May 5, 2016
Executives
Jennifer Jarman - Director, The Blueshirt Group Vic Viegas - President, CEO, & Interim CFO
Analysts
Charlie Anderson - Dougherty & Company Mark Argento - Lake Street Capital Markets Josh Nichols - B. Riley
Operator
Good day everyone and welcome to the Immersion Corporation First Quarter 2016 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Ms. Jennifer Jarman.
Please go ahead, ma’am.
Jennifer Jarman
Thank you, Shannon. Good afternoon, and thank you for joining us today on Immersion’s first quarter 2016 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 is Vic Viegas, President and CEO and Interim CFO.
During this call, we may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, litigation, anticipated future products, anticipated 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 list of the risks that could cause this, please see our Forms 10-K filed with the SEC, as well as the factors identified in the press release we issued today after market closed.
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 will turn the call over to CEO, Vic Viegas. Vic?
Vic Viegas
Thanks, Jennifer, and thanks everyone for joining us this afternoon. I’m pleased with the results we achieved in the March quarter of 2016 in an otherwise challenging environment.
Despite the lack of any revenue from Samsung in the first quarter, and our announcement earlier today about the filing of a second patent infringement complaint against Apple, AT&T and AT&T Mobility both of which I will address in a few minutes. Our business continues to be healthy with our revenue and bottom-line results in line with our previously articulated guidance.
While we remain diligent in protecting and preserving our intellectual property, our business and our ecosystem of customers and partners, we also continue to light the way for new and expanded opportunities for haptics. During the quarter, we continue to see momentum in our business including the launch of new mobile devices featuring our TouchSense software, multiple haptically-enabled advertising campaign wins and the addition of new content gaming partners as we continue to expand our ever growing haptic ecosystem.
In a few minutes, I will discuss our recent business developments and outlook but first I’ll discuss the details of our first quarter 2016 financial results. Revenues for the March quarter were $13.6 million, down 16% from revenues of $16.3 million in the year ago period.
Revenues from royalties and licenses of $13.4 million were down 16% from royalty and license revenues of $16 million in the first quarter of 2015. Of these amounts in the first quarter of 2016, variable royalties based on shipping volumes and per unit prices totalled $8.5 million and fixed payment license fees totalled $4.9 million.
This compares to variable royalties of $8.6 million and fixed licensees of $7.4 million in the prior year period. Excluding Samsung from a comparison, revenues would have grown 21% over the same quarter a year ago.
While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality patterns, for the first quarter of 2016, our breakdown by line of business as a percentage of total revenues was as follows: 28% from mobility, 33% from gaming, 7% from auto and 32% from medical. Looking at year-over-year trends, mobility revenues were down 60% from the first quarter of 2015, principally due to the non-renewal of our Samsung contract.
Gaming revenues were up 11% due to increased sales of haptic gaming peripheral customers. Automotive revenues were up 9%, driven by increased customer sales.
Medical revenues were up 135%, primarily due to a non-recurring license fee. Gross profit was $13.6 million, or 99% of revenues compared to gross profit of $16.2 million in the first quarter of 2015.
Turning now to our operating expenses. Excluding cost of revenues, total GAAP operating expenses were $18.2 million in the first quarter of 2016, compared to $16.2 million in the year ago period with a significant contributing portion of the increase driven by higher legal expense primarily related to our recent litigation filings against Apple and Samsung.
Operating expenses in the first quarter of 2016 included non-cash charges related to depreciation and amortization of $227,000 and stock-based compensation of $2.3 million. Of the non-cash charges, $289,000 were included in sales and marketing, $625,000 in research and development, and $1.6 million in G&A expense.
And of the stock-based compensation charges $228,000 were included in sales and marketing, $526,000 in R&D, and $1.6 million in G&A. Our headcount decreased from 156 employees at the end of December 2015 to 130 employees at the end of March, 2016.
The decrease reflects a rebalancing of the organization to align our employee skill sets with our current operational and strategic outlook including our focus on content initiatives and cloud based design. We continue to hire in marketing, sales and engineering to bring the right talent to our organization.
We also began our search for a new CFO to replace Paul Norris, who announced his retirement during our last conference call. We have engaged an executive search firm and are now in the process of sourcing candidate.
