Immersion - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Immersion Corporation Q4 and twenty twenty Earnings Conference Call. Please note that today's call is being recorded. And at this time, I would like to turn things over to Aaron Inkerman, Immersion's Chief Financial Officer. Please go ahead.

Speaker 1

Good afternoon and thank you for joining us today on Immersion's fourth 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 Jared Smith, our 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 ks for 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 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 Jared.

Speaker 2

Thanks, Aaron, and thanks everyone for joining us on the call today or listening via webcast. It's an exciting time for Immersion and we believe that 2021 is poised to be an inflection year for haptic technology adoption. Haptics is quickly emerging as one of the most innovative technologies for improved user experiences in consumer products and content as embodied in the Sony PlayStation five DualSense controller which delivers a next level gaming experience. In smartphones, market leaders Samsung and Apple offer high definition haptics performance which is driving demand for consistent and improved performance across the entire market not just in flagship models. In VR, advanced haptics provides the critical sense of touch to fully immerse the user in a virtual environment.

Consumer market growth is also being accelerated by continued improvement in the performance and cost of actuators that enable these premium experiences. The consumer applications are not the only driver of this haptics market inflection. Haptics is well established in touch buttons, touchpads, and displays in premium cars. And automotive adoption is now poised to accelerate in the high volume midrange segment. New use cases are also growing in markets such as industrial and medical equipment as well as household appliances.

Driven by growth in both consumer markets and in use cases in new markets, Ivy Tech X Research is forecasting the market for haptics technology to reach nearly $5,000,000,000 in 2025. We are pleased to share continued strong financial performance in the fourth quarter. We were profitable on both a GAAP and non GAAP basis and generated positive free cash flow. We achieved our highest quarterly profitability in the last five years with the exception of Q1 twenty eighteen. This result is due to the hard work across the organization in optimizing our operating structure and in continued fiscal discipline.

Next, I'd like to provide an update on our progress in the automotive, gaming and mobile market segments. In automotive we made strong progress last quarter driving industry adoption of our Microchip Technology, TDK and Vorayas. Our product development kits make it easier for Tier 1s to adopt haptics and improve system performance. Our kits provide design files, software, support and an underlying technology license. Over the past month, we expanded this program by making touchscreen hardware units based on our design available to select customers for HMI prototyping and technology evaluation purposes.

We've begun shipping our first hardware units to customers. We also expanded the footprint of licensed Tier one customers integrating our technology. I'm especially excited about our recently announced commercial partnership with Farisha, one of the world's leading automotive technology companies. Under our multiyear license agreement, we are providing Farisha access to our haptic technologies and solutions including the product development materials I referenced earlier. The agreement enables Farisha to develop advanced interactive haptic user interfaces with our latest innovations.

In addition to Farisha, we also recently announced a multiyear license agreement with Woori Industrial Company Limited, a leading automotive component supplier in Korea. The agreement licenses our technologies for automotive touchscreens. Our continued technology innovations and new customer announcements favorably position us for continued growth as OEMs adopt haptic interfaces throughout the vehicle. We look forward to keeping you updated on these partnerships. In gaming we're thrilled with the successful launch of the Sony PlayStation five and its transformational DualSense controllers.

As previously shared, Sony Interactive Entertainment is an emerging licensee and the PlayStation five DualSense controllers utilize our 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. We received our first royalty report and revenue for the PlayStation five DualSense controllers in Q4. It was in line with our expectations and we continue to expect the platform and controller to be very successful in the quarters and years ahead. The positive market reception of the DualSense controller has catalyzed increased market interest in haptics, which we are seeing across the industry as well as in our customer and partner engagements.

In Q4, we executed a multiyear renewal of our licensing agreement with Aptivan, a game peripheral OEM that offers force feedback steering wheels and related racing and flight simulator equipment. Aptivan utilizes advanced haptics to fully immerse the gamer and recreate highly realistic driving dynamics. Dynamics. So gaming technology has also brought relevance and value to VR experiences. And I'm excited to share two recent VR customer wins.

