Immersion Corporation

Good day, everyone, and welcome to the Immersion's second quarter 2021 earnings call. At this time, I would like to turn the conference over to Aaron Ackerman. Please go ahead.

Good afternoon, and thank you for joining us today on Immersion's second quarter 2021 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-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 for 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 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 2020, 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. 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.

Thanks, Aaron, and thanks, everyone, for joining us on the call today or listening via webcast. The results that we are reporting today reflect the continued success of our customers and partners in developing and shipping high-performance haptic products and solutions in our core markets of automotive, gaming, and mobile. Our revenue grew 94% compared to the second quarter of 2020, and our gap net income was $5.3 million compared to a gap net loss of $0.7 million in the same quarter of last year. We saw revenue growth in all of our core markets. In automotive, we remain on track for double-digit percent revenue growth in fiscal 2021 compared to fiscal 2020. In Q2, we expanded our license agreement with Stanley, a leading provider of electronic components, to cover automotive products. Stanley now has access to our innovative haptic technology for touch-based automotive products. The addition of Stanley strengthens our position in the market as it builds on our existing Tier 1 licensee base, including Farisha, Alps Alpine, Continental, and many others. We are engaged with several OEMs and Tier 1s who are evaluating our technology and haptics for new vehicles and interfaces. We continue to believe in the long-term potential of haptics in automotive and our ability to address this market. In gaming, we're excited that Sony Interactive Entertainment recently announced that PlayStation 5 surpassed 10 million units sold, making it the fastest-selling console in Sony's history. Immersion innovations are central to the PlayStation 5 experience. The DualSense controller has become the industry benchmark for performance, and gamers are purchasing them to use on a range of platforms. Sony also previously announced that many of the haptic innovations from the DualSense controller will be implemented in its forthcoming new VR controller. The success of our technology and Sony products positions us nicely with the growing use of advanced haptics in gaming and VR. We also remain on track to achieve double-digit percent revenue growth in gaming in fiscal 2021 compared to fiscal 2020. In mobile, We continue to focus on driving revenue growth from the China market through our channel licensing program. We recently announced a new channel partnership with Titan Haptics, a Canadian-based developer of advanced haptic motors, to make our haptic IP available to mobile phone and wearable OEMs that incorporate its actuators. Titan Haptics actuators are based on a new technology it developed to deliver compelling high-definition experiences. This partnership expands the footprint of component suppliers offering a channel license option servicing China and other global markets. Haptics is essential to today's smartphone experiences, including mobile gaming. We're pleased to share that ASUS, the company behind the powerful ROG gaming smartphones, executed a multi-year renewal license for its use of immersion touch-sense software and technology in its mobile products. Our mobile segment revenue remains on track to meet or exceed our 2020 segment revenue. We also see interest in haptics from companies in adjacent markets who are seeking to leverage tactile feedback to improve the user experience in their products. I'm pleased to share that Peloton, a leading interactive fitness platform provider, executed a technology license with immersion in Q2. As part of the agreement, we are also providing engineering services to support development of new products. As part of our long-term strategy to support continued adoption of advanced haptics in our target market segments, we are leading development of industry standards. Last quarter, we reported that MPEG approved a call for proposals for coding of haptic effects. Multiple companies have submitted candidate proposals, which are currently under evaluation. We look forward to keeping you updated on this initiative. These wins and developments demonstrate our continued progress driving adoption of our technology across the ecosystem. I'll now turn the call over to Aaron for a review of our Q2 results.

Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q2 2021 financial performance. Total revenue of $11 million for Q2 2021 was up 94% from total revenue of $5.7 million in the same quarter last year. Revenue from per-unit royalty arrangements increased approximately $4.8 million, or 111% compared with the prior year quarter, primarily due to increased volume from both mobility and gaming licensees. 6D license revenue increased $0.5 million in the three months ended June 30th, 2021, compared to the same period in 2020, mainly due to fixed fee payments from new and existing automotive licensees. Recurring revenues represented 91% of revenues in Q2 2021 versus 98% of revenues in the second quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns, And for the second quarter of 2021, a breakdown by line of business as a percentage of total revenues was as follows. 61% from mobility, 21% from gaming, and 18% from automotive. Gross profit was $11 million compared to gross profit of $5.6 million in the same quarter of 2020. Turning to operating expenses. Gap operating expenses of $5.2 million for the second quarter of 2021 were down 23%, or $1.5 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 $0.5 million lower litigation, patent-related, and general legal costs, $0.4 million lower professional service costs, $0.4 million lower facilities expenses, as well as $0.2 million lower other expenses in the quarter. Looking at our net results, GAAP net income for the second quarter of 2021 was $5.3 million, or 17 cents per diluted share, compared to GAAP net loss of $0.7 million, or 3 cents per diluted share, in the same quarter of 2020. 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 expense. On a non-GAAP basis, we had net income of $7.2 million, or 23 cents per diluted share, in the second quarter compared to non-GAAP net income of $0.8 million, or $0.03 per diluted share, in the same period last year. Moving on to the balance sheet, overall, we had total cash and cash equivalents of $107.3 million as of June 30, 2021. This represents a $47.8 million increase from the $59.5 million as of December 31, 2020. Overall, our Q2 revenue performance was better than originally anticipated. And as a result of the uncertainty caused by the recent Delta variant and the potential impact that may have on our licensees' businesses, we may not see continued increases in revenue on a quarterly basis off of this Q2's performance. We remain cautiously optimistic about our future performance, but at the same time also recognize that Q2 was an outstanding quarter and we may face tougher headwinds from the impact of the resurfacing of COVID and supply chain issues on our licensees. We remain confident in our ability to manage our cost structure and expect to remain profitable and to continue to generate positive peak cash flow in the coming quarters, despite the tough business environment.

