Q2 2020 Immersion Corp Earnings Call
Good day and welcome to the Immersion Corporation Q2 2020 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Aaron Anchorman, Chief Financial Officer. Please go ahead Sir.
Good afternoon, and thank you for joining us today on immersion second quarter Twentytwenty Conference call. This.
This call is also being broadcast live over the web and can be accessed from the Investor Relations section of our website at <unk> Dot immersion dot com.
Me on today's call is Ramsey vitamin President and 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 cobot 19 on her business and the business of our customers and suppliers.
Well, it's on the economy in general and also when you exclude projected financial results were operating metrics business strategies litigation or attributes of litigation anticipated future products future expense reductions anticipated tax expenses anticipated market demand, we're opportunities our operating model and other forward.
Okay topics.
Statements are subject to risks uncertainties and assumptions, especially in light of the ongoing adverse effects of the Cobiz 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 interested parties should reduce the risk factors listed in the press release, we issued today after market close Immersions annual reports on form 10-K for 2019.
And its most recent quarterly reports 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 immersions 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 financial business or any other development developments occurring after the date of this release.
What's the update the reasons actual results could differ materially from those anticipated in these forward looking statements, even if new information becomes available in the future except as required by law.
Additionally, please note that during this call we may discuss non-GAAP financial measures for each non-GAAP financial measure discussed a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today's press.
With that said I'll turn the call over to Ramsey.
Thanks, Aaron and thanks, everyone for joining us on the call today, we're listening via webcast.
I'm excited about the progress we've made executing our strategy to deliver new products technology, lower operating expenses lead development of industry standards and achieved sustained profitability.
This quarter, we significantly improved our operating model and implemented further cost reductions to align with the current covert 19 business environments.
Immersion like most companies has been negatively impacted by called the 19.
Resulting in revenue of 5.7 million bonus for the quarter, which was down 35% from the total revenue of 8.7 million in the same quarter last year.
This was primarily driven by a decline in fixed fee revenue.
I'm pleased to note that recurring revenue, which we have actually strategic objective to grow.
Was relatively stable year over year over year.
As I'll discuss this further we are well positioned for growth.
Hi, good cost economy recovers.
We are confident in our future as demonstrated by over $30 million of share repurchases. This year.
We've also continued to make strong progress towards improving our operational efficiency and reducing our operating expenses.
We spent the past year working towards these objectives by more efficiently managing all patent portfolio.
Reducing litigation expenses.
Shifting resources to Montreal, where we have lower personnel expenses.
Hitting our San Jose facility.
And reducing other costs such as professional services.
We remain very disciplined with expense management through the current economic environment and expect to achieve additional reductions in the second half of this years.
That's part of this initiative, we continue to evaluate on investment decisions with the goal of aligning resources to the best opportunities and driving efficiencies and all functions.
Our results in the second quarter demonstrate progress against these objectives.
During the quarter compared to the same period last year, we achieved an 8.1 million dollar improvement in operating income.
An 8.2 million dollar improvement in non-GAAP income and a total reduction of $11.4 million in non-GAAP operating expenses.
We continue to believe we can reduce our total annualized operating expenses in line with by strategic initiatives and are making significant progress towards our goal to sustain profitability and generating meaningful free cash flow.
In concert with I'll focus on generating profit free cash flow and maximizing shareholder value Immersions Board of directors has recently appointed Eric singer as executive Chairman.
This change brings direct shareholder representation to the role.
Sure and hold all previous chairman will continue to serve on on board and I would like to thank her for her many contributions and leadership over the past few years.
Next I'd like to provide an updated <unk> update about progress in automotive mobile and gaming market segments.
Cobiz 19 is impacting the automotive market, resulting in reduced equal shipments in activity in the near term.
We expect however, the market will gradually recover after twentytwenty I remain confident with our investment in automotive.
Despite the current environment, our new product strategy, resulting is resulting in stronger customer engagements with product and design teams, who lead technology decisions on interfaces throughout the vehicle.
Hey building greater awareness of the volume haptics as well as emerging solutions.
Last quarter for example, we highlighted the adoption of emerging technology and software by Alps, Alpine and leading tier one automotive supplier.
Well also highlighted the importance of our engagements with Oems to inspire their designs and generate demand for haptics systems from our tier one licensees.
This quarter I'm pleased to share that Nissan recently announced its new our yet he crossover vehicle with integrated haptic controls.
One of our existing tier license tier one suppliers is providing the haptics systems for the sequel, and therefore immersion will receive royalties in the future from systems from the needs on Oreo.
This illustrates our opportunity to grow revenue from existing automotive licensees as long as the proliferation of haptics beyond luxury vehicles and into the mid tier brands.
