Q3 2019 Earnings Call
Good day and welcome to the Immersion Corporation Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jennifer Jarman Blueshirt group.
Please begin.
Thank you Corey good afternoon, and thank you for joining us today versus third quarter 2018 Conference call. This call is also being broadcast live over the web and can be accessed on the Investor Relations section of the company's website at Www Dot immersion dotcom with me on today's call or Ramsey heightened <unk>, president and CEO and.
Lynwood interim CFO .
During this call we may make forward looking statements, which may include projected financial results are operating metric isn't this strategy anticipated future litigation or after <unk> litigation anticipated future.
Feature expense were not [laughter] heated market demand or opportunities our operating model and other forward looking topic. These statements are subject to risks uncertainties assumptions. Many of these risks and uncertainties are beyond the control and version for more detailed discussion of these factors and other factors that could cause.
Actual results may vary materially interested parties have reviewed a risk factors listed in the press release me today after market close immersion annual report on Form 10-K for 2018 and its most recent quarterly report on Form 10-Q strong file with the U.S. Securities and exchange.
The forward looking statements mentioned on this call with life immersion belief predictions as of today, except as required by law immersion disclaims any obligation to update these forward looking statements as the result of financial business or any other development right. After the date of this really or to update the reason actual results could differ materially.
Well knows anticipated in these forward looking statements, even if new information becomes available in the future. Additionally, please note that during this call may discuss non-GAAP financial measure for each non-GAAP financial measure just got a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between them.
non-GAAP financial measure discussed.
Frankly comparable GAAP financial measure is available in today's press release, but that said I'll now turn the call over accused CEO Ramsey Randy.
Thank you Jennifer and thanks, everyone for joining us on my call or listening via webcast.
We're very excited today to provide a glimpse of the new emerging.
As you know we've been focused on establishing a growing and highly visible based recurring revenue that is starting to materialize.
Combined with the most would the cost reduction.
First we have initiated last quarter I'm very pleased that as of Q3 immersion has already transitioned out of cash burn mode and into a new era of sustained profitability.
Our strong and experienced management team has been hard at work formulating our strategic plan and today, we will share highlights of our focus in form an exciting growth division that will provide the platform for future success.
First let me provide an overview of our Q3 financial results then I will review our progress across the operating goals, we outlined last quarter before highlighting key elements of our strategic initiatives moving forward.
In addition, we plan to provide a deeper dive into our go forward strategy at an analyst and Investor day to be held on a warning on November 18 in New York was that I will turn it over to land. Thank you Ramsey.
Immersions revenues for the third quarter were 10.6 million up 2.1 million or 24% from revenues of 8.5 million in a year ago period.
This increase primarily reflects increases in royalty revenues related to lump sum sees stemming from new agreements that we entered into during the second and third quarters of 2019, partially offset by decreases in variable royalties due to lower shipping volumes.
Revenues from royalties and licenses in the third quarter of 2019.
It is variable royalties based on shipping volumes and per unit prices totaling 6.4 million and fixed license fees totaling 4.1 million.
This compares to variable royalties of 4.1, Diane and fixed license fees of 4.3 million in the air they'll period.
Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns.
For the third quarter of 2019, a break down by line of business as a percentage of total revenues was as follows.
79% from mobility.
15% from automotive.
6% from gaming.
Looking at year over year trends.
Mobility revenues were up 50% from the same quarter last year, primarily due to license agreements entered into in the second and third quarter of 2019, which contain bulk lump sum and variable revenue components.
Partially offset by decreases in variable royalties due to lower shipping boss.
Automotive revenues were up 9%.
Primarily related to certain per unit royalty agreements with revenues in excess of annual minimum royalty provisions, which we recognized as revenue during the third quarter of 2019.
Gaming revenues were down 53% during the third quarter 2019.
Primarily due to lower shipping volumes.
Gross profit was 10.7 million compared with gross profit of 8.6 million in third quarter of 2018.
Turning now to operating expenses, excluding cost of revenues total GAAP operating expenses were 11.8 million in the third quarter of 2019.
Paired to 13.7 million in the year ago Gary.
Sales and marketing expenses were 1.7 billion for each of the third quarters in both 2019 and 2018.
Research and development expenses of 1.9 million in the third quarter of 2019 decreased 0.2 million were 8%.
Paired with the last same quarter last year.
This decrease was primarily driven by lower compensation cost as a result of our cost reduction efforts.
General and administrative expenses of 8.2 million.
Decreased 1.7 million or 17% compared with the same quarter last year.
This decrease was primarily driven by a reduction in litigation and legal expenses.
Following legal settlements during the third and second quarters of 2019.
Looking at our net results GAAP net loss for the third quarter 2019 was 1.4 million or four cents per share.
