Q4 2019 Earnings Call
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 Immersions fourth quarter in 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 Dot immersion dotcom with me on today's call around behind them as president and CEO Erin increments.
No.
During this call we may make forward looking statements, which means and projected financial results are operating metrics business strategies anticipated future litigation or assets have litigation anticipated future product feature expense reduction is estimated tax expenses anticipated market demand or opportunities our operating model and other.
Looking tie these statements are subject to risks uncertainties and assumption many of these risks and uncertainties are beyond the control other version.
For more detailed discussion of these factors and other factors that could cause actual results could vary materially interested parties shouldn't view the risk factors listed in the press release, we issued today after market close Americans 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.
[laughter].
Forward looking statements mentioned on this call reflect immersions belief and predictions as of today, except as required by law immersion disclaims any obligation to update. These forward looking statements as a result in financial business or any other developments right. After the date of this really or to update the reasons actual results could differ materially from those into the.
They did any forward looking statements, even if new information becomes available in the future. Additionally, please note that during this call. We may discuss nongaap 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.
Got it and the most directly comparable GAAP financial measure is available in today's press release, but that said I'll turn the call over to Chief Executive Officer, Ramsey Haida Ramsey.
Thank you Jennifer and thanks, everyone for joining us on the call or by listening in by webcast.
I'm pleased to speak with you again today to reflect our accomplishments in 29 team and the significant changes we've undergone to realign their margin 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 short and long term.
I'm also pleased to know that based on the strong progress we've made and optimizing 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 remain focused on our goal to drive near term profitability.
And to strengthen our direction them execution in areas of expense management strategy corporate governance and operation.
First.
I'll touch on one of the key initiatives recently achieved.
Completing the build out of our leadership team as we welcomed Aaron Ockerman as our new CFO last month.
Aaron is a tremendous addition to our executive team based on the depth and breadth of his financial expertise is operational leadership and his strategic understanding of software and technology driven growth businesses.
He is based in our Montreal office and has already hit the ground running.
I'm pleased to have them here with me today to provide an overview of our Q4 results and Twentytwenty outlook.
Following his remarks I will continue with our annual recap and vision for the new year.
With that I'll turn it over to Aaron.
Thank you for the warm welcome Ramsey I'm extremely excited to be part of immersion I look forward to meeting many of you over the coming months.
Let me begin by referring you to this afternoon's press release.
Permeation regarding our Q4, four and full year financial performance, including tables that illustrate the comparison of our revenue for the fourth quarter and full year, 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 [noise].
Revenue from fixed license fee arrangement 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 arrangement was down approximately 300000 or 3% compared with the prior year quarter, reflecting declines in reported royalty bearing shipments by commercial and industrial gaming automotive and medical licensees.
Offset in part by an increase in royalty bearing shipments reported by mobile licensees.
For the year ended December 31st 2019, total revenues of $36 million decreased $75 million or 60% compared to the prior year.
The decrease was primarily attributable to a $71 million decrease fixed fee license revenue as a result of a large fixed fee agreement signed in the first quarter of 2018.
As discussed in previous calls the treatment of fixed fee arrangements under AMC six so six has contributed to some lumpiness in our results and reduces comparability with prior year results that said, we're making progress towards our stated goal of transitioning most of our revenues to a recurring nature instead of relying on onetime fixed fee arrangement.
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 periods last year.
The reduction in expenses for the quarter Endear 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 plans relocation of many of our administrative functions to.
Montreal and 2020.
Specifically as it relates to our key opex reduction levers in Q4.
We continue the optimization of our patent portfolio, where we have now trimmed 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 18% from Q3, Q4, and we continue to target and eventual 40% reduction from prior levels.
[noise] there were some nonrecurring operating expenses this quarter.
During the fourth quarter, our board approved a plan to vacate our San Jose facility by March 31st 2020 and to some but the facility as soon as possible thereafter.
Consequently, we began accelerating the amortization of the San Jose leasehold improvements over that period, which contribute four which contributed 522000 to operating expenses in the quarter.
As well we were recognized an impairment of 939000.
