Feb 22, 2018
Executives
Jennifer Jarman - Investor Relations, The Blueshirt Group Carl Schlachte - Interim Chief Executive Officer Nancy Erba - Chief Financial Officer
Analysts
Anthony Stoss - Craig-Hallum Capital Group LLC Josh Nichols - B. Riley FBR, Inc.
Charles Anderson - Dougherty & Co.
Operator
Good day, ladies and gentlemen, and welcome to the Immersion Corporation Fourth Quarter and 2017 Conference Call. Please note 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, Hally. Good afternoon, and thank you for joining us today on Immersion’s fourth quarter and fiscal year 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 website at www.immersion.com. With me on today’s call is Carl Schlachte, Interim CEO and Chairman of the Board; 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 most recent 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’d like to turn the call over to Interim CEO, Carl Schlachte. Carl?
Carl Schlachte
Thanks, Jennifer. Thanks to everyone for joining us this afternoon.
I'm pleased to be speaking with you at this exciting point in Immersion's 25-year history. Today we will share our fourth quarter 2017 and full fiscal year results, and we will talk about the many opportunities in front of the Company after having reached a settlement and license agreement with Apple.
Immersion has been and will continue to be the torchbearer of haptics. Our focus on innovation and development of cutting edge haptic technology remains at the forefront of our Company strategy.
Today our employees are working on haptic technology solutions for fascinating and seemingly insurmountable challenges that will become mainstream in the market during the next five to 10 years. This is the work we do here.
This is why our patent portfolio is exceptional and this is why I'm so excited about the future of Immersion. In December, we announced a restructuring of the Company through which we have refocused our strategy and investments on our core competencies in the mobile, wearables, and gaming, and automotive markets.
In the mobile OEM market, we continue to innovate and work to provide end users with an optimized haptic experience. With Apple as a licensee, for the first time we are now able to provide Immersion-based haptic performance across the entire mobile ecosystem.
Between our proven patent portfolio and our leading haptic expertise, we are well positioned to expand our market presence and revenue stream by attracting additional mobile and wearables OEM customers. Turning to the automotive market.
We are pleased with the growth we are seeing both in terms of existing customer traction and the signing of new licensees. As the implementation of haptics begins to expand from luxury car models to mainstream vehicles, we expect our revenue will increase in line with this adoption rate.
The gaming market including virtual reality and augmented reality has historically been an important area of innovation for Immersion. We continue to see revenue opportunities in this space both with the increased adoption of VR, but also the future AR applications that would benefit from the utilization of haptics.
Our research efforts particularly in AR are both foundational and cutting edge, and I am continuously amazed by the ingenuity of our team. I can't emphasize enough that the innovation and research we are doing today in Immersion will become tomorrows mainstream technology.
I am confident in the strength of our haptic technology solutions and patent portfolio and believe we are well positioned to drive value for our shareholders. I’ll now turn the call over to Nancy who will discuss the financials, recent accounting changes, and our outlook for 2018.
Nancy?
Nancy Erba
Thanks Carl. We definitely have a lot to cover today.
I'll start with our Q4 and full-year results. I’ll also cover the impact of the 2017 Tax Cuts and Jobs Act, and the implementation of the new revenue recognition accounting standard, ASC 606 before sharing our outlook for 2018.
Revenues for the December quarter were $6.9 million, down 26% year-over-year reflecting decreases in revenue from the gaming, medical, and mobility lines of business, offset in part by increased automotive revenue. Revenues from royalties and licenses of $6.7 million were down 25% from the prior year period.
In the fourth quarter of 2017, variable royalties based on shipping volumes and per unit prices totaled $5.3 million and fixed payment license fees totaled $1.4 million. This compares to variable royalties of $6.2 million and fixed license fees of $2.7 million in the prior year period.
For the fourth quarter of 2017, a breakdown of total revenues by line of business was 39% from mobility, 37% from gaming, 22% from auto, and 2% from medical. Looking at year-over-year trends, gaming revenues were down 36% during the quarter, primarily due to a decrease in revenue from Sony which was partially offset by revenue from new customers like Nintendo.
