May 4, 2009
Executives
Alex Wellins – Investor Relations, The Blueshirt Group Clent Richardson – President, Chief Executive Officer Steve Ambler – Chief Financial Officer, VP Finance
Analysts
Mark Argento – Craig-Hallum Jeff Schreiner – Capstone Investments [Aaron Husock – Alexa Global]
Operator
Welcome to the Immersion Corporation first quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr.
Alex Wellins with The Blueshirt Group.
Alex Wellins
Thank you for joining us on Immersion's first quarter 2009 conference call. This call is being webcast and is accessible from the investor relations section of the company's website at immersion.com.
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 news 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 CEO, Clent Richardson.
Clent Richardson
Good afternoon to Immersion's investors and analysts and thank you for your time today. As you've undoubtedly seen from our press release, Immersion posted revenue of approximately $7.5 million in total revenue for the first quarter of 2009, $7 million from continuing operations and slightly over $.5 million in discontinued operations.
Revenue mix from continuing operations was $4.5 million from our Touch line of business and $2.5 million from our Medical line of business. Our net loss was approximately $7.5 million and cash burn during the quarter was approximately $5 million.
While Immersion is making operational progress and we are signing a number of exciting deals that bode very well for the future and growth of the company, we fully understand that we must improve our results both on the top and bottom line. Therefore, Steven and I will keep our comments today succinct and to the point.
We will be clear and direct with regard to the plans to continue our success in areas that are showing progress and specific actions we are taking address the issues in the areas that need improvement and are underperforming. We have stated that Immersion intends to reach and sustain profitability as quickly as possible and we have taken aggressive action and prudent action to decrease expenses towards this goal.
We began laying the ground work for these cost reduction initiatives as we exited Q4 and they began to take hold in Q1. These actions include the relocation of our Medical line of business from Maryland to our headquarters in San Jose which will result in significant cost savings beginning in the second half of 2009 including the elimination of approximately 20 full time positions from the Medical line of business.
Overall our head count decreased from 183 in Q4 2008 to 174 at the end of Q1 2009. We reduced our full time head count in Q1 by 5% and are in the process of reducing it further by approximately 12% in Q2 which would result in a 17% reduction in the first half of this year.
Additionally, we are eliminating virtually all temps and contractors to further reduce our costs. Other decisive and measurable steps we have taken to control expenses in this difficult economic environment include CEO and senior Executive Management salary reductions, a reduction in retainer fees for members of our Board, a company wide salary freeze, the elimination of all non essential travel and two company wide furloughs or shut downs in 2009.
All of these actions have been taken and set in motion but results will not be evident overnight. While we did reduce our total net loss from Q4 to Q1, you should expect that our cost cutting initiatives will not materially benefit our financial results until Q3.
That said, investors should understand both the trajectory of our expense reductions and the strategy behind them. We believe the sum total of these actions will be that by Q3 you will see our expenses decrease by in excess of $2 million per quarter from Q1 levels.
Our plan is to operate the business with a goal of cash neutrality in the second half of 2009 by lowering each expense line of our business to cross the important break even milestone and then drive for and deliver sustained profitability in 2010 and beyond. Immersion is backed by an extremely strong balance sheet ending Q1 with approximately $81 million in cash.
We have added further emphasis to our cash preservation plans and will maintain a very strong balance sheet as we exit 2009. I'll note the gross margins increased sharply to 84% in Q1.
Maintaining healthy margins is a key element of our go forward financial plan and a focus area for our company. Shifting from expenses to our products and solutions, the Immersion team marked progress on both the Medical and Touch sides of our business during Q1.
Demand for our Haptics solutions across the various sectors of our Touch line of business including mobile, gaming, automotive and touch interface products is in fact intensifying. The outlook for our Medical simulation products internationally remains robust and as you may have seen in a recent press release, we forged an exclusive reseller partnership with leading medical device and industrial distributor Gadelius K.K.
in Japan. That said, we have substantial work to do given the softness of the domestic medical market and the challenges from the overall economy.
I will provide additional details on our Touch and Medical lines of business after Steven reviews our Q1 results with you in detail and then we'll be happy to take your questions.
Steven Ambler
As you are all aware, we commenced the divestiture of our 3D line of business in the quarter. Under U.S.
GAAP we are required to separately account for increment expenses that are directly attributable to our 3D business' discontinued operations while the remainder of the business in accounted for in continuing operations. For today's discussion, I will focus my comments primarily on our results from continuing operations.