Paired with GAAP net loss of 4.6 million or 15 cents per share in the third quarter of 2018 [noise].
In addition to normal GAAP metrics, we use non-GAAP net loss and non-GAAP loss per share to track our business performance.
As a reminder, we define non-GAAP net loss as GAAP net loss adjusted to reflect cash tax expense less stock based compensation and restructuring expenses.
non-GAAP net income in the third quarter was 48000.
Or zero cents per share.
Compared with non-GAAP net loss of 2.2 million or zero cents seven cents per share in the same period last year.
Turning to the balance sheet.
Overall, our balance sheet remains strong with our total cash portfolio.
Including cash and short term investments at 95.6 million.
As of September Thirtyth 2019.
Our total cash portfolio used during the third quarter was 6 million.
Down from 16 billion in the second quarter.
The latter of which included a 6.9 billion dollar reimbursement paid to Samsung.
The sequential decrease was primarily due to higher cash collections and decreases and legal and litigation expenses. Following legal settlements in the third quarter of 2019 as compared to the second quarter.
As noted last quarter in March this year.
We received a determination from the council of international core to Barbara Tracy.
Where we were directed to reimburse Samsung roughly 6.9 million.
Plus 0.9 million in court fees for withholding taxes.
Samsung had paid to the Korean taxing authorities on Immersions behalf.
We recorded the amounts to be reimbursed on our balance sheet as both long term asset and the current liability in accounts payable.
We paid the reimbursement during the second quarter.
As we approach yearend, we have revised our expected 2019 revenue range to between 35 million and 38 million.
And our anticipated bottom line non-GAAP net loss to between 12 million and 15 million.
From an opex standpoint, our expected GAAP operating expenses remain between 55 million and 58 million.
Which includes noncash stock based compensation expense of between six and 7 million.
Resulting in non-GAAP operating expenses between 48 million at 52 million.
Including now your numbers are approximately $11 million and litigation expenses [noise].
This is a net loss we are expected to incurred domestically.
We are forecasting cash tax expense for the year to be I have 2 million or less.
Our mix from current revenue in Q3 was approximately 64%.
And as we continue to focus in on establishing more predictable recurring revenue streams. We expect this next to increased to over 70% in Q4.
Additionally, as Ramsey mentioned earlier based on the success to date and implementing our corporate transition. We expect further expansion of our profitability on a non-GAAP basis in Q4.
With that I will now I'll turn it back over to Ramsey.
Glenn.
As you can see from our financial commentary, we've already started to see a ramp down of expenses, including a 94 sequential decrease in litigation expenses.
Last quarter, we also share details regarding a revised opex structure and the levers to drive down expenses to be inline with our desired company profile.
Typically in the area as we outlined during our last call who have made the following initial progress.
One.
Regarding the more efficient management of our patent portfolio. We have already trained over 400 issued patents and over 300 patent applications from the pool, resulting in a 14% reduction in prosecution and maintenance fees from Q2 Q3.
We continue to focus our resources on the most valuable IP and to eliminate spending that is not tied to emerge as long term success.
This review process will continue and is expected to result in additional savings as we aim to cut our annual patent prosecution costs by 50% and all patent maintenance costs by 30%.
Two.
Consulting and professional services decreased 23% from Q2, Q3, and we continue to target any eventual 40% reduction from prior levels [noise].
And three we achieved sequential cost reduction on the order of 2% in engineering and Gionee through the realignment of our employee footprint, including targeted resource migration to Montreal.
The Board has also approved plans to exit our Silicon Valley office facility as soon as practicable in favor of accommodations conforming to our reduce operating structure.
Wow. This is expected to result in additional restructuring charges, we believe that can run the business more effectively with the smallest footprint and the lower ongoing costs with monthly savings in cash flow upon subleasing the facility.
This progress demonstrates that we already well under way towards our goal of reducing non-GAAP opex to below $32 million for 2020 , which is a key underpinning of our strategy to drive sustained profitability.
That being said, we do not intend for our cost cutting initiatives to eclipse our ability to capitalize on the growth opportunities in front of us and we will continue to invest diligently in a responsible manner.
The next components of our strategy is to generate a compelling product and technology road map to support growing and recurring revenue, while optimizing immersions worldwide patent licensing business from current and new licensees.
Essentially we are accelerating our transition from a patent licensing business. It's a combination of both patent and technology licensing.
As such investing in underlying haptics technologies and the promotion of the compelling experiences that those technologies enable remains key to our growth.
We believe haptics continues to be an early stage with strong growth potential ahead.
Currently there are no standards regulating the implementation and deployment of haptics, what the mandatory or de facto.
This has resulted in an industry wide challenges to adopt and scale new high quality haptics experiences.