Mobility revenues were down 17% principally due to lower volume. Automotive revenues were up 35% due to increased volume from our existing automotive licensees as well as revenue recognized from new licensees.
Medical revenues were down 87% in line with our expectations regarding our transitioning revenue mix. Gross profit was $6.9 million or 99% of revenues compared to gross profit of $9.2 million in the fourth quarter of 2016.
Turning now to our fourth quarter operating expenses. Excluding cost of revenue, total GAAP operating expense was $19.1 million in the fourth quarter of 2017, compared to $20.4 million in the year-ago period.
A significant portion of this quarter's expense was driven by restructuring costs of $1.6 million as well as higher legal expenses, primarily related to litigation and various other legal matters. Operating expenses in the fourth quarter of 2017 included $2.2 million of non-cash charges comprised of depreciation and amortization of $238,000 and stock-based compensation of $2 million.
Of the total non-cash charges, $308,000 was included in sales and marketing, $276,000 in research and development and $1.7 million in G&A expense. Of the stock-based compensation charges, $217,000 was included in sales and marketing, $202,000 in R&D and $1.6 million in G&A.
Looking now at our net results. GAAP net loss for the fourth quarter of 2017 was $12.3 million or $0.42 per basic and diluted share compared to GAAP net loss of $38.1 million or $1.32 per basic and diluted share.
GAAP net loss for the fourth quarter of 2016 included a tax provision of $26.8 million, primarily related to a non-cash charge of $28.1 million recorded to establish a full valuation allowance against the company’s U.S. deferred tax assets.
As a result of the Tax Cuts and Jobs Act of 2017, we did revalue our deferred tax assets and liabilities in the fourth quarter of 2017 to reflect the reduction of the federal tax rate. But due to our valuation allowance, no tax expense was incurred.
We continue to evaluate other aspects of the act and may revise estimates in the future as additional guidance and interpretations become available. 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 expected long-term effective tax rate of 19%, less stock-based compensation and restructuring costs. We define non-GAAP earnings per share as non-GAAP net income or loss per share.
Non-GAAP net loss in the December 2017 quarter was $6.2 million or $0.21 per basic and diluted share compared to non-GAAP net loss of $7.9 million or $0.27 per basic and diluted share in the same period last year. Turning to full-year 2017 results.
Revenues were $35 million, down 39% from the prior year. Revenues from royalty and licenses were down 39% to $34.1 million.
Of these amounts, variable royalties totaled $21.5 million in 2017 and fixed license fees totaled $12.6 million, down from variable royalties of $25.6 million and fixed license fees of $30.4 million in 2016. The decrease in variable royalties reflects the impact of expired contracts with certain OEM and lower volumes reported by mobile, gaming, and medical customers.
The decrease in fixed license fees was primarily a reflection of a one-time license fee of $19 million from Samsung recognized in 2016. For 2017, a breakdown of total revenues by line of business was 49% from mobility, 30% from gaming, 15% from automotive, and 6% from medical.
Gross profit for 2017 was $34.8 million or 99% of revenues, down from gross profit of $56.9 million in 2016. GAAP operating expenses excluding cost of revenues were $80.2 million in 2017 compared to $72.2 million in 2016 and included $24.8 million in litigation expense, primarily related to and now resolved enforcement action against Apple, and cost of $1.6 million related to our previously announced restructuring activities.
GAAP net loss for the year was $45.3 million or $1.55 per basic and diluted share, compared to GAAP net loss of $39.4 million in 2016 or $1.37 per basic and diluted share. GAAP net loss for 2016 included a tax provision of $25.5 million for the year, primarily related to the non-cash charge of $28.1 million as previously mentioned.
Non-GAAP net loss for 2017 was $28.6 million or $0.98 per basic and diluted share, compared to non-GAAP net loss of $5 million or $0.17 per basic and diluted share in 2016. Now to address our balance sheet, our cash portfolio including cash and short-term investment was $46.5 million as of December 31, 2017 down from $89.8 million exiting 2016.
