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Good day, and welcome to the Immersion Q1 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chief Financial Officer, Aaron Akerman. Please go ahead, sir.

Good afternoon, and thank you for joining us today on Immersion's first 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 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 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. Except as required by law, Immersion does not intend to update these forward-looking statements as a result of the 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 measures 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. As I reflect on the last 12 months since Q1 of 2020, I am proud of our team's progress in transforming our business to the profitability we reported today. In Q1 of last year, we were at the beginning of what would become a global pandemic with deep worldwide economic impact in the following quarters and in our core markets. Despite the challenges in 2020, we finished Q1 2021 at 14% year-over-year revenue growth across our core markets. Moreover, we reduced operating expenses by over 50%, yielding non-GAAP net income of $2.8 million compared to a non-GAAP net loss of $2.6 million in the same quarter last year. Additionally, we generated positive operating cash flow and closed the quarter with over $3 of cash per share. Many of our customers in our core markets experienced severe challenges in 2020, yet we see continued investment in haptics as a differentiator, a powerful user experience and a safety feature. Let's review developments in our core markets. In automotive, we see continued market adoption of our technology to improve usability and safety. We are well positioned for strong double-digit percent revenue growth in fiscal 2021. Our growth outlook is based on three factors: First, as highlighted in previous calls, we have seen a gradual market recovery from COVID, and based on recent forecast data from IHS, we believe light vehicle shipments will recover to pre-COVID levels by 2022. We also expect stable growth of vehicle shipments in the years ahead. Second, we see growing adoption relevance of haptics in new vehicle designs. We're excited to share that the Cadillac Celestiq and the BMW iX will feature haptic interfaces supplied by our existing Tier 1 licensees. BMW highlighted haptics as a key technology feature of its new shy tech design, introduced as part of its Vision iNEXT initiative. BMW design puts control in the background and only makes them visible when they are needed. Haptics enables HMI designers to enhance the usability and functionality of controls elegantly and discretely integrated into touch-based surfaces. Our technology unlocks new user experience and possibilities. Third, we continue to receive positive customer feedback on our automotive touchscreen hardware unit used for prototyping and our technologies in our product development kit. We are engaged with the number of OEMs in Tier 1s who are evaluating our technology and haptics for new vehicles and interfaces. This provides us confidence that we will continue to be successful signing up additional Tier 1 licensees and winning adoption in new OEM vehicle designs. In gaming, the PlayStation 5 continues to be in high demand. In its latest financial results published last week, Sony reported that it had shipped 7.8 million PlayStation 5 console since launch, which is slightly ahead of where the PlayStation 4 was during the same period after launch. Despite supply chain constraints, Sony noted that it currently expects the PlayStation 5 to ship more units than the PlayStation 4 sold in the year after launch. Based on high consumer demand for and positive reviews of the PlayStation 5 and its DualSense controller, we expect it to be very successful throughout its life cycle and catalyze increased demand for haptics more generally in gaming and VR. Similar to automotive, we expect double-digit percent revenue growth in fiscal 2021, driven primarily by a full year of Sony PlayStation 5 DualSense controller shipments. We continue to make progress in our pipeline, and I look forward to sharing more with you on the expanding role of haptics and our technology in gaming and VR products. In mobile, we continue to grow revenue from the China market through our channel licensing program. This program enables our channel partners to offer licensed haptic components to smartphone OEM. We recently expanded the scope of our agreement with a key partner, who is engaged with additional China mobile OEMs. We continue to see positive momentum in the China mobile market, and the ecosystem is working to enable a high-quality consistent gaming experience across Android devices, which has been one of the key barriers to meaningful adoption of high-quality haptic systems. A new working group in IEEE with participation from leading game and mobile companies in China is developing a standard for advanced haptic experiences on mobile devices. We believe this initiative will create new opportunities for ecosystem growth and corresponding revenue growth in 2022 and beyond. As we touched on last quarter, we continue to expect the mobile market to recover this year to pre-COVID level. Samsung, one of our largest licensees, recently commented that its mobile communications business had quarter-over-quarter sales growth of its smartphones underpinned by the launch of the Galaxy S21. It expects sales of new Galaxy A products to ramp up in the second quarter. We continue to see growing relevance of haptics to smartphone functionality, and this is reflected in continued customer renewals. We're pleased to share that Panasonic Mobile Communication recently renewed its licensing agreement and will continue to utilize emerging technology in its smartphones. Our mobile business is on track to meet or exceed our 2020 mobile revenue, and we are particularly pleased with the growth of our channel licensing revenue stemming from the China market. As part of our long-term strategy to support continued adoption of advanced haptics in our target market segments, we are a leading development of industry standards. Last Friday, our initiatives standardized haptics, an MPEG, achieved a target milestone. MPEG approved a call for proposals for coding of haptic effects. The proposal was developed by a working group comprised of representatives from Apple, InterDigital, Immersion and others. Android development will support future growth through expanded licensing opportunities of our patents as well as implementation in our software products. In addition to standards, we continue to drive new research and innovation to support long-term growth. Last quarter, we had numerous patents issued for new inventions relevant to gaming, mobile, automotive, and use of haptics in content distribution and playback standards. I'll now turn the call over to Aaron for a review of our Q1 results.

Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q1 2021 financial performance. Total revenue of $7.2 million for the Q1 2021 was up 14% from total revenue of $6.3 million in the same quarter last year. Revenue from per unit royalty arrangements increased approximately $0.9 million or 18% compared with the prior year quarter, primarily due to revenue from new licensees. Recurring revenues represented 99% of revenues in Q1 2021 versus 98% of revenues in the first quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns. And for the first quarter of 2021, a breakdown by line of business as a percentage of total revenues was as follows: 68% from mobility, 19% from gaming, 13% from automotive. Gross profit was $7.1 million compared to gross profit of $6.2 million in the same quarter of 2020. Turning to operating expenses. GAAP operating expenses of $4.6 million for the first quarter 2021 were down 57% or $6.1 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 $1.5 million lower salaries and benefits expenses; $1.4 million lower litigation, patent related and general legal costs; $1 million lower professional service costs; $0.9 million lower leasehold improvement amortization; $0.5 million lower facilities expenses; as well as $0.8 million reduction in other expenses. Looking at our net results. GAAP net income for the first quarter of 2021 was $2 million or $0.07 per diluted share compared to GAAP net loss of $4.8 million or $0.16 per 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 expenses. On a non-GAAP basis, we had net income of $2.8 million or $0.10 per diluted share in the first quarter compared to non-GAAP net loss of $2.6 million or $0.08 per share in the same period last year. We expect to see continued improvement in our profitability on both GAAP and non-GAAP basis in the coming quarters. Moving to the balance sheet. Overall, our balance sheet is growing stronger with total cash and cash equivalents of $102.6 million over $3 per outstanding share as of March 31, 2021, a $43.1 million increase from the $59.5 million as of December 31, 2020. We expect to continue to generate positive free cash flow in the coming quarters, despite the tough business environment.

Thanks, Aaron. We are very pleased with the significant improvement in our financial results compared to Q1 2020. We generated 14% revenue growth while cutting our operating expenses by over 50%, resulting in strong profitability and positive cash flow. We also closed the quarter with over $3 per share of cash and cash equivalents. We continue to achieve sustained profitability under our optimized operating structure. I'm excited that we are 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 the call up for questions, I'd like to note that given the circumstances, Aaron 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?

[Operator Instructions] We'll take our first question from Anthony Stoss of Craig-Hallum.

A couple of things here. Jared, you mentioned China mobile several times in your prepared remarks and on the press release. Can you give us a sense of maybe how big it might be already? What your expectations are kind of for the size of that opportunity in China? And then also, I found it curious, your comments related to haptics and gaming and Android in China. How do you think it could pay on the gaming side, and Google has been talking about embedding haptics in Android. I'd love to hear a little bit more on each of those topics, and then a follow-up after that.

As far as the China opportunity, as I said, we've grown it quite significantly from when we started the channel licensing program or signed up our initial channel partners or recent channel partners in the past couple of years. I can't really comment on how big it will be from the standpoint of what the market looks like. There is about 600 million phones that are manufactured by the China mobile OEMs. So it gives you an idea of the size of the market. And what we want to do is, through channel licensing and expanding the channel licensing program where we can to capture as much of that as we can. We're at the front end of that. It certainly has a big potential in terms of growth because of where we started from, and we've grown a lot this year. So I think the potential is pretty big. I can't give you a number, per se. As far as the -- your second question was specifically about the haptics -- Android haptics that we mentioned about China. Is that correct?

