Oct 30, 2014
Executives
Vic Viegas - President & Chief Executive Officer Paul Norris - Chief Financial Officer
Analysts
Josh Nichols - B. Riley Asset Management David Williams - Ascendiant Capital Shannon Richter - Feltl & Co.
Matthew Galinko - Sidoti
Operator
Good day and welcome to the Immersion Corporation, third quarter 2014 conference call. Today’s conference is being recorded.
At this time I would like to turn the conference over to Jennifer Jarman. Please go ahead ma'am.
Jennifer Jarman
Thank you operator. Good afternoon and thank you for joining us today on Immersion’s third quarter 2014 conference call.
This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company’s website at www.immersion.com. With me on today’s call are Vic Viegas, President and CEO; and Paul Norris, CFO.
During this call we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products, anticipated new markets, market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions.
Accordingly, actual results could differ materially. For a listing of the risks that could cause this, please see our latest Form 10-Q filed with the SEC, as well as the factors identified in the press release issued today.
Additionally, please note that during this call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available in today’s press release.
With that said, I'll now turn the call over to Chief Executive Officer, Vic Viegas. Vic.
Vic Viegas
Thanks Jennifer and thanks everyone for joining us this afternoon. In our third quarter we generated revenues of $12.1 million, a September quarter record, and we were profitable for the seventh quarter in a row.
During the quarter we entered into a new multi-year licensing agreement with LG, with favorable terms reflecting the increasing value of Immersion haptics, saw adoption of Immersion Technology and new haptic use cases in the mobile and wearables markets and launched the first commercial tactile mobile advertisement with SHOWTIME using our new TouchSense engage platform. We are very pleased with the headway we have made to-date and the trends we are seeing in the mobile and wearables markets, to extend haptics beyond touch confirmation and utilize the capabilities haptic technology has to enhance realism and communications.
We are also excited to announce that we have hired Mahesh Sundaram, a highly experienced and skilled sales executive as our Vice President of Worldwide OEM sales. As we look forward to the future, we are more confident than ever that the innovations technology and IP we have developed are gaining momentum.
After Paul has provided the details of our third quarter 2014 financials, I will share our recent business updates and perspective on market developments. Paul.
Paul Norris
Thanks Vic. As Vic mentioned, revenues for the September quarter were $12.1 million, up 6% from revenues of $11.3 million in the September quarter last year and a record for our third quarter.
Revenues from royalties and licenses of $11.7 million were also up 7% from royalty and license revenues of $11 million in the third quarter of 2013. Of these amounts, in the third quarter of 2014, variable royalties based on shipping volumes and per unit prices totaled $4.2 million and fixed payment license fees totaled $7.5 million.
This compares to variable royalties of $4.4 million and fixed license fees of $6.6 million in the September quarter last year. While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the third quarter of 2014, a breakdown by line of business as a percentage of total revenues was as follows: 66% from mobility; 23% from gaming; 6% from auto; and 5% from medical.
Gross profit was $11.9 million or 99% of revenues compared to gross profit of $11.2 million or 99% of revenues in the third quarter of 2013. Turning now to our operating expenses.
Excluding cost of revenues, total GAAP operating expenses were $10.2 million in the third quarter of 2014 compared to $10.4 million in the same quarter last year. Operating expenses in the third quarter of 2014 included non-cash charges related to depreciation and amortization of $144,000 and stock-based compensation of $1.1 million.
Of the non-cash stock-based compensation charges, $230,000 were included in sales and marketing, $265,000 in research and development and $636,000 in G&A expense. Litigation related expense for the quarter was $913,000, up from $669,000 in the third quarter of 2013.
Net income for the third quarter of 2014 was $1.1 million or $0.04 per diluted share, compared to $599,000 or $0.02 per diluted share in the third quarter of 2013. Net income for the third quarter of 2014 includes a provision for tax expense based on an effective tax rate for the quarter of 36%.
As a reminder, beginning in 2014, in addition in normal GAAP metrics, we are using non-GAAP net income and non-GAAP earnings per share to track our business performance. We define non-GAAP net income as GAAP net income less stock-based compensation.
We define non-GAAP earnings per share as non-GAAP net income per fully diluted share. Non-GAAP net income for the September 2014 quarter was $2.2 million or $0.08 per diluted share, compared to non-GAAP net income of $1.8 million or $0.06 per diluted share for the same quarter last year.
Our cash portfolio including cash and short-term investments was $63.1 million as of September 30, 2014, down from $71.1 million as of the end of 2013. The decrease was driven primarily by our continued purchase of Immersion shares under our stock buyback program.