Please note that all comparative numbers have been adjusted to reflect this accounting. Looking at a breakdown of revenue across our two lines of business, Medical and Touch, first quarter revenues for Medical of $2.5 million represented 36% of total revenues.
This is down 16% from the year ago period and down 41% sequentially. Although we did experience significant weakness in revenue from our domestic medical market which accounted for most of the shortfall, some of the drop from Q4 2008 was caused by normal seasonal buying cycles.
Quarterly revenues from our Touch line of business of $4.4 million accounted for 64% of total revenues. This is up 13% from $3.9 million in the year ago period and up 34% from $3.3 million in the preceding quarter which is seasonally strong within our gaming and hand held markets.
In analyzing our first quarter revenues by category, total product sales revenues which represented 39% of revenue increased 3% compared to the first quarter of 2008, decreased 34% sequentially. 92% of product sales revenues come from our Medical business and 8% come from our Touch line of business.
Patent, technology licensing and royalty revenues increased 9% from the comparable period in 2008 and increased 32% sequentially. Patent, technology licensing and royalty revenues all came from our Touch business and represented 54% of total revenue.
Development, contract and other revenue decreased 44% from the year ago period and decreased 23% sequentially. The decrease reflects our continued efforts to move away from development work and concentrate our focus on product sales and licensing.
98% of development contract revenues came from our Touch line of business and the remaining 2% came from Medical. Development work comprised 6% of total revenue.
Gross margins of 84% for the first quarter increased from 76% in the year ago period and from 69% in the preceding quarter. Gross margins improved primarily as a result of efficiencies and decreased staffing levels within our operations groups as well as a change in revenue mix.
Total operating expenses of $14.1 million included $646,000 in restructuring costs related to reorganizations within both our Touch and Medical lines of business as well as non cash stock charges of $1.2 million. In addition, these total operating expenses of $14.1 million compare with operating expenses of $10.9 million in the year ago quarter which included non cash stock charges of $943,000 and with operating expenses of $13.2 million in the preceding quarter.
Those included $537,000 in restructuring costs as well as non cash stock charges of $1.1 million. Head count decreased from 183 at the end of Q4 2008 to 174 at the end of Q1 2009.
As Clent mentioned, our expense reduction plan includes reduced head count as we move through 2009. Interest and other income totaled $431,000 for the quarter.
That compares to $1.5 million in the year ago period and $392,000 in the preceding quarter. Interest income primarily reflects lower invested cash balances as well as general interest rate declines over the past year.
After offsetting gains from the sale and operation of our discontinued 3D business in the period, our net loss for the quarter was $7.5 million or $0.27 per share. This compares to a net loss of $2.6 million or $0.08 per share in the first quarter of 2008 and an improvement over net loss of $9.7 million or $0.35 per share in the preceding quarter.
Our cash, cash equivalents and short term investment balance was $80.9 million at the end of the March quarter and that's equivalent to $2.90 per share. Receivables at the end of March were $4.1 million which compares to $6.8 million at the end of December.
DSO's at the end of the quarter were 52 days net the reserves and 65 days gross of reserves. As of March 31, 2009 we had 27.9 million shares of common stock outstanding.
Thank you for your attention. I'll turn the call back to Clent.
Clent Richardson
At is evident from the results; our Medical line of business has not met revenue expectations. We believe this is due to a very challenging current macro economic environment, especially domestically.
On a seasonal basis, it's important to note that Q1 has been the slowest quarter for our Medical line of business for each of the past four years. That said, there is no question that we have been negatively impacted by hospitals and other facilities slowing our pushing out capital equipment spending, especially in the U.S.
International sales were down only slightly from Q4 partially due to Asian markets that are always seasonally slower in the first few months of the year due to Chinese New Year and other holidays. While macro and seasonal factors negatively impacted our Medical results for Q1, a careful analysis of the operations and forecasts for the Medical business late last year led us to the conclusion that in order to drive and sustain growth, as well as better management of our bottom line, we needed to restructure this business.
This analysis resulted in our decision to relocate the business in San Jose as we announced in last quarter's earnings call. I am pleased to report that as of today, we are commencing Medical operations based here in San Jose.