The mobile market has also been it negatively impacted impacted by cobot 19.
The old leading to undergo a recovery in the quarters ahead.
At Samsung stated in its recent earnings announcement and expect a gradual recovery and the demand for mobile devices in the second half Twentytwenty.
Our revenue this quarter was in line with our expectations and we expect gross in the second half of the year.
We continue to work with channel partners to address the China market and our revenue from this program has been stable quarter over quarter.
The games market is providing more resilient to cold at 19 as the stay at home effect opens up more time and flexibility for gaming.
We continue to anticipate the upcoming release of the Sony Playstation five this holiday season, and do not believe called at 19 will have a materially negative impact on unit shipments.
As previously previously announced Sony Interactive Entertainment has a license and the Playstation fives dual sense controllers utilize emerging technology.
Immersion collect royalties from east controller, and we expect more than one controller will ship Brew council overtime to support multiplayer gaming and to replace worn out controllers.
Haptics capabilities in the dual since controller or getting rave reviews from developers and others, who have early access.
The creative director of golf ball and upcoming game on the police station Fives recently called out the dual sensors advanced haptics as they particularly exciting feature I noted that it enables games to for the first time deliver sensations of weapons hitting other weapons and surface materials.
This validates the value of our technology and reinforces our belief that the Playstation five catalyze other gaming and be our company to pursue more advanced haptic capabilities and new products.
Our continued innovation and BR was also recognize in the issuance or the new patent titled Haptic effect generation for space dependent content.
Which covers method and systems for offering and rendering haptic effects in video content, such as 360 degree three D NVR video.
We are proud that our team continues to lead and innovation and it's exciting field.
I also wanted to touch on our progress leading to the creation of haptic technology standards.
Standards will improve interoperability between haptic content and devices, enabling broader proliferation and growth haptic across multiple markets, including mobile gaming NPR.
We believe standards can support continued growth for immersion through expanded licensing opportunities up our patents as well as implementations and all software products.
In Q2 emergent submitted separate proposals to the advanced television systems Committee known as a T.S.C.
And the moving pictures experts group known as Mpeg.
Both H.T.S.C.N. Mpeg art influential standards development organizations that define media creation delivery and playback formats across the consumer electronics ecosystem.
Our proposals specify the protocols and procedures needed to incorporate haptics into broadcast and online distributed.
So in a range of devices, including smartphones and tablets.
All proposals are designed to deliver an optimal use user interface based on the content device type and if you were personal preferences.
We're excited that all proposals have generated an initial support and have passed the first seasons toward standardization, both HSC and that bag.
In addition, our newly formed haptics industry Forum designed to bring together leaders across the ecosystem not includes about 50 participants representing dozens of leading technology companies.
The overwhelming support we've seen in Q2 validate industry interest and demand for haptics technology standards and the opportunity to lead these efforts.
In summary, while immersion like others faced challenges navigating through an uncertain environment due to cope with 19 I'm excited and encouraged by the progress we've made to execute our strategy and improve our financial performance.
And with that I'll now turn the call over to Aaron for a review of our Q2 results before opening up the call to your questions.
Thanks, Ramsey, let me begin by referring you to this afternoon's press release for information regarding our Q2 Twentytwenty financial performance.
Total revenue of $5.7 million for the quarter is down 35% from total revenue of $8.7 million in a second quarter last year.
Revenue from per unit royalty arrangement was down approximately zero point $1 million were 3%.
Paired with the prior year quarter.
Revenue from fixed license arrangements.
70% on a comparable basis, primarily due to $3 million of onetime license fees come to customers in mobility and gaming recognized in the second quarter of 29.
Recurring revenues represented 98% of revenues in the second quarter versus 65 or 7%.
In the second quarter last year.
I revenue mix for each line of business typically fluctuate quarterly due to seasonality patterns and for the second quarter a breakdown by line of business as a percentage of total revenues was as follows.
79% for mobility, 10% from gaming, 8% from automotive and 3% from others.
Gross profit was $5.6 million compared to gross profit of $8.7 million from the same quarter of 29 team.
Turning to operating expenses.
GAAP operating expenses of $6.7 million for the second quarter were down 63% or $11.2 million from the comparable period last year.
Production expenses for the quarter reflected our disciplined focus on cost throughout various cost reduction initiatives, which resulted in $8.2 million lower litigation and petsense related costs.
$1.0 million.
Our professional service costs, as well as $1.3 million lower salaries and benefits expenses.
With our continued focus on managing our cost structure for these difficult times, we expect to report further reductions in quarterly Opex from this level in the coming quarters.
Looking at our net results GAAP net loss for the second quarter was zero point $7 billion or three cents per share compared to GAAP net loss of $8.6 million were 27 cents per share in the same quarter or 29.
