixed license fee arrangements was up 55% on a comparable basis, primarily due to license fees from customer renewals recognized in the fourth quarter of twenty nineteen. Revenue from per unit royalty arrangements was down approximately $300,000 or 3% compared with the prior year quarter, reflecting declines in reported royalty bearing shipments by commercial and industrial, gaming, automotive, and medical licensees, offset in part by an increase in royalty bearing shipments reported by mobile licensees.

For the year ended 12/31/2019, total revenues of $36,000,000 decreased $75,000,000 or 68% compared to the prior year. The decrease was primarily attributable to a $71,000,000 decrease in fixed fee license revenue as a result of a large fixed fee agreement signed in the first quarter of twenty eighteen. As discussed in previous calls, the treatment of fixed fee arrangements under ASC six zero six has contributed to some lumpiness in our results and reduces comparability with prior year results. That said, we are making progress towards our stated goal of transitioning most of our revenues to a recurring nature instead of relying on onetime fixed fee arrangements. Recurring revenues represented 60% of revenues in Q4 twenty nineteen versus 51% of revenues in the fourth quarter last year and 69% of revenues in fiscal twenty nineteen versus 20% in fiscal twenty eighteen.

Turning to operating expenses. GAAP operating expenses for the fourth quarter and full year 2019 were down 241%, respectively, from the comparable periods last year. The reduction in expenses for the quarter and year reflects the impact of lower litigation and patent maintenance expenses. We have also reduced operating expenses by completing the relocation of our research function to Montreal in 02/2019, and we will continue our cost reduction program with the planned relocation of many of our administrative functions to Montreal in 2020. Specifically, as it relates to our key OpEx reduction levers in q four, We continue the optimization of our patent portfolio, where we have now trimmed over 100 issued patents and approximately 500 applications from the pool, resulting in another 25% reduction in prosecution and maintenance fees from q three to q four.

We remain on track to cut our annual patent prosecution costs by 50% and our patent and maintenance costs by 30%. Consulting and professional services decreased 18% from Q3 to Q4, and we continue to target an eventual 40% reduction from prior levels. There were some nonrecurring operating expenses this quarter. During the fourth quarter, our board approved a plan to vacate our San Jose facility by 03/31/2020 and to sublet the facility as soon as possible thereafter. Consequently, we began accelerating the amortization of the San Jose leasehold improvements over that period, $522,000 to operating expenses in the quarter.

As well, we recognized an impairment of $939,000 to the right of use lease asset, which also impacted operating expenses in the quarter. Moving on to income taxes. Income tax expense of $471,000 for the year primarily reflects estimated foreign taxes and foreign withholding tax expenses and an increase in the valuation allowance against certain of our foreign deferred tax assets. As of December 3139, we carry a valuation allowance against substantially all of our federal, state, and foreign deferred tax assets. We routinely assess factors related to the realizability of our deferred tax assets to determine if or when an adjustment to our valuation allowance is appropriate.

As a reminder, the valuation allowance does not impact our ability to utilize our deferred tax assets, including net operating loss carry forwards. GAAP net income for the fourth quarter was $1,000,000 or $03 per diluted share. GAAP net loss for the year was $20,000,000 or $0.64 per diluted share. Non GAAP net income for the fourth quarter was $3,100,000 or $0.10 per diluted share. Non GAAP net loss for the year was $13,200,000 or $0.42 per diluted share.

Turning to the balance sheet. Our balance sheet position remains very strong as we exit the year. Our cash portfolio, including cash and short term investments, was $89,500,000 at year end, down from $124,900,000 at the end of twenty eighteen, primarily due to cash used in operations, the $6,900,000 withholding tax reimbursement paid to Samsung in the second quarter, as well as $2,700,000 of cash used for stock repurchases. We will continue to keep a strong focus on our cost reduction efforts while ensuring that our spend is aligned with key strategic initiatives. I'd now like to provide an update on our guidance for 2020.

Like others in the industry, we are monitoring the impact of the COVID-nineteen virus on our customers and anticipate some negative impact on their activities and shipment volumes in 2020. Given that Immersion receives its variable royalty reports one quarter in arrears, the specific impact is difficult to assess at this time. However, we believe it's prudent to account for broader variability in our outlook and are currently projecting total revenue of 31,000,000 to $35,000,000 for the year. This outlook also takes into account fluctuations that typically occur due to seasonality and product release cycles in several of our end markets such as mobile and gaming. And as such, we expect that revenue will be back end loaded toward q three and q four of twenty twenty.