Dollars to the right abuse leased asset, which also impacted operating expenses in the quarter.
Moving on to income taxes.
Income tax expense of $471000 for the year, primarily reflects estimated foreign taxes and foreign withholding tax expenses and an increase in evaluation allowance against certain of our foreign deferred tax assets.
At December 31, 2019, we carry evaluation allowance against substantially all of our federal state and foreign deferred tax assets.
We routinely assess factors related to the realize the ability of our deferred tax assets to determine if or when I, just an adjustment to our valuation allowance is appropriate.
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 worth three cents per diluted share GAAP net loss for the year was $20 million was 64 cents per diluted share.
Non-GAAP net income for the fourth quarter was $3.1 million or 10 cents per diluted share non-GAAP net loss for the year was $13.2 million or 42 cents per diluted share.
Turning to the balance sheet.
Our balance sheet position remains very strong as we exit the year or 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 operations.
The 6.9 million dollar 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 focused on our cost reduction efforts, while ensuring that our spend in line with key strategic initiative [noise].
[noise] I'd now like to provide an update on our guidance for 2020 [noise].
Like others in the industry beer monitoring the impact of the Cobiz 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 interveners the specific impact it's difficult to assess at this time. However, we believe it's prudent to account for broader variability in our outlook and are 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 and several of our end markets such as mobile and gaming and as such we expect that revenue will be back end loaded towards Q3 in 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 onetime fixed payments to recurring revenues the majority of which will be structured as per unit royalty fees based on volumes shipped by our customers.
We expect recurring revenues and 2020 to represent over 80% of our revenue mix up from 69% and 29 team.
Regarding our expense outlook for 2020, we expect GAAP operating expenses of between 36, and 37 million down from 57.4 million in 2019.
Included in this number is noncash stock based compensation expense of between five and $6 million.
On a non-GAAP basis, we expect 2020 operating expenses to be between 29 and $30 million ahead of our original 32 million dollar targets and down from $50.5 million in 29 team.
Further as the result of our ongoing cost reduction programs. We now expect exit fiscal 2020 with a non-GAAP opex run rate of approximately $27 million beginning in the fourth quarter.
[noise] due to the full value a valuation allowance. We continue to carry we are forecasting cash income tax expense for the year to be approximately $200000 [noise].
As a reminder, we define non-GAAP net income as GAAP net income adjusted to reflect cash taxes.
Stock based compensation and restructuring expenses.
We expect 2020, non-GAAP net income to be between 1 million and $6 million or four cents 19 cents per diluted share.
With that I'll now turn it back over to Ramsey.
Thanks Aaron.
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 afterward immersion underwent a major transformation of our board.
This resulted in a new outstanding group of advisors to which we added direct representations from our largest shareholder.
With 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.
And it didn't seem to putting a new executive team in place and proactively adding direct shareholder representation to our board core elements underlying corporate transformation included.
Dramatically, reducing opex, where the laser focus on profitability.
Shifting the nature of our business model.
Establishing a path to revenue growth.
Creating a capital allocation policy to include stock buybacks and strengthening our corporate governance.
[noise] zeroing on our progress in each of these areas.
First and maniacal focus on immediate cost reductions and drive to drop to profitability.
We believe profitability is Paramount and from day, one would have been laser focused on opex reductions to transform the cost structure of the business and return to more value to shareholders.
Our progress in the second half of 2019 included $6.1 million and reductions in litigation 1.2 million of patent.
1 million in consulting and 0.1 million in engineering, and G.N., a related to Canada resource migration and the planned reduction of our real estate footprint in California.
And our efforts to rightsize, our operation do not stop there.
As Aaron indicated we see opportunity to significantly lower our opex level even further.
The goal of reaching 27 million non-GAAP run rates by Q4.
This will position emerge into greater success and continued expansion of our profitability and twentytwenty on and beyond.
Second.
The shift to a more transparent and sustainable business model that will deliver more predictable growth.
They became quickly your parents that Americans ability to grow and to measure its success was being impeded by lump sum nature of its revenue model.