The time line of this transition has been managed aggressively and effectively to ensure that we have seamless operations for the most important selling month of the quarter, to avoid any unnecessary rent payments and eliminate expenses wherever we can. From an expense standpoint, we are reducing head count in Medical from roughly 80 down to 50 full time equivalents and we have taken significant cost of our the business in terms of consultants, temps and contractors.
To reiterate, we will not realize much of the benefit of these cost reductions in Q2 due to relocation and restructuring expenses, though we will see a meaningful impact in the second half of 2009 and most importantly, we are sizing this business for its expected revenue trajectory for the balance of 2009. Last quarter we introduced two new products into the market; the first new product introductions for our Medical line of business for quite some time.
Despite the typical six to nine month sales cycle, I can report that we have already made initial sales of these products. This initial success indicates the significant levels of interest for our Medical simulation solutions and as is our plan, we must now capitalize on this interest.
International demand for simulation remains strong and we are making progress globally as we continue to add and expand relationships with important distribution partners. As mentioned at the top of the call, one such partnership is an exclusive new distribution agreement with Gadelius K.K., one of Japan's prominent distributors of medical devices and industrial equipment.
Our two companies are already deploying sales and marketing initiatives aimed at bringing the highest level of advanced virtual reality, medical training simulators, curricula and services to the Japanese market. I attended the kick off for this partnership at a high profile medical trade show for surgeons in Japan in last March and it was notable that Japan has placed a strong emphasis on using simulation for both the training of new surgeons and for government mandated ongoing medical training in this country.
Demand for simulation solutions also remains extremely high in China and on my recent trip there, I observed the construction of a 90,000 square foot stimulation training center outside Beijing. Another 100,000 square foot center was also highlighted in the Wall Street Journal recently, a remarkable illustration for that country and its focus on providing health care to its enormous population.
Today we announced that MARKO Surgical Corporation, a leading innovator or orthopedic robotically assisted surgery has become our first licensee in the area of surgical robotics. We are very confident about this partnership as it represents the convergence of our Touch and Medical solutions and we are opening a new revenue stream for Immersion at the same time.
We will recognize a small amount of revenue from this relationship immediately and we believe and expect this segment has the opportunity to in fact grow over time as well. To summarize on Medical, we are taking rapid and aggressive steps to cut costs while focusing our sales efforts to reverse the negative trends of this line of business.
We have relocated the business to corporate headquarters and by the end of Q 2, we will have sized the operation to match current revenue forecasts. We are working through a difficult macro economic environment but we are encouraged by interest and demand from our customers globally.
Our Touch line of business has growth revenue both sequentially and year over year. Interest in and demand for innovative touch solutions is extremely high and the magnitude of the opportunity before us is great as we're still in the nascent phases of adoption for our technology.
In the mobile phone market, which is the most discussed sectors among investors and the media, this represents a microcosm of the overall touch industry. While overall phone sales are expected to flat or decline for the first time ever this year due to the general economy, industry analysts are forecasting that touch based phones and the Smart Phone category are by far the fastest growing area for handset makers and carriers alike.
This trend was further reinforced at the two largest mobile phone trade shows, the Mobile World Congress and CTIA. It's fair to say that the focus of most activity was around touch based products and the thousands of new apps available for mobile users worldwide.
To win in this market, handset makers must be focused on enhancing user experience to differentiate their products in a manner that is fun for consumers yet efficient technically, and Immersion helps them do just that. Immersion's Touch Sense feedback solutions dramatically enhanced the user experience in these devices.
The top three handset makers in the world, Nokia, Samsung and LG are all licensees for Immersion's Haptics solutions which are shipping in their high volume touch enabled phones. In fact, our partners shipped over 15.3 million hand sets in Q1, up from 12.5 million in Q4 of '08.
This means that on a cumulative basis, more than 58 million Immersion enabled hand sets have been delivered to the world wide market. Along with robust growth, our market penetration has been very impressive over the last three years.
Our data reflects that in 2007 Immersion was integrated in only 3% of all touch screen phones shipped globally. In 2008 that number grew to 15% and based on our run rates and our market analysis, we believe that by the end of 2009 we will be designed into approximately 25% of the touch screen phones shipped during this calendar year.
Last quarter I commented on our strategy of vertically integrating Immersion solutions with semi conductor companies and our progress relative to signing our first two licensees in this area Leadis and Imagis. Not surprising, the integration of Immersion's technology is of substantial interest to a number of chip makers as it allows them to embed and deploy Haptic functionality ubiquitously across a wide spectrum of devices.