We executed a multiyear technology license with Sense Arena, a provider of VR products for athletes designed to improve reaction time and performance. Haptics enables Sense Arena's products to deliver highly realistic tactile feedback and opens up new training possibilities. We also announced a multiyear technology license with Stryker VR, a high end peripheral and platform OEM for VR and gaming experiences for upcoming consumer peripherals. Stryker VR is utilizing our technology to deliver fully immersive tactile effects, including realistic trigger capabilities. Its peripheral will be available for use with popular VR platforms on the market.

We're excited about our opportunities in gaming and VR. The PlayStation five is off to a great start and our recent game and VR customer wins validate our belief that we are well positioned for future growth. Turning to mobile. We continue to see signs of recovery and have a positive outlook for 2021 and beyond. Samsung, one of our largest licensees, recently commented in its Q4 earnings call that it expects market demand for 2021 for its mobile business to recover to a pre COVID-nineteen level.

Gartner, a leading market research provider, released an updated forecast earlier this month that predicts worldwide smartphone sales will grow 11% over 2020. These perspectives reinforce our belief that the worst of COVID's impact is behind We believe five gs and new smartphone models will support strong shipments in the years ahead. We're also pleased with our continued progress with our channel licensing program designed to address the China smartphone market. This program enables our channel partners, including Awenic, to offer a license to Immersion's patent portfolio in conjunction with select haptic driver ICs. This program achieved its highest ever revenue in Q4.

As part of our long term strategy to support continued adoption of advanced haptics in mobile and adjacent markets, we are leading the development of industry standards. Last week we announced that the Advanced Television Systems Committee, known as ATSC, published Emergent's proposal as a recommended practice on haptics for ATSC three point zero. The recommended practice enables the addition of haptics in ATSC three point zero broadcast and broadband content streams on mobile devices capable of haptic feedback. In concert with our efforts to drive haptic standards in MPEG, this development strengthens the long term value of our IP portfolio and will support future growth through expanded licensing opportunities of our patents as well as implementations of our software products. Immersion was recognized as a top 100 global innovator for the second year in a row by Clarivate, a leader in providing trusted insights and analytics on research and intellectual property.

Over the past year, we've optimized our research and patent prosecution process to maximize the return on our investments. Over the past quarter we've had more patents issued related to our core initiatives including the use of haptics in streaming media, gaming and VR. In summary we are on a very positive trajectory and are excited about the opportunities ahead as haptics grows in relevance and importance across our core markets and beyond. We have achieved sustained profitability under our optimized operating structure. As a result of all these factors, we entered 2021 with momentum to deliver double digit percentage growth in revenue and profitability.

I'll now turn the call over to Aaron for a review of our Q4 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 Q4 twenty twenty financial performance. Total revenue of $10,900,000 for Q4 twenty twenty was down 5% from total revenue of $11,500,000 in the same quarter last year, but up over 40% sequentially. Revenue from per unit royalty arrangements increased approximately $400,000 or 4% compared with the prior year quarter. Revenue from fixed license fee arrangements was down 34% on a comparable basis, primarily due to a $1,100,000 fixed license fee from a mobility customer recognized in the fourth quarter of twenty nineteen.

Recurring revenues represented 91% of revenues in Q4 twenty twenty versus 60% of revenues in the fourth quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the fourth quarter of twenty twenty, a breakdown by line of business as a percentage of total revenues was as follows: 57% from mobility, 19% from gaming, 24% from automotive. Gross profit was $10,900,000 compared to gross profit of $11,400,000 in the same quarter of 2019. Turning to operating expenses.

GAAP operating expenses of 5,700,000 for the fourth quarter twenty twenty were down 48% or $5,300,000 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 1,700,000 lower litigation, patents related and general legal costs, dollars 1,300,000.0 lower salaries and benefits expenses, dollars 800,000.0 lower professional service costs, dollars 700,000.0 lower useful improvements amortization as well as $800,000 lower other expenses in the quarter. Looking at our net results, GAAP net income for the fourth quarter of twenty twenty was $8,100,000 or $0.30 per diluted share compared to GAAP net income of $1,000,000 or $03 per diluted share in the same quarter of 2019. GAAP net income for the fourth quarter twenty twenty included a tax benefit of $2,200,000 resulting from the release of a valuation allowance on deferred tax assets of one of our foreign entities. In addition to GAAP metrics, we use non GAAP net income and non GAAP net income per share to track our business performance.

