Mar 2, 2009
Executives
Alex Wellins – Investor Relations, The Blueshirt Group Clent Richardson – President and Chief Executive Officer Stephen Ambler – Chief Financial Officer and Vice President, Finance
Analysts
Mark Argento - Craig-Hallum Capital Jeff Schreiner - Capstone Investments Glenn Mattson – GTK Capital Mark McMahon - Raymond James & Associates
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by.
Welcome to the Immersion Corporation quarterly conference call. (Operator Instructions) I would now like to turn the conference over to Alex Wellins of The Blueshirt Group.
Please go ahead, sir.
Alex Wellins
Thanks, [Mary]. And thanks, everyone, for joining us on today's call.
During the course of our comments today we will be making forward-looking statements. These forward-looking statements include management's current analysis of certain aspects of Immersion's future business.
Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in our statements.
Factors that could cause actual results or developments to differ include the risk factors mentioned in today's new release and Immersion's SEC filings and in our annual report to stockholders, as well as any factors mentioned during our discussions today. With that said, I'll turn the call over to Immersion's President and CEO, Clent Richardson.
Clent?
Clent Richardson
Thank you, Alex, and welcome to today's call. Today we will review Immersion's fourth quarter and full year business activities, our financial results, and our company's go forward strategy.
These results reflect solid progress and execution against a backdrop of severe economic turbulence. Immersion's fourth quarter revenue was $9 million, which was flat with last quarter excluding the one-time deferred revenue from ISLLC recognized in that period.
Revenue for the fiscal year grew to $36.5 million, a 5% increase over fiscal 2007. While single-digit growth is not the bar by which we intend to be measured, we do believe that posting year-over-year growth during a period of intense and rapid transformation in our company is indeed noteworthy.
We ended the year with approximately $86 million in cash. Our strong debt-free balance sheet, combined with our diversified low-cost business model is a core foundation for our company, providing a secure platform to drive future growth.
Last quarter I told you that we were taking decisive steps designed to accelerate the growth rate and predictability of our business. Since our last call we have continued to follow through on this commitment.
Our leadership team has been rebuilt featuring world class executives with extraordinary passion and enviable track records of success. We announced the planned divestiture of our 3D line of business, which has been a low growth distraction and is not core to our go forward strategy.
We forged important new customer relationships and deployed record numbers of our solutions across vertical and geographic markets. And in the last few weeks we have relaunched in a manner in which the world sees Immersion via an updated logo which better represents our two lines of business and a new modern website.
The new site unmistakably provides users, investors and potential customers who visit a way to learn about Immersion, who we are and what we're focused on. It is complemented by a corporate messaging platform that better explains who we are and what we do, while appropriately capturing the aspirations and opportunities in front of the company.
More importantly, we have structurally reorganized and simplified our company from five businesses into two lines of business - Medical and Touch - to improve focus, drive future growth, and leverage synergies inherent in our business model. Today we continue to take bold steps to simplify, reduce duplication and realize greater synergies by announcing that we will relocate our Medical line of business to our corporate headquarters in San Jose, California.
We believe that this move will measurably improve our business from an execution, operations and management perspective. Moreover, it will result in meaningful cost savings that will positively impact our financial results in 2009 and in the future.
The divestiture of our 3D line of business and move of our Medical line of business continues the rapid and positive change that we are propagating throughout our global organization. Every element of this plan is designed to make Immersion a more simplified, unified customer-focused company that is open for and ready to do business with the leading companies of the world.
On our last call I invested time defining haptics and Immersion's leadership in this burgeoning market. The fact that in a remarkably short period of time the need for these explanations have diminished is an extraordinarily important shift for the company.
I'll give you two very brief examples. First off, it's not an overstatement to say that Touch products were the dominant theme at CES this year, the first major consumer technology event of 2009.
You couldn't walk more than a few dozen feet on the show floor without seeing a demo of a touch-based interface on a digital device. In fact, the trend was so pervasive that the Discovery Channel put its spotlight on Immersion in a special television segment titled, "Game Changers at CES."
If you haven't seen it yet, I urge you to do so. You'll then understand why the reaction to this program among current and potential customers and business partners has been positive, rapid, and significant.
Second, noted technology forecaster Paul Saffo cited haptics as one of the most important and meaningful trends for the next decade. I'll briefly paraphrase: "One word that should be in everybody's vocabulary is haptics.
At the moment, we look at our machines and they look at us, but they don't have the sense of physical touch or feedback. Haptics is the way to get sensory touch between machines and humans.
The real event of the decade is running just below the surface of all of these sensors that are helping connect our computers and our networks to the physical world." End quote.
This bold vision echoes our claim that Immersion's technology is the future of user experience in digital devices. I've said that in order for us to capture the immense business opportunities before us our mission must be to operate at a higher level of activity, simplify our business, be customer focused and partner friendly, and leverage the world's most comprehensive portfolio of patented haptics technology.
Looking back, it's a credit to our team that we made strong progress against these objectives since our last call. We stepped up the pace at which we made noteworthy announcements to improve transparency and enable our investors to better mark our success.
We posted solid performance amidst the new global economic reality. We made strong progress in resetting the leadership team and preparing to re-launch the company.