In the meantime, I have taken up the post as Interim CFO to ensure that our business continues to move forward without disruption. Looking now at our net results, net loss for the first quarter of 2016 was $2.7 million or $0.09 per basic and diluted share compared to net loss of $59,000 or $0.00 per basic and diluted share in the first quarter of 2015.
Net loss for the first quarter of 2016 includes a tax benefit of $1.7 million that includes certain non-cash tax expenses, benefits and expenses associated with our international tax structure. In addition to normal GAAP metrics, we use non-GAAP net income loss and non-GAAP earnings and loss per share to track our business performance.
We define non-GAAP net income or loss as GAAP net income or loss adjusted to reflect an expected long-term effective tax rate of 19% less stock-based compensation. We define non-GAAP earnings or loss per share as non-GAAP net income or loss per share.
Non-GAAP net loss in the March, 2016 quarter was $1.2 million or $0.04 per basic and diluted share compared to non-GAAP net income of $1.7 million or $0.06 per diluted share in the same period last year. Based on our current outlook, we are making no changes to our financial guidance and continue to expect 2016 revenues to be in the range of $55 million to $65 million generating bottom-line results of between a non-GAAP net loss of $8 million and non-GAAP net income of $3 million.
Our cash portfolio, including cash and short-term investments, was $60.8 million as of March 31, 2016, down from $64.9 million exiting 2015. The decrease was driven primarily by cash used for operations along with the timing of receivables.
Turning now to the business, we are excited about the continued momentum we see in our OEM and content businesses, remain focused and serious about protecting our valuable technologies including taking legal action as necessary to protect the interests of our business, employees, customers, partners and stockholders. In that context, we announced earlier today that we filed a second complaint for patent infringement against Apple, AT&T and AT&T Mobility with the U.S.
International Trade Commission alleging that the Apple iPhone 6S, Apple iPhone 6S Plus, the Mac Book and the Mac Book Pro with Retina display infringed certain emergent patent including patents covering pressure related haptics. We have over 2,200 issued and pending patents worldwide and we believe this is an important and appropriate step to protect and preserve our intellectual property, our business and the ecosystem that we have built around haptic technology.
We also filed a corresponding patent infringement complaint in the U.S. District Court with the District of Delaware.
The emergent patents included in the complaints are listed in a press release that we issued earlier today. Similar to our last complaint, we are requesting that the ITC institute an investigation into the importation of Apple devices in the U.S.
by Apple, AT&T and AT&T Mobility that infringe out patent and issue an exclusion order prohibiting the entry into the U.S. of these infringing devices.
We expect that this action will not slow the progress of our first action against Apple and AT&T Mobility but will follow a similar timeline. We’re also seeking damages in the corresponding complaint filed with the U.S.
District Court for the District of Delaware. The time for decision in this case will depend upon a schedule set by the District Court and whether our request is made for a stay pending the outcome of the ITC proceedings.
We are pleased with the progress of our first action against Apple and AT&T Mobility. The ITC instituted the investigation on March 14, 2016 and we have a scheduled claim construction hearing on July 20, 2016.
A hearing before the ITC on November 14 through the 18, 2016 and initial determination date of February 17, 2017 and a target date for completion of the investigation of June 19, 2017. The District Court action has been stayed until the determination of the ITC becomes final.
We continue to believe that the merit of both of our cases are strong and substantial. On a related matter, on March 29, 2016, a petition for Inter Parties Review or IPR challenging the validity of one of the patents asserted in our first action against Apple and AT&T Mobility was filed with the Patent Trial and Appeal Board or PTAB at the USPTO by an individual unrelated to either Apple or AT&T.
Our preliminary response is due on June 27, 2016. The PTAB will decide whether to institute the IPR no later than three months from when we submit our response.
We plan to vigorously defend the validity of our patent. Turning next to Samsung, Samsung remains unlicensed as of the end of 2015, and the now expired agreement with Samsung, Samsung had the right to purchase wind down rights prior to the expiration of the contract but did not do so.
They continue to ship products that were licensed under the agreement without a wind down right and we have filed an arbitration proceeding against them with the International Chamber of Commerce seeking damages. In addition, Samsung remains unlicensed for any new products launched after the end of 2015.
Any future license with Samsung is dependent on resolving the current issues in arbitration. In our appeal of the invalidity ruling affecting three of our basic haptics patents and the patent infringement litigation brought by us against HTC, the Federal Circuit will hear oral arguments on this case tomorrow.