We will revisit our annual outlook on a quarterly basis as more data becomes available. This year, we expect to make further progress in shifting our revenue mix from one time fixed payments to recurring revenues, the majority of which will be structured as per unit royalty fees based on volume shipped by our customers. We expect recurring revenues in 2020 to represent over 80% of our revenue mix, up from 69% in 2019. Regarding our expense outlook for 2020, we expect GAAP operating expenses of between 36,000,000 and $37,000,000 down from $57,400,000 in 2019. Included in this number is non cash stock based compensation expense of between 5 and $6,000,000.

On a non GAAP basis, we expect 2020 operating expenses to be between 29 and 30,000,000, ahead of our original $32,000,000 target and down from $50,500,000 in 2019. Further, as a result of our ongoing cost reduction programs, we now expect exit fiscal twenty twenty with a non GAAP OpEx run rate of approximately 27,000,000 beginning in the fourth quarter. Due to the full valuation allowance we continue to carry, we are forecasting cash income tax expense for the year to be approximately $200,000. As a reminder, we define non GAAP net income as GAAP net income adjusted to reflect cash taxes, less stock based compensation and restructuring expenses. We expect twenty twenty non GAAP net income to be between $1,000,000 and $6,000,000 or $04 and $0.19 per diluted share.

With that, I will now turn it back over to Ramzi. Thanks, Aaron. It's been

Speaker 2

a little over a year since I joined Immersion, following a prolonged period of transition and uncertainty for the company and with a mandate to create long term shareholder value by developing and executing a new strategy. Soon afterwards, Immersion underwent a major transformation of our board. This resulted in a new outstanding group of advisors to which we added direct representation from our largest shareholder. With the board committed to listening carefully to shareholder input and firmly focused on generating and maximizing shareholder value, we were able to begin the process of formulating a new strategy for the company. In addition to putting a new executive team in place and proactively adding direct shareholder representation to our board, core elements underlying our corporate transformation included dramatically reducing OpEx with a laser focus on profitability, shifting the nature of our business model, establishing a path to revenue growth, creating a capital allocation policy to include stock buybacks, and strengthening our corporate governance.

Zeroing in on our progress in each of these areas. First, a maniacal focus on immediate cost reductions and drive to drop to profitability. We believe profitability is paramount. And from day one, we've been laser focused on OpEx reductions to transform the cost structure of the business and return more value to shareholders. Our progress in the second half of twenty nineteen included $6,100,000 in reductions in litigation, dollars 1,200,000.0 in patents, dollars 1,000,000 in consulting, and $100,000 in engineering and G and A related to Canada resource migration and the planned reduction of our real estate footprint in California.

And our efforts to right size our operation do not stop there. As Erin indicated, we see opportunities to significantly lower our OpEx level even further with a goal of reaching a 27,000,000 non GAAP run rate by Q4. This will position Immersion to greater success and continued expansion of our profitability in 2021 and beyond. Second, the shift to a more transparent and sustainable business model that will deliver more predictable growth. It became quickly apparent that Immersion's ability to grow and to measure its success was being impeded by lump sum nature of its revenue model.

We outlined a clear path to shift the company's revenue orientation from short term, one time payments to recurring revenue deals that can be recognized on a quarterly basis and allow us to share in the success our technology brings to our customers' product. Recurring revenue consists of two main forms, licensees who report per unit loyalty received during the quarter or who make six payments on a quarterly basis or a combination of the two. We are pleased that this transition is reaching toward our goal with more than 80% of revenue in 2020 projected to come from recurring revenue as Erin indicated. Third, creating a path for recurring revenue growth. Along with the shift in our business model, we needed to reposition Immersion for growth leveraging their company's rich technology assets while recognizing that we still have a pivotal role to play in ensuring that haptics usage will continue to thrive and grow.