We moved past several pieces of distracting litigation, consolidating five lines of business into two, and exited the year with growing momentum and a greater appreciation for Immersion's products and solutions than ever before. Our plan for 2009 is designed to further this momentum by capitalizing on the positive changes we have put in place, building on our successes and leveraging our strong balance sheet and diversified business model.
We will move away from customer engineering products to product-based solutions that will drive scale to our business. 2009 will be a year of execution as we march toward sustainable profitability while striving to deliver longer term shareholder value.
We will continue to carefully invest in our business in areas that we think will deliver strong ROI while maintaining a robust balance sheet, with a goal of accelerated growth rate over 2008 levels. I'll now ask our CFO, Stephen Ambler, to review our financial results.
Following Stephen's comments I will provide you with greater detail on our recent achievements and insights into our 2009 strategy before taking your questions. Stephen?
Stephen Ambler
Thanks, Clent. For the fourth quarter of 2008 revenues were $9 million, sequentially flat compared to the preceding quarter when you exclude $1.1 million of one-time deferred revenues from ISLLC recognized in Q3 and a decrease of 9% from $9.9 million in the comparable period last year.
As previously announced, we are in the process of divesting our 3D line of business. For comparison purposes, revenues for the fourth quarter excluding the 3D business were $7.6 million compared to $8.2 million a year ago.
Revenues for the fiscal year totaled $36.5 million, an increase of 5% compared to $34.7 million for fiscal 2007. Excluding the 3D line of business, revenues totaled $31.6 million in 2008 and $29.9 million in 2007, an increase of 6%.
Looking at a breakdown of revenue across our various lines of business, fourth quarter revenues from Medical of $4.3 million represented 48% of total revenues. This is up 27% from the year ago period and up 34% sequentially.
For the year our Medical revenues totaled $14.8 million, down 4% from 2007, and represented 41% of our total revenues. We continued to see strong growth in international sales with our Medical line of business.
Medical international revenues grew 135% over the year ago period and also grew 24% sequentially. Quarterly revenues from Touch interface products of $600,000 accounted for 7% of total revenues and were down from $1.3 million in the year ago period and $1 million in the preceding quarter.
For the year, revenues from our Touch interface line of business was $3.5 million, down 29% from 2007, and represented 10% of total revenues. Fourth quarter mobility revenues of $1 million represented 11% of total revenues.
I'll note that due to revenue recognition rules related to payment terms from one of our licensees, approximately $700,000 of repeating license revenues that we would normally have recognized in Q4 of 2008 will now be recognized in Q1 2009. Annual revenues for mobility totaled $4.9 million, up 106% from 2007, and represented 13% of total revenue.
Quarterly revenues from our console and PC gaming business, which comprised 19% of total company revenues, were $1.7 million, down from $2.5 million in the same period last year and from $2 million non-one-time revenues in the preceding quarter. Revenues from 3D products accounted for 15% of our total revenues for the quarter and 13% for the year.
Analyzing our fourth quarter and year end revenues by category, total product sale revenues increased 30% compared to the fourth quarter of 2007 and 16% sequentially, and represented 61% of revenue. 72% of product sale revenues came from our Medical business, 24% came from our 3D business, and 4% came from our Touch interface products business.
For the year, product sale revenues accounted for 53% of total revenues and grew 5% over 2007. Patent technology licensing and royalty revenue decreased 29% from the comparable period in 2007 and [40%] sequentially, and represented 32% of total revenue.
59% of licensing and royalty revenue came from our gaming business, while 28% came from our mobility business, and 13% came from our Touch interface products business. For the year, licensing revenues accounted for 39% of total revenues and grew 20% over 2007.
Development, contract and other revenue declined 62% from the year ago period, but increased 8% sequentially. The year-over-year decrease reflects our continued efforts to move away from development work and concentrate our focus on product sales and licensing.
Development work comprised 7% of total revenue. Mobility comprised 49% of this revenue, with the majority of the remainder coming from our Touch interface products business.
For the year, development, contract and other revenues declined by 35% compared to 2007 and represented 8% of total revenues. Gross margins of 46% for the fourth quarter reflect $2.1 million in cost of product sales related to the divestiture of our 3D line of business.
Excluding this impact, gross margins decreased to 69% from 77% in the year ago period and 71% in the preceding quarter. For the year, gross margins were 72% excluding the writedown of the 3D business compared to 75% in 2007.
going forward we expect gross margins to trend up based on the resulting change to our product mix. Total operating expenses of $14 million for the fourth quarter of 2008 include $537,000 in restructuring charges related to the disposal of the 3D business, as well as non-cash stock charges of $1.1 million.
This compares with operating expenses of $9.1 million in the year ago quarter, which also included non-cash stock charges of $786,000, and with operating expenses of $12.4 million in the preceding quarter, and those included $1 million in noncash stock charges. Overheads included litigation expenses related to our patent infringement lawsuit against Mentice and Simbionix.
We are looking forward to the discovery portion of this litigation, which will begin in the next quarter. Total headcount at the end of December was 183 compared to 175 in the preceding quarter and 155 at the end of the fourth quarter of last year.
In January 2009 we commenced the divestiture of our 3D line of business and performed a small reorganization, the net of which was to reduce headcount by 13. While we continue to invest in people, we do not expect net growth in headcount in 2009.