We outlined a clear path to shift the company's revenue orientation from short term onetime payments to recurring revenue deal that can be recognized on a quarterly basis and allow us to share and the success our technology brings to our customers product.
Recurring revenue consists of two main forms like.
Licensees will report per unit loyalty received during the quarter or who make fixed payments on a quarterly basis.
Or a combination of the too.
We are pleased that this transition is reaching toward our goal with more than 80% of revenue in twentytwenty projected to come from recurring revenue as Aaron indicated.
Third.
Creating a path for recurring revenue growth.
Along with the shift in our business model, we needed to reposition immersion for growth leveraging their companies rich technology assets.
While recognizing that we still have a pivotal role to play and ensuring that haptics usage will continue to thrive and grow.
This resulted in the development of a new inform and excite strategy encompassing both patent and technology licensing.
This strategy was approved by the board and provide the optimal approach towards long term value creation.
We highlighted the focal points of this plan at all well attended Investor Day in November.
We encourage those were mistake to review the presentation and the webcast, which are available on our Investor Relations site.
In Q4 and over the past few months, we began execution of our new strategy.
And automotive we are focused on winning additional tier one licensees as well as expanding our business with our existing customers.
We have a strong foundation with around 10 tier one licensee.
We're working to expand the value and roll of Haptics haptics would these customers.
One such example is continental whom we highlighted last quarter as they executed and expanded license to integrate haptics and broader range of user interfaces, including accelerator pedal.
And along with our strategy were introduced two new automotive product experiences at CES in Las Vegas, as well as automotive world in Tokyo, Japan.
The first is a new large touch screen reference design, featuring our active sensing technology software and advanced <unk> actuators from TDK.
In electronics component partner based in Japan.
This solution built and expands on our previously time based on linear resident actuators.
These solutions demonstrate how different haptics system designs paired with our software technology can deliver high fidelity H.M.I. experiences in the automotive environment.
We are providing automotive licensees access to our these I know how software and patent portfolio through an integrated automotive licensing program [noise].
We are encouraged by our customer engagements at CES and automotive world.
We also collaborated with Alps, Alpine leading global manufacturer of electronic components and systems to jointly develop and showcase and integrated backlit interior touch panel with advanced haptic effects.
Immersion consulted only design and provide our active sensing technology software to power the experience.
This solution will showcase at CES and its subsequent OEM customer meaning [noise].
Both immersion and Alps outlined believe haptics will enable new innovative human machine interface possibilities and improvements in the evolving automotive cockpit.
We will continue to collaborate and jointly develop new solutions and experiences with Alps Alpine as part of our partnership.
As part of our new strategy, well identified an opportunity to license technology to the multibillion dollar global adult device market.
I am pleased to share that we have just executed a strategic commercial partnership with fetal robotics and innovative sextet company based in Amsterdam.
Under the terms of this partnership we will deliver advanced have to control software and format technology that enables more advance adult experiences, including control of devices by content and interactive applications as well as remote intimacy use cases.
We're also licensing access to our extensive patent portfolio.
We believe hundreds of patents in our portfolio are relevant adult devices and related interactive use cases.
Our technology and patents will be available to adult devices are we device Oems via an integrated solution from feel robotics.
The commercial partnership is based on a revenue sharing model so both parties share and the success.
Peter Robotics is pursuing a software as a service model based on an end user users usage of the OEM device with content services.
We will collect it double digit percentage of the revenue.
Assuming an active lifespan of a device over a two to three year time period commutative revenue per device should be in a low single digit dollar range.
In gaming, we continue to anticipate persona is public statements the release of its Playstation five gaming console and the holiday Twentytwenty timeframe.
As we previously announced last May Sony Interactive Entertainment took a license to our haptics technology for gaming NVR controllers.
We therefore anticipate revenue from Playstation five controllers once shipments commence towards the end of our fiscal year.
We're also continue to believe Sony's new control those were catalyze increased market demand for advance intra interactive haptic experiences.
And mobile emergent remains predominately a patent license or today.
And we continue to be diligent and pursuing all revenue opportunities available to us, including our channel strategy in China.