Immersion may accelerate adoption of the haptic ecosystem by facilitating industry wide standards to enable easier adoption.
We look forward to sharing more impact on its approach at our upcoming Investor Day [noise].
Moving forward, we plan to focus our product efforts on the following market segments automotive PC gaming.
VR mobile and adult.
For several of these markets patent licensing will continue to be an essential component and our mandate around mandate is hey to continue to work towards contract renewals as well that new licensing opportunities across our markets, including making our IP licensing program successful.
And b to refine and strengthening our patent portfolio, which at the core helps drive immersion technology solutions and adoption.
So how do we frame our product solutions in order to target these areas and execute on the next year about growth strategy.
We will focus on two product initiatives designed to deliver compelling touch experiences across multiple market verticals.
We're break these down into two categories that we referred to as inform and excite.
Both initiatives are designed to deliver horizontal platform technologies to efficiency address multiple market verticals.
They inform program will facilitate easy adoption of high fidelity cost effective effective haptics for touch interfaces.
And we'll spend touched based human machine interface is for everyday use cases.
The program will help our customers deliver high fidelity reproduction mechanical buttons and controls across markets, such as automotive PC and mobile.
In markets such as automotive, we have a strong foundation of existing tier one patent license fees, such as outlined in electronics pre and continental who just renewed its license.
Our inform product initiatives provide a path to deliver and capture more value for reference designs firmware and haptic design tools.
In addition, we are partnering with the industry on bringing new innovations to market.
This quarter for example, we entered into a collaboration agreement without alpine to jointly develop new human machine interface technologies for cars.
Turning to our excite program. It is designed to enable spectacular immersive touch experiences.
Think of it adds lifelike touchy experiences for digital content and markets, including gaming VR mobile any new category that we'll pursue within the adult market.
The exciting initiative will enable extensive creative control live experiences with the objective to enable haptics to play a central role role alongside video and audio.
We already see proof points in the market for these types of experiences.
For example, Sony Interactive Entertainment one of our licensees recently announced that the Playstation five controllers will include higher fatality advanced haptic features.
We plan to share more details regarding our informatics night initiatives, including product approach and our view of the market potential at our upcoming Investor day.
Lastly, there is be inorganic component of our future growth.
As I communicated last quarter the goal of our strategic planning is to ensure that all of our resources are fully optimized an allocated to create long term shareholder value.
Our board is aligned with management and taking a prudent approach to opex being resolutely focused on more predictable profitable revenue generation and determining the best direction for our capital allocation policy, while supporting these goals.
We are therefore taken an ownership mentality as it relates to our capital allocation in our efforts to maintain a healthy balance sheet.
While also pursuing stock buybacks and tuck in acquisition when appropriate.
As we look to scale our growth we plan to explore highly strategic asset acquisitions that may help us accelerate ARX or expand our initiative.
We are taking a very responsible approach towards pursuing any opportunities as it relates to the size and accretive nature of any deal possible phase for from a market product and technology perspective, as well as a management and geographic fit.
Emerging has established a new baseline from which to carry out our vision for success.
By accelerating the shift to a more predictable revenue mix, taking timely and decisive action and the realignment of our expenses, we have crossed the threshold and for profitability with the ability to sustain and expanded from here.
So lots of exciting opportunities in front of us and a well analyze fresh approach in plays from which the to profit from which to profitability grow and capitalize on our target markets.
Importantly, our go forward strategy does not require us to recreate the wheel.
Rather we will leverage the Companys 20, plus years of innovation in making compelling digital touch experienced as possible by advancing the art and science of haptics.
This will be in comp accomplish not just by licensing our underlying IP, but also through technology products breakthrough innovations and ecosystem support.
We've only just scratched the surface regarding our strategic path to success today.
I look forward to seeing many of you on November 18th in New York to meet the new team experienced some of our product demonstrations and learn more regarding our plans for executing across our markets where that would like now to open up the call for questions operator.
Thank you if you would like to ask your question. Please taking them by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question.
Pause momentarily to allow everyone an opportunity to signal for questions.
Well take our first question from Charlie Anderson.
So where do you can company.
Yeah. Thanks for taking my questions I'm looking for the analyst day in a few weeks.
Ramsey I Wonder if maybe you could just first address the downward revision to the revenue for the year pick at the midpoint a couple of million dollars, maybe just what changed relative to three months ago.
Maybe just to take out into that.
Pipeline looks in terms of licensing opportunities as you look at the next year I'm not going to follow up.
Sure I'm you know Charlie why we don't provide the quarterly guidance, we did see some timing differences over Q3 Q4.
In Q3, we forecast certain customer deals in automotive in mobility, but those are going to occur in Q4 of 29 team.