In addition to GAAP metrics, we use non-GAAP net income loss and non-GAAP net income loss per share to track our business performance.
As a reminder, we define non-GAAP net income loss as GAAP net income loss adjusted to reflect cash taxes.
That's stock based compensation depreciation and restructuring expenses.
On a non-GAAP basis, we had positive net income zero point $8 million or three cents per share in the second quarter compared to non-GAAP net loss of $7.4 million for 23 cents per share in the same period last year.
We expect to see continued improvement in our profitability on a non-GAAP basis in the coming quarters.
Let's move to the balance sheet overall, our Baron balance sheet remains strong with total cash and cash equivalents, a $54.1 million as of June 30.
35.4 million dollar reduction from $89.5 million after December 31st 2019.
One key driver of the cash production, what's the completion of our share buyback program under which we use $30.6 million to be purchased 4.9 million shares from the six month ended June thirtyth.
Secondly, as mentioned on last quarters earnings call on April eight he made a provisional deposit the LG of approximately $5 million withholding taxes, Oh Gee he has to pay to the Korean tax authorities on Immersions behalf.
As noted in our previous filings we believed that there are valid defenses to the claims raised by the Korean tax authorities in both the LG and Samsung cases, and we are appealing <unk> in the Korean courts.
On July 16, Korea administrative court issued its really in which it feels that the withholding taxes and penalties, which were imposed by the Korean tax authorities in the Samsung case should be cancelled entirely with some of our litigation costs to be borne by the Korean tax authorities.
That said on August Threerd.
We in tax authorities have formally indicated their intention to appeal such willing to the Korea, hi courts.
Excluding the impact of the stock buyback program and the traditional LG deposit we generated positive cash flow from operations in the second quarter of 2020 and expect to continue to generate positive free cash flow in coming quarters, Despite the tough business environment.
Due to the uncertainty in the environment and the inability to protect the course of the current pandemic, we have decided to continue to suspend our practice, providing full quarterly guidance.
We remain committed to advancing our goals for profitable growth and our efforts to advance initiatives to improve offer racial efficiency.
The structural changes we have made enough business already position us for significant decreases in total operating expenses on a year over year basis. In addition, we expect to maintain profitability in the third quarter as we continue to make progress.
Long term operating.
Our non-GAAP opex for the quarter was $5.2 million down from $16.6 million into comparable prior year period.
We expect to exit the year with a non-GAAP annual Opex run rate of between 17 and my team.
Before we open up the call for questions I'd like to note that given the circumstances Ramsey you know 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 culinary operator.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. 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 pause for just a moment to allow everyone an opportunity to signal for questions.
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We'll take our first question from Anthony Stoss with Craig Hallum capital.
Hey, guys. This is mason on for Tony purchased wanted to say great work on the <unk> reductions really impressive stuff there.
Can you hear me thank you.
Yes, we're okay. Thank you okay right couple of questions and for me first and you're talking about this live on the call, but can you just remind us your thoughts on how big the overall PS five opportunity is for immersion and then as a follow up to that with the positive reception of the PS five door Soc happy features I'm curious if you.
Seen any interest from other gaming customers that are looking to compete with Sony on controller features and then I've got one more after.
Sure I'm you know, we don't breakout individual customer forecast at this time and along those lines also not providing forward looking guidance based on probably my team, but that said.
As stated in our script, we don't believe Koby 19 will have a mature in the negative impact on the fixation fives and expect it to expects the fishing five control to shipments will contribute meaningful revenue from Q4.
This year and beyond we know that that's coming in on time, we do not that different bike there potentially revised there what kind of hub.
And to your second question, we yes, we do see interest from competing controllers to enter the market as the bar for haptic devices, and haptic experience becomes higher and higher meaning high definition, haptics and knee and how long held devices become.
Much more interesting experience, we believe the entire market will have to follow and we are well positioned to provide solutions provide solutions for those types of third party providers controllers.
Great. Thanks, and then with all the cost that Youve taken out of the model you just talked about the leverage on the expense side going forward. How much do you think you can grow revenues from here without adding any incremental expenses. That's it for me. Thanks.
So the we remain committed to the strategy to deliver a new technologies and products to support the growth in concert with continued patent licensing the cost reductions have been in areas of mitigation more efficient management of our patent portfolio DNA and moving some positions to Montreal.
No we have not scaled back research and development, which is why is one of the cornerstones of delivering that strategy and the same goes for our sales efforts. We have a intact sales team that continues to engage with customers. So in in overall, we believe our strategy continues to be intact, and and starting to pay off as.
Highlighted by some of the design wins last quarter in this quarter.
Aaron did you want any I mean anything to that question.