We are beginning to see initial shipments of license chips from our licensed I see partner.
We will continue to evaluate where we can maximize the value of our IP in this market.
Though it's still early days in execution of our new strategy market feedback as well as our activity with Alps, Alpine and feel robotics provides validation that we can deliver value with new technology products. In addition to patent licensing to support long term growth.
We look forward to keeping you updated on our progress.
As highlighted on our Investor day, we believe the time is right for standardization of haptics across it technology stack.
Some design guidelines <unk> decoders to hardware interfaces and vibration motor performance characteristics.
Haptics standards would enhance immersions ability to market products and technologies and expand the breadth of our licensing activities.
Pursuant to our news kind of standardization strategy immersion is moving forward with several standards initiatives.
For example, we are in the midst of preparing a proposal for adding haptics tracks into the impact base me, Jeff <unk> format to be presented at the next Mpeg meeting.
Standardizing haptics Emedia files will allow content creators to move easily incorporate to more easily incorporate high fidelity haptics experiences into audio video content.
Immersion has also active in the I Tripoli tactile Internet working group that is developing a haptics standard for Fiveg communications, including Haptics encoder decoder standard.
Furthermore, we are evaluating participation in other standards such as the H.T.S.C. three point O. standards efforts.
We are engaging broadly with relevant stakeholders in the haptics ecosystem to execute our standard strategy.
Now, let's move to the fourth facet underlying our corporate transformation, which involve listening closely to our shareholders regarding capital allocation, including the desire to implement share buybacks.
Several considerations factored into the timing of this initiatives.
Including the shift toward profitability the settlement of ongoing litigation.
Clarity regarding the need for cash reserves relative to our new operating model and share price dynamics conforming to this prudent use of capital.
We're pleased to report that these elements aligned in the fourth quarter and combined with our confidence in our cost cutting efforts and new strategic initiatives initiatives I am happy to report and update you that do during December through March 4th we repurchased close to 975000 shares of common stock for an aggregate purchase.
As of approximately $7.2 million.
We expect to continue to be active with regard to share buyback activity under the right conditions and we have approximately $26.2 million remaining under our authorized repurchase program.
Fifth we continued to be focused on improving corporate governance. This includes proactive shareholder engagement through which would have been acting on feedback received regarding best practices, such as adding direct shareholder representation communicating in executing on our capital allocation policy and executing on on the process.
Declassify the board.
In addition, we'll continue to improve on the composition of emergence board of directors.
Asked just announced this afternoon. The total number of boards. He has been expanded to eight and who would like to welcome Eric singer of buybacks capital Advisors to Immersions Board of directors, along with Stephens Dominic venture capital from seven Rosen funds and Frank Franz Fink, former CEO of Maxwell technologies and energy storage company.
And Gennum Corporation, a wireless and mobile systems group of Freescale semiconductor.
Biax is one of our largest shareholders and Eric Steven and France will bring deep strategics insight into the board.
As part of these appointments, Jonathan Bizbuysell, and Sid Ganis will step down and I'd like to take this opportunity to thank them both for the valuable contributions over the past year.
Now I'd like to take a moment to talk about our vision and goals were twentytwenty.
As Aaron highlighted the positive impact of our cost reductions will lead to expanded non-GAAP profitability on an annual basis and twentytwenty.
Despite this being a transition year for a total revenue.
The new customer agreements made over the past year and tangible progress toward increasing our record directory recurring revenue mix will contribute to favorable revenue over the long term.
With any new strategy the goal should be to establish metrics by which to measure of success and our initial gauges have been to monitor our progress with regard to opex and recurring revenue.
Next we will look to introduce short term indicators that allow us to share market.
More customer feedback relative to our traction in our markets.
Additionally, well within the next 12 months, we will aim to provide more clarity with regard to our average SP per market.
All with the goal of generating greater transparency regarding how to model our business.
In short.
And then a little over years time, we have made tremendous headway in carving a path to profitable growth and long term value creation for immersion.
We are extremely excited and confident in our strategic initiatives and are now focused on executing across our plans, while continuing to strengthen our organization as a whole.
