Nov 2, 2017
Executives
Jennifer Jarman - Investor Relations, The Blueshirt Group Vic Viegas - President and Chief Executive Officer Nancy Erba - Chief Financial Officer
Analysts
Josh Nichols - B. Riley FBR Charlie Anderson - Dougherty & Company
Operator
Good day, everyone and welcome to the Immersion Corporation Third Quarter 2017 Conference Call. Today’s conference is being recorded.
At this time, I’d 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 third quarter 2017 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 Web site 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, litigations, 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 Form 10-Q filed with the SEC as well as the factors identified in the press release we issued today after market close.
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. This is an important time for Immersion.
One that requires a resolute approach to the execution of our strategy and achievement of our operational objectives. We continue to focus on delivering value to our shareholders through the licensing of new customers, renewals with our existing customers and the expansion and protection of our intellectual property.
I would now like to highlight some of our customer and market achievements that took place during the third quarter. I am pleased to share with you that Sony Mobile Communications has licensed the Immersion patent portfolio for their mobile devices including phones, tablets, smart watches and fitness bands.
We continue to expand our technology license agreement with LG Electronics to include Immersion's TouchSense technology for high definition haptics in LG's premier mobile phones including the LG V30. We announced that Tencent has licensed our TouchSense technology to deliver next generation interactive experiences to its mobile QQ and NOW applications.
Additionally, Tencent has also licensed Immersion technology to incorporate haptics into its Super NBA game. In the gaming VR and AR market, we entered into a licensing agreement with Yomuneco, enabling the addition of tactile feedback to its gaming applications using our TouchSense Force Haptic Lab solution for the Unreal Engine design tool.
Yomuneco is now developing a new VR role playing game scheduled to be released in 2018. We also renewed our licensing agreement with Perfect World game studio for their Torchlight game which will enhanced interaction by using 47 Immersion designed and tailored tactile effects.
Finally, we have extended our TouchSense Force Haptic Lab solution to game developers building on the Unity Technologies engine. With the Haptic Lab developers can now easily design and integrate high quality touch effects into their games to leverage the advanced capabilities of newer gaming consoles including a Nintendo Switch system.
We are pleased with the continued adoption and advancement of haptics as is evidenced by new customers licensing our technology solutions and renewals and expansions by our existing customers into our key strategic markets. I will share more with you regarding our recent business developments, enforcement actions and outlook, but first I will turn the call over to Nancy to discuss the details of our third quarter 2017 financial results.
Nancy?
Nancy Erba
Thanks, Vic. Revenues for the September quarter were $11.9 million, down $14.4 million or 55% from revenues of $26.3 million in the year ago period.
This decrease is primarily related to a one time license fee of $19 million from Samsung that we recognized during the quarter ended September 30, 2016, partially offset by mobility license fees from new and existing customers recognized during the quarter ending September 30, 2017. Revenues from royalties and licenses in the third quarter of 2017 included variable royalties based on shipping volumes and per unit prices totaling $4.7 million and fixed payment license fees totaling $6.9 million.
This compares to variable royalties of $5.3 million and fixed license fees of $20.8 million in the prior year period. While revenue mix for line of business is expected to fluctuate on a quarterly basis due to seasonality pattern, for the third quarter of 2017 a breakdown by line of business as a percentage of total revenues was as follows.
71% from mobility, 17% from gaming, 9% from auto, and 3% from medical. Looking at year-over-year trends, mobility revenues were down 63% from the third quarter of 2016 primarily due to the aforementioned one time license fee of $19 million from Samsung recognized in the third quarter of 2016, partially offset by license fees from new and existing mobility customers recognized in the third quarter of 2017.
Gaming revenues were down 15% during the quarter, primarily reflecting decreased license fees, partially offset by increased royalty revenue from gaming licenses. Automotive revenues were up 3%, attributable to increased volume from our automotive license fees.
Medical revenues were down 27% resulting from expiring medical contracts. Gross profit was $11.8 million compared to gross profit of $26.3 million in the third quarter of 2016.