No you said there.
Good thing.
Thanks.
Alright, perfect. Thanks, guys I'll hop back in to Q.
Thank you we'll take our next question from Derrick Soderbergh with calling your securities.
Taking my questions I want to start with gaming sort of build off all the previous question on the Playstation five so most of those benefited from Playstation console refreshes in the past and you know as it relates to the five launch can you maybe help us understand immersions positioning.
Content opportunity relative to those historical launches.
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I can I can certainly give you a overview of the the license architecture went without getting into too much confidential detail is that because that really question isn't it.
Oh, yeah, that'd be nice just it'd be nice to.
Asking your thoughts on you know dislodge versus you know the ones in the past.
Sure. So I just wanted to say first that you know we when when you say content just kind of highlighted I think he knows it's already we don't generate any revenue from content related to the gaming. It's all related to the sale of hardware certainly regards to Sony. So I just wanted to put that out there for clarification, but that aside too.
Taking a look at.
This.
Platform relative to previous platform. It is quite interesting to see how much focus and how much marketing and messaging is coming around the idea of haptics.
We believe that.
Ah Sony has done a wonderful job delivering an amazing surround sound experience over the years that experience, it's pretty much maximize in other words, you kind of hard to increase it by a significant amount and same thing with video you know the incredible graphics bps for a you know we're being.
So with the kids fight, but we're getting to that point, where.
It is quite a outstanding experience and for the question is where do you go next which is why be the leap Sony and other gaming console, that's starting to focus on haptics, it's kind of the third.
Experience to get you more immersed in that game and more importantly, it is an experience that has been sub standard. So far we all know what haptics has been so far it's just a vibrating device.
What Tony has done an increase that experience so much should that the immersive miss of they have to controlled or gets you to get you pet extra.
Feel of being immersed in the content in the game.
It's not technology and IP. So just as it was quoted by one of the game developers. They to lead. This is the first time, where you can actually feel to kind of surfaces that you are touching not just in vibration button you can actually get a different feeling whether you're hitting a weapon or hitting a different kind of service that is a grand you experience.
And that kids singularly differentiated by haptics I'm very excited about this not just because Sony is doing it but we believe that kind of experience will be the norm and the standard going forward.
And these types of as you know we get paid for every.
One of these controllers, whether you have one are you buy second one later either because you have somebody you playing with or because youre controlled as one out. We believe is gonna be continued source of revenue for us and if BD all control than sort of Sony and up ticking off that will be additional source of revenue.
So the content tied to answer your question is very exciting because there's a lot of emphasis on haptics.
We're very excited that we're well positioned to monetize it as well as through a third party providers.
Right. So I guess would it be safe to assume that the license fees I guess per controller. This time around relative to prior launches would be would be greater.
We have not discussed the pro controller or pricing at all we're under confidential terms with Sony So I can't really comment on that Okay. That's fine and then in automotive now that sales are sort of recovering off.
April lows can you remind us where your per unit exposure is in terms of geography and vehicle type.
[noise] buying large or pricing doesn't.
Change by geography, nor does it change by the eco type we sell into the tier ones, which you know create products that sometimes go across different vehicles and across peers. So we have a fairly simple and straightforward price seems to make the life.
For bark tier ones fairly straightforward and that's also based on their request.
We continue to enjoy and speeds from one to $3 per car depending on how many.
Products aren't in the car and what I mean by product that could be for example, a.
Display considered one license product a trackpad that's another licensed product Oh, let's say buttons and side panel. So these tend to be attitudes and therefore, you have a range of royalty depending on how many of these instances you have in the car and its most basic form you could see a car would the display that might come.
Men somewhere around the dollar to dollar 50 per car.
Those types of pricing rain or are pretty standard across geographies and cross most.
Most vehicles.
Okay, and just generally speaking can you expand on sort of where youre exposure is geographically right now without what your wins.
So currently we have licensed about 80% of tier ones and so we are in very good shape in terms of getting.
The vast majority of company designing haptic head ends and haptics technologies and providing them to the Oems. Therefore, you know we we were in a position where our tier one ship systems to a range of Oems, including BMW Mercedes Howdy Lexus.
And others.
That said I'll talk like our pipeline has additional tier ones in progress as more companies seek to supply haptics system.
We also engage the Oems directly to push the adoption of haptics, so which drives demand to our license suppliers, we're making good progress as evidenced by the Nissan ARIA and Mercedes mute M.B., you X large screen interface, which will debut and that 2021 S class So weve fairly.
Evenly spread between a Europe U.S. and Asia at this moment.
Great I appreciate the color. Thanks.
Sure.
Thank you.
This concludes today's question and answer session.
Appreciate your participation you may now disconnect.
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