We are focused on driving efficiencies throughout our organization. Interest and other income net of other expenses comprising inventories writedowns totaled $392,000 for the quarter compared to $1.8 million in the year ago period and $988,000 in the preceding quarter.
Interest income primarily affects lower invested cash balances following the recent Microsoft settlement in addition to share buybacks completed during the quarter as well as general interest rate declines over the past year. Investment writedowns totaled $250,000 for the quarter.
After accounting for the one-time charge related to the disposal of our 3D line of business, our net loss for the quarter was $9.7 million or $0.35 per share. Excluding the one-time items, net loss would have been $7.1 million or $0.26 per share.
This compares to net income of $511,000 or $0.02 per diluted share in the fourth quarter of 2007 and to a net loss in the preceding quarter of $4.3 million or $0.15 per share excluding the associated charge and tax effects from the Microsoft settlement. For the year our net loss totaled $47.7 million or $1.61 per share, including the one-time charges previously mentioned.
Excluding these items, net loss would have been $24.4 million or $0.82 per share. This compares to net income for 2007 of $117 million or $3.71 per diluted share and that included $134.9 million of litigation conclusions and patent license income.
For the year we used $18.3 million to buyback 2.8 million shares under our stock repurchase program. This included the purchase of 960,000 shares in the fourth quarter at a cost of $5 million.
We have since suspended our stock buyback program in light of the macroeconomic environment and continue to be conservative with our balance sheet. Our cash, cash equivalents and short-term investment balances were $85.7 million at the end of December, equivalent to $3.07 per share.
The decrease in our cash balance from the prior quarter reflects the Microsoft settlement on October 1, stock buyback, and near-term investments we have made to accelerate revenue growth. Receivables at the end of December were $6.8 million compared to $5.3 million at the send of September, reflecting increased product sales and the timing of orders during the period.
DSOs at the end of the quarter were 70 days. At December 31, 2008 we had 27.9 million shares of common stock outstanding.
Before I turn the call over to Clent I'd like to note a few housekeeping items. As Clent indicated in his opening remarks, we have streamlined the company into two line of business - Touch and Medical.
While we will continue to segment our revenues by royalty and license, product and development in our financial statements, beginning with the first quarter of 2009 conference call we will begin to discuss our financials in terms of Touch results and Medical results. I will also note that we expect to generate some remaining revenue from our 3D line of business in the first quarter of 2009 or until the disposition of this group is finalized.
As we've already mentioned, we are relocating our Medical line of business to San Jose. This move stems from the expiration of our lease in Gaithersburg, Maryland and the opportunity to realize significant synergies and cost savings leveraging the space and infrastructure that we have available at our corporate headquarters.
This move will also save significant sums on travel, ongoing expenses related to having additional offices, and other operational efficiencies. Several key managers will be relocating during this process and we expect to supplement them with new hires as needed in San Jose, which we are presently finding to be a quality hiring market and should remain so for the foreseeable future.
While we're not providing specific guidance at this time, we expect to begin realizing cost savings from this move starting in mid-2009. We estimate that savings will exceed $1 million per year in subsequent years.
Finally, we recently completed the sale of the [inaudible] portion of our 3D business. The amount of the sale is not material to our business, and we will be accounting for it in other income within our Q1 financial results.
I'd like to thank you for your attention, and I'll turn the call back to Clent. Clent?
Clent Richardson
Thank you, Stephen. As Stephen and I have mentioned, we have reorganized our company around two line of business, Medical and Touch.
Observations and thinking toward this restructuring has been in the works since shortly after I assumed the role of CEO. The Board and I recognized the need to simplify Immersion's business to increase velocity, drive results, improve collaboration and maximize efficiencies inherent in our operating model.
This new structure is already creating operating leverage and improving the manner in which we deal with global customers in our Touch line of business. For example, branded global companies might produce mobile phone handsets, MP3 players and consumer electronic devices.
Under our old structure we may have had three separate groups selling and supporting a single customer. Our new structure has allowed us to streamline our operations and is creating cross-fertilization concepts and opportunities that we believe will directly translate into increased revenue and a better return on investment.
This restructuring is also designed to spur growth and innovation in our Medical line of business. We believe that the combination of new leadership, the move to our San Jose headquarters, and new product introductions that I will discuss in a few minutes, will deliver meaningful synergies and provide substantial growth catalysts for this line of business.
As many of you know, the majority of our employees for the Medical line of business are currently located in Gaithersburg. I'll note, however, that no sales people are located in our current Medical facility and that a portion of our development and test work will also be unaffected, as it will remain in our Montreal site.
So we expect the move will be reasonably seamless from a business continuity standpoint, with no material disruption to our operations. As Stephen mentioned, the move will result in substantial cost savings that will positively impact our financials starting in mid-2009 and beyond, but most importantly this move is a critical step in emphasizing and affirming our one company, one team strategy and value.
As a further point of emphasis, I'll note that we are no longer calling this line of business Immersion Medical. Moving forward we are all part of Immersion, regardless of where we are located or what business we're in.
We are one company with one brand globally. This shift will drive added return and value for our marketing investments.
Simply put, any marketing investments made going forward will be for one unified global brand - Immersion. Commensurate with the restructuring of our business is the recent re-launch of our updated brand.
I hope that everyone has visited Immersion.com by now and, if not, that you will do so. The intent and mission of this effort was to deliver one cohesive corporate message to a global audience.