And in Q3, we forecast certain customer deals that are going to be pushed out into 2020 , we don't see let down in the overall strategy or or revenue trajectory, but we did see a somewhat of a delay in executing some deals or revenue coming in.
Forgive me talking about what was the second question yeah.
The health of the licensing pipeline as you see it looking into next year.
Sure the pipeline right now is consisting of.
Automotive.
Mobile.
And adult.
And each of which we have a dedicated sales and marketing team I'm focused on some of it as new markets. Some of it is existing markets and the.
Automotive market, we have about 80% penetration in the tier one we're going to continue to close the remaining ones. There's some large ones that are in progress today.
We are going to be hiring sales force in Europe to continue to manage that pipeline.
And automotive our I continue towards focusing on the non Korean Android opportunities, mainly the Chinese Oems, which we still need to address.
Market is a brand new ones for us and that has been an incoming opportunity. Therefore, we do see some potential progress in the short term, meaning 2020.
Okay, Great and then in your script for my follow up you did mention.
In terms of cap allocation buybacks, you also mentioned acquisitions I wonder.
The acquisition front, if you could maybe just elaborate some other criteria you would look for.
In terms of what would be a good fit for you guys. Thanks.
Sure Yeah. The goal here is to accelerate our current efforts not to try to prevent the company to get into a whole new market. So we're going to take on a prudent approach.
Which leaves cash for either reserves or stock buybacks.
We're also want to pursue acquisitions that will increase our IP in a responsible way so creating a acquisition taken on acquisition that deep South our technology is one of the IP position would be something that's important the strategic fit is going to be a critical so it's gonna have to be something that is very dry.
Means our current courses I have as I have outlined it.
Perfect. Thanks, so much.
Thanks, Charlie.
Once again, if you would like to ask your question. Please press star one on your telephone keypad now.
We'll take our next question from Anthony Stoss with Craig Hallum.
Definitely Ramsey in the OLED a couple of questions.
Once you complete the a the opex shrink sometime in 2020 between now and then do you have any sense of what it's going to take from a restructuring charge standpoint, but also when you look out in the 2020 I'm not asking for numbers, but given mobile is your biggest revenue generator. What do you think the growth rate might be for your mold business and you think you could brianna.
The new customer in mobile.
Oh, I'll talk specifically to the a restructuring piece.
You'll see in the 10-Q that comes out Theres, a subsequent event disclosure specifically related to the lease.
And what we talk to is that there's a $2.4 million right abuse asset for the lease and the net book values of the lease hold improvements and furniture and fixtures are about 1.1 million.
[noise] the restructuring charges associated with that will be timed towards Q4, and possibly Q1, depending on the amount of time it takes us to access the facility here.
Okay all right.
And beyond that facility restructuring charges as you.
Shrink heads et cetera.
I think weve accounted for most of that are already in our restructuring adjustment that we've made in the body of Q3.
And then Ramsey mobile growth 2020, or thoughts on bringing on new customers for mobile.
I think the combination of our I see strategy, which we continue to push forward.
Plus signing on new ice tea partnerships that we're currently working on in addition, the exciting initiative, bringing new technology that will be appealing to the Chinese companies as opposed to just a patent licensing, but license and thirdly, a read doubled effort in light of the latest.
Wins of change in patent licensing in China, I'm not sure how significant that isn't we've all seen that <unk> settlement out there, but you know it remains to be seen if this is a trend or one exception, but we're definitely going to try to take advantage of this and push forward. So we have three three elements about China strategy, we're going to continue to push forward on.
And then you mentioned beyond just IP license the technology licensing is there a market that.
Too expensive for you to go after that you could leisinger Ah.
Technology to let somebody else run with it is there a market for help us understand what are the markets that you're not tapping into.
I would say the aiotv market is the most fragmented and high maintenance market that we are not going to pursue from a technology perspective, the needs of the different aiotv.
Our so varied even the definition of Ifyou. So varied we don't even know where to start so what kind of leaving the aiotv markets for patent licensing both focusing strictly opportunistically opportunistically on any company that might be infringing, our IP and and going about it the build the old way so to speak.
Then my last question any guess in terms of what you might need it for litigation expense and 2020.
Oh not at this point I, we aren't going to keep some reserves as you know our businesses IP. So protecting I'd be continues to be our top one of my top priorities I do not have a number in mind, but we're going to continue to be on the look out for any opportunities, where we have reached dead and therefore, where it might have tripled.
Trigger on.
Okay. Thank you best of luck.
Thank you.
Thank you I'll now turn the call back over to today's speakers.
[noise], Thanks, operator, and thank you all for joining us on this call today, we look forward to seeing many of you soon at our analyst and Investor day have a good day.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
[noise].