Nov 3, 2016
Executives
Jennifer Jarman - Director of The Blueshirt Group Vic Viegas - President and Chief Executive Officer Nancy Erba - Chief Financial Officer
Analysts
Josh Nichols - B. Riley Charlie Anderson - Dougherty and Company Mark Argento - Lake Street Capital Markets Mark McMahon - LPL Financial
Operator
Good day and welcome to the Immersion Corporation Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Jennifer Jarman of The Blueshirt Group. Please go ahead.
Jennifer Jarman
Thank you, Carina. Good afternoon and thank you for joining us today on Immersion’s third 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 Nancy Erba, 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 listing of the risks that could cause this, please see our most recent Form 10-Q 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 now turn the call over to Chief Executive Officer, Vic Viegas. Vic?
Vic Viegas
Thank you, Jennifer, and thanks everyone for joining us this afternoon. I’d like to take this opportunity to introduce and welcome Nancy Erba to Immersion.
Nancy joins us from Seagate Technology where she held executive positions in finance, corporate development and sales and business operations. During her ten years at Seagate, she served as the division CFO for two Seagete’s strategic businesses.
Nancy brings with her broad financial experience the ability to work cross functionally across teams and a demonstrated commitment to driving profitable growth. Welcome Nancy.
Third quarter financial results were generally in line with expectation and we exited the quarter with the strong balance sheet and positive momentum as we continue to expand our customer base. Haptics are being adopted more broadly than even across existing markets and into new and immerging spaces as well.
Our business is built on a solid IP foundation which coupled with our innovative software solutions makes us uniquely position to lead in the market. We’ve remained confident in this leadership position and as importantly our customers and partners are experiencing the measurable benefits of having Immersion’s haptics in their phones, games, cars and mobile ads.
I will provide a more detailed update on our business in a few minutes, but at this time, I will turn to call over Nancy to review our financial results and outlook. Nancy?
Nancy Erba
Thanks, Vic. And I’d like to take this opportunity to say how excited I am to be joining Immersion.
I’ve enjoyed getting to another management team and have been very impressed with the strength of the finance organization. I have also had the chance to be on the road to meet some of our analysts and investors and I appreciate the depth in which you follow the company and understand the complexities and underlying fundamentals of our business model.
To those I haven’t yet met, I look forward to speaking with you and meeting you over the coming weeks and months. I’d now like to turn to the results of the quarter.
Revenues for the September quarter were $26.3 million of 84% from revenues of $14.3 million in the year ago period. This is primarily a result of the recognition of the $19 million non-recurring license fee from Samsung, which we detailed during our second quarter earnings call.
We remained in the standstill period with Samsung which was negotiated as part of the wind-down agreement completed in July 2016. Revenues from royalties and licenses of $26 million were up 87% from $13.9 million in the third quarter of 2015.
Of these amounts in the third quarter of 2016, variable royalties based on shipping volume and per unit prices totaled $5.2 million and fixed payments license fees totaled 20.8 million. This compares to variable royalties of $6.2 million and fixed license fees of $7.7 million in the prior year period.
Gross profit was $26.3 million or 100% of revenue compared to gross profit of $14.2 million in the third quarter of 2015. While revenue mix per line of business is expected to fluctuate on a quarterly basis due to seasonality pattern.
For the third quarter of 2016, a breakdown of line of business as a percentage of total revenues was as follows; 85% from mobility, 9% from gaming, 4% from auto and 2% from medical. Looking at year-over-year trends, mobility revenues were up a 146% from the third quarter of 2015 primarily from license fees recognized from Samsung.
Automotive revenues were up 9%, as more vehicles had haptic technology incorporated into their central consoles. Medical revenues were down 46%.
And as growth in the other lines of business outpaces the medical market, we expect this transition in our revenue mix to continue. Gaming revenues were down 27% during the quarter, primarily due to a decrease in revenue from Sony.
