Immersion Corporation

Good day, ladies and gentlemen, and welcome to the Immersion Corporation Q3 2020 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.

Good afternoon, and thank you for joining us today on Immersion's third quarter 2020 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 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-19 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-19 global pandemic. Many of these risks and uncertainties are beyond the control of immersed 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 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 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.

Thanks, Erin, and thanks, everyone, for joining us on the call today or listening via webcast. As we announced earlier today, Ramsey 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 June of 2019 as vice president of worldwide sales, because I recognize immersion's central role in the development of haptic technologies and the adoption of these technologies across diverse markets. Haptic 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 and the Sony PlayStation 5 DualSense 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 and 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 emerging ecosystems. 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-19. This is reflected in strong royalty reports from our Tier 1 licensees and an increased level of customer and OEM engagement on new opportunities throughout the quarter. We're pleased to share that additional vehicle designs, including the forthcoming Deep Wagoneer, will feature haptic interfaces. 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 Q3, we developed an updated touchscreen reference solution, utilizing our active sensing technology firmware and automotive grade components in collaboration with our partners, Data Module, Microchip Technology, TDK, and Vareas. Our solutions are designed to make it easier for Tier 1s 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 Q3, we executed a multi-year renewal with LG Electronics for continued use of our TouchSense software and HEPIC 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 5 launch on November 12th. As previously announced, Sony Interactive Entertainment has a license, and the PlayStation 5 DualSense controllers utilize Emerging technology. Emerging 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 5 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 5 titles. Marvel's Spider-Man will let players feel webs on their fingertips with the adaptive triggers. Gran Turismo 7, a racing simulator, will signal brake and accelerator pedal weight and dynamics in the adaptive triggers. In NBA 2K21, 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 capabilities in the DualSense 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 5 reinforces our belief that the gaming and VR industry at large will continue to seek innovative haptic technology. In Q3, Guimo 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 terms of the license are confidential, it is a multi-year term and is based on typical immersion per unit royalty rates. Hemo is an innovator in game pads and specialized controllers, which is for 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-132 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.

Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q3 2020 financial performance. Total revenue of $7.6 million for Q3 2020 was down 29% from total revenue of $10.6 million in the same quarter last year. Revenue from per unit royalty arrangements was down approximately $0.1 million 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 $2.9 million fixed fee from a mobility customer which was recognized in the third quarter of 2019. Occurring revenues represented 100% of revenues in Q3 2020 versus 73% of revenues in the third quarter last year. A revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns, And for the third quarter of 2020, 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 $7.6 million compared to gross profit of $10.6 million in the same quarter of 2019. Turning to operating expenses. GAAP operating expenses of $5 million for the third quarter were down 58%, or $6.9 million, 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 $2.7 million lower litigation, patent-related, and general legal costs, $1.5 million lower salaries and benefits expenses, as well as $0.8 million lower professional service costs in the quarter. Looking at our net results, GAAP net income for the third quarter of 2020 was $2.9 million, or 11 cents per share, compared to GAAP net loss of $1.4 million, or 4 cents per share, in the same quarter of 2019. In addition to GAAP metrics, we used 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 $4.1 million, or 15 cents per share, in the third quarter compared to non-GAAP net income of $0.2 million, or 1 cent 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 surpass the expectations that we had prior to the COVID-19 pandemic. From a profitability standpoint, this was our best quarterly performance in the last two and a half years, and we expect to see continued improvement in our profitability on both a gap and non-gap basis in the coming quarters. Let's move to the balance sheet. Overall, our balance sheet remains strong. we generated $1.9 million of positive cash flow in the third quarter, which increased our cash and cash equivalents balance to $56 million as of September 30, 2020. For the nine months ended September 30, cash and cash equivalents declined by $33.5 million, primarily due to the completion of our share buyback program, under which we used $30.6 million to repurchase 4.9 million shares in the first half of 2020, as well as the provisional deposit of approximately $5 million disbursed to LGE in the second quarter of 2020 for withholding taxes LGE had to pay to the Korean tax authorities on immersion'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&A. Operator?

Thank you, sir. And ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. We'll take our first question today from Charlie Anderson, Collier Securities.

Yeah, thanks for taking my questions and it's great to see a bit of a rebound here on some of the event markets. First question is on OpEx. So, you know, you outperformed, I think, the run rate you intended to end the year with here in Q3, but you're still talking about ending the year. So, was anything sort of unique to Q3 to drive it lower and... I'm just sort of curious, you know, how that relates to OPEX U going forward and I'm going to follow up.

Okay, so 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 Q3, so that drove both salaries and consulting fees lower. We sublet our San Jose facility late in Q2, so in Q3 we had the full benefit of that, and we continue to optimize our patent and legal expenses and our patent portfolio and natural objects down in the quarter as well. With respect to our outlook, we have continued to maintain the guidance of $17 to $19 million, and that leaves some room to add some customer engagement activities, marketing and some travel to customers, things of that nature. Although we will continue to maintain strict financial discipline and keep our focus on the automotive.

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 the last two quarters, seemingly more the mid-range than the luxury market. Just sort of curious what's going on there, and we 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. I think it was higher than either of the quarters you had in the back half of last year. So curious what was going on there. I'm also curious if there's kind of a halo effect coming down from DualSense in terms of customer conversations you're having and to potentially other use cases out there. Thanks.

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, and we have more Tier 1s 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. This is what they're telling us, that they see that something that they can push down, like they do a lot of features, push down into the tier. So we expect to continue to see that type of adoption. In gaming, yeah, there's a lot of interactive effects, but it's also – Generally, as we pull, as the economy recovers from COVID, we're seeing some growth there, so it's a mixture of effects.

Okay, great. Thank you so much.

Next, we'll go to Anthony Scott, Craig Hallam.

Hey, Jared. Hey, Aaron. A couple things. I'm curious, you know, Ramsey had put forth a full-year guide for There was nothing in the press release. Anything you can share on your expectations for the December quarter? I know it's going to be tricky to guesstimate the number of PS5 royalties that would be owed to you in the December quarter. I'm just curious your thoughts on that, 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 going to go after or new ones that you think you're going to go after. Thanks.

So I'll make the first comment on Q4. So we're not issuing any explicit guidance, although we have said in our comments earlier today we do expect growth in revenues and growth in bottom line profitability on both the non-GAAP and GAAP basis, as well as growth and positive cash flow. So we're looking forward to Q4. And as I also said earlier, we are expecting Q4 to be better than we expected it to be before the pandemic hit.

Okay, and I'll follow up on your question. Regarding strategy, so Again, very excited and honored to be appointed as interim CEO. And I come from the management team, so I'm 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 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, and then we're looking at things that we could 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.

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 really an untapped other verticals that are out there that you guys can go after in that same way, on the cheap, if you will?

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 other paths we could take in 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, Jared. Sure.

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

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 meet Emergent 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.

And everyone, that just concludes today's conference. Thank you all for your participation today.