The USPTO filed an Amicus Brief in support of our position and will participate in the oral argument. We continue to feel confident that the invalidity ruling will be overturned and that the three basic haptic patents will return to our portfolio.
Finally, I’m happy to report that on January 20, 2016 we received a final award in an arbitration proceeding that we initiated against Sony in October of 2014 to resolve a dispute around whether that Sony Dualshock4 Wireless Controller products made, sold or distributed in Japan are covered by one of our Japanese patents and, therefore, are royalty bearing products under our license with Sony. The arbitrator ruled that the controllers infringe our patent.
On April 26, 2016, we received a district court order granting our petition to confirm the award and denying Sony’s motion to vacate the award. We see this win as a proofpoint that our gaming and intellectual property portfolio remains relevant despite the expiration of some of our earlier gaming patents.
While we remain committed to protecting and preserving our intellectual property, we are excited by the prospects for new and expanded opportunities for Haptics. During the first quarter, we continued to see momentum in our OEM business with the launch of a new phone by Kyocera and MEIZU featuring our TouchSense technology.
In addition, we continue to see heightened interest from OEMs in using pressure haptics to differentiate themselves in the market. We have a deep and rich background around pressure haptics including our work with Fujitsu in launching the first pressure sensitive phone with haptics.
Since then we have developed a number of new use cases using haptics with pressure to intuitively navigate through the user interface on a mobile device and to create interactive experiences that simulate a change in pressure when touching the screen. We continue to engage with OEMs across various markets who are interested in adopting this technology.
We also saw good traction in our content business during the quarter with the delivery of eight haptically enabled advertising campaigns spanning multiple industries including consumer brand, automotive and entertainment through Opera Mediaworks’ ad network and TF1, the largest broadcast network channel in France. This is a dramatic increase from last year when we delivered a total of eight campaigns in all of 2015.
We also saw great progress with content gaming partners including Tencent and CRI Middleware. Tencent, one of the largest Internet companies in China, launched Kowloon Wars featuring TouchSense effects.
CRI a leading provider of audio and video solutions for the gaming industry in Japan integrated our TouchSense SDK into its mobile game developer platform. As adoption of our technology by content creators and distributors accelerate we are exploring monetization opportunities with these partners.
We continue to invest in expanding our content business ecosystem in developing tools and technology to allow for the easy implementation of haptics in the creation and distribution of content. In addition as more haptically enabled content becomes available in the marketplace we expect to be well-positioned to demonstrate the playback value of this content to our OEM customers.
Today, thanks largely to our groundbreaking innovation and evangelism, the use of haptics across multiple markets is increasing at lightening speed. Not only due to mobile gaming and automotive markets consider haptics to be a must have feature to bring realism to touchscreen interfaces but most recently virtual reality has become the next market to demand haptics as an integral part of its platform.
With our worldwide portfolio of approximately 2,200 issued and pending patents and our ability to bring targeted solutions for the marketplace, we are well-positioned to help this fledgling industry realize its full potential by incorporating the sense of touch in the user's experience to suspend a user's disbelief and make the virtual world a reality. In closing, I want to reiterate that we are excited about our prospects as momentum for haptics across multiple markets continues to grow.
We remain in a strong financial position and are confident in our ability to execute effectively during the remainder of the year. Our success depends upon remaining fiscally responsible and investing wisely in our business growth preserving our capital to enforce our intellectual property when necessary.
With a strong team in place, a broad and growing portfolio of IP and products and a resolute focus on our strategic initiatives, I believe we have what it takes to execute well. We will now open up the call to your question.
Shannon?
Operator
Thank you. [Operator Instructions] And our first question will comes from Charlie Anderson of Dougherty & Company.
Charlie Anderson
Great, thanks for taking my questions. Hello Vic, I wanted to ask about the Samsung arbitration, I want to review any timelines on that that you would be able to share or just any general view of that would be helpful for everybody?
And then in terms of the new Apple case just kind of roughly the strategy there, is it simply case of new infringing products or new IP, I mean just any more color on the strategy or adding another case will be helpful.
Vic Viegas
Sure, Charlie, very good question. So in the Samsung case we filed that action on March 4 of this year, they responded on April 12, we have a response that will also be filed on May 13, so it’s moving along quickly as appropriate in an arbitration filing and we’re looking for a result, a favourable result, let’s say, sometime later this year in the September time frame.