As a reminder, we define non GAAP net income as GAAP net income adjusted to reflect cash tax expense, less stock based compensation, depreciation and restructuring expenses. On a non GAAP basis, we had net income of $8,000,000 or $0.29 per diluted share in the fourth quarter compared to non GAAP net income of $3,800,000 or $0.12 per diluted share in the same period last year. From a profitability standpoint, Q4 twenty twenty was the best quarter in the last five years, both on GAAP and non GAAP basis, with the exception of Q1 twenty eighteen, in which a significant fixed license fee arrangement was signed and recognized. As Jared pointed out, we expect to see double digit percentage growth in profitability on a non GAAP basis in fiscal twenty twenty one. Let's move to the balance sheet.

Overall, our balance sheet remains strong with total cash and cash equivalents of $59,500,000 after generating CAD3 million of cash flow from operations in the fourth quarter of twenty twenty. Cash declined by CAD30 million from the CAD89.5 million as of December 3139, due to the share buyback program under which we used $30,600,000 to repurchase 4,900,000.0 shares in the first half of fiscal twenty twenty and the provisional deposit of approximately $5,000,000 made to LGE midyear for withholding taxes LGE had to pay to the Korean tax authorities on Immersion's behalf. There have been no material updates in the South Korean tax cases since our last conference call. 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

Thank you. And we'll go first to Anthony Stos of Craig Hallum.

Speaker 3

Hey Jared. Hey Aaron. Nice quarter. You rattled off several new auto wins during the quarter on this call. I'm curious if you can give us a sense or a cadence of when a lot of these designs will come into play?

I understand you get an auto win, sometimes you have to wait three or four years for the production of that auto. But maybe just take us through kind of a cadence or what you expect a growth rate for auto? And then secondly, on Samsung, do you know if you're completely penetrated across all product lines? My understanding is in the past you guys were more on the high end and is there additional penetration you could do with Samsung? Then after those two, I had one follow-up.

Speaker 2

Okay. Thanks. Great to have you on the call. So in terms of auto, you're right. The time to revenue can be a few years in some cases if they're at the very front end of the design cycle.

But that isn't always the case. And with some of our newer licensees we can be seeing revenue as soon as in the following year or in one year's time frame depending on where they are in their design cycle and how they're working with us and when the license is executed. So that varies somewhat. So we do see continued growth in automotive. Particularly you'll see the acceleration well actually you'll see the benefit of the auto licensees that we have been signing this year and next year.

And then we'll see an acceleration after that as adoption picks up particularly in the midrange area. And then your second question was on Samsung. Is that right? I without discussing all the details of the agreement, essentially they are licensed across their smartphone product line. And so we aren't licensing in just one particular segment.

And our IP is used across just in the market in general from low end

Speaker 4

phones to high high end phones.

Speaker 3

Got it. Thanks for that. And then as a follow-up, what I found most interesting was your comments related to the new markets. Industrial, medical, I think you've talked about in the past, but household appliances, I think this is the first time you guys have brought that up. Can you give us use case scenarios?

I mean, presume touch buttons will be replaced with more of a haptic feedback perhaps, but maybe go in-depth and talk about the ASPs if they're similar to mobile or just what you think you can do in the household appliance market?

Speaker 2

So that's a great question. And it's really very you mentioned touch buttons being replaced. One of the big trends that we're seeing is just generally touch screens showing up on devices. And interestingly it's not just, you know, large refrigerators or a washing machine. It can be printers or even smaller devices with a small screen on it.