Now turning to our third quarter operating expenses. Excluding cost of revenue, total GAAP operating expenses were $17.2 million in the third quarter of 2017 compared to $16.1 million in the year ago period.
This increase was primarily driven by higher legal and other professional services expenses. Operating expenses in the third quarter of 2017 included $1.6 million of non-cash charges comprised of depreciation and amortization of $240,000 and stock-based compensation of $1.3 million.
Of the total non-cash charges, $407,000 was included in sales and marketing, $307,000 in research and development and $864,000 in G&A expense. Of the stock-based compensation charges, $317,000 was included in sales and marketing, $231,000 in R&D and $790,000 in G&A.
Operating expenses continue to trend down due to the front end loaded litigation expense related to the Apple ITC enforcement action, as well as concerted efforts made to tightly manage non-litigation operating expenses. We would expect this trend to continue in the fourth quarter.
Looking now at our net results. GAAP net loss for the third quarter of 2017 was $5.3 million or a loss of $0.18 per share compared to GAAP net income of $7 million or $0.24 per share in the third quarter of 2016.
In addition to normal GAAP metrics, we use non-GAAP net loss and non-GAAP net loss per share to track our business performance. We define non-GAAP net loss as GAAP net loss adjusted to reflect an expected long-term effective tax rate of 19%, less stock-based compensation.
Non-GAAP net loss in the September 2017 quarter was $2.9 million or $0.10 per share compared to non-GAAP net income of $9.9 million or $0.34 per share in the same period last year. Turning to the balance sheet.
We continue to place tremendous emphasis on maintaining the strength of our balance sheet our cash portfolio including cash and short-term investments was $48.1 million as of September 30, 2017, down from $89.8 million existing 2016. With the bulk of our ITC Apple litigation expenses behind us, we would expect to see a slowdown in the cash burn in the fourth quarter.
We continue to evaluate various options available to us, including debt, equity licensing deal structure, litigation financing and strategic partnership, any of which would enable us to increase our cash position in the coming quarters if needed. For 2017, we now expect revenues to be in the range of $33 million to $35 million and litigation spend to be between $21 million and $24 million.
Given the operating expense management we have undertaken, we now expect non-litigation operating expenses to be between $51 million and $54 million. Based on this forecast, we expect to generate bottom line results of a non-GAAP net loss between $24 million and $29 million.
I would now like to comment on a new accounting standard governing revenue recognition that we and most other calendar year end companies will adopt effective January 1, 2018. Of note for Immersion, it impacts the timing of revenue recognition for both per unit royalty agreements and fixed fee license revenue.
For per unit royalty revenue, we currently recognize revenue when royalty reports are received from our customers, typically one quarter in arrears. Under the new standard, we will estimate and record revenue in the quarter when the underlying sales occur.
As a result, there will be variances between the estimated per unit royalty revenue and that based on the actual sales supported by our customers. We will true up the estimate in the following quarter to record any differences based on actual results.
For fixed fee license revenue, under the existing revenue standard, we currently recognize revenue when earned, which generally results in recognition on a straight line basis over the term of the license. We have considered the new standard with regard to our existing contracts with fixed license fee arrangements and concluded that under the new standard, revenue would be recognized at a point in time when the company satisfies its performance obligation, which typically occurs when the license is granted.
In other words, for our existing fixed fee license agreement, if they were recorded under the new standard, that revenue would have been recognized in the quarter in which the agreement was signed. As a result, as implementing the new revenue standard, we expect that as of January 1, 2018, our deferred revenue will be substantially reduced upon the adoption of the new standard and a corresponding increase will be recorded to retained earnings.
We are in the process of validating the impact of the new accounting to our expected 2018 revenue and plan to update our outlook for next year as we normally do, following our fourth quarter and fiscal 2017 results. Beginning in 2018, any new license agreements entered into will need to be evaluated for revenue recognition based on the new revenue standard.