We have received our first royalty revenue from our initial licensees already and we are both encourage by and confident of the prospect of a new high margin incremental revenue stream for Immersion via partnerships with chip makers. This is a major focus area for our Touch group's efforts and you should expect that we will sign additional partnerships in calendar 2009.
Quickly turning to other sectors in our Touch line of business, Immersion recently participated in GDC, a gain developer conference where we met with a number of manufacturers and licensees to demonstrate recent product and technology innovations by our team. We engaged in positive and encouraging discussions relative to future products in the gaming sector which is critical as sales of PS2 and related peripherals begin to show signs of winding down in favor of newer consoles.
While the slowdowns in the automotive sector have in fact impacted Immersion's deployment, we are involved in a series of promising projects in this area as well. Last quarter, we noted that Toyota selected our Touch Sense technology to power a new Haptic based driver control feature in the 2010 Lexus RX which is in market now.
And Road and Track Magazine just gave a sneak peak at the new 2012 Tesla Model S highlighting its use of Haptics, noting a 17 inch touch screen entertainment system in the center console with Haptic interface. We are engaged in discussions with most of the auto manufacturers in the world and as previously announced two additional 2010 car models have designed in our technology; one from Toyota that is already in the Japanese market and another from a new licensee that will be available later this year.
And finally on the product front, we continue to diligently pursue opportunities in the consumer and office product sector. There is no question that touch screens are being implemented across a wide range of industrial categories including IP phone systems, white goods and printers.
While confidentiality agreement preclude us from disclosing progress in this area at this time, we are working closely with category dominant brands and household name OEM's to bring a number of innovative products to market and will update you as we are able to share more details. As we look ahead to the balance of 2009, our financial goals are simple and clear.
We intend to improve revenue performance and drive growth. We intend to reduce expenses across the board as we drive for cash flow break even and sustained profitability and we intend to maintain a strong balance sheet.
To accomplish these goals we must and will continue to improve the efficiency of our operations, focus our sales efforts to capture both short and long term opportunities and continue to innovate, creating high differentiated solutions in user experience and deploy the world's leading portfolio of patented Haptics technology in end markets globally. I've now been the CEO of Immersion for one year and can say without a doubt that we are making progress beyond what is evident in today's financial results.
This team has been engaged in the restructuring and reorganization of the company which is already beginning to show the fruits of our investments. We understand that we are fighting the headwinds of a global economy and we recognize that investors are often not patient when told long design cycles and an inability to disclose specific design wins due to contractual obligations.
We are making significant progress. We are forging new important relationships that will in fact drive new revenue.
Further, the expense management initiatives laid out in today's call will begin to take measurable and impactful effect in the second half of this year. Expenses will decline.
Cash usage will be aligned with revenue production and we will maintain our solid financial footing. We are taking rigorous and precise actions relative to head count and overhead so they properly reflect our revenue.
In short, while it sounds quite simplistic, as we move through the year you will see that we will indeed adjust our operations and investments to spend less than we make and all of these actions are designed to eliminate our cash burn and turn the corner to ongoing profitability. Interest in Touch based solutions is greater than ever before and industry trends such as the emphasis on touch and windows seven, demonstrates just how focuses major OEM's are in creating a touch based product portfolio.
And, despite current softness, interest in medical simulation is quite high as well. While our expense reduction actions demonstrate that we are unmistakably serious about making the touch choices and appropriate investment required to operate in today's environment, we also refuse to miss the critical opportunity to deploy Immersion solutions ubiquitously.
Stepping back, it's critical to note that we are participating in very large and growing markets. Our Touch business is both growing and performing well and we're also taking prudent and aggressive actions to improve the performance of our Medical line of business.
Our IP and ability to innovate in a growing and important areas of Haptics and user experience are second to none. While being highly cognizant of our need to stop cash burn in our business, we must not step back from vital investments as Immersion has an unmistakable opportunity to shape the future of user experience in digital devices.
We look forward to keeping you informed and having you mark our progress as we move through 2009 and emerge a very different company than we were a year ago than we are today. Thank you for you attention and interest.
Let's open up the call for our first question.
Operator
(Operator Instructions) Your first question comes from Mark Argento – Craig-Hallum.
Mark Argento – Craig-Hallum
This MAKO deal, I know it's early on and the company MAKO is just ramping up in terms of units, but is it typically this type of deal that you get upfront royalty and then per unit payment, or how should we think about these deals going forward?