On behalf of the board and myself I want to thank and applaud our dedicated hardworking employees around the world.
We recognize that change is not easy and truly appreciate your commitment and resolve over the past year.
Would also like to express my gratitude to our valued customers and partners, who are embracing the power of haptics for the benefits of consumers.
We see only greater and greater potential for haptics based experiences as we continued to work together on solutions that maximize immersion technology.
And with that.
Now I'd like to open up the call to questions operator.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using eight speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
We'll take our first question from Charlie Anderson with Dougherty and company.
Yeah, Thanks for taking my questions and welcome Aaron.
I just want to start with full year guidance I didn't get the midpoint.
Got a per unit royalties up just modestly I consider that 69% versus 80% and I know, 20% was the goal you laid out.
And I was.
On the transition year, but maybe if you guys could just kind of reconcile for us the goal of 20% within that fortune versus 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 Twentytwenty and we're anticipating that there will.
Not be an increase in recurring revenues over fiscal 19.
I guess I get that so the but there was a 20% but at the analyst day.
A little bit 19.
I'll be in an impact is that literally be impacts that.
Causes that dynamic or are there other.
I used to call that.
The demand I mean, that's the main impact had we not taking into account that had been not adjusted our our forecast for the call didn't 19.
Situation, we would have.
Seen an additional 20% growth and recurring revenue. This is in 2020.
Okay.
Great and then I Wonder if you guys could maybe just speak to the licensing pipeline.
Yeah, No embarked on this strategy where are you you have.
I P as well as product you know across some of the key verticals Ramsey I Wonder if maybe you could just highlight how how some of those discussions are going yeah, whether it be auto whether it be PC, whether it be adult market mobility et cetera, just give us a little bit more color on what you're seeing real time. Thank you.
Sure. So thank you Charlie with automotive its becoming very apparent that.
That while the need for haptics is increasing the expertise is still quite needed and.
Our customer feedback from both the U.S. and automotive World and Japan reinforce 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 a top a couple of quarters around more companies signing up to our technology and not just our patents. So so we're very encouraged by.
The feedback I received from the the automotive shows so we had about 80% of our customers right now I E, 80% of the Tam of tier ones licensed slap 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 and finding opportunities to engage the technology level I'm just not just the patent no not just at the patent level. So that's automotive and adult I'm very pleased.
A few robotics as I mentioned in the last.
Quarter as well as out our.
Shareholder day, the reason to get into this wasn't just the opportunity to go after patent licensing, but because it already receiving several inbound requests.
For helping assistance and bringing in the sophisticated haptics into this market.
In the form of technology software design support and what have you feel robotics is the leading provider of technology platform in this space. The good news about feed robotics is that it is not just the single customer they provide technology to several customers in the form of technology deliverables, which then.
Get integrate in adult toys and find what have you. So therefore, our partnership with freedom Robotics will reach a two dozens of customers in this marketplace and together with their customer sales with their outreach existing multi year history and reputation will be able to accelerate our entry to this market.
And our revenue share model, whether it covers a devices or subscription will guarantee that's 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 deals that been done in a 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 a patent a portfolio. This therefore brings the focus on China.
Since the rest of the World has been a license our eyes and how did license China, which then opens up this technology.
And patent a discussion around the I see strategy. So therefore, our strategy in China to continue to see if this I see strategy is going to pay off and if not why do we do about the Chinese companies selling outside China. We're monitoring this very closely we believe that there's 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 what 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'll continue to provide them with our technology as well as our Uh huh.
On the P.T. side, we are taking a wait and see approach given limited resources and the frugality of that business, what kind of holding off right. Now is nothing eminent 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're holding off but opening up a third investment so to speak NBC.
Excellent. Thank you for all the color just one quick housekeeping question, Brian We can certainly for the 10-K, but I wonder if you could note the 10% customers for the year potentially thanks.
So the only 10% of customer for the year is Samsung.
Okay did you.
Seven per se.
I'm, sorry, 2027, 27%.
Great. Thank you so much.
Thank you as a reminder, please press star one to ask a question.
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.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].