Immersion Corporation Q2 FY2020 earnings call

• Immersion was negatively impacted by COVID-19, but recurring revenue was stable. The company improved its operating model and implemented cost reductions to align with the COVID-19 environment. - In the automotive segment, Nissan's Ariya EV with integrated haptics was highlighted, showing growth opportunities from existing licensees and expansion into mid-tier brands. - The mobile market was negatively affected by COVID-19 but expected to recover, with revenue in line with expectations and growth anticipated in the second half of 2020. - In the gaming segment, the PlayStation 5 DualSense controller using Immersion technology was noted, and positive reception was observed. Immersion submitted sector proposals to ATSC and MPEG for haptic standards, and a haptic industry forum with about 50 participants from leading technology companies was formed.

Immersion's revenue for the second quarter of 2020 was $5.7 million, a 35% decrease from the $8.7 million in the same quarter of the previous year. This decline was mainly due to a drop in fixed fee revenue. Recurring revenue, which is a strategic growth objective, remained relatively stable year-over-year. By line of business, the revenue mix was as follows: mobility accounted for 79% of total revenues, gaming 10%, automotive 8%, and others 3%. Gross profit for the quarter was $5.6 million, compared to $8.7 million in the second quarter of 2019.

Due to the uncertainty caused by the COVID-19 pandemic, Immersion suspended providing full quarterly guidance. The company expects to maintain profitability in the third quarter and aims to exit the year with a non-GAAP annual operating expense run rate between $17 million and $19 million.

• The ongoing adverse effects of the COVID-19 global pandemic pose risks to the business. - The Korean tax authorities have formally indicated their intention to appeal the court ruling regarding withholding taxes and penalties in the Samsung case.

Q: First, just wanted to say great work on the production. Really impressive stuff there. A couple of questions for me. First, and you talked about the full-on deposits, can you just remind us your thoughts on how big the overall PS5 opportunity is for Immersion? And then as a follow-up to that, with the positive reception of the PS5 Dualshock haptic features, curious if you've seen any interest from other gaming customers that are looking to compete with Sony on controller features. And then I've got one more after.

A: Sure. We don't break out individual customer forecast at this time. And along those lines, we're also not providing forward-looking guidance based on COVID-19. But that said, as stated in our script, we don't believe COVID-19 will have a materially negative impact on the PlayStation 5 and expect it to – expect the PlayStation 5 controller shipments will contribute meaningful revenue from Q4 this year and beyond. We know that it's coming in on time. We do know that it will revive their – potentially revive their book up. And to your second question, we – yes, we do see interest from competing controllers to – into the market as the bar for haptic devices and haptic experience becomes higher and higher, meaning high-definition haptics in the – and handheld devices become a much more interesting experience, we believe the entire market will have to follow. And we are well positioned to provide solutions for those types of third-party providers of controllers.

Q: I want to start with gaming, sort of build off the previous question on the PlayStation 5. So Immersion has benefited from PlayStation console refreshes in the past. And as it relates to the 5 launch, can you maybe help us understand Immersion's positioning and content opportunity relative to those historical launches?

A: Sure. I just want to say first that we – when we say content, just going to highlight, I mean I think you know this already, we don't generate any revenue from content related to the gaming. It's all related to the sale of hardware, certainly with regards to Sony. So I just want to put that out there for clarification. But that aside, taking a look at this platform relative to previous platform, it is quite interesting to see how much focus and how much marketing and messaging was coming around the idea of haptics. We believe that Sony has done a wonderful job delivering an amazing surround sound experience over the years. That experience is pretty much maximized. In other words, it's kind of hard to increase it by a significant amount. And the same thing with video, the incredible graphics on the PS4 will be improved with the PS5. But we're getting to that point where it is quite an outstanding experience. And therefore, the question is where do you go next, which is why we believe Sony and other gaming consoles are starting to focus on haptics. It's kind of the third experience to get you more immersed in that game. And more importantly, it is an experience that has been substandard so far. I mean we all know what haptics has been so far. It's just a vibrating device. What Sony has done is increase that experience so much that the immersiveness of the haptic controller gets you an extra feel of being immersed in the content of the game based on technology and IP. So just as was quoted by one of the game developers, they believe this is the first time where you can actually feel the kind of surfaces that you are touching, not just a vibration, but you can actually get a different feeling, whether you're hitting a weapon or hitting a different kind of surface. That is a brand-new experience, and that is singularly differentiated by haptics. And we're very excited about this, not just because Sony is doing it, but we believe that kind of experience will be the norm and the standard going forward. And these types of – as you know, we get paid for every one of these controllers, whether you have one or you buy a second one later, either because you have somebody playing with or because your controller is worn out, we believe this is going to be a continued source of revenue for us. And if the VR controllers for the Sony end up taking off, that will be additional source of revenue. So the content side, to answer your question, is very exciting because there's a lot of emphasis on haptics. We're very excited that we're well positioned to monetize it as well as through third-party providers.