The decrease primarily reflects cash used in operations including expenditures related to enforcement actions against Apple and others. As a result of recent restructuring activities undertaken to streamline our operations and the settlement reached with Apple, we are confident in the strength of our liquidity position as we look forward to 2018.
We will continue to monitor our cash balance and our stock price as well as market conditions and strategic factors as we consider any non-operational uses of cash including future buybacks of our stock. Regarding diagnosis for 2018, in addition to normal considerations, we take into consideration the impact of the new Revenue Recognition Accounting Standard, ASC 606.
The resolution of our enforcement action with Apple and the continuing litigation with Samsung, Motorola and Fitbit, as well as the effect of our recently announced restructuring activities on our operating expenses going forward. Let me frame our revenue guidance by explaining the implication of the new ASC 606 accounting standard.
Effective Q1 2018, our royalty revenues will be reported based on estimates of the underlying shipments for the current period, rather than reported one quarter in a rear based on royalty report received from customers, as has been our practice historically. We will be required to estimate the royalty revenue for the period and record true up as required when we receive royalty report from our customers the following period.
We do not expect this change in the timing of royalty revenue recognition to have a significant impact on full-year royalty revenue projection, but do expect a change in seasonality patterns versus prior years. In contrast, we do expect the effect on revenue recognition for our fixed license fee arrangements to be significant.
Under ASC 606, we expect a substantial portion of the revenue from fixed license fee contracts will be recognized upon contract execution with the remainder likely recognized ratably over the contract term as the future performance obligations are satisfied. With this in mind, we expect there could be unpredictability and our revenue forecast reflecting the difficulty in projecting when significant fixed fee license agreements will be executed.
In light of these changes in the revenue recognition practices, we currently expect 2018 revenue as estimated in accordance with ASC 606 and based on our current expectations regarding existing and anticipated fixed license fee contracts of $80 million to $95 million. I should also note that this outlook is independent of any possible litigation outcome.
On the expense side, we are currently assuming litigation expense of between $8 million and $10 million for 2018. GAAP operating expenses outside of this litigation expense totaling $43 million to $45 million for the year.
And finally, stock-based compensation of between $5.3 million and $5.5 million for the year, with the highest expense expected to occur in the first quarter. Due to the full valuation allowance and the changing tax regulations, we anticipate forecasting cash tax expense going forward, which for 2018 is expected to be approximately $300,000.
Beginning in 2018, we will define non-GAAP net income as GAAP net income adjusted to reflect cash tax less stock-based compensation. Based on this forecast, we expect to generate bottom line results of between non-GAAP net income of $35 million and $46 million.
After all of that, I will now turn the call back to Carl.
Carl Schlachte
Thanks Nancy. I’d now like to provide a brief update on our current legal proceedings.
I'll begin with Apple. On January 29, we announced the settlement of all litigation and the signing of the multi-year license agreement with Apple, and on February 16, the ALJ issued an order terminating the ITC investigation.
In August 2017 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. For the Samsung case, the first day of jury selection will be in February 2019.
For the Motorola case, the trial date has been scheduled for September 2019. Finally, we continue to make progress on our cases against Fitbit for patent infringement of our wearables portfolio in the Shanghai Intellectual Property Court and District Court of Northern District of California.
The trial date has been scheduled for 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, I want to thank all of the Immersion employees for their tireless efforts in 2017. Their hard work and commitment is bearing fruit and we look forward to a profitable year in 2018.
As we've stated previously, we are unwavering in our focus to deliver value to our shareholders through the adoption and monetization of haptics. The achievements thus far in 2018 helped confirm the confidence we have in our patent portfolio and the innovative work that we do.
We will now open up the call to your questions.
Operator
Thank you. [Operator Instructions] Our first question today will come from Anthony Stoss from Craig-Hallum.
Anthony Stoss
Hi, thanks. Congrats on your settlement with Apple.
Quite a few questions, I'm curious and just want to confirm in your guide that you're not assuming anything from Samsung or other litigations in that $80 million to $95 million at this point?
Nancy Erba
That’s correct.
Anthony Stoss
Okay. And then I wanted to hear more on the auto side that it's really starting to grow for your folks, I’m curious how much you think you penetrated the auto market?