Clent Richardson
We're particularly confident and excited about this MAKO announcement as it's the first in a new category and it is also a new revenue stream for us. Typically the arrangements will be a fee upfront to start and a per unit royalty payment or licensing payment depending upon the agreement.
Mark Argento – Craig-Hallum
Do you have to put any upfront engineering costs in in terms of getting the product up and running in their device or is it fairly well integrated at this point?
Clent Richardson
Each agreement will be a little bit different because each of these surgical robotics manufacturers are in varying stages of implementing and considering Haptics. That said, in this instance, this will have a very quick turn into the market and we believe there will be little work we will have to do to help get them up and running.
Mark Argento – Craig-Hallum
I know you had mentioned in the press release and discussed a little bit on the call about your market share assumptions 15% to 25% on the flat panel mobile devices, does your assumption there include any new OEM wins, any new manufacturers or is that with who you have already announced relationships with?
Clent Richardson
Let me just quickly unpack how we arrived at that. First, it's based on an I supply study that everybody that follows us and this category generally understands from May of 2008.
It is also based upon our track record run rate and knowing what models of phones we're working on that are coming to market as well as forecast validation from the three largest handset manufacturers on the planet which are Nokia, Samsung and LG. So this is an integrated understanding of the market.
We do not take into account any new OEM's in this particular forecast.
Mark Argento – Craig-Hallum
Shifting back to Medical, I know that there's been some bills, some pending legislation introduced with HR855 I think you've touched on this before, are you following that bill and have you done any lobbying efforts behind that, the bill to see if you could get that Medical training somehow pushed through?
Clent Richardson
You bet, and for those that haven't read it, it's a reasonably easy read. It has been referred to committee which is the first phase after a bill has been introduced.
It goes to committee for review and edit and consideration and implementation and it's a process. We do follow it very, very closely.
We have a self serving interest in it certainly and we believe it will also help improve patient care in the United States. We have contributed modestly in lobbying, but generally speaking, lobbying efforts at this stage of where the bill is in process aren't hugely impactful.
That will happen a little further on in the process.
Mark Argento – Craig-Hallum
A housekeeping question, cash flow from operations for the quarter, I know you're still taking in some cash payments I believe from Sony if I'm not mistaken. How much did you burn out on an operating basis versus some of these royalty payments?
Steve Ambler
Our non cash expenses are around $1.6 million a quarter, at least they were in Q1. So you take out operating expenses which were $14.1 million and take out $1.6 million, you get $12.5, so that's the expense that we burned on expenses.
From an overall cash flow point of view in Q1, we burned as Clent said in the quarter just under $5 million and we're targeting cash flow neutrality in the second half of the year. We get there with some modest growth.
Mark Argento – Craig-Hallum
Are your payments from the Sony, that deal that you did with Sony a couple of years ago, is that, are you still taking any cash from Sony?
Steve Ambler
Yes we are. We will continue to take in some cash from them each quarter through the end of this year so I there's still three more payments to come.
Mark Argento – Craig-Hallum
In terms of the moving costs and some of the severance costs related to repositioning Medical, is that in this quarter or will that be in next quarter?
Steve Ambler
We took $646,000 of restructuring charges in Q1. We are in the process of as you say moving our Medical business to San Jose.
There's going to be some facility related costs there and some people related costs and we expect the majority of those costs to hit in Q2, this quarter that we're in now and expect those costs to be in the $1 million range.
Mark Argento – Craig-Hallum
Those will be all expense then?
Steve Ambler
Yes, they're all going to be fitting in that restructuring line. They're not going to be in overall expenses.
As we said, we expect our overall expenses to come down a couple million or more each quarter between this Q1 that we've just been through and Q3. You will see some reduction in Q2, but it won't be significant.
The line by line items, sales, marketing, etc., you will see reduction there but you will have restructuring costs offsetting that.
Mark Argento – Craig-Hallum
I know you said head count has gone down from about 80 to 50 in Medical. Where have you targeted the reductions?
Is it R&D? Is it sales?
Where are you making adjustments.
Clent Richardson
When you restructure and reorganize a business as well as relocate it, it gives you an opportunity to take a look a the entire business inside out, which we've done. As you would well expect, there are a number of synergies that we're gaining in corporate functions which bringing into headquarters, we don't need two IT departments, we don't need two finance departments, we don't need two security, and it goes on and on.