During the second quarter call, we discussed the facts that we are in the arbitration process with Sony and we continue to have confidence in the strength of our IP. We remain optimistic about the future monetization opportunities in the gaming market.
Our broad IP portfolio uniquely positions us to be the leaders in Gaming, VR, AR. And we are encourages that the industry continues to realize the need for physical experience that haptics brings to gaming and entertainment environment.
Turning now to our operating expenses, excluding the cost of revenues, total GAAP operating expenses were $16.1 million in the third quarter of 2016 compared to $12.9 million in the year ago period with a significant contributing portion of the increase driven by higher legal expense, primarily related to our litigation with Apple and various other legal matters. Operating expenses in the third quarter of 2016 included non-cash charges related to depreciation and amortization of $230,000 and stock based compensation of $1.2 million.
Of the $1.4 million non-cash charges, $396,000 were included in sales and marketing, $360,000 in research and development and $687,000 in G&A expense. And as a $1.2 million stock based compensation charges, $335,000 were included in sales and marketing, $257,000 in R&D and $622,000 in G&A.
Looking now at our net results, net income for the third quarter of 2016 was $7 million or $0.24 per basic and diluted share compared to net income of $184,000 or $0.01 per basic and diluted share in the third quarter of 2015. Net income for the third 2016 includes a tax provision of $3.8 million that includes certain non-cash benefits and expenses associated with our international tax structure.
In addition to normal GAAP metrics, we use 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 adjusted to reflect an accepted long term effective tax rate of 19%, less stock based compensation.
We define non-GAAP earnings per share as non-GAAP net income per share. Non-GAAP net income in the September 2016 quarter was $9.9 million or $0.34 per diluted share compared to non-GAAP net income of $2.2 million or $0.08 per diluted share in the same period a year ago.
Now to address our balance sheet, we are pleased with the strength of our balance sheet and the improvement of our cash position during the quarter. Cash and short term investments were $94.9 million as of September 30th, 2016, up from $56.3 million as of June 30th, 2016.
The increase was primarily driven by the Samsung payment received during the quarter as well as a meaningful increase in differed revenue during the September quarter. We used $729,000 for share repurchases under our authorized share repurchase program to buy back 106,000 shares.
And we have $33.7 million remaining in the currently authorized stocks repurchase program. We will continue to monitor our cash balance and stock price, as well as market conditions and strategic factors as we consider any future buy back activity.
At this time, we continue to expect 2016 revenues to be in the range of $55 million to $65 million, which we now anticipate generating bottom line results of a net loss between $11 million and $800,000 and between a non-GAAP net loss of $6 million and non-GAAP net income of $4 million. I will now turn the call back to Vic to further discuss the current business environment.
Vic Viegas
Thanks Nancy. We’re excited to see momentum build as we expand the scope of our offerings beyond software and tools sold through direct customer engagement to now include a streamline approach of licensing our know-how an intellectual property as we build out our IP business development function.
This hybrid model allows us to broaden our customer base and participate in markets where we may not otherwise have a solution to offer and also allow us for deeper penetration at our solutions based customers. We have already begun to see the benefits of this model, which is evident in the growth in deferred revenue from new customer agreements entered into during the quarter.
We’re engaging new customers to discuss licensing opportunities and we are already seeing synergies as our IP BD team partners with our sales force to create - to offer creative business solutions to our customers. This week, we announced our Haptic Ad Service, the industry's first comprehensive service that offers advertisers the ability to add touch feedback effects to their premium HTML mobile video ads.
Based on touch sense design cloud and touch sense campaign manager, our cloud-based solution makes use of industry standards and allows advertisers to create engaging and immersive brand experiences. As part of this announcement, we shared quantifiable results regarding the benefits of haptic in mobile advertising and partnership with Teads, a global outstream video advertising network, a joint AB trial was conducted by research now, which revealed that video ads enhanced with haptics had an impressive increase and purchase intent and positive brand opinion.