Our research and feedback already reveals that users have found the content rich and compelling, the navigation clear and concise overall, simplified, logical and focused on the future. The updated logo and website are complemented by new marketing material and a revised messaging and communications platform, all downloadable PDFs from our website.
In short, we have reset our team on a global basis, and that team is now poised to deliver results backed by one fully integrated company. Now, digging into the results of our Medical line of business, Medical represented 48% of our revenue in Q4 and 41% for fiscal 2008.
While Immersion's Touch products are undeniably hot and of great interest on Wall Street, it is critical for investors in our company to understand our Medical line of business. Historically, the largest contributor of Immersion's revenue on a percentage basis, the Medical line of business is one of the most meaningful and vital growth drivers of our company.
In Q4 our team delivered revenue that was up both year-over-year and sequentially following a disappointing Q3. While we're not yet satisfied with the results or growth rate for this line of business, the numbers are encouraging for several reasons.
First, we did not launch any significant new products or procedures in 2008, meaning that our sales team was able to grow revenue solely on current products, service and technology. Second, this is a capital-based business with reasonably high per unit pricing.
Given the macroeconomic climate, we are pleased that our team is able to identify and close customers and we believe this is a firm indicator of demand for Immersion Medical simulation products. And finally, international revenue for our Medical line of business nearly tripled in the fourth quarter of 2008 over Q4 2007 and doubled in full year 2008, demonstrating the magnitude of the global opportunity for Immersion.
Diving into more detail, we have installed new leadership for this line of business in Dan Chavez, and we recently announced that Steve Anderson has joined us as Vice President of Product Development. In addition, Terri Seppala has been appointed Vice President of North American sales.
You should expect that we will continue to build out this team as we transition the business to the West Coast in the first half of 2009, while driving growth and measurable results. Last quarter we mentioned that we signed a key distributor in China.
In November I made a highly productive trip to Beijing, where I delivered a keynote address at the first ever international forum on the future of simulator education in China. The fact that this was held at the Great People's Hall on Tiananmen Square gives you a sense of the significance of this event with the Vice Leader of the Party in attendance.
In addition, I hosted an in-depth media event with the top medical and technology publications from around that vast country. After this experience I can tell you that the need and interest in our solutions is high and the demand is great, with over 700 medical teaching institutions in China alone.
While China and of itself represents an enormous opportunity, we are starting to make an impact in other geographies as well. One recent example was the sale of several medical simulation systems to a university in Colombia, another unmistakable indicator of growing interest for our medical simulations solutions worldwide and specifically in the important and growing Latin American market.
We also signed BT Medical Consulting in Greece and [Borsley] Medical Services in the Middle East as distribution partners, again highlighting the significant global demand of our solutions. I mentioned that our 2008 Medical revenues were executed without the benefit of new product introductions.
That has already changed in early 2009 and changed with significance. We have a pipeline of new products slated for this line of business, two of which we recently announced.
In another example of Immersion's leadership in this key sector, we launched the first ever haptic medical simulation for a new lung cancer diagnostic procedure, with a new EBUS - TBNA module for bronchoscopy system. This module provides realistic virtual reality training, leveraging sight, sound and touch for a difficult yet highly accurate procedure that diagnoses and stages lung cancer, the single largest annual cause of cancer deaths worldwide.
We also launched a critical enhancement to our endovascular platform with the new carotid modules that provide multimodal virtual reality training for carotid angioplasty and stenting, a minimally invasive procedure performed to help prevent strokes. By bringing these new products and cases to market, we will add fuel to our sales engine for this line of business in 2009 and beyond.
You should expect a number of product enhancements and launches during 2009 which will provide us with the momentum and ammunition to drive improved performance this year and heading into 2010. In summary, 2008 was a year of progress and reinvention for our Medical line of business.
Driven by new leadership, ongoing investment in new product development, as well as more aggressive marketing and channel expansions, we have set the stage for growth in 2009 and beyond. It is important to note that growth in this line of business will not be linear due to seasonality and given the uneven nature of contracts for capital-based solutions.
That said, we intend to improve our business via a much stronger presence in the industry, a retooled and reinvigorated product set, combined with a focused global team creating and ready to capture opportunities. I'll conclude my comments on Medical by noting a highly relevant piece of legislation, H.R.
855. This has been introduced in the House of Representatives.
If passed, the Enhancing Simulation Act of 2009 - also known as H.R. 855 - would increase the use of medical simulation technology, creating nationwide centers for training, education and research.
The goals of this bill are to improve the quality of care, reduce medical errors, and increase health care savings. Passage of this bill could present a significant opportunity for Immersion and our team will monitor its progress and participate in activities to support its ratification where and when needed.
Now, turning to our Touch solutions, in early January we materially streamlined this line of business and appointed Craig Vachon Senior Vice President and General Manager. Immersion's Touch line of business now encompasses our mobile, Touch interface products and gaming groups all under Craig's leadership.
By fully integrating our Touch solutions, we will realize functional synergies to gain simplicity, speed and accountability. To illustrate our progress, I'll invest a few moments to highlight some of the significant inroads we've made in Touch since our last earnings call.