This resulted in the development of a new inform and excite strategy encompassing both patent and technology licensing. This strategy was approved by the board and provides the optimal approach towards long term value creation. We highlighted the focal points of this plan at our well attended Investor Day in November. We encourage those who missed it to review the presentation and the webcast, which are available on our Investor Relations site. In Q4 and over the past few months, we began execution of our new strategy.

In automotive, we are focused on winning additional tier one licensees as well as expanding our business with our existing customers. We have a strong foundation with around 10 tier one licensees. We're working to expand the value and role of haptic haptics with these customers. One such example is Continental, whom we highlighted last quarter as they executed an expanded license to integrate haptics into a broader range of user interfaces, accelerator pedals. In line with our strategy, we introduced two new automotive product experiences at CES in Las Vegas as well as Automotive World in Tokyo, Japan.

The first is a new large touchscreen reference design featuring our active sensing technology software and advanced piezo actuators from TDK, an electronics component partner based in Japan. This solution builds and expands on our previous design based on linear resonant actuators. These solutions demonstrate how different haptic system designs paired with our software technology can deliver high fidelity HMI experiences in the automotive environment. We are providing automotive licensees access to our design know how, software, and patent portfolio through an integrated automotive licensing program. We are encouraged by our customer engagement at CES and automotive world.

We also collaborated with Alps Alpine, a leading global manufacturer of electronic components and systems, to jointly develop and showcase an integrated backlit interior touch panel with advanced haptic effects. Immersion consulted on a design and provided our active sensing technology software to power the experience. This solution was showcased at CES and its subsequent OEM customer meetings. Both Immersion and Alps Alpine believe haptics will enable new, innovative human machine interface possibilities and improvements in the evolving automotive cockpit. We will continue to collaborate and jointly develop new solutions and experiences with ALKS Alpine as part of our partnership.

As part of our new strategy, we identified an opportunity to license technology to the multibillion dollar global adult device market. I am pleased to share that we have just executed a strategic commercial partnership with Fido Robotics, an innovative sex tech company based in Amsterdam. Under the terms of this partnership, we will deliver advanced haptic control software and format technology that enables more advanced adult experiences, including control of devices by content and interactive applications, as well as remote intimacy use cases. We're also licensing access to our extensive patent portfolio. We believe hundreds of patents in our portfolio are relevant to adult devices and related interactive use cases.

Our technology and patents will be available to adult device OEMs via an integrated solution from Field Robotics. The commercial partnership is based on a revenue share model so both parties share the success. Field Robotics is pursuing a software as a service model based on an end user user's usage of the OEM device with content services. We will collect a double digit percentage of the revenue, Assuming an active lifespan of a device over a two to three year time period, cumulative revenue per device should be in the low single digit dollar range. In gaming, we continue to anticipate, per Sony's public statements, the release of its PlayStation five gaming console in the holiday 2020 time frame.

As we previously announced last May, Sony Interactive Entertainment took a license to our haptics technology for gaming and VR controllers. We therefore anticipate revenue from PlayStation five controllers once shipments commence towards the end of our fiscal year. We also continue to believe Sony's new controllers will catalyze increased market demand for advanced interactive haptic experiences. In mobile, Immersion remains predominantly a patent licensor today, and we continue to be diligent in pursuing all revenue opportunities available to us, including our channel strategy in China. We are beginning to see initial shipments of licensed chips from our licensed IT partners.

We will continue to evaluate where we can maximize the value of our IT in this market. Though it's still early days in the execution of our new strategy, market feedback, as well as our activity with ALKS, Alpine, and Field Robotics provide validation that we can deliver value with new technology products in addition to patent licensing to support long term growth. We look forward to keeping you updated on our progress. As highlighted at our investor day, we believe the time is right for standardization of haptics across the technology stack. From design guidelines, APIs and decoders, to hardware interfaces, and vibration motor performance characteristics.

Haptic standards will enhance Immersion's ability to market products and technologies and expand the breadth of our licensing activities. Pursuant to our new standardization strategy, Immersion is moving forward with several standard initiatives. For example, we are in the midst of preparing a proposal for adding haptics tracks into the MPEG based media file format to be presented at the next MPEG meeting. Standardizing haptics in media files will allow content creators to more easily incorporate high fidelity haptics experiences into audiovideo content. Immersion is also active in the IEEE Tactile Internet Working Group that is developing a haptic standard for five gs communications, including haptics encoder decoder standard.