Yes.

Yes. So yes, that's a really interesting effort that's going on because this is something that's been a challenge for some time is that the haptics performance and the hardware they use and the other aspects of those subsystems has varied so much. It's been very difficult for companies. As an example, like Tencent, who is the big gaming company in China be able to -- for users to be able to have a consistent gaming experience. So this standard that they're pushing is a big step forward because whether that'll do it is, it will drive more consistent and high-quality haptic subsystems into phones, which is what they really need to happen to be able to enable that consistent experience. That's all good for us because it just -- it moves advances haptic into higher-end haptic systems, which utilizes our more advanced IT. And then what was your third question?

Really just Android making comments -- excuse me, Google making comments related to embedding haptics in next-generation Android software. Just so you can pay to that scenario.

Well, this again flow through our customers in the mobile ecosystem from the standpoint the ones that use Android or iOS from the standpoint of that's where we're monetizing in the mobile market is through -- of the handset of any kind that they upgrade. And I think there's been a lot of kind of market pressure to do that to get better haptics experiences because of what they've observed on other platforms. That's just going to help us both from a technology and just IT standpoint by up-leveling the experience and -- which requires up-level hardware and more advanced features.

Okay. And then lastly, on the PS5 and the pull-through for maybe other accessory or other gaming controllers. Soon we'll be approaching Christmas selling season again. Do you expect other new licensees to come on board, licensing from Immersion haptics for different types of game controllers into this fall?

Yes. I can't comment on specific engagements, but we're talking to a number of other players in that market. We did announce our collaboration with StrikerVR, which is a company that makes accessory technology that's going to utilize our trigger technology. And we have those discussions ongoing with others in terms of what their shipment plans would be in terms of when they can -- whether they would intersect the holiday season, I can't comment on, but the DualSense controller is certainly sparking a lot of interest among third-party peripheral manufacturers. I just don't have a comment on timing of when that might hit.

[Operator Instructions] We'll move to our next question from Derek Soderberg of Colliers Securities.

I wanted to talk a bit about automotive. Last quarter, it sounded like the 2021 setup was pretty nice. You have a couple of wins for future vehicles this quarter, more on the premium end. But would you expect this year for us to see an acceleration of mid-tier adoption? Or is that opportunity a little bit further down the line?

So we would expect to see or we do expect to see mid-tier adoption or continued mid-tier adoption actually this year. We see all this technology being advanced down into the mid-tier, some of the luxury yet. And then as that gets adopted into vehicles this year, you start seeing the revenue in the following years. But we're looking forward to more announcements this year from OEMs and also even new licensees from this standpoint of the different programs that they'll be supplying. And we do see that both in luxury and mid-tier. So you're going to see the mid-tier pickup.

Got it. And then I'm curious as well on automotive, if there is any opportunity with Apple and their CarPlay systems. It seems like they have a decent chunk of the market. Is this potential upside for you guys? Or would we have to wait for a renewal on that? Is that an opportunity for you guys?

Well, so our current model in the automotive market is that we licensed the haptic component manufacturers, right, in the Tier 1s to ship into those cars. So that's our current model. To the extent that any of the other technologies in the market that are driving those haptic implementations -- and more haptic implementations and better ones, we would benefit from that, and we see revenue growth from that. But that's currently where we're focused at is more specifically on the hardware side. So that -- but again, what we've seen everywhere is that things that happen elsewhere in the ecosystem are helping to drive adoption of more advanced haptics, and where they are beginning -- other parts of the ecosystem are actually implementing things in their systems that rely on haptics or engage factors.

Got it. And then finally, just wanted to ask a bit about cash. Looks like your net cash position is above $100 million. Curious as to what your plans are for use of cash this year. Is there anything out there may be supplemental to your portfolio to buy? Are you considering the option to spend some of that cash to repurchase shares?

So we don't typically comment on use of cash before, we actually do it through our public announcements. But certainly, our Board and management team are continuously looking at our cash balance and our capital allocation policies to make sure that we maximize value for shareholders.

And there are no further questions in queue. So I'll turn it back over to management for closing statements.

Thanks, operator, and thank you to all for joining us on this call today. I'm very excited with our continued progress and financial results. We're 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.