The results indicated that 71% of users in the study agreed that haptics made the ad more interesting and 72% wanted to feel haptics in other mobile video ads. Users experiencing video ads with haptics were also 51% more likely to turn off their mute function in order to engage more fully with the content.
We're encouraged by the positive results we're seeing from our partners and this new business opportunity is an example of how the broad adoption of haptics is providing new paths to monetization. In September, we announced touch sense STK for mobile apps.
This new cross-platform haptics solution unifies the functionality from the touch sense STK for mobile games and touch sense STK for mobile video into one easy-to-use STK for Android app developers. The solution enables developers to differentiate themselves among their competitors by delivering engaging and impactful mobile experiences for their users.
We will continue to innovate and develop new solutions and design tools for our customers to advance the proliferation of haptics. During the quarter, we continue to see our technology adopted in the mobile gaming market by Hero Interactive, Perfect World and Rockstar.
They were also new products launched by our OEM customers including the Lenovo Yoga Book, Fujitsu’s FO4H tablet and Meizu’s MX6 phone, all utilizing haptics to bring more immersive experiences to their customers. As mentioned earlier, we are seeing the growth in adoption of haptics in our existing markets including Apple's recent iPhone 7 release.
The replacement of the mechanical home button, the use of haptics within their phones applications and the opening of their API to allow the development of new applications utilizing haptic affects. In addition, Google launched their two new Pixel smart phones which both utilized the benefits of haptics.
These are further exciting examples of the expansion of haptic use across the mobile market. Regarding our ongoing litigation with Apple, the Markman hearing took place on October 18th.
As a reminder this is a claim construction hearing and based on the judge's comments, we currently expect a ruling in January 2017. Our hearing before the ITC is currently scheduled April 27th to May 5th, 2017 and the initial determination data scheduled for August 11th, 2017.
The target date for completion of the investigation is still expected to be on December 11th, 2017. Apple has now filed IPRs against all the patents in suit with the exception of certain claims in one patent.
In September, the U.S. Patent and Trademark Office deny the institution of the IPR filed by Amit Agarwal demonstrating the strength of our patent portfolio.
In closing, we are pleased with the results of the third quarter and the expansion of our customer base across all our markets. We remain encouraged by the demonstrated value haptics provides the mobile advertising and content and believe we are uniquely positioned to succeed in this new market.
As we continue to work with our customers and partners to build the ecosystem for haptics, we believe are IP BD team will enhance our ability to reach an even broader set of customers. Immersion’s foundation of innovation and the strength of our patent portfolio gives us confidence in our ability to lead, execute to our strategy and be successful through the balance of this year and into 2017.
We will now open up the call to your questions. Carina?
Operator
Thank you. [Operator Instructions] And we'll take our first question from Josh Nichols with B.
Riley. Please go ahead.
Josh Nichols
Yes, hi. I was wondering - very nice cash balance at the end of the quarter.
For the long term portion of the deferred revenue over what period of time do you expect that to flow through to income?
Vic Viegas
So Josh, as you know the deferred revenue there's a short term portion, which is recognized over - expected to be recognized over the next 12 months and then the long term is revenue that would be expected to be recognized beyond 12 months. So beyond that I would say at some period longer than one year.
Josh Nichols
Okay. And then looking here, anything you could say regarding when the standstill period was Samsung might end?
Vic Viegas
No, Samsung continues to be on license for the products that they've launched in 2016. There is a standstill on place as we said.
We expect that we will eventually reach a license agreement whether it's through negotiations or through some form of enforcement, but nothing further on the timing of the standstill.
Josh Nichols
Okay, thank you.
Vic Viegas
Thanks, Josh.
Operator
And moving on we’ll take our next question from Charlie Anderson with Dougherty and Company.
Charlie Anderson
Yes, thanks for taking my questions. I’ll just ask in the deferred revenue as well.