Thanks, Darren. We are very pleased with the significant improvement in our financial results compared to Q2 2020. We generated 94% revenue growth while reducing our operating expenses by over 20% and strengthened our balance sheet considerably in the same period. We continue to achieve sustained profitability under our optimized operating structure. I'm excited that we remain on track to deliver double-digit percent year-over-year growth in revenue and profitability. I look forward to keeping you updated on our progress. Before we open up the call for questions, I'd like to note that given the circumstances, Erin 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. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, star one to ask a question. And first, we'll go to Anthony Stoss from Craig Hallam. Your line is open.

Hi, guys. Really nice quarter. Easy one for you first, Aaron. On the OpEx side of things, do you expect it to remain relatively flat going forward or up or down a little bit? And then... I know you're not guiding for Q3, but typically and seasonally your September quarter would be up sequentially, and you're reasonable to believe that that wouldn't be the case this time. And then maybe for Jared, related to, I guess, Titan and just your penetration into the Chinese handset marketplace, how much do you think Titan will help you within that Chinese smartphone space? Thanks.

Okay, thanks for the question, Tony. So first on the OPEX, You know, our previous guidance was that we expected to be, you know, sustainably within 17 to 19 million of non-GAAP objects. We're running below that now. And while we previously said, you know, that could go up once we start traveling more and doing more marketing activities, certainly we're not anticipating doing a lot of that next quarter, given the resurfacing of COVID and some of those other issues. So, you know, I don't expect it to increase significantly, but longer term, it could be in the range of 17 to 19, as we previously said. And with respect to the seasonality, while it's true that Q3 typically is a strong quarter for us, given the outstanding performance in Q2 and how that was above our expectations and the resurfacing of COVID and supply chain issues on our licensees, we may not continue to beat Q3 on a sequential basis compared to Q2.

Okay, and Jared, the last question.

Yeah, again, we're pleased with how things are going with our channel licensing. With Titan, I'm not able to actually estimate the specific impact. This is coming at it from the angle of actuators and a new technology. It may take some time for that technology to be adopted, but we see the potential to grow the overall China licensing program with their participation.

Okay. Okay. Then if I may, two quick follow-ups. I think in the past you've commented about you think the auto segment will likely be your fastest growing, albeit it's smaller than the other two. I'm curious if that's still the case. And then I don't think you disclosed in the past what you mentioned on this call about Peloton being a license. How are they using it? Do you think there's other applications for kind of consumer devices?

So on the first question with automotive, just based on the adoption and what the OEMs are saying, we do consider that it'll keep growing. There's a longer lag time or longer time to production in that market. So that's something that just grows steadily over time. But we still anticipate that over time that will continue to grow. And then on your second question, in regards to, I can't talk too much about specifically what we're doing with them, but as far as other markets, we do see the potential in other markets for haptics outside of our core markets. In other consumer devices, kind of outside of gaming and phones, there is some potential there. So that's something that we keep an eye on and we do talk to some customers about, but there is some longer-term potential for that, definitely. Thanks, Jared. Appreciate it.

And again, if you'd like to ask a question, please press star 1 at this time. Next, we'll go to Derek Soderberg from Collier Securities. Your line is open.

Hey, guys. Thanks for taking my questions. My congrats as well on the strong results. I want to start with automotive. I was wondering if you guys could provide any more detail about what's sort of going on in there on the upside. I think in the past you guys have received upfront payments in that segment. Is that the reason at all for any of the upside? And if you guys could sort of segment where that revenue growth is coming from by application, you know, is it primarily touchscreen infotainment systems and how much of it is screens versus buttons and the steering wheel? Anything there would be great.

I'll respond to the first part of your question. Yeah, go ahead. There were a couple of upfront payments in the automotive sector, which I alluded to earlier in my conversation. Part of those were fixed fee payments that we received from automotive licensees.

And then regarding the different applications – it's actually we're seeing button applications and screen applications the different applications whether the buttons are in the center console or on the dash say so that continues and then interest in screens as screens become more prevalent in cars not just at the high end range I don't have a specific

distribution that that kind of changes over time but I would say that the the applications are still across those different those different modalities got it got it and then just looking at your cash balance and operating model I think you guys are going to be generating cash from here you guys talked about sustained profitability I guess I was just curious if you could provide some reasons on why you guys are going out and raising money You know, it seems like to me it could be for an acquisition. You guys, I'm just curious if you're more active in that space in M&A. And then what sort of would be the area of interest for you guys in that case? Would it be, you know, for more patents or hardware or both? Any detail there would be helpful. Thanks.

So we have no ongoing engagements with respect to M&A activities. I mean, we do look at things from time to time and keep our eyes open on what's out there. But there's nothing that we're engaged with at the current time. And with respect to, you know, the ATM in general, I'll refer you to our public filings, which has, you know, complete information at that.

Got it. And then where are you at with that new offering? How much have you sort of gone out and sold so far? And, you know, do you guys – what's sort of the timeline on you guys using that? You know, any updated commentary on that would be helpful as well.

Yeah, so any of the information that we're able to disclose is in our NQ file this afternoon as well as in our previous public files.

Okay, thanks.

And at this time, I'll turn it back to Jared Smith for closing remarks.

Thanks, Operator. And thanks to you all for joining us on the call today. Very excited with our continued progress and 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.

That does conclude our call for today. Thank you for your participation. You may now disconnect.