Starting with the mobile phone market, I'll note that licensees of Immersion solutions Nokia, Samsung and LG are now number one, two and three in the world market, helping to drive our revenue source in Q4. Additionally, our partners shipped over 12.5 million handsets in Q4, up from 10 million in Q3.
Well over 40 million Immersion-enabled handsets have been delivered to the worldwide market. Nokia's 580 Express Touchscreen Music Phone launched to great reviews and acclaim throughout Europe and in Asia, resulting in the shipment of over 1 million units of this device in Q4 alone.
We are penetrating the important open software operating system phone market with participation in the Android mobile platform and inclusion in an upcoming Samsung Linux phone for South Korea Telecom. And we have signed a worldwide license with Pantech, one of Korea's largest mobile phone manufacturers, to use Immersion's haptic technology in several of its premiere mobile phones.
The most model by Pantech is expected to launch by the end of Q2. Craig Vachon and I recently returned from Mobile World Congress in Barcelona, where we met with customers, prospects and leaders in the world of mobile services and devices.
We aggressively promoted the value of Immersion's haptics technology as the future of mobile devices to all of our relevant audiences, and we generated a great number of new opportunities from those meetings. Other highlights from our Touch line of business include Samsung's highly successful launch of its P3 device, CES, which is the first digital music player featuring Immersion's haptic technology.
This was the result of a very successful pilot of an integrated Touch sales effort initiated in Q3 prior to announcing the change to one fully integrated Touch line of business. This product introduction is a proof point of the benefits of integrating all our Touch efforts under one integrated line of business.
Additionally, we are making strong progress with regard to integration of our haptics technology with semiconductor companies. Vertically integrating our technology at the chip level is a key part of our go forward strategy, and we recently made two announcements that are proof points of that progress.
First, we entered into an agreement with Leadis Technology, a provider of analog and mixed signal semiconductors. We are jointly combining Immersion's haptics playback software, effects library and technology with Leadis' touch controllers to enable the rapid implementation of high-quality feedback in capacitive touch-enabled devices.
Second, we are building on the success of our existing relationships with [Imagis]. The first product of this partnership has been very successful for Imagis's top tier customers, including LG and Samsung.
Our expanded partnership should drive further integration of Immersion's haptic technology into integrated circuits, making it easier for additional customers to gain the competitive advantages that haptics provides. Turning quickly to automotive, Toyota selected our TouchSense technology to power a new haptics-based driver control feature for the 2009 Lexus RX, which is now in showrooms across the country.
This feature has garnered extremely positive reviews relative to improving safety and allowing designers increased flexibility in the positioning and navigation of the audio display and navigation system. If you've not experienced this excellent implementation of our technology, CNET has a segment from CES which features this model with our technology.
As mentioned last quarter, we have two additional new car wins for mid-2009 release, with others in the pipeline for 2010 through 2012. We also signed a license agreement with Tier 1 systems integrator Visteon that will lead to future innovations for haptic-enabled controls in the automotive sector.
Visteon's booth at CES featured a car control console of the near future with our technology embedded and brought to life. The booth was extremely popular and so much so that CNET also did a video feature story on this concept with our technology.
And finally, we announced the first ever automotive grade actuator to enable fast integration of advanced touch feedback into touchscreens and touch services for the global automotive industry. Moving on to the other touchscreen applications, our haptics technology for casino gaming systems was prominently featured at the 2008 Global Gaming Expo.
Our partner, 3M, as well as numerous gaming system integrators, demonstrated the technology in new products throughout that show. The gaming category of our Touch business is an area we're seeing interesting and highly promising developments and new innovations.
These innovations are being driven by our research and development efforts and I look forward to sharing some of our product plans with you in future earnings calls. In summary, Immersion's progress since our last call is tangible, measurable and accelerating.
2008 was a year of transition, reinvention and transformation across our lines of business. We posted growth in 2008 despite the macroeconomic meltdown and exited the year with a diversified global business backed by an extremely healthy balance sheet.
Haptics is one of the most talked-about technology trends for the coming decade, and Immersion leads the world with patented IP in this vibrant market. While we will continue to strategically and carefully invest for future growth in our business, we have been and will continue to manage the company prudently given the macroeconomic environment.
The relocation of the Medical line of business to San Jose will begin to drive down costs beginning in mid-2009 and the substantial investments that we have made to reinvent the company, these will in fact slow down as we focus on operationalizing and exploiting the value from our investments. Being mindful of the economy and our business plans, we have implemented salary freezes across the company and curtailed all non-essential travel.
We intend to exit 2009 with a very strong cash position and I want to be quite clear - our goal is to attain a breakeven position, then turn the corner by delivering profit as quickly as possible and drive to sustained profitability moving forward. 2009 is a year of execution, where we will begin to deliver on the promise of Immersion, and I look forward to updating you on our progress regularly.
Thank you for your attention, and now, Operator, let's open up the call for the first quarter.
Operator
Thank you, sir. (Operator Instructions) Your first question comes from Mark Argento - Craig-Hallum Capital.
Mark Argento - Craig-Hallum Capital
First off on the H.R. 855, that bill, could you just give us a little more color on would that actually mandate that medical institutions actually use training machines?
Could you just elaborate on that a little bit?
Clent Richardson
You bet. It's still early days.
This is still in consideration. The bill has not been finalized or ratified, but what it implies is that much like simulation is required for pilot training, we would expect that the same would hold true for various forms of medical procedures and surgeries.