I would direct you to read our disclosures in our 10-Q scheduled to be filed tomorrow after the market close for further detail. Additionally, throughout 2018, we will provide disclosures in our quarterly filings that will present a comparison of revenue and other financial data as if the changes had not taken place.
The new accounting standards does not change our business model. We continue to focus on the development of haptic technology, the licensing of our solutions and IP to new and existing customers and driving shareholder value for our investors.
I will now turn the call back to Vic to provide a business update.
Vic Viegas
Thanks, Nancy. In previous conference calls I have outlined our five strategic markets that we remain focused on as well as our market engagement cycle of innovation, adoption, monetization and recognition.
I will now provide an update on our strategy and momentum in this quarter for three of those five strategic markets, specifically mobile OEM and content, gaming and mobile ads. Our mobile OEM and content strategy continue to gain global momentum in the adoption and monetization phases.
Adoption and monetization are the phases where by licensing our IP and solutions, content providers and mobile OEMs can realize the value that haptics bring to their products, enabling us to achieve a sustainable and growing revenue stream. This quarter we reached a significant milestone in our China content strategy with Tencent's deployment our haptic technology into their popular 2Q instant messaging application.
They are now live streaming applications and Super NBA game with a combined monthly active user base of over 650 million users. We believe widespread adoption of haptics in mobile content coupled with the positive response we have seen from Tencent users, facilitates future mobile OEM monetization opportunities similar to our licensing agreements with Sony Mobile Communications and LG Electronics.
For the gaming market opportunity, in addition to the adoption of haptics in traditional mobile games such as Perfect World's Torchlight and Tencent's Super NBA game, we are also driving adoption of haptics in the nascent VR games category with companies such as Yomuneco and [indiscernible] planning haptic enabled games in 2018. With falling VR hardware cost fueling wider user adoption, we will continue our momentum in enabling popular VR titles to achieve higher levels of user engagement through the addition of tactile effects.
As with our mobile strategy, we believe this increased adoption and user engagement will facilitate future monetization opportunities through gaming PC and console OEMs. Finally, we continue to drive adoption and to demonstrate the value that haptics bring to mobile advertising.
In Q1, we were nominated for a Drum marketing on mobile awards or MOMA, in the best use of technology category for Universal Studios Jason Bourne movie trailer featuring our TouchSense technology. In Q3 we were pleased to win this award alongside our partner Teads, demonstrating that the mobile marketing community recognized the proven value haptics can bring to mobile advertising.
This quarter has demonstrated to us that haptic technology is an essential part of the digital experience across multiple industries and we look forward to continuing our adoption and monetization momentum in future quarters. I would now like to provide a detailed update on our current legal proceedings.
I will begin with Apple. Regarding the Apple litigation, first with respect to the inter-parties reviews or IPRs filed by Apple and with the Patent Trademark and Appeal Board or PTAB, challenging the validity of our patents.
And second, with respect to the ITC proceedings. As you may recall, Apple filed two IPRs against each of the seven patents in suite for a total of 14 IPRs.
We are pleased that the PTAB has refused to institute IPRs against two of the patents, meaning that the PTAB has refused to consider the validity challenges that apple has put forth against these patents. To date the PTAB has instituted one IPR against each of the five remaining patents.
One of which instituted less than the full set of claims that Apple had challenged. Three IPRs remain pending.
Regarding the ITC proceedings, as a reminder, the hearing before the Chief Administrative Law Judge or ALJ at the ITC was completed on May 4, 2017. We have received notification from the Chief ALJ that the due date for the initial determination has again been extended.
This time from November 13, 2017 to January 31, 2018. The notification explained that the Chief ALJ has assumed responsibility for the investigations of a retiring judge, and needs to extend the dates in order to afford him an adequate amount of time to complete the additional investigations he is now responsible for and to draft the initial determination.
As a result of this extension, the target date for the completion of the investigation is now expected to be May 31, 2018. We remain confident in the strength of our position.