I guess I’m wondering why you're unable to disclose where that came from. Any color you could give us that mobility just anything that would be helpful for us?
Thanks.
Vic Viegas
Sure Charlie. As you know is part of our normal business to enter into license agreements where cash collected in advance of revenue yields deferred revenue.
So it's happened multiple times in the past covering periods as short as a couple years or longer. During the quarter, we entered into a number of license agreements, as a result picked up a considerable amount of cash as you can see on the balance sheet and we're excited by the potential of these customers, these products.
Not a lot we can say until we're allowed to. Usually we’re restricted in terms of announcing customers related to a product launches or some other limitation.
So at this point, very excited, it shows good growth and momentum in the business, but just not able to give you any details. Hopefully, we'll be able to give you more detail in the next couple of quarters.
Charlie Anderson
Could you maybe speak to about the interplay between what you saw there in that level of activity and then the full year guidance like was it contemplated in the earlier guidance or is this something new that have shown up just the interplay there be interesting?
Vic Viegas
Sure, I guess is, as I mentioned before I mean there's always some number of licensing engagements discussions that are ongoing. The timing of when you reach agreement and enter into a license arrangement is always up to a number of different variables.
So in the quarter, obviously we're able to reach agreement with some new licensees and again the timing of when their products launch and when revenue recognition is triggered. At this stage, it's sitting in the first, because those events have not yet occurred, in terms of the interplay I mean you can see a big portion of the increase occurred in the deferred, long-term deferred.
So it’s going to occur - revenue will recognize over a longer period in one year. There should be some impact in the near term.
But it was always part of our expectation for the rest of the year.
Charlie Anderson
Great. And then finally from me just on the Markman, I wonder if you could maybe just offer any comments on how you felt that went and then maybe sort of post Markman how that is influenced any other licensing discussions where there are people paying attention to the same just how the overall you know licensing program in light of the Markman?
Thanks.
Vic Viegas
Yes. Sure.
What I heard, I wasn’t there myself, but what I heard from my team was they felt very good about the day, the results of the hearing. The judge did not ask any questions.
And so really our team presented our case. The other side presented their case.
Most of that already we are aware of based on the paper submitted. Not a lot.
That was gleaned from the event because again the judge didn’t ask any clarifying questions. We did hear that the judge expects to publish a ruling on the issue in January of next year.
But other than that, I don’t think there was too much that you could derive from the day other than we obviously felt like our team did very well, we feel like we’ve got a strong case and we feel just as confident about our position as we ever have.
Charlie Anderson
Great. Thanks so much.
Vic Viegas
Thanks, Charlie.
Operator
[Operator Instructions] We will take our next question from Mark Argento with Lake Street Capital Markets. Please go ahead.
Mark Argento
Yeah. Good afternoon.
And just wanted to change it up a little bit, maybe we could focus a little more on some of the others areas of potential deployment of your technology in revenue and particularly I know you guys continue to focus on opportunities and enhance content, maybe talk a little bit more about how you guys see this market playing out. When could you see some material revenue from some of the ad-based, some of the video games, I know you’ve been added for a little while and I know you continue to be excited about it, but maybe drill down a little bit on that, any new progress there?
Vic Viegas
Sure. Mark, as you know when we roll this out, we talked about it being a long-term investment.
It would take a number of years. I think I’ve always talked about three years or longer.
We are - we continue to show evidence that the haptics imbedded in ads makes a difference in retention and engagement metrics. The most recent study done around the Jason Bourne video trailer I think had about $8 million impressions.
So it was a large scale study and the results were terrific as they have always been. Our own internal studies and now as we do bigger scale studies, they continue to show dramatic improvement in retention and engagement.
That’s caught the attention of the marketing community. Teads is one of the larger ad networks and we’re pleased to be working with them.
There are a number of others also conducting their own studies. I’m happy to say, we’re entering into commercial agreements with many of these companies.