During the quarter we spent approximately $5 million to buy back 535,000 shares. During the first nine months of 2014, we have spent approximately $12 million to buyback 1.2 million shares.
At the end of the third quarter we had $7.4 million remaining under our authorized stock buyback program. Subsequent to the end of the quarter, and because management and the Board remain confident in our business fundamentals and future prospects and continue to believe that our stock is attractively priced, the board has increased the amount of our authorized stock repurchase program by $30 million.
We expect to continue to execute opportunistically to buyback shares under the program. We will continue to monitor our cash balance and stock price relative to any future buyback activity.
As we enter the final quarter of the fiscal year, we have greater clarity around our anticipated financial results for the year. We expect revenues for 2014 to be in the range of $51 million to $54 million, an increase of between 7% and 14% over 2013.
Non-GAAP net income for 2014 is anticipated to be in the range of $8 million to $12 million. With that, I’ll turn it back over to Vic.
Vic Viegas
Thanks Paul. As I mentioned earlier, we saw a number of exciting marketplace developments during the third quarter, offering us opportunities and helping build momentum for our technology and IP licensing business.
I will provide more market perspective shortly, but first I’d like to share some of our specific third quarter accomplishments with you. In September we were very excited to launch TouchSense Engage, our end-to-end technology solution that enables mobile advertisers and content providers to create and deploy haptically enhanced video on mobile devices.
SHOWTIME acted as our TouchSense Engage launch partner, promoting its award winning television show HOMELAND, with a campaign that featured the first ever ad to combine audio and video with the unique tactile dimension. The video ad, which ran in both the SHOWTIME ANYTIME app, and a Slate News app generated accolades and excitement throughout the advertising and mobile communities.
This groundbreaking ad campaign was highlighted in top advertising, marketing and technology publications, including AdWeek, Variety, CNET and Entertainment Weekly. The industry publication, Mobile Marketer, named the SHOWTIME ad as one of the Top 10 ads of the September quarter.
We are excited to come to market with an innovative and high profile partner like SHOWTIME. This program has raised the profile for Immersion haptics, as a tool for advertising and content owners to create engaging mobile video using the sense of touch.
In addition, the program establishes the technological viability of our solutions and will generate useful analytics data regarding the value of haptically enhanced media. In addition to the launch of TouchSense Engage, we also teamed up with SomaTone, a leading audio and sound design studio in the gaming market.
Through this relationship SomaTone will have the ability to offer haptic design services to their customers, using Immersions advanced design tools. We believe that by giving creator partners such as SomaTone access to our design tools, and training them on the esthetics of tactile effect design, we will both increase the number of apps that use Immersion haptics, as well as ensure higher quality mobile gaming experiences.
We are continuing to build momentum in the content and entertainment space and look forward to sharing more news with you in the near future. Moving to our OEM business, during the quarter we announced the successful negotiation of a multi-year license with LG Electronics for our TouchSense software and basics haptics IP for mobile devices.
This new and expanded agreement captures the additional value our IP and technology brings to mobile devices, and we are pleased to continue our relationship with LG, one of the world’s leading device manufactures. During the quarter LG launched the G3 handset using Immersion technology, to bring a high quality tactile experience to their user experience.
We also continue to see high profile devices using Immersion TouchSense technology gain traction in the market, with launches of the Huawei Honor 6, the Xiaomi Mi4 and the Samsung Note 4 featuring our software. Immersion worked closely with both Huawei and Samsung to develop new haptic use cases, to create a more engaging and delightful user experience for their unique UI and applications.
As we discussed last quarter, the Huawei Honor 6 includes custom design tactile effects to enhance a number of applications including weather, mirror and camera. The phone has sold over 2 million devices during its first quarter of availability in China, with sales beginning in Malaysia and India in the fourth quarter.
The Xiaomi Mi4 phone launched in July with customizable haptic user settings, tool applications with customize haptics, as well as themes available on their store front, enhanced with tactile effects. Xiaomi recently announced that they would expand sales of the Mi4 to India by the end of the year.
Samsung uses haptics throughout its Note 4 user interface, providing advanced settings, confirmation for the finger print sensor and one of the most advanced tactile keyboards in the market. The Samsung Note 4 keyboard includes distinct tactile effects that help users intuitively understand when they are hitting a letter key, the backspace, spacebar or the answer button.
Tactile effects also help the user select text when copying and pasting. The Note 4 also includes a rich set of tactile effects in the camera and photo apps, providing realistic camera focus, and shutter features along with enhancements to manage the photo album and offering tactile queues to guide users when they are taking selfies.