And so our expectation is this would create a significant opportunity for us.
Mark Argento - Craig-Hallum Capital
And is it part of a larger bill or is it a stand-alone bill?
Clent Richardson
I'm not a specialist in the bill. This is specific to simulation and we believe that this hits our sweet spot for the solutions that we provide as well as I think it provides other simulation requirements as well.
Mark Argento - Craig-Hallum Capital
In terms of, you know, haptics has been around for quite awhile. We've seen some traction on the mobile side given the [performance] factors of the handsets, medical it seems like international's picking up a little bit, autos, you know, some modest wins.
Looking back kind of broader picture here, what are really the key one or two things that you see the company having to reach kind of the tipping point in terms of being able to really get the right return on the investment that you guys have put on the business? Is it medical?
It sounds like that scenario. Do you need an H.R.
855 to make a profitable business out of it? Could you just talk a little bit more thematically about how you guys look at this business and what really needs to happen for this company to become profitable on a sustained basis?
Clent Richardson
Mark, thanks very much. First of all, it starts with people, and so we have now I believe got the team in place to execute and we have provided focus, divesting 3D, bringing our Medical line into our headquarters to streamline and provide synergies, creating a platform for us to manage two businesses - Touch and Medical.
Medical for us, with or without H.R. 855, is a significant opportunity and one we believe fits into a broader curriculum that we will call health care education.
And without going into great detail at this point, what I will suggest is that we have not had any new products to fuel growth. We now are beginning that pipeline and delivery.
That will fuel growth. We've proven clearly that international is a substantial upside opportunity for us.
We've not had, I would say, the correct formation for go to market and we now have that. So for us I believe Medical is all about operationalizing and delivering against our product plans and ensuring that we continue our march internationally.
In Touch, Touch, I believe, we are very near the tipping point. Certainly, I think it's safe to say the dominoes are starting to fall in the mobility category.
That is proven as we're now seeing quarter-on-quarter growth and we expect somewhere north of 10 million phones per month toward the end of 2009 alone. In the touchscreen interface products category, one of the things that we have discovered is that it has taken longer to do design wins and to actually begin to harvest revenue from those design wins.
That said, that doesn't diminish the opportunity at all. We are having a longer view on that particular business, which means that we are also focused on our haptic chip partner program, vertically integrating our technology at the chip level.
So between Touch interface and the design wins in the consumer and the machine control categories, combined with our embedding technology in the haptic chips, we believe this creates a tipping point for us both on the device side, but also in the embedded side. And then thirdly in gaming, while we're seeing the initial signs of PlayStation 2 begin to slow, we have new inventions and we have new creations and innovations that are in the gaming side that I mentioned in my comments at the outset that I'm not able to talk about on this call or maybe even the next call, but we expect to provide very interesting opportunities which we will pursue in the future.
Wrapped together, I believe focusing on Medical and Touch provide us the two right businesses and now for us it's about execution.
Mark Argento - Craig-Hallum Capital
I know there's been a lot of change in terms of personnel within the organization. Has that made its way into the sales organization as well?
I know the heads of these groups have been changed out, but how far down in the organization have you made changes?
Clent Richardson
I think it's fair to say that the leadership team we have in place is very, very hands-on, as you know that I am. I would say there's nothing sacred as we vectored and reorganized the business.
And so without getting to specifics below the senior executive level, you could rest assured we have taken a very serious look at the way we go to market, the way we've incented our teams, and the way we've created either vertically or geographically our plans. And so we have new sales leaders in both sides of the business.
Earlier last year we announced David Barkay internationally in Medical. Terri Seppala is an announcement that we just talked about.
And we have Leslie Mulligan, who used to run our 3D tech line of business and the gaming line of business, she's our Vice President of Sales for our Touch line of business now.
Mark Argento - Craig-Hallum Capital
I know you guys don't talk a lot about this on your conference calls, but I think it would be helpful to get a little bit better idea of how you guys feel about kind of your IP position relative to your patents. A large amount of your value is locked up in those patents.
Could you just talk a little bit about how you feel, where you are in terms of your patent positioning in some of the key verticals, in particular touchscreens on the mobile side and maybe medical?
Clent Richardson
The way I would characterize this, Mark, is we have a robust patent portfolio and we are clearly the leader of patented technology in the haptics segment. Our job as a management team is to unlock shareholder value from those patents, and we're exploring every way possible in which to do that.
And I think probably what I'll do at this point is not get into a lot more detail on this call, but stay tuned in subsequent calls as we talk about how we exploit our intellectual property, whether it be in royalty and licensing or in actual design implementations with partners moving forward. And I think one great example of that is how we are going to be distributing our IP through vertical integration with haptic chips.
I really do like that model. It gives us broad distribution.
It gives us a wonderful platform upon which to build other solutions on top of that embedded technology. And you wouldn't be surprised at all if we would have solutions in the medical space in subsequent years.
Operator
Your next question comes from Jeff Schreiner - Capstone Investments.
Jeff Schreiner - Capstone Investments
Clent or Stephen, could you help us understand a little bit, you know on the conference call for the third quarter earnings, if I'm not mistaken you guys kind of got into maybe a little bit better in revenues than what was reported and that was around the end of October. And obviously everyone's been going through this macro environment - certainly a change across the industry however could you kind of guide us through what happened to Immersion specifically there and where a lot of the erosion came from in the timeframe from November to December?