Additionally, we have filed a patent infringement lawsuit in the Beijing High People's Court against an Apple distributor and two Apple retailers asserting that various iPhone products including the iPhone 8 infringe two of our Chinese patents. We are seeking a permanent injunction preventing the importation, sale and offering for sale of the iPhone products noted above in China as well as damages.
As you may recall from last quarter, we commenced patent enforcement proceedings against Samsung in District Court in the Eastern District of Texas and against Motorola in District Court in Delaware, alleging that Samsung and Motorola are infringing our basic haptics patents. Both of these proceedings are still in their early stages and we will update you on our progress during our next earnings call.
Finally, we continue to make progress in our cases against Fitbit for patent infringement of our wearables portfolio in the Shanghai intellectual property court and district court for the northern district of California. We are responding to various motions made in the early stages of these cases and the claim construction hearing in the district court case has been scheduled for May 10, 2018 with a trial date of May 6, 2019.
We remain confident in our portfolio and look forward to making significant progress in these actions in the coming year. In closing, we have demonstrated this quarter that we continue to drive new business opportunities while executing on renewals and expansions of existing customer agreements.
Our attention also remains on closing managing our non-litigating operating expenses and maintaining a strong balance sheet. We remain confident in all of our enforcement actions.
As we have stated, we are unwavering in our focus to deliver value to our shareholders through the adoption and monetization of haptics. This is an important and pivotal time for Immersion and we will be steadfast and thoughtful in our effort to achieve this goal.
We will now open up the call to your questions. Shannon?
Operator
[Operator Instructions] And our first question will come from Josh Nichols with B. Riley FBR.
Josh Nichols
So you have been pursuing patent infringement in China more recently. I was just wondering, at a high level, could you talk a little bit about your thoughts behind pursuing that strategy and how patent infringement enforcement in China differs from that in the U.S.
Vic Viegas
Sure, Josh. So as you probably know, we have patents all around the world and we have a carefully crafted litigation strategy.
China is an important part of that strategy and we believe that we have a strong portfolio in China and that the time is right to enforce actions against Apple on the infringement of those patents. At lease these two that are currently being prosecuted.
In terms of the venue, in China there are a number of different courts that you can take IP disputes to. We have chosen to take it to the High Peoples Court which is I believe the highest court that these type of disputes would be litigated.
The process is quite streamlined. It's faster than it is typically in the United States and we feel confident in our position.
We feel like the cost is definitely something that is worthwhile pursuing and so we have decided that China is the right venue for this particular action.
Josh Nichols
Thank you. And then I did want to ask a little bit, you mentioned it earlier I believe, but content to media and embedding haptics technology in mobile ads has always been one of this [tough] [ph] long-term growth drivers for Immersion.
Could you talk a talk a little about the progress it's made? What's going on there and also where you need to improve to really be able to scale this thing?
Vic Viegas
Well, that’s one of the most exciting parts about this last quarter was the adoption by Tencent and a number of very profile applications. They are using it in a social application, in stickers and in alerts and other types of interactions.
They are adding an emotional component to the communication component, if you will. And so this is getting exposure broadly, as I mentioned hundreds of millions of daily active users, monthly subscribers.
And so it adds that additional, physical or emotional element to that interaction. This is something that the OEMs take notice and want to participate in to be part of that rich communication experience.
And so it's helping drive our OEM engagements, our OEM licensing efforts and in fact you saw in the quarter, an increase in the mobile space with regards to new OEMs and expanding licensing with existing OEMs. In addition to that one particular strategic account, Tencent, and those applications we are seeing broad adoption in other gaming applications.
And similarly it too is having an impact on user interest and we also are leveraging the mobile ad opportunities where we are able to show substantial increase in retention and engagement. And all of these have an impact on the OEMs interest in expanding their relationships with us and delivering a better experience to the use of our TouchSense technology.
So it is having a near-term impact. It's having an impact in terms of attracting other content parties and overall it's a key part of our OEM engagement strategy.
Operator
[Operator Instructions] Our next question will come from Charlie Anderson of Dougherty & Company.