Finally, Samsung incorporated novel tactile effects to assist users when operating their phone in Air Command mode. Air Command allows users to interact with the phone using the S Pen or their finger while hovering above the screen and provides haptics throughout the phone to help guide the user while navigating.
During the quarter we also witnessed promising announcements from world leading OEMs who have not historically invested in quality haptic capabilities. These moves send a strong signal that haptics has truly transitioned into being a must have technology in today’s digital world, a development which benefits our existing business and opens the door to new licensing and market opportunities.
As we reflect on these Immersion and industry wide developments, it’s worth stepping back to look more broadly at opportunities for haptics, as it gains awareness and increased adoption in the marketplace. From our perspective, as a haptics innovator and licensor, we see Touch feedback technology as progressing through three fundamental business stages.
The first stage is the innovation period. During this stage we focus on invention, investing in the future by hiring talented and creative employees, performing technical and market research to identify areas of value, and then developing enabling technology and IP behind these value areas.
The next stage is deployment. During this stage we develop marketable products, create licensing strategies and establish licensing arrangements and partnerships designed to bring our technologies to market.
The deployment stage follows traditional product adoption cycles with early adopters validating our technology, gathering consumer and market feedback and creating demand from followers. In this stage we begin to recognize revenue based on our investments.
The final stage is monetization. Here we scale our business, establish license agreements with increasing numbers of customers, pursue enforcement activities and have an opportunity to increase our royalty rates based on the market adoption and increasingly valuable uses of our technology.
Our business is in different stages in different markets. Generally speaking, our OEM business that’s moved from deployment is now well into the monetization stage, while by contrast our content business is just now transitioning from innovation into deployment.
We evaluate all our businesses through this lens, which is why we are thoughtful and deliberate in our approach to developing IP and technology for new markets and applications. This also reflects why we look to the adoption of new haptic features in the broader mobile and wearable market as a positive trend for Immersion.
Beyond mobile and wearables, we continue to see demand in the automotive market as new designs like the recently released haptic touch pad in the Mercedes C-Class are embraced by consumers, and user research by auto manufactures and suppliers reinforce the safety and usability value haptics brings to the automotive interface. The activity with automotive partners and brands is brisk and we are seeing great progress in establishing haptics as a must-have technology in automotive interfaces.
Moving to a discussion of corporate developments, as I mentioned earlier, I’m pleased to welcome Mahesh Sundaram as our new Vice President of Worldwide OEM sales. Mahesh brings a wealth of experience in licensing software and IP to mobile OEMs, as well as deep understanding of working with the mobile entertainment and content ecosystem.
We are excited to have Mahesh join the Immersion team. Lastly, regarding the HTC case in the District Court in Delaware, the court will hold a hearing on November 25, in which it will consider the parties arguments about claims construction and several motions that HTC has filed arguing that it doesn’t infringe the patents and that they are invalid.
We can’t predict when the court will rule on these motions. Trial is still scheduled for March 23, 2015.
Overall, we are encouraged by the market embracing new used cases for haptics beyond confirmation that take advantage of both Immersion software, as well as our IP and innovations. We are excited to see the market buzz and positive feedback from our first commercial deployment of our content and advertising initiative with SHOWTIME.
We are seeing activity turn into action in the market and believe that the momentum we are seeing will benefit Immersion now and in the future. With that said, we will now open up the call to your questions.
Operator.
Operator
Thank you. (Operator Instructions).
And our first question is from Josh Nichols from B. Riley Asset management.
Josh Nichols - B. Riley Asset Management
Hi Paul, Vic. A real question; it looks like operating expenses came down pretty much across the board by a significant amount.
Could you give a little bit of additional detail on how that was possible?
Paul Norris
Yes, we as your aware keep a close on our costs in general. We are continuing to higher people.
Our headcount as of the end of last quarter was up to 132 people, but we have certain marketing and other sorts of expenses, that down (ph) fall or linier progression during the year. And so I think during the last quarter we had some lower marketing expenses and some of the expenses we had last year if you’re looking at year-over-year in the patent prosecution side were due to a change in the patent regime that caused us to file fairly heavily during the mid and early part of 2013.
So overall we are again managing our expenses, seeing some cyclical changes, particularly in the consulting and the marketing and third party expense side, while we ramp up to invest in opportunities in China and elsewhere.
Josh Nichols - B. Riley Asset Management
And was there anything specific in the G&A space, because that’s the one that actually dropped year-over-year, even though there was a $900,000 plus in HTC litigation expense right?