Stephen Ambler
I'll take that one. If you actually look at our revenue, the Medical side of our business increased its revenues by over $1 million compared to Q3, so we're reasonably happy with that and I think it shows that, despite the tough economic environment out there, Medical can grow.
On the Touch side, looking at those three businesses in total, one area that really hurt badly in Q4 was the auto side. As you know, I mean, people aren't making large capital purchases of cars; we're primarily in high end vehicles.
So that did have an affect on us in the quarter. Also I alluded to in my part of the discussion that we had to defer about $700,000 of revenue out of Q4 into Q1.
We weren't actually expecting at the beginning of the quarter; it came up during the quarter. And so it makes the quarter look worse and the next quarter will look a little bit better.
So in total I think our revenues have hung on in there. The other thing to note about Q3 was that we had about $1 million of a legal settlement, for want of a better phrase, within revenues.
That was a dispute with a licensee that we'd been deferring revenues for quite awhile. So if you take that out of Q3 and match that against the Q4 actual revenues, they're flat.
And as I've just said, we had to defer $700,000 out of this quarter into next quarter. So I actually [inaudible] too disappointed by this quarter's revenues.
Jeff Schreiner - Capstone Investments
Could you talk about possibly, Clent, the new ASIC that you guys have recently announced and how that really could improve the opportunities going forward for the company, potentially lowering, you know, building materials, what impact that may have on building materials for you and your customers? And looking at the comments we're heard today about being more product centric, is this ASIC-type of structure that the company's going to be now focusing on and, if so, how does that impact the margins going forward?
Clent Richardson
Right. I'll let Stephen talk about the margins.
What we have recently announced is agreements with both Imagis and Leadis, and both of these firms are embedding our technology onto chips that they design and that they distribute. What this does and without getting too deep into the gears, it provides an opportunity for us to distribute our technology to anyone that is putting their chips into their devices.
And the implication here is there are chips in virtually every electronic digital device. So to contemplate the vast opportunity, we'll take a mobile phone for this example.
Our job is not to talk about the [inaudible] and whatnot; it's a relationship for Imagis and Leadis, in this case, to work out with the manufacturers. But it solves all a distribution problem for us because they're already calling on these particular device manufacturers, and it also protects us from an intellectual property standpoint in ensuring that our IP is well protected, particularly in dark territories where IP is not as well respected.
So while we're not suggesting that we're going to now run to this side of the ship and only focus on haptic chip partners, this is something that we're adding to our go to market strategy in the Touch line of business. It's going to be a vibrant part of our revenue mix moving forward.
I would expect we would hope to make [inaudible] toward the end of 2009 and into early 2010, but this is laying a foundation upon which we think is quite significant revenue opportunity. And if you look at most of the chip manufacturers, they're all understanding well the power and opportunity of touch - touchscreen, touch feedback, confirmation, validation, flat screens and so on and our technology is a natural to help make a better user experience for people that have touchscreen solutions.
Stephen Ambler
On the margin side, because this will effectively be a licensing and royalty revenue stream, that will provide very, very high margins and so the margins that we have as a company will increase. It's interesting when you look at the margins, excluding the writedowns of the inventory on the 3D side, our margin was 69%, which was below 70%, and part of that was because we did discount some of our 3D products in the fourth quarter to effectively run down some of the inventories that we had.
The Medical business is a product sales business. It actually brings our gross margins down a little bit as well.
But the combination of the ASIC model as well as the expected increases in some of the licensing revenues from some other parts of our business and the removal of the 3D business, which had margins below 50%, you will see our margins rising as each quarter passes in 2009 over the fourth quarter of 2008.
Jeff Schreiner - Capstone Investments
And that would be a sequential increase, Stephen - do I understand correctly?
Stephen Ambler
You will definitely see - I should never say definitely - but you will see an increase in Q1 over Q4 2008, yes.
Jeff Schreiner - Capstone Investments
Kind of touching on Mark's question, looking at the future value of the company here and how things are shifting and changing and obviously it looks like a lot of positive things going on, but what should we look at on a financial basis in terms of what kind of a benchmark for us to judge the company on for a breakeven level going forward as we move into this new model that you seem to be creating and adding on to the strategy as I've heard several times today?
Clent Richardson
Right. So we're not going to be forecasting or providing guidance on when we expect to breakeven, but I will give you a couple of benchmarks.
The first is growth - for any organization to be able to grow in this macroeconomic reality, that is not trivial, and we intend to grow and I believe we are only not on a path to growth, we have a solid plan that will take us to respectable growth. The second measure by which I would ask investors to consider us is managing our business such that we actually perform cash neutral in terms of impacting our cash in the bank.
And so that would be the first step on a path to profitability. That, of course, is the ultimate goal here as we turn the corner.
And then the fourth measure is design wins and customer announcements, talking about our technology and future use, which is an earlier indicator of rain that will fall in subsequent quarters. Stephen, do you have other comments you'd like to add?
Stephen Ambler
No, not really. I think that says it all.
Operator
Your next question comes from Glenn Mattson – GTK Capital.