And so we're seeing interest in getting the haptic feedback on those touch screens where it may not exist today just to confirm to the user that they're actually getting a successful touch experience. And so you'll see a lot of growth specifically in the screens segment As screens, you know, these panels and screens get cheaper and cheaper, of course, they're showing up on more and more of these devices. And if you yourself have ever used these, you can tell sometimes that you're not sure whether you've actually gotten a successful response with a touchscreen and so it's adding haptics to that. And if you recall the comment that I made about improved performance and cost in actuators that helps drive that market as well, right? It drives haptics in those applications as well.

In terms of ASPs, know, typically with larger screens in particular you're going to see higher ASPs like we have talked about in mobile and compared to in automotive as compared to mobile. And, you know, it also, you know, depends on the volume. I don't want to quote specific numbers yet, but it generally would follow that trend as you go to those larger screens and those similar applications. The ASPs would be higher than mobile.

Speaker 3

Then just as a follow-up to that, you know, Samsung being your biggest customer and then the mobile side, clearly they're one of the biggest household appliance makers. Is it fair to assume that, you know, there are likely potential customers here? Could you generate revenue this year on the household appliances side? And does it go beyond just Samsung perhaps for appliances?

Speaker 2

So I can't comment on specific customers. But, you know, are basically appliances and other products that are currently using haptics. And we have some licensees already in certain types of product categories that could fit into that broader category. In terms of new revenue I don't expect to see anything this year from appliances because it's not one of our core focus markets. It's more of an other market that we, you know, we keep an eye on and that we engage with the customers when the need arises or when we start seeing adoption increase.

That would be my kind of general answer to that question. We're really focused on automotive, gaming and mobile primarily. Primarily. But the reason we mentioned that about these other markets or these new markets is to talk about that we still look at those opportunities when we think that they are interesting and have a meaningful return.

Speaker 3

Thanks for the color Jared. I'll jump back in the queue.

Speaker 2

Thank you.

Speaker 0

And our next question will come from Derek Soderbergh from Collier Securities.

Speaker 4

Hi guys. Thanks for taking my questions. Jared, I'm just curious, you know, how are you feeling about the PlayStation five deal? You know, overall, you think the royalty rate is sort of in line with the value that it brings? And going forward, do you think new gaming controllers will have similar content to that of the PlayStation?

Or do you think you're going to have more pricing power with new customers? Then I have a follow-up.

Speaker 2

Okay. So to answer your question, I'm very happy about the Sony license and, you know, scope and the economics and the potential. That's certainly something that I'm feeling very good about. And, you know, Sony has a strong track record with their consoles. And they ship over a long period of time and in high volume.

So I'm very excited about that. In terms of I presume you mean other controllers. You mean like other game controller manufacturers. Presume is what you're talking about. Yes.

Yes, the ASPs vary in that. And it depends on what exactly the peripheral is and the volumes they have. But, you know, we capture a pretty good range of ASPs in that market currently. And I do see that particularly in those higher value peripherals of which there are many different types we would certainly see higher ASPs there. It.

That's helpful. And then

Speaker 4

I do have a follow-up unless you wanted to add something else.

Speaker 2

No, no, go ahead.

Speaker 4

Okay. Yes. And then Aaron, I guess you guys are exiting the year with OpEx around $3,500,000 Just curious how we should think about OpEx levels, where they're at today? And at these levels, can you support some of the initiatives that you guys have laid out in gaming and mobile? Yes.

Speaker 1

So as we've previously said, we feel that we can sustain the business at OpEx between non GAAP OpEx between 2017 and 2019. We're currently a little bit below that, but we continue to believe that provides for ample room to run the business and increase spending in a disciplined way on particular visiting customers, some additional marketing programs, things of that nature. So we continue to believe that's a sustainable level for us.

Speaker 4

Got it. Thanks.

Speaker 0

And with that, that does conclude our question and answer session. I would like to turn the call back to our presenters for any additional or closing comments.

Speaker 2

Thanks operator and thank you to all of you for joining us on this call today. I'm very excited with our continued progress and our financial results. We're well positioned to drive continued adoption of haptics in our core markets and grow the company. We look forward to sharing updates on this effort in future calls. Thank you and goodbye.

Speaker 0

And with that ladies and gentlemen that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.