Furthermore, we are evaluating participation in other standards, such as the ATSC three point zero standards effort. We are engaging broadly with relevant stakeholders in the haptics ecosystem to execute our standard strategy. Now let's move to the fourth facet underlying our corporate transformation, which involved listening closely to our shareholders regarding capital allocation, including the desire to implement share buybacks. Several considerations factored into the timing of this initiative, including the shift toward profitability, the settlement of ongoing litigation, clarity regarding the need for cash reserves relative to our new operating model, and share price dynamics conforming to this prudent use of capital. We're pleased to report that these elements aligned in the fourth quarter and combined with our confidence in our cost cutting efforts and new strategic initiatives, I am happy to report and update you that during December through March 4, we repurchased close to 975,000 shares of common stock for an aggregate purchase of approximately $7,200,000 We expect to continue to be active with regard to share buyback activity under the right conditions, and we have approximately $26,200,000 remaining under our authorized repurchase program.

Fifth, we continue to be focused on improving corporate governance. This includes proactive shareholder engagement through which we have been acting on feedback received regarding best practices such as adding direct shareholder representation, communicating and executing on our capital allocation policy, and executing on the process to declassify the board. In addition, we'll continue to improve on the composition of Immersion's board of directors. As just announced this afternoon, the total number of board seats has been expanded to eight. And we would like to welcome Eric Singer of BIOX Capital Advisors to Emergent's board of directors, along with Steven Dominic of venture capital firm Seven Rosen Funds, and Franz Fink, former CEO of Maxwell Technologies, an energy storage company and Genm Corporation, a wireless and mobile systems group of prescale semiconductor.

VIAX is one of our largest shareholders, and Eric, Steven, and Frans will bring deep strategic insight into the board. As part of these appointments, Jonathan Visbal and Sid Ganitz will step down, and I'd like to take this opportunity to thank them both for their valuable contributions over the past year. Now, I'd like to take a moment to talk about our vision and goals for 2020. As Erin highlighted, the positive impact of our cost reductions will lead to expanded non GAAP profitability on an annual basis in '20 despite this being a transition year for a total revenue. The new customer agreements made over the past year and tangible progress toward increasing our recurring revenue mix will contribute to favorable revenue over the long term.

With any new strategy, the goal should be to establish metrics by which to measure our success. And our initial gauges have been to monitor our progress with regard to OpEx and recurring revenue. Next, we will look to introduce short term indicators that allow us to share market or customer feedback relative to our traction in our markets. Additionally, within the next twelve months, we will aim to provide more clarity with regard to our average ASP per market, all with the goal of generating greater transparency regarding how to model our business. In short, in a little over a year's time, we have made tremendous headway in carving a path to profitable growth and long term value creation for Immersion.

We are extremely excited and confident in our strategic initiatives and are now focused on executing across our plans while continuing to strengthen our organization as a whole. On behalf of the board and myself, I want to thank and applaud our dedicated hardworking employees around the world. We recognize that change is not easy, and truly appreciate your commitment and resolve over the past year. We'd also like to express our gratitude to our valued customers and partners who are embracing the power of haptics for the benefits of consumers. We see only greater and greater potential for haptics based experiences as we continue to work together on solutions that maximize Immersion's technology.

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

Speaker 0

Thank you. We'll take our first question from Charlie Anderson with Dougherty and Company.

Speaker 4

Yes, thanks for taking my questions and welcome Aaron. I just wanted to start with the full year guidance. I think at the midpoint, you've got the per unit royalties up just modestly if I consider that 69% versus 80%. And I know 20% was the goal you laid out at Analyst Day. So I know it's a transition year, but maybe if you guys could just kind of reconcile for us the goal of 20% within that portion versus sort of your expectations for this year.

Any puts and takes there? And then I got a follow-up.

Speaker 3

So the recurring revenues would be over 80% in 2020, and we're anticipating that, there will not be an increase in recurring revenues over fiscal 'nineteen.

Speaker 4

I get that. So there was the 20% goal put out at the analyst day. I know you guys have talked about COVID nineteen being an impact. Is that literally the impact that, you know, causes that dynamic, or are there other things to call out?