Glenn Mattson – GTK Capital
I must say that the expenses have certainly grown. I'm a little bit shocked year-over-year how much they have grown.
I know you're making investments for the future and I know you've made a lot of other arrangements, but what can you tell me about - since we don't know when we're going to increase sales enough to be profitable, what can you tell me about the expenses? I know you've taken no salary increases and things of this nature, but I see sales and marketing going up $2 million year-over-year, research and development $800,000, general and administrative going up $1.4 million, these are shocking numbers, frankly, for a company that's not growing.
Stephen Ambler
Let me talk a little bit about our overheads. Yes, our overheads in Q4 were a little bit higher than we would have liked.
We are taking steps to get those overheads down. As you know, we're divesting our 3D line of business and I mentioned that we were reducing our headcount by 13 individuals, which will come out; that will have an effect on our operating expenses.
Also moving the Medical business to San Jose will also impact our Medical expenses as we make savings, and I mentioned earlier on that we expect to save over $1 million a year. We have been involved in litigation and other legal expenses and those have been quite high.
Those will come down. So we do expect our overheads to decrease.
Glenn Mattson - GTK Capital
How much will your legal be? Should I ask?
Stephen Ambler
In the fourth quarter? The actual litigation fees in the fourth quarter were about half a million dollars.
We do incur other legal expenses.
Clent Richardson
Glenn, let me make a comment on your first question. We're not satisfied with our overheads.
We are working to operationalize and bring those down and you can measure us on our success and ability to do that at the same time while we grow revenue. And we have grown.
We're not happy with the growth rate, but the fact that we've been better than flat and grown year-over-year, we're actually happy with and we will continue on that trajectory.
Operator
Your last question comes from Mark McMahon - Raymond James & Associates.
Mark McMahon - Raymond James & Associates
I've got a couple of questions in terms of some macro, big picture as well as some specifics. I know that you guys don't like to give forward-looking statements, but I think part of the disappointment is that privately offline talking with analysts, talking with potential analysts, about revenue guidance, so to speak - not specifics, but in terms of generally how the industry's going is that I guess my disappointment is and when I'm talking to my investors that, you know, trust their money with me when I make companies such as yourself is that when we have such big huge divergences between what is published and then tomorrow morning's Zacks headline news is so different from what you guys reported.
Is that something you guys are thinking about changing going forward from this straight, absolutely no guidance rule towards helping analysts out there or potential analysts get better a better handle on what your businesses look like currently?
Clent Richardson
Mark, certainly a reasonable question. I think in this macroeconomic environment no one knows how deep, how far or how fast, and so I don't think we'll get any credit for trying to provide any guidance and, you know, candidly predictability beyond a quarter or two is, while we do have royalty and licensing revenue that we count on and we have a business plan built upon, we're not going to be providing guidance until things in our business are more predictable, number one, and number two, combined with a macroeconomic environment that settles down.
It's just not wise and it's not advisable and we won't.
Mark McMahon - Raymond James & Associates
Along those lines, for example, now you're two-thirds through the quarter. I've got another small cap company that I'm invested in - a smaller cap company that's in the hundred million dollar revenue range - but from my understanding is how their Treasurer, how their Chief Financial Officer all works with analysts is at this point in the quarter - because you usually get an analyst comment the day after, a couple of days after - is that they'll say you can kind of give some indications on their previous numbers on whether or not you're in line or close to in line and sort of you might want to re-think those numbers for the current quarter because of the macroeconomic times we're in.
I'm just trying to get a feel. When hearing you guys discuss how you are today and your expectations of growth going forward and to measure you by that, I'm not quite sure what to be putting down pen to paper in terms of what my expectations should then be for this quarter.
Should I be expecting that you guys did in fact grow from fourth quarter through to first quarter, that you guys are now from an internal perspective meeting your objectives on growth, or is that something that is esoteric, meaning you're hoping to be doing $10 million in unit sales by one manufacturer by the end of the year and a bunch of other things congeal and so at the end of the year I should be expecting some growth? There's a disconnect, and I'm not quite sure what I should be thinking.
Stephen Ambler
Well so thinking about, talking to analysts off the call, if we do give information to those analysts we are effectively giving guidance, so we can't do that. That's prohibited, so we can't do that.
So I do sympathize with the fact that people are working in the dark. So some extent our business is seasonal as well.
We have different parts of the business seasonal at different times. Q4 is normally good for the gaming side of the business.
Q3 is normally very good for some of the Medical side of the business. So those come into play, and we're still an early stage company.
Some of our revenues are effectively lumpy. That's just one of the things you suffer with.
Clent Richardson
And I think, to your question, Mark, this will be an unsatisfactory answer to your question - we're just not going to be giving guidance for the foreseeable future, and I think if you're someone that tracks our business, if you look at 2006, 2007, 2008 results you can see quarter by quarter, and our goal is to grow year-on-year quarter by quarter. And I think that's probably as much as we're going to say on this at this point.
Operator
Thank you. And management, at this time I'll turn the call back over to you for closing comments.
Please go ahead.
Clent Richardson
Very good. Thank you, everyone, for your interest, questions and support today.
Thank you, Stephen, for your support. Thank you, Alex, and thank you, [Mary].
We look forward to seeing you on the road or talking with you in our next quarterly call. With that, have a good day.
Operator
And ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.