Are you touching all the major OEMs? What are you finding?
Is it migrating more to the dashboard, just love to here a little more than that and I had one last follow-up.
Carl Schlachte
Sure. This is Carl.
We think we've penetrated it just at the beginning part of this market. If you look in modern cars, certainly luxury and higher end cars, the dashboard is becoming more and more yet another screen, and the whole aspect of distracted driving and the ability to know when you're touching something without taking your eyes off the road is a big area for growth for us going forward.
So we're pleased with our progress so far, but we're just at the start.
Anthony Stoss
And then late last year, you shared some expense, you start going after the advertising opportunity in light of the settlement with Apple and your cash balance, is that something that you would look back to put back on or I’m curious your thoughts on that?
Carl Schlachte
Yes. I don't think it's something that we're looking to add back on.
We generated some really interesting intellectual property along the way. One of the things that we learned as it relates to advertising, especially with a company our size is that despite the success that we were seeing and we were seeing good traction and good success.
The amount of money that we would have to spend in order to scale along with that just didn't make prudent fiscal sense for us. So I don't see us adding that back in, but I do think that we've got avenues for having discussions with partners in that space that might make sense.
Anthony Stoss
Great. Final question, Carl.
Following the announcement of the settlement with Apple have you noticed any uptick in terms of consumer interest – customer interest, was there anybody that you feel sitting on the sidelines and now they’re moving ahead quickly?
Carl Schlachte
We have an engagement discussion with folks where they've actually referenced that particular settlement as a reason for engaging in discussions with us. I think it's a very nice validation of the strength of the intellectual property that we've developed, and that kind of public validation always helps when it comes to talking to customers.
Anthony Stoss
Perfect. Great job, guys.
Thank you.
Carl Schlachte
Thank you.
Operator
Thank you, Anthony. Our next question will come from Josh Nichols with B.
Riley FBR.
Josh Nichols
Yes. Thanks for taking my question.
I was curious just looking at 2018 guidance, ballpark about what amount of revenue is assumed for growth that's not currently signed?
Nancy Erba
Not currently signed. I would say as a percentage it would be – I'll just say small.
We feel good about the revenue forecast. There's always a pipeline that we're taking into consideration, so every year we do our forecast and you're well aware of this Josh.
If you look at our full pipeline and see where things are in different stages and we make some assumptions that some will achieve what we need and some won't. And we also have the variability of our royalty-based agreements where we're dependent upon our customer volumes.
So there is some judgment that have to take place there, but certainly we feel good about the range that we've given. Over the year, we maybe able to tighten that a little bit if we see things come through, but for right now that's where we feel comfortable.
Josh Nichols
And then, how should we think about seasonality throughout the business? Historically, there has been some in the gaming and handset space particularly in Q4 and Q1?
Nancy Erba
Yes. I think given the new rev rec, we will likely see that seasonality particularly in gaming move into more Q3 and Q4 versus Q4 and Q1 simply won't be recognizing in arrears.
But I would also say that for 2018 you should expect overall for revenues to be front-end loaded this year.
Josh Nichols
And historically the company has provided before, what’s the company’s current cash balance?
Nancy Erba
Well we've decided to – we're giving you that 12/31 balance which is $46.5 million. We're not going to disclose our current balance as of today.
You'll get that with the Q1 numbers, but I will say that we are very pleased with the health of the balance sheet and where we sit with cash.
Josh Nichols
Okay. Thank you.
That's all for me. Those are helpful.
Nancy Erba
Okay. Thanks Josh.
Operator
Thank you. [Operator Instructions] Our next question will come from Charlie Anderson with Dougherty & Company.
Charles Anderson
Yes. Thanks for taking my questions and good afternoon.
So I wondered if you could talk a little bit as it relates to the 2018 guidance if there is any episodic or non-recurring revenue in there. I'm thinking about often there's a past sales element and deals, and then where they ASC 606 you mentioned recognized at the time of execution, I wonder if maybe you could help us with the impact there and again with something that's potentially non-recurring as we think about sort of what’s the consistent run rate of the business?
