Earnings Call Transcript - IMMR Q4 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Immersion Corporation Q4 and 2020 Earnings Call. Please note that today's call is being recorded. And at this time, I would like to turn things over to Mr. Aaron Akerman, Immersion's Chief Financial Officer. Please go ahead, sir.

Aaron Akerman, CFO

Good afternoon and thank you for joining us today on Immersion's fourth quarter 2020 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of our website at ir.immersion.com. With me on today's call is Jared Smith, our new Interim CEO. During this call, we may make forward-looking statements, which may include any expectations, projections or other characterizations of future events or circumstances and include statements regarding the impact of COVID-19 on our business and the business of our customers and suppliers as well as on the economy in general and also include projected financial results or operating metrics, business strategies, litigation or absence of litigation, anticipated future products, future expense reductions, anticipated tax expenses, anticipated market demand or opportunities, our operating model and other forward-looking topics. These statements are subject to risks, uncertainties, and assumptions, especially in light of the ongoing adverse effects of the COVID-19 global pandemic. Many of these risks and uncertainties are beyond the control of Immersion.

Jared Smith, Interim CEO

Thanks, Aaron. And thanks everyone for joining us on the call today or listening via webcast. It's an exciting time for Immersion. And we believe that 2021 is poised to be an inflection year for haptic technology adoption. Haptic is quickly emerging as one of the most innovative technologies for improved user experiences and consumer products and content, as embodied in the Sony PlayStation 5 DualSense controller, which delivers the next level gaming experience. In the smartphone market, leaders Samsung and Apple offer high-definition haptic performance, which is driving demand for consistent and improved performance across the entire market, not just in flagship models. In VR, advanced haptics provides the critical sense of touch to fully immerse the user in a virtual environment. Consumer market growth is also being accelerated by continued improvement in the performance and cost of actuators that enable these premium experiences. But consumer applications are not the only driver of this haptics market inflection. Haptics is well established in touch buttons, touch pads, and displays in premium cars, and automotive adoption is now poised to accelerate in the high-volume mid-range segment.

Aaron Akerman, CFO

Thanks, Jared. Let me begin by referring you to this afternoon's press release for information regarding our Q4 2020 financial performance. Total revenue of $10.9 million for Q4 2020 was down 5% from total revenue of $11.5 million in the same quarter last year, but up over 40% sequentially. Revenue from per unit royalty arrangements increased approximately $0.4 million or 4% compared with the prior year quarter. Revenue from fixed license fee arrangements was down 34% on a comparable basis, primarily due to a $1.1 million fixed license fee from a mobility customer recognized in the fourth quarter of 2019. Recurring revenues represented 91% of revenues in Q4 2020 versus 60% of revenues in the fourth quarter last year. Our revenue mix for each line of business typically fluctuates quarterly due to seasonality patterns and for the fourth quarter of 2020, a breakdown by line of business as a percentage of total revenues was as follows: 57% for mobility, 19% from gaming, and 24% from automotive.

Operator, Operator

Thank you. And we'll go first to Anthony Stoss of Craig-Hallum.

Anthony Stoss, Analyst

Nice quarter. You rattled off several new auto wins during the quarter on this call. I'm curious if you can give us a sense or a cadence of when a lot of these designs will come into play. And I understand you get an auto win; sometimes you have to wait three or four years for the production of that auto. But maybe just take us through kind of a cadence or what you expect the growth rate for auto to be. And then, secondly, on Samsung, do you know if you're completely penetrated across all product lines? My understanding is in the past you were more on the high end. Is there additional penetration you can do with Samsung? Then after those two, I have one follow-up.

Jared Smith, Interim CEO

So in terms of auto, you're right the time to revenue can be a few years in some cases if they're at the very front-end of the design cycle, but that isn't always the case. And with some of our newer licensees, we could see revenue as soon as in the following year, or within a one-year timeframe depending on where they are in their design cycle and how they're working with us when the license is executed. So that varies somewhat. We do see continued growth in automotive; particularly you'll see the acceleration—actually you'll see the benefit of the auto licensees that we have been signing this year and next year, and then we'll see an acceleration after that as adoption picks up, particularly in the mid-range area. And then your second question was on Samsung. Without discussing all the details of the agreement, essentially they are licensed across their smartphone product line. So we aren't licensing in just one particular segment. Our IP is used across the market in general from low-end cost to high-end cost.