We also have substantial floor space here that we've recently vacated as a result of divestiture of our 3D lines of business that free up production floor and inventory capability. So we'll see the benefit of that as well across corporation functions.
And with little exception, we are doing operationalizing across each of the major categories of that business where we have some development, there's some in the marketing area. There's some that will be done modestly in the sales and business development area, but predominantly in the revenue generation and development side, we're doing our level best to keep those intact.
Mark Argento – Craig-Hallum
In terms of the one year look back, any think you'd do differently if you got the opportunity to do it again? What makes you most excited and most frustrated?
Clent Richardson
The world has changed two times in the last year and I think if I were to look at doing anything different it would probably be to take a little earlier view of some of the restructuring that we did in Q1. We might have considered and contemplated that a little earlier in the Q4 quarter.
That said, we had an operating plan that I came into that we also supported and really believed is the right thing to invest into growing the business. It's easy to have the fifth quarter quarterback view of the game, but I will tell you there aren't many regrets here.
Am I optimistic? Yes.
If you take a look over the last three quarters, management continues to accumulate our stock. We are working for the second half of the year to be cash neutral.
This company, as cash neutrality is sort of the first gate that you need to pass to get to profitability. We've never been organically profitable.
That's a huge milestone for the business. We have a strong balance sheet.
We are debt free. We've got $80 million in the bank.
I think we're really in the driver's seat. Right now it's about proving that we can get across the threshold of profitability, cash neutrality before than, and then really driving the revenue top line to show relevance in the broader market.
So I think the fact that Touch is continuing to grow, that we have an international interest in our Medical line of business, there's only nine or ten things that I listed there, but those keep me pretty bullish and we remain very confident and optimistic about the business.
Mark Argento – Craig-Hallum
Your background is sales and marketing. How do you judge the job that the company has done in terms of establishing its brand and reputation and mine share with a lot of these larger OEM's?
I know you've put up some deals which is encouraging, but I assume that we could all take heed that you're having discussion and guys understand the value proposition that the technology brings to the table?
Clent Richardson
As I said in the comments toward the end of the top of the call, the interest in Haptics and the interest in Immersion is substantial, and while we will do what we need to do to spend less than we make, we also refuse to walk away from the necessary investments to ensure ubiquity. I said as I was walking in here in the press release when I joined the company, that I felt like Immersion was nearing the tipping point for our ubiquity and deployment.
I believe we're further down that path. As I travel the world, as we talk to teaching hospitals and universities, we've opened up a new theater in South America, across the panhandle of Asia, Eurasia and India, Korea, Japan, China.
These are markets that have an appetite for training surgeons and medical practitioners. There really no other way to scale it short of using cadavers or using live patients which brings some cultural stigma.
So we think we've got a unique solution there and as we sort of zoom out and look forward, our brand is stable and growing. Our reputation is strong and we are and have been customer leading and doing our level best to try to cut deals whenever we can and at the same time balancing that against insuring that we vigorously protect our intellectual property.
So kind of a long answer to a short question, but I would say our brand reputation is growing. I inherited a quality company with a lot of cash that was debt free, that has done a number of things very, very well and I hope that we've been able to build substantially on that, and I think we have.
Operator
Your next question comes from Jeff Schreiner – Capstone Investments.
Jeff Schreiner – Capstone Investments
Could you just remind us what the revenue level break even is for Immersion?
Steve Ambler
It's obviously a number that's come down a little bit because of the changes that we're making with our operating expenses. We're kind of focusing more at the moment on cash flow neutrality and if you take account of the operating expenses that we had in Q1 which was $14.1 million and take over $2 million in expense reductions that we're implementing plus the fact that some of our expenses are non cash related, our cash spend on expense side is going to be around $10 million to $11 million in Q3, Q4 which will get us to that second half cash flow neutrality situation.
So with modest revenue growth, we achieve that. And that's what we're planning on doing and we can see that.
Jeff Schreiner – Capstone Investments
I have heard correctly then today in statements that you just said it and Clent has referenced it that the company does believe on a cash neutral as you described it, on a cash flow neutral basis, is that likely achieved given not significant growth is needed to achieve that in '09?
Clent Richardson
That's correct. We believe and have confidence that we will have modest revenue growth and we are also constantly evaluating our expense line in the business to make sure that we spend less than we make.
Be clear, cash preservation is king. We are into protecting the erosion against our cash balance.