Charlie Anderson
There is one to dial into. What happened in the quarter with the higher revenue, I think it was kind of concentrated to mobility.
So I think we are up pretty decently from last quarter in that category. Was that sort of episodic revenue because as I look as your guidance, implied Q4 sort of backdrop prior Q2 levels.
So if you could maybe just tell me a little bit more about what's going on there and then I have got a follow up.
Nancy Erba
So, yes, we were really pleased with the revenue this quarter. We did have both new mobility customers and we mentioned specifically Sony Mobile as well as other mobile customers who were seeing higher revenue from and also expanding our relationship with them whether that be through additional phones that they are now putting haptics or just across a broader portfolio of products that they have.
For the year we did actually narrow the range and bring it you slightly. Now at 33% to 35%.
And so, yes, there was obviously a step up in Q3. There will be continued growth opportunities for us in Q4 but we felt it was -- given where we are in the year it's necessary to narrow that and raise it a little bit.
Charlie Anderson
Got it. So these wouldn’t be variable royalty.
Like, I guess, when putting on [practice] [ph] it doesn’t look from the guidance that they are variable royalties that flow into Q4. It more looks like a past sales type of element.
Am I reading all right?
Nancy Erba
So it's actually probably a combination of both. Some that were fixed and then some that actually will hit our variable numbers next quarter.
Charlie Anderson
Got it. Okay.
And then a quick question on the accounting standards change. I wonder if maybe if you could just sort of describe, think some of your other peers have sort of described it as sort of static versus other deals where there is maybe a future IP contemplated.
I wonder if you could maybe just talk about what will be the differences for you in terms of why you would sign one deal or the other if you are seeing sort of the same thing. And then on a go forward basis, how it would may or may not change your approach and then also I wonder do you have the ability to go back to some of the licensees where there is an impact to maybe renegotiate so it is more favorable just from a optics standpoint.
Thanks.
Nancy Erba
Sure. I think you are referring to static versus dynamic.
Some of those phrases have been used by others. Our existing fixed fee agreements and those are the one that we have evaluated, those are the ones that are in place today, would be more of the static nature which is why we are discussing today the facts that those would have been recognized upfront in the quarter in which the agreement was signed.
Certainly any new agreement that we reach going forward, we would as part of that negotiation look at what the best structure is for us and the customer and there will likely be some that are static and some that are dynamic in addition to the ongoing kind of per unit royalty agreement. So the agreements that we have in place.
So after evaluating those and working with our auditors, the determination was made for the treatments that I discussed, we don’t believe we have any opportunity at this point to go and renegotiate any of those but certainly as we look at new agreements going forward, we will be considering what the revenue implications are.
Charlie Anderson
Got it. And then just last question for me relates to cash burn.
Just any general commentary there as you have had another litigation here. What sort of your outlook is there, sort of balancing defending your IP with making sure you have adequate cash on the balance sheet to run the business.
Thanks.
Nancy Erba
Sure. The cash position as we mentioned at $48 million, we are certainly comfortable with where we are today.
As I have mentioned in the comments, we believe that the cash burn will decrease as we go into Q4 just because of the bulk of the ITC litigation expense is behind us. The new case that we brought up today and discussed with Apple in China, that was already contemplated in our litigation forecast.
So we are still leaving our litigation expenses expected to be 21 to 24 for the year. So don’t think of that as adding on to the already described litigation expense.
We will continue to look at different opportunities in front of us whether that be debt or equity, or as mentioned before, how we structure agreements with customers. Whether those are more cash upfront or overtime and take advantage as we need to of any of those opportunities that are in front of us to add cash to the balance sheet if we feel like we need to in the coming quarters.
Operator
[Operator Instructions] And it does appear we have no further questions at this time. We will turn the conference back over to our speakers for any additional or closing remarks.
Vic Viegas
Okay. Thank you, everyone for joining us this afternoon.
We look forward to updating you again on our next call. Good day.
Operator
And that does conclude today teleconference. Thank you all for your participation.