Speaker 3

That's the that's the main the main that's the main impact. Had we not taken into account had we not adjusted our our our forecast for the COVID nineteen situation, we would have seen an additional 20% growth in recurring revenue this this in 2020.

Speaker 4

Okay. Got got it. Fair enough. Great. And then I wonder if you guys could maybe just speak to the licensing pipeline as you've now embarked on this strategy where you have both IP as well as product across some of the key verticals.

Ramzi, I wonder if maybe you could just highlight how some of those discussions are going, whether it be auto, whether it be PC, whether it be adult market mobility, etcetera. Just give us a little bit more color on what you're seeing real time. Thank you.

Speaker 2

Sure. So thank you, Charlie. With automotive, it's becoming very apparent that while the need for haptics is increasing, the expertise is still quite needed. And our customer feedback from both CES and automotive world in Japan reinforced the fact that support for building haptics is needed for software, reference design, and just general help in bringing the technology to the marketplace. So our relationships with Alps, Alpine and Continental are proof points that our technology is needed, is valuable, and you can look forward to more announcements in the next couple of quarters around more companies signing up for our technology and not just our patents.

So so very encouraged by the feedback that we received from the automotive shows. So we have about 80% of our customers right now, I. E. 80% of the TAM of tier one license. We still have about 20% to go.

But we're also talking to the existing 80% about taking on existing technology, not just the remaining 20. So going back and finding opportunities to engage at the technology level and not just at the patent level. So that's automotive. In the adult, I'm very pleased with field robotics. As I mentioned in the last quarter as well as at our shareholder day, the reason to get into this wasn't just the opportunity to go after patent licensing, but because we were receiving several inbound requests for help and assistance in bringing in the sophisticated haptics into this market in the form of technology, software, design support, and what have you.

Fear Robotics is the leading provider of technology platform in this space. The good news about Feed Robotics is that it is not just a single customer. They provide technology to several customers in the form of technology deliverables, which then get integrated in adult toys and what have you. So therefore, our partnership with Free Robotics will reach to dozens of customers in this marketplace. And together with their customer sales, with their outreach, existing multi year history and reputation, we'll be able to accelerate our entry to this market.

And our revenue share model, whether it covers devices or subscription, will guarantee us a revenue as market and this business grows. As far as mobile, we continue to be a patent licensing company today with the exception of LG Electronics. As you know, a lot of deals that have been done in the past have covered patent licensing. Haptics in the Android ecosystem continues to be more on the basic side, I would describe. So it's more about licensing our core patent portfolio.

This, therefore, brings the focus on China since the rest of the world has been licensed, our eyes in how to license China, which then opens up this technology and patent discussion around the IT strategy. So therefore our strategy in China to continue to see if this IT strategy is going to pay off, and if not, what do we do about the Chinese companies selling outside China? We're monitoring this very closely. We believe that there's opportunity. We don't believe there's a lot of successful history in companies collecting from this market, specifically patent licensing markets within China and outside China.

So we're proceeding carefully given our limited resources. But the focus is going to be on Android devices in China as well as being sold outside of China. Other than that, I would say LG remains to be our main technology licensee, and we continue to provide them with our technology as well as our patents. On the PT side, we are taking a wait and see approach given our limited resources and the frugality of that business. We're kind of holding off right now with nothing imminent.

So we're gonna continue to engage, but much more cautiously given that we are seeing traction in adult as well as automotive, which is where most of our engineering resources are going, we're holding off, opening up a third investment, so to speak, in PC.

Speaker 4

Excellent. Thank you for all the color. I just have one quick housekeeping question for Aaron. We can certainly wait for the 10 k, but I wonder if you could note the 10% customers for the year potentially. Thanks.

Speaker 3

So the only 10% customer for the year is Samsung.

Speaker 4

Okay. Did you do you have the amount that you got this year or no? I'm sorry.

Speaker 3

Much? 727%.

Speaker 4

27. Great. Thank you so much.

Speaker 0

Thank you. At this time we have no further questions in queue. I'd like to turn it back to management for closing remarks.

Speaker 2

Thanks, operator, and thank you all for joining us on this call today. We look forward to seeing some of you at the upcoming SUDATI Spring Investor Conference in New York later this month. Thank you, and have a nice day.

Speaker 0

This concludes today's call. Thank you for your participation. You may now disconnect.