So we’re confident in our position there and we think it will move quickly and we think that we will be collecting damages on that issue. The other issue with regards to Apple it is identified a number of our pressure based patents.
We have essentially increased the products that we are targeting to include the Mac Book product line of products and are moving our filing I guess on that one was today and expect that to move through the ITC case hopefully at the same pace as the first filing which is we said in our prepared comments are moving quickly and we’re quite pleased with the progress there. Other than that I really don’t have too much help I can add to the Apple case.
Charlie Anderson
And then just a quick follow up on that, Vic, as you added that was that already embedded in your thinking in the full year guide, I mean you are reiterating that, so I was just curious how that influences the expense line?
Vic Viegas
Yes I think we’re still feeling as we reiterated the annual guidance revenue and bottom line. We are still comfortable with the expense targets and litigation budgets that we initially identified and feel that it can handle the funding for these cases as well as others if need be.
Charlie Anderson
Perfect. Thanks so much.
Vic Viegas
Thanks Charlie.
Operator
And our next question will come from Mark Argento of Lake Street Capital Markets.
Mark Argento
Good morning ,Vic, or good afternoon I should say.
Vic Viegas
Hey Mark.
Mark Argento
How are you doing?
Vic Viegas
I’m doing great.
Mark Argento
First question on the medical, looks like you had a decent license in the quarter there, what was that all about and then I think you mentioned it was a one-time event?
Vic Viegas
Yes. sure, so as you probably noticed in the past periodically we get catch up payments certain option rights or other one-time events and that is what this falls into that category.
It was from a medical customer and it was pursuant to an agreement that we had entered into a number of years ago. So they exercise a certain option and as a result we were able to report that revenue in the quarter.
Mark Argento
Got it. And then going back to the legal, did you -- can you breakout or will you breakout for us in the quarter what you guys spent in terms of the legal dollars?
Vic Viegas
No, I’m not able to give that kind of detail. I can just say that our original guidance included $14 million to $16 million for the year, and we feel confident that that is the right target for the full year.
We are on pace for that.
Mark Argento
And then the venue that you’re arbitrating with Samsung, the international chamber of commerce, I’m not familiar with that venue maybe you could educate also little bit on the ICC?
Vic Viegas
Sure. So within the Samsung agreement that has now expired it does capture a conflict resolution process and that would be through arbitration and that is the venue that we’re using is the ICC.
I believe it’s a venue that we’re comfortable with, we’re familiar with. Typically, we would identify an arbitrator, Samsung will identify an arbitrator and then those two arbitrators would select the third, it would go through a process of disclosures and information and we would expect that to be resolved as I said sometime in September of this year.
Mark Argento
Great, that is it from me. Thanks.
Vic Viegas
Thanks Mark.
Operator
Our next question will come from Josh Nichols of B. Riley.
Josh Nichols
Yes hi Vic.
Vic Viegas
Hi Josh.
Josh Nichols
Yes, good to see the Sony [indiscernible] strength in the company’s plan portfolio regarding to the gaming stuff even for the legacy. Anything you could mention about materiality or any impact that that would have on our go forward basis with sales featured DualShock controllers in region?
Vic Viegas
So the dispute is on the Japanese sales of those controllers, I’m not able to give you a dollar amount but it’s a number that is large enough for us to go through the effort. I would kind of add to your comment about the importance of this.
We have 2,200 patents and two of those patents were litigated many years ago but that is a very small fraction of our gaming patents and as a result, Sony argue that beyond those two patents they were going to agree or accept that they were valid or infringed and so that was the reason for the proceeding. We have in all of these markets whether it’s gaming, virtual reality, mobile devices, pressure based apps, we have a significant portfolio of which only a few patents have actually been identified and current actions or prior actions.
So I think it’s important for us to defend the entire portfolio because it is a formidable haptic portfolio.
Josh Nichols
And then Apple and Samsung obviously watch each other pretty closely, do you think that there is intertwining between you have an expedited timeline maybe September for potential Samsung resolution at least as it pertains to unwind agreements any impact that you could have on Apple or how you mean those two play against each other potentially?
Vic Viegas
I’m really not able to speculate and I’m not sure I even have much of an opinion on it, I think the matters are quite different. In Samsung case it is really around a breach of contract and their continued shipment of products with our technology without paying.