Paul Norris
Yes, so a number of the external consulting expenses are in G&A and also the patent prosecution expense are in G&A, so those maybe what you are looking at in particular?
Josh Nichols - B. Riley Asset Management
Okay, great. And I guess just looking at the revised revenue, any discussion on some of the opportunities that the company sees in the fourth quarter going forward and then, that’s pretty much it?
Vic Viegas
Well, we continue to see positive momentum from our existing licensees, so we anticipate continued growth in their product launches and the units sold, which would bode well for us. We see the prospect for signing new licensees, especially in the Asia territory, China in particular.
So we are quite optimistic about fourth quarter opportunities.
Josh Nichols - B. Riley Asset Management
Okay, and I guess lastly just highlight the Asia opportunities you mentioned. Any comment or how the Lenovo’s closing of the Motorola acquisition today might help Immersion over the coming months or year?
Vic Viegas
We continue to think that that’s a good development for us. I think we mentioned before that we’ve had discussions ongoing with Lenovo as we had with the other major China OEMs and of course Motorola is our licensee, currently of our basic haptics business.
So we have those two teams coming together now. So we don’t have anything specific to announce around it, but the closing of that deal kind of closes the opportunity for us to work with these two different groups together as one, so I look at it as a plus.
Josh Nichols - B. Riley Asset Management
Great. Okay, thanks a lot guys.
Vic Viegas
Thanks Josh.
Operator
Our next question comes from David William with Ascendiant Capital.
David Williams - Ascendiant Capital
Hey, good afternoon guys. Thanks for the time in taking my question here.
I guess my first question really is on the revenue guidance you gave. It seems to be down about $1 million at the midpoint.
I’m just kind of curious what you’re seeing there is a driver. I would have really thought that the signing of the LG agreement might have helped you guys out towards the back end of the year and maybe helped you get to the higher end of your guidance.
Is there anything there that you are seeing may be product delays or anything that may be dampens that guide a bit or is there something else going on there?
Vic Viegas
Well David, if you do look at the guidance, its always based on the best information we have at the time. In the past we had anticipated faster licensing of OEMs in China and we had assumed a number of product launches earlier in this cycle, and so I’d point to one area.
These are still opportunities that are being executed on and are not missed opportunities. They are simply moving later into the cycle, so that would be one area based on a previous set of assumptions, a little slower in terms of revenue from China.
The second is in general we had anticipated some increased gaming revenue from the new consoles that had been launched from third party controller suppliers. Those suppliers have not been allowed to produce products, at least not on the Sony platform in particular and so those are revenues opportunities that we hope will then reappear in 2015.
But originally we are part of our 2014 plan and have moved out what we believe at least a couple of quarters. Those are the two areas I’d point to in terms of overall business health.
David Williams - Ascendiant Capital
Thanks, and if I can ask about the OpEx line as well, how should we think about that going forward? Obviously you saw some declines here.
Is that kind of a baseline which you think that we should use going forward or should this return to more normal levels as we get into I guess 4Q and in to next year?
Vic Viegas
Good question. I think we are going to probably see, best as I can tell, slightly lower than the trajectory in the path for fourth quarter.
I mean, they would tend to go up in the fourth quarter, but maybe not as much based on some of the tightening up in the last quarter. But then as you get into next year, I would say over a year time frame or more, that we are really kind of engaging in the same hiring, same investment, same activities overall.
So I think we’ll be growing kind of along the same lines as we had been before this quarter.
David Williams - Ascendiant Capital
And if I can ask one more here, I was just kind of curious if you could maybe walk us through the monetization platform around ad content and some of the gaming initiatives you have in place today. You obviously announced a new relationship.
I’m just kind of wondering how you plan to monetize that and what that revenue potential could be. Maybe what your internal thoughts are about that opportunity?
Vic Viegas
Sure. We’re very excited, not only by the opportunity to generate revenue from our gaming and ad based business, but also the benefits that drive our OEM business.
It gives us a chance to continue to promote new and improved solutions that provide greater experiences for users, so it helps in both directions. A little more precisely, in the gaming space we are starting to build a broader ecosystem and I’d say that this is in part from the enthusiasm that we are starting to see.
People are looking for Immersion and other parties to provide haptic design services. SomaTone is I think the party you were referring to.
An outstanding company that’s very well established in the mobile gaming community and one who is able to promote haptics to those game developers, as well as provide haptic design services, and so we are working closely with them to enable them to provide that capability. In the ad space, the recent success we had with the SHOWTIME HOMELAND launch was outstanding.