We have one more quarter of some heavy lifting and hard rowing that we need to do in Q2. As we turn the corner on July 1, we enter Q3, we'll realize the benefits of all the expense reduction initiatives that we've undertaken and with modest revenue growth we expect to hit cash neutrality by the end of the year.
Jeff Schreiner – Capstone Investments
One would think just looking from the outside in, a lot of the inventory you hold on your balance sheet is mostly related to the Medical business given the nature of some product sales there. Could you tell us if that is correct, why was the inventory up sequentially from the fourth quarter given the neutral outlook provided by you in the Medical business going forward?
Steve Ambler
The majority of the inventory of the company is on the Medical side of the business. It's not all Medical.
There is some inventory related to the Touch side of the business, but the majority of it is Medical. I think it's fair to say that the domestic Medical revenues have been disappointing in the last couple of quarters.
The buying cycle at the moment, capital purchases into that market is pretty tough and the manufacturing cycles take a little longer than some other companies, so we had to build up some inventory to meet our expected revenue there. And with the Medical domestic being a harder sale in the last couple of quarters than anticipated, we've seen our inventory balances increase.
We are obviously addressing that and intend to bring our balances down.
Jeff Schreiner – Capstone Investments
Anything changed year over year when we look at who's making up your A/R balances to maybe the increase we've seen? If I'm not mistaken I think it was around 36 days in Q1 '08 and it's about 52 when you net out reserves this quarter.
Has anything changed there?
Steve Ambler
We've seen a little bit of longer payments taking place or payments not taking place on a timely basis from some of our overseas customers. Our DSO does move around.
At the end of December it was 70 days, now we're back down to 52. And you're correct, a year ago it was actually 37.
So it does move around a little bit. I think it's also tied up a lot to the way our business is changing and it comes back to Clent's thought to that last question from Mark over the last year.
A year ago, international revenues were about 35% to 40% of our total revenues, of the company. In Q1, our international revenues were 55% of total revenues, 45% domestically.
So we've seen more sales overseas. And for us, it's just going to take our customers longer to pay when they're based overseas than within the U.S.
Jeff Schreiner – Capstone Investments
You've been discussing about the intense demand and the intense interest in the Haptics technology and certainly that can be referenced by some of the key designs that companies had and the success. One could point to just even the handsets that you had to recognize the value of Haptics the industry has found.
In your past life you worked for a company called TiVo and they had a product which if you interviewed anyone who had a TiVo probably would never give it up for the life of them. However, the company I would say if you're still looking at their model today has still had a problem monetizing the overall value of that TiVo brand and what the product offers.
Can you help us understand how maybe Haptics might be different than TiVo and how you see the monetization playing out over the next 12 to 24 months?
Clent Richardson
It's hardware solutions with a subscription service versus licensing and royalty revenues. It's kind of hard to compare them directly across.
But what I would say that Immersion's opportunity is truly ubiquity in the user experience and while we have been a little bit hamstrung in our ability to talk about the dozens and dozens of engagements that we have with potential partners and partners that we currently have, that we've not yet announced, the interest for our products and solutions continues to increase. Our legal department is busy with new contracts and NDA's and agreements and you will see those announcements coming out as we can make those announcements, but they are sort of customer and partner driven.
We can't get ahead of their product announcements. Our job clearly is if you take a look at the mobile market at the microcosm of Touch, the same thing has happened in our automotive category.
We're seeing that now move to IP telephones and desktop telephones and across netbooks and notebooks and the input/output for Win 7 as that operating system comes across. You'll continue to see this in industrial machines, in kiosks in the casino gaming.
For us, I think it's just a matter of making sure that we can give our investors confidence that we're not going to erode our cash balance by our ongoing operations and that we can then prove that we have top line relevance by growing and our goals are to achieve that. If we're successful at doing that, I have no doubt that we will achieve ubiquity and to go from 3% to 15% to 25% on the Touch screen phone market I think is one proof point of five or six that you will see across the consumer categories.
And I think you're also going to see a similar take up as we move across our Medical theatres as well.
Operator
Your next question comes from [Aaron Husock – Alexa Global]
[Aaron Husock – Alexa Global]
Thank you for the increased focus on cost reduction and cash flow break even. We appreciate it.
Can you give us an update on your progress in raising your average selling price in the handset space? You've got new initiatives underway and some contracts I think are going to come up for renewal.
Can you update us there?