And then I’ve got a few follow ups.
Nancy Erba
Sure. So I will say that over the past couple of months and we mentioned this on our last call, we've been working really closely with our accountant.
I think everyone in the Valley has relative to the new revenue standard. And where we have landed is that certain of our contracts will have almost a mix component, meaning we will have some portion of that that will be recognized upfront, but due to ongoing performance obligation, there will also be a portion that's recognized ratably over the license fee agreement.
So what the guidance reflects is that interpretation and it is slightly different from what we had thought previously where we thought the majority would be or that all of that would be recognized upfront. Now, we've been able to come to alignment that a portion of it will actually be recognized over the term of the agreement.
And that's only for certain subset of our contracts. It will depend on the individual agreement.
Charles Anderson
Okay. Can you be specific on how much is front-end loaded specifically on 2018 and maybe if not on the call is there – is that something that would be disclosed in the K and 10-Q, just to help us understand how we look at sort of the baseline of the business if that makes sense?
Nancy Erba
We won't be disclosing that in the K. As part of the Q, we will do the modified retrospective and there will be a little bit more information at that point in time.
But as of now and what we disclosed in the K, we will not have that detail.
Charles Anderson
Okay. Got it.
So share count for the full-year, I'm curious, and then also you mentioned the $300,000 of tax expense, the tax provision, how should we think about the long-term tax rate on the business?
Nancy Erba
Yes. So full-year 292 in terms of share count and because of the valuation allowance that we have on the books right now, we are going to be forecasting our cash tax expense going forward, which like I said was $300,000, as we move through this year and continue to evaluate the impact of the tax act on Immersion.
We may make some modifications to that during the year, but as of now with the valuation allowance we're not seeing a huge impact.
Charles Anderson
Got it. And then a couple questions for Carl.
So Carl that you've got Apple done, I'd be curious your views on in terms of monetizing the rush the portfolio going forward to what degree do you feel like there is some enough there for other people to sort of read into what's the right rate? And I'm also curious in general given where the balance sheet that sounds like you guys are really comfortable there?
Do you feel like you've got enough on the balance sheet to most efficiently maximize the licensing program independently; doesn't it make sense to do with partners over time? Just your general views there?
And then I have one more questions.
Carl Schlachte
Yes, I’ll answer the second question first. I think if you we feel really comfortable that with the status of our balance sheet as it relates to being able to handle what we see on our plate in the near and mid-term future, so not particularly worried about that – any of that kind of stuff.
As it relates to closing other license deals, these things are – they're all individual by nature and that different things get pulled into different negotiations in different time, some people are interested in licensing. In addition to things like getting access to our patents that are also interested in discussing different pieces of technology that we have that can actually supplement their own technology portfolio going forward.
Haptics, it turns out as one of the few areas in the mobile phone, hardware ecosystem that is actually increasing in cost. In the Android market, it's gone up something on the order of like 200% the actuators are.
So there is a lot of emphasis being placed on that and how do you take advantage of that? And that hasn’t effect on the way that you do these negotiations and there's kind of a roundabout way of answering the question, do we have a rate in mind for each of these folks.
It's highly dependent on the suite of technologies and portfolios that they're interested in licensing.
Charles Anderson
Got it, so I’ve just got one more that Nancy, you mentioned there would be a portion that’s sort of fixed as in a portion that’s has a future deliverable. Can you maybe just help us understand what is the future deliverable in that component larger or smaller than the fixed portion and some of these deals you're talking about?
Nancy Erba
Again it will be specific to the particular agreement and they do vary depending upon the structure. What I can say and we do describe this in the K, is that it will be dependent on planned what we deliver in terms of our portfolio and other deliverables and the solutions and technology over the life of the agreement.
So the amount upfront versus ratable in the future will be very specific by customer.
Charles Anderson
Okay, thanks so much.
Carl Schlachte
Thanks Charles. End of Q&A
Operator
Thank you. Ladies and gentlemen, this does conclude our question-and-answer session for today in addition to our conference.
We thank you all for your participation. You may now disconnect.