I think it was really well recognized in the industry as a novel approach. Our early and preliminary feedback are that it did have a significant impact on user behavior, which was very important, and we continue to gather more analytic data.
SHOWTIME was obviously pleased and more importantly it’s led to continued and growing interest from a number of other parties. So in that content space, we see significant demand and a lot of interest.
From a revenue standpoint we still see this as early stages where we’re proving the value; we are exposing the capability, gathering analytic data, which will be used in marketing of these services. So we don’t expect significant revenue in 2014, but clearly over the next two to three years, as we move more into the monetization phase, we think that this holds out the hope of terrific growth in revenue.
David Williams - Ascendiant Capital
Thanks and good luck guys.
Vic Viegas
Thank David.
Operator
Our next question is from Shannon Richter with Feltl & Co.
Vic Viegas
Hi Shannon.
Shannon Richter - Feltl & Co.
Yes, I’m on for Jeff Shiner actually.
Vic Viegas
Oh Jeff.
Shannon Richter - Feltl & Co.
Yes. Just a couple of quick questions here.
Most of them were covered already, but what do you guys see as your biggest headwind that you’re facing right now as you are bringing on additional mobile licenses?
Vic Viegas
I‘m not sure we are seeing a lot of headwind. I think if anything we are seeing good tailwind.
If you look at the adoption of haptics not only by the Immersion customer base, but also by other parties in the market, we are seeing areas such as new gaming controllers coming out of Microsoft, we are seeing obviously the Apple iPhone 6, 6 Plus and their watch using high end actuators. We are seeing for the first time Amazon including in their tablet an actuator, we are seeing considerable number of wearables coming out with actuators as well.
So when you add up all of that momentum, that’s having a real positive impact on our ability to engage existing customers and gain new design wins, as well as attract new prospects. So I’m not seeing a lot of headwind.
I’m seeing actually good tailwind and a lot of opportunity here in the near future.
Shannon Richter - Feltl & Co.
Perfect. Thank you so much for taking my questions.
Vic Viegas
Thank you.
Operator
Our next question is from Matthew Galinko from Sidoti.
Vic Viegas
Hey Matt.
Matthew Galinko - Sidoti
Hey, how are you doing?
Vic Viegas
Great.
Matthew Galinko - Sidoti
Thanks for taking my question. The first one is around headcount, just another one there.
Just curious how we should think about the pace of headcount additions as we move into 2015 and will there be as big of a build in ’15 as we’ve seen in ’14?
Vic Viegas
Yes, we will continue to invest at a relatively similar pace. We are still making our plans.
We are going through a strategic planning process right now, mapping out some of the activities we are going to engage in 2015, but I see us continuing to invest particularly in the content area and to build out our China team, especially as we get further on in the licensing process. So we’ve gone up as I mentioned earlier, from around 120-ish at the beginning of the year to over 130 now and so I would continue to expect that to grow throughout 2015.
Matthew Galinko - Sidoti
Got it. And then regarding the SHOWTIME work, I’m just curious if there’s been any sort of – anything you could share about further work with SHOWTIME on any other opportunities within that brand.
Vic Viegas
Well, I would say clearly the success of the HOMELAND campaign has given us opportunities elsewhere at other companies, as well as opportunities to continue to stay engaged with SHOWTIME. The nice thing about adoption of our SDK is once you’ve adopted the SDK in your app, then that capability is available for any further campaigns.
And so if you look at Slate and SHOWTIME, both of their apps now use our SDK and bringing new content through that app is easier, less friction. So we’ve got active engagement with them and hope to continue to grow the relationship.
Matthew Galinko - Sidoti
Got it. And then last one from me is when we think about brining on new potential OEM partners in Asia, is it reasonable to expect kind of similar process as with Huawei where its saw variable or its possible that we moved a little bit quicker into a fixed license across the handsets.
Vic Viegas
I would probably say that it will most likely follow the Huawei structure, which is there will be a handful of models launched early in the relationship, and based on the success of those models we would expect them to continue to increase the designs with haptics, and at some point as a result of increased units, increased volume, increased adoption of higher quality experiences, that we would then move to a point where bundling it into more of a fixed fee would make more sense, but initially I think it will follow the Huawei structure.
Matthew Galinko - Sidoti
That’s all from me, thanks.
Vic Viegas
Thanks Matt.
Operator
(Operator Instructions) And as we have no further questions, I’d like to turn the call back to management for any closing comments.
Vic Viegas
Well, thank you all for being on the call with us today. We look forward to updating you again on our next quarterly call.
Good day.
Operator
That does conclude our call and we appreciate your participation.