Clent Richardson
It will be a largely unsatisfying response to a good question. We don't talk about our ongoing negotiations as they're in the mix.
But there's a couple of things that the company did early on that were very smart indeed. The first was to get the single largest handset manufacturer on the planet to sign up and agree that Haptics was a table steak to differentiate their user experience, and that being Nokia.
Soon after came LG and Samsung that actually beat Nokia to the market because of their design and manufacturing cycles. And who would have known that three years later they would be the number one, number two and number three handset manufacturers on the planet?
That said, as we have the opportunity to raise prices, we certainly look to try to do that and we have been successful in some relationships already doing that. The early ones in get the best deal and the later ones in, as the water rises, generally pay a higher price and we are also following that model and we don't break out individual prices or individual contracts, but rest assured that as the water rises, and more players come into the market, that we view that as an opportunity to increase price.
And that same model holds true for virtually every theater in the Touch line of business whether it be automotive, whether it be mobile, whether it be in the traditional computer touch screen space and the gaming space or other.
[Aaron Husock – Alexa Global]
Can you get into a little bit, it's not just you going to them and saying we'd like you to pay more. What is the leverage point that you have in terms of additional features or capabilities with Haptics that help bump them up a notch?
Clent Richardson
We've got a truly brilliant innovation engine here in our research and development group. Certainly people are generally happy to pay more if they get more and we are continually improving both the effects as well as the way customers can improve and differentiate their user experience, and we are offering various ways for them to do that.
I don't know if you've been following our product solutions for example in the mobile category, but you can sort of get a view to off of our website, we essentially have a good, better, best product strategy. So you can get in for a reasonably value oriented price at the good quality, or the good mix.
But if you want some of the cooler whiz bang features that our technology provides, you'll pay a higher price. And so we use that same model across each of our Touch line categories.
[Aaron Husock – Alexa Global]
Since you brought up Nokia, are you already shipping into the Series 60 platform or for now is your Nokia revenue just primarily the 5800?
Clent Richardson
The Series 60 including our technology I don't think has shipped yet. We're expecting it to start shipping I believe in the third quarter.
We can't control that. That's completely down to Nokia, but that's a rough time line of when that product is meant to ship.
[Aaron Husock – Alexa Global]
The touch screen Haptics share numbers that you laid out there, do you have a sense for what you think those will be in sometime early 2010 when both N6 and NS40 have Haptics in them?
Clent Richardson
We want to be careful not to forecast or preannounce our customers' products. That said, we are in the Series 60 and that will be shipping and we have delivery times.
It was to have been Q1 of this year and it's been pushed to Q3 of this year. Certainly the next holy grail is the high volume market which is Series 40.
We expect that to be shortly thereafter but it is our belief and expectation that we will be across both platforms.
[Aaron Husock – Alexa Global]
The handset unit number that you threw out there, I guess it was 15.3 million units. given how you recognize hand set growth year over year is that actually the number of units shipped with Haptics in Q4 of last year or is that a Q1 of this year number?
Steve Ambler
That is the number that shipped within Q1 this year, January 1 to March 31, 2009.
[Aaron Husock – Alexa Global]
And you'll be recognizing royalties on those units in Q2?
Steve Ambler
That's correct. We recognize royalties one quarter in arrears.
[Aaron Husock – Alexa Global]
I know you can't really talk about the white goods yet, but can you give us any sense for how big you think it might be maybe relative to your other product categories and a little bit on timing of that opportunity?
Clent Richardson
I talked about this a little bit on prior calls. Consumer design cycles generally are quicker than certainly automotive for example and some other devices that we're in.
That said, it can be nine to twelve months even for some of the fastest, through you could expect to see uptick in both announcement, product announcement as well as some potential revenue as we approach Q4 because that's generally the golden quarter for consumer buying. I want to be careful not to get too far ahead on any forecast there but across virtually all categories whether it be a white goods or consumer, we are having conversations and helping OEM's and ODM's create a differentiated user experience.
Because the high end in particular, it generally starts at the high end product and moves its way down across the entire category of product portfolio. We're having meaningful and material conversations in virtually all of those categories.
Operator
That concludes our question and answer session for today. I would now like to turn the call back to management for any closing remarks.
Clent Richardson
We appreciate your interest and attention for our earnings call today. We look forward to seeing you on the road or at any events we will have or our next earnings call next quarter.
Thank you very much for your interest and support in Immersion. Have a good day.