And so we’re generating revenue today. I’d expect it to continue to grow.
I would expect next year to be $1 million or more. And it could ramp very quickly because of a lot of ad dollars being spent on a mobile platform and if you can show increased engagement then it is real dollars for a lot of people.
Mark Argento
Okay. It’s helpful.
And what - I know you bought all the stock back in the quarter, obviously you guys are generating and brought add a bunch of cash for the balance sheet here with the Samsung settlement. What - kind of when you guys talk internally, what some of the criteria think about when you decide if you’re going to buy back stock or not and is it makes sense at some point in time that I know you want to keep a healthy balance sheet especially just given the business here in but do something more aggressively like a tender offer or something like that for some shares?
Vic Viegas
Yeah. It is the balance.
It’s - we take a look at the near term cash flow, we look at the stock price, we look at the enforcement actions and where we are in those efforts. And it’s a lot of factors go into establishing a buying program.
During the quarter, stock price hit a point at which the plan triggered and some shares were bought back. Based on today’s decrease I hope we can buy some more here soon.
But I think it will be opportunistic. It’s not our primary profit driver our investments in the business and forcing our IP are really the focus.
So I will be opportunistic as it makes sense but we’ll also be cautious as we said we want to make sure that we have a strong balance sheet as we take these various enforcement actions to protect our business.
Mark Argento
Yeah, I mean obviously you’re in a kind of unique environment just with the market not been overly kind of small, my small cap stocks right now and IP driven companies right now as well not getting to the love they normally do. So I would - hopefully you guys can take advantage here because I think it’s a little bit gift but good luck with everything and appreciate the time.
Vic Viegas
Thanks Mark.
Operator
And we’ll take our next questions from Mark McMahon with LPL Financial. Please go ahead.
Mark McMahon
Yeah. Good afternoon, Vic.
I had a follow-up question regarding your mentioning the Google Pixel phone and their employment of haptics ending manufactured by HTC. In the last quarter, you guys had mentioned that you’re having some issues with Motorola, as a licensee and a little bit of dispute regarding the settlement you guys had a few years back.
I was wondering if you taping in how that’s going with the launch of this phone with Google haven’t been a partner and HTC having recently settled for patent infringement. What’s our expectation with the Pixel phone and Motorola going forward?
Vic Viegas
Sure. Well I’m happy to say as they did in the prepared remarks that the Google products that Pixel phones, I think they use LRI Motors, they’re using haptic.
So we are taking a look at those phones and determining the right action to take. In terms of the prior agreements, we did enter into an agreement with Google.
This covered their Nexus phones that were sold quite some time ago. So the current products would not be covered by that old agreement.
In terms of Motorola, we had an agreement in place. It had a life to it.
It came to an end. We’ve continued to have discussions about renewing the agreement for their new phones and are optimistic that we can reach agreement.
But today that agreement has expired and was not renewed. That would not have any impact at all on the Google phones.
And then in terms of HTC, that was a result of litigation settlement and that license covers the HTC phones. It’s not clear that the HTC agreement, I doubt that it would have any impact of bearing at all on the Google phones as well.
So this would most likely require a new license directly with Google for the sale of those phones.
Mark McMahon
Okay. So even though HTC is the exclusive manufacturer at this point and they are licensing, that does not translate into a phone that’s branded by Google?
Vic Viegas
I believe for the most part that’s true.
Mark McMahon
Okay. Alright, thank you.
Vic Viegas
Okay, Mark.
Mark McMahon
Yeah.
Operator
At this time, I would like to turn the conference back over to management for any additional or closing remarks.
Vic Viegas
Well, thank you again everyone for being on the call with us today. And we hope to see some of you shortly a scheduled road show we’re having here on the West Coast.
Look forward seeing some of you and have a good day. Thank you.
Operator
Once again that does conclude today’s conference. Thank you for your participation.
You may now disconnect.