Anthony Stoss, Analyst

And then, as a follow-up, what I found most interesting was your comments related to the new markets, industrial medical. I think you've talked about this in the past but household appliances, I think this is the first time you guys have brought that up. Can you give us use case scenarios? I presume touch buttons will be replaced with more of a haptic feedback, perhaps, but maybe go in depth and talk about the ASPs similar to mobile or just what you think you can do in the household appliance market?

Jared Smith, Interim CEO

So that's a great question. And it's early. You mentioned touch buttons being replaced. One of the big trends we're seeing is just generally, touch screens showing up on devices. Interestingly, it's not just large refrigerators or washing machines; it can be printers or even smaller devices with a small screen on it. We're seeing interest in getting haptic feedback on those touch screens where it may not exist today just to confirm to the user that they're actually getting a successful touch experience. So you'll see a lot of growth specifically in the screens segment, as screens—these panels and screens get cheaper and cheaper, of course, they're showing up on more and more devices. If you've ever used these, you can tell sometimes that you're not sure whether you've actually gotten a successful response with the touchscreen. So it's about adding haptics to that. And if you recall the comments I made about improved performance in cost and actuators that helps drive that market as well. It drives haptics in those applications, as well. In terms of ASPs, typically with those larger screens, particularly, you're going to see higher ASPs like we talked about in mobile and compared to automotive. It also depends on the volume. I don't want to quote specific numbers yet, but it generally follows that trend: as you go to those larger screens and those similar applications, the ASPs would be higher than mobile.

Anthony Stoss, Analyst

Just as a follow-up to that, is Samsung being your biggest customer and in the mobile side, clearly, they're one of the biggest household appliance makers. Is it fair to assume that they're a likely potential customer here? Could you generate revenue this year in the household appliance side, and just go beyond just Samsung, perhaps for appliances?

Jared Smith, Interim CEO

So, I can't comment on specific customers. But there are appliances and other products that are currently using haptics, and we have some licensees already in certain types of product categories that could fit into that broader category. In terms of new revenue, I don't expect to see anything this year from those clients because it's not one of our core focus markets. It's more of another market that we keep an eye on, and we engage with the customers when the need arises or when we start seeing adoption increase. That would be my general answer to that question. We're really focused on automotive, gaming, and mobile primarily. The reason we mentioned those other markets or new markets is to communicate that we still look at those opportunities when we think that they are interesting and could provide a meaningful return.

Operator, Operator

And our next question will come from Derek Soderberg from Collier Securities.

Derek Soderberg, Analyst

Jared, I'm just curious how you are feeling about the PlayStation 5 deal overall. Do you think the royalty rate is sort of in line with the value that it brings? And going forward, do you think new gaming controllers will feature content similar to that of the PlayStation? Or do you think that you're going to have more pricing power with new customers? Then I have a follow-up.

Jared Smith, Interim CEO

So to answer your question, I'm very happy about the Sony license and the scope and the economics and the potential. That's certainly something that I'm feeling very good about. Sony has a strong track record with their consoles, and they have shipped in high volumes over a long period of time. So I'm very excited about that. In terms of, I presume you mean other controllers; you mean like other game controller manufacturers. I presume that's what you're talking about. ASPs vary in that and it depends on what exactly the peripheral is and the volumes they have. But we capture a pretty good range of ASPs in that market currently. I do see that, particularly in higher value peripherals, of which there are many different types, we would certainly see higher ASPs there.

Derek Soderberg, Analyst

I do have a follow-up unless you wanted to add something else?

Jared Smith, Interim CEO

No, no, go ahead.

Derek Soderberg, Analyst

Yes, and then, Aaron, I guess you guys are exiting the year with OpEx around $3.5 million. Just curious how we should think about OpEx levels, where they're at today and at these levels, can you support some of the initiatives that you guys have laid out in gaming and mobile? Thanks.

Aaron Akerman, CFO

Yes. So as we've previously said, we feel that we can sustain the business at OpEx between non-GAAP OpEx between $17 million and $19 million. We're currently a little bit below that. But we continue to believe that provides ample room to run the business and to increase spending in a disciplined way on particular visiting customers, some additional marketing programs, things of that nature. So we continue to believe that's the sustainable level for us.

Operator, Operator

And with that, that does conclude our question-and-answer session. I would like to turn the call back to our presenters for any additional or closing comments.

Jared Smith, Interim CEO

Thanks, operator, and thank you to all of you for joining us on this call today. I'm very excited about our continued progress and our financial results. We're well positioned to drive continued adoption of haptics in our core markets and grow the company. We look forward to sharing updates on this effort in future calls. Thank you and goodbye.

Operator, Operator

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.