It’s just unacceptable and as a result we have refused to engage them in any renewal discussions until we resolve this matter. I don’t think that has anything to do with Apple.
Maybe they feel a little more embolden because we are in litigation with Apple but I assure you we have to resolve the financial capability to manage multiple cases, some are going to be faster than others and we think it’s what we need to do to protect our business.
Josh Nichols
And then last question for me, I mean things in the AR and VR space seems to be going quite well and also content and media is kind of ramping, anything that you could add regarding timeline where some of the stuff might materialize into some pretty material revenue in the next year or so regarding mobile gaming and some of the other newer arenas that company is moving into?
Vic Viegas
I would say in all three areas the AR, VR content in general and mobile, mobile gaming in particular, I wouldn’t look to any of those to be substantial in 2016. We are getting all of the right indications in all those areas.
We’re excited to see our own solution being recognized in the market as we provide demos and engage customers, we’re excited to see existing controllers utilizing technology that we believe is covered by our prior inventions in our IP, so we feel confident that there is a meaningful role for us to play in that space. And in the VR role the particular having have to create the Immersive experience is essential, it’s not enough just to have visual and audio you need the haptic cues as well.
So feel really good about that the long-term. On the content side as we said in the prepared remarks lot of new campaigns, each of these campaigns starts to open up the industry’s awareness of the capability and these are campaigns by large companies.
This is Lexus and Peugeot and Ford and a number of other. So it’s getting a lot of industry recognition and as a result it’s expedited some of the discussions that we have with those players.
And then in the gaming it doesn’t get any bigger than Kowloon Wars and the Google category of games you can feel. So we feel like we are really accelerating those areas, we will and have been capturing some revenue within each of those discussions and relationships but I would say before it gets meaningful it is going to be at least another year.
Josh Nichols
Thanks Vic.
Vic Viegas
Yeah, thanks Josh.
Operator
[Operator Instructions] Our next question will come from Tony Stoss of Craig-Hallum Capital Group.
Vic Viegas
Hi, Tony.
Unidentified Analyst
Hey Vic, this is [indiscernible] for Tony Stoss.
Vic Viegas
Okay.
Unidentified Analyst
Yep, so quick question on could you add a little more color on how things are progressing with valid?
Vic Viegas
Very important account for us in China they are actively using our TouchSense technology, they see the value of advanced haptic capability and so we’ve got a team on site there on a pretty regular in frequent basis. It's also adding interest on the content side so, for the Chinese content community to see Huawei and others launching new phones, new with haptic capability it just sense them to support and grow the content business as well so, a great relationship and growing revenue opportunity for us.
Unidentified Analyst
Do you see them becoming a 10% customer in future?
Vic Viegas
Absolutely, that's a possibility, that’s our goal there a fast growing company and we want to grow beyond a handful of models and other and border line up of products and capture a larger percentage of their markets. So, yes we would love to have them as a greater than 10% customer.
Unidentified Analyst
Okay, thanks and then just outside of a mobile and gaming and medical, what type of interest are you seeing like on the auto side?
Vic Viegas
Well, the first thing was at the CES conference earlier this year and if you were there you would see that entire halls full automotive technology being showcased and haptics was quite prominent from a number of companies including Bosch, Continental who is a licensee of ours. So there is a growing recognition of what we have been promoting for years and that is that haptics enhances the user interface in a way that provides confirmation value and allows you to stay concentrated on the driving function and more quickly and more accurately engage your touch screen interface.
So, I think people are raving around touch screens and touch pads on the automotive front and haptics is a key part of that implementation.
Unidentified Analyst
Great, thanks. That’s all I had.
Vic Viegas
Thank you.
Operator
And it does appear we have no further questions at this time. I’ll turn the conference back over to management for any additional or closing comments.
Vic Viegas
Well, thank you all for being on the call with us today and on a side note I will present at several upcoming conference during the month of May including the Jefferies TMT Conference in Miami. The B.
Riley Annual Investor Conference in Hollywood and The Cowen SID display week event in San Francisco. In June I will also present at the annual Craig-Hallum conference in Minneapolis and the Cowen TMT conference in New York and I look forward to seeing and speaking with many of you at those conferences.
Thank you and we look forward to updating you again on our next call. Have a great day.
Operator
And that does conclude today’s teleconference. We thank you all for your participation.