IMMR - NASDAQ

Good day and welcome to the Immersion Corporation Q4 2019 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.

Thank you, Todd. Good afternoon and thank you for joining us today on Immersion's Fourth Quarter 2019 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 Haidamus, President and CEO; and Aaron Akerman, 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 product, future expense reduction, 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, Immersions annual report on Form 10-K 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 belief and predictions as of today, except as required by law Immersion disclaim 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 our 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 will now turn the call over to the Chief Executive Officer, Ramzi Haidamus. Ramzi?

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 line Immersion for success and shareholder value creation. We ended the year on a very positive note, achieving GAAP profitability in Q4. 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 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 remained focused on our goals to drive near-term profitability and to strengthen our direction in execution and areas of expense management strategy, corporate governance and operations. First, I'll touch on one of the key initiatives recently achieved, completing the build-up of our leadership team as we welcome Aaron Akerman as our new CFO last month. Aaron is a tremendous addition to our executive team based on the depth and breadth of its 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 Q4 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, Ramzi. I'm extremely excited to be 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 where information regarding our Q4 and full year financial performance, including tables illustrates the comparison of our revenue for the fourth quarter and full year to the same period a year ago. Our revenue of $11.5 million for Q4 2019 was, up 5% from revenue of $10.9 million a year ago. 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 2019. 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 industrials, gaming, automotive and medical licensees offset in part by an increase in royalty bearing-shipments reported by mobile licensees. For the year ended December 31, 2019, total revenues of $36 million decreased $75 million or 68%, compared to the prior year. The decrease was primarily attribute to a $71 million decrease in fixed fee license revenue as a result of large fixed fee agreement signed in the first quarter of 2018. As discussed in previous calls, the treatment of fixed fee arrangements under ASC 606 has contributed to some lumpiness in our results and reduces comparatively with prior year results. That said, we are making progress towards our stated goal of transitioning most of our revenues to recurring these are instead of relying on one time 60 arrangements. Recurring revenues represented 60% of revenues in Q4 2019 versus 51% of revenues in the fourth quarter last year, and 69% of revenues in fiscal 2019 versus 20% in fiscal 2018. Turning to operating expenses, GAAP operating expenses for the fourth quarter and full year 2019 were down 24% and 1%, respectively from the comparable period 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 2019, and we will continue our cost reduction program with the plant relocation of many of our administrative functions in Montreal in 2020. Specifically, as it relates to our key OpEx production numbers in Q4, we continue the optimization of our patent portfolio, where we have now trained over 100 issued patents and approximately 500 applications from the pool, resulting in another 25% reduction in prosecution and maintenance fees from Q3 to Q4. We remain on track to cut our annual patent prosecution costs by 50% and our patents and maintenance costs by 30%. Consulting and professional services decreased in 18%, from Q3 to Q4, and we continue to target an eventual 40% reduction from prior levels. There were some non-recurring operating expenses this quarter. During the fourth quarter, our board approved the plan to vacate our San Jose facility by March 31, 2022 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, which contributed 522,000 to operating expenses in the quarter, as well as we were 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 taxes spend 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. As of December 31, 2019, 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 allowances 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 million or $0.03 per diluted share. GAAP net last for the year was $20 million or $0.64 per share per diluted share. Non-GAAP net income for the fourth quarter was $3.1 million or $0.10 per diluted share. Non-GAAP net loss for the year was $13.2 million or $0.42 per 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 $89.5 million at year end, down from $124.9 million at the end of 2018. Primarily due to cash used in operation, the $6.9 million withholding tax reimbursement paid to Samsung in the second quarter as well as $2.7 million of cash used for stock repurchases. We will continue to keep a strong focus on our cost reduction efforts, while ensuring that our spend in line with key strategic initiatives. I'd now like to provide an update on our guidance for 2020. Like others in the industry, we're monitoring the impact of the COVIT-19 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 our currently projecting total revenue of $31 million to $35 million 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 backend loaded toward Q3 and Q4 of 2020. 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 payment to recurring revenue. The majority of which it will be structured as per unit royalty fees, based on volumes shipped by our customers. We expect recurring revenues in 2020 to represent over 80% of our revenue mix, up from 59% in 2019. Regarding our expense outlook for 2020, we expect GAAP operating expenses of between $36 million and $37 million, down from $57.4 million in 2019. Included in this number is non-cash stock-based compensation expense of between $5 million and $6 million. On a non-GAAP basis, we expect 2020 operating expenses to be between $29 million and $30 million, ahead of our original $32 million target and down from $50.5 million in 2019. Further, as a result of our ongoing cost reduction programs, we now expect to exit fiscal 2020 with a non-GAAP OpEx run rate of approximately $27 million beginning in the fourth quarter. Due to the full valuation allowance we continue to carry, we're forecasting cash income tax expense for the year to be approximately $200,000. As a reminder, we define non-GAAP net income and GAAP net income adjusted to reflect cash taxes, less stock-based compensation and restructuring expenses. We expect 2020 non-GAAP net income to be between $1 million and $6 million or $0.04 and $0.19 per diluted share. With that, I will now turn it back over to Ramzi.

Thanks, Dan. It's been 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 new, outstanding group of advisors through which we added direct representation from our largest shareholder. While 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 for 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 policies to include stock buybacks and strengthening our corporate governance.

Thank you. [Operator Instructions] We'll take our first question from Charlie Anderson with Dougherty & Company.

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 wasn't known -- that it's kind of 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 I got a follow-up.

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 '19.

I get that. So, the -- but there was the 20% goal put out at the Analyst Day. I know you guys have talked about COVID-19 being an impact. Is that literally the impact that causes that dynamic? Or are there other things to call out?

That's the main impact. Had we not taken into account -- had we not adjusted our forecast for the COVID-19 situation, we would have seen an additional 20% growth in recurring revenue this -- in 2020.

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

Sure. So thank you, Charlie. With automotive, it's becoming very apparent that, 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 our technology and not just our patents. 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 1 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, not just the patent -- not just at the patent level. So that's automotive. In the adult, I'm very pleased with FeelRobotics. 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, because we are receiving several inbound requests for help and assistance and bringing in the sophisticated haptics into this market in the form of technology, software, design support and what have you. FeelRobotics is the leading provider of technology platform in this space. The good news about FeelRobotics 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 FeelRobotics 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 or guarantee as a revenue, as this 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 the 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 and hobbit 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 is opportunity. We don't believe there's a lot of successful history in companies collecting from this market, specifically patent licensing market 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 patent. On the PC 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, as nothing imminent. So, we're going to continue to engage, but much more cautiously, given that we are seeing traction in adult as well as automotive, which is where our -- most of our engineering resources are going. We are holding off -- opening up a third investment, so to speak in PC.

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.

The only 10% customer for the year is Samsung.

Okay. Do you have the amount that you want to share now?

27%.

Sorry, how many...

27%. Great. Thank you so much.

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

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