Good day, and welcome to the Immersion Corporation Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarman from The Blueshirt Group. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today on Immersion’s second quarter 2015 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 are Vic Viegas, President and CEO; and Paul Norris, CFO. During this call, we may make forward-looking statements which may include projected financial results or operating metrics, business strategies, 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 can cause this, please see our latest Form 10-K 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'll now turn the call over to Chief Executive Officer, Vic Viegas. Vic?

Thanks, Jennifer, and thanks everyone for joining us this afternoon. The second quarter of 2015 was another quarter of record results for Immersion generating 16.2 million in revenues and representing the 11th quarter in a row that we have delivered record quarterly revenues on a year-over-year basis. The quarter also marked an exciting milestone as we announced that over 3 billion devices have been sold using Immersion haptic technology. We addition, we continue to see growing market interest and adoption of haptic technologies illustrating how haptics is becoming a must-have technology for consumer devices. In a few minutes, I’ll discuss our recent business developments but first I’ll ask Paul to discuss the details of our second quarter 2015 financials. Paul?

Thanks, Vic. As Vic mentioned, revenues for the June quarter were $16.2 million, up 37% from $11.8 million in the year-ago period and representing record quarterly royalty revenues for Immersion’s second quarter. Revenues from royalties and licenses of $15.9 million had a similar record and were up 37% from royalty and license revenues of $11.6 million in the second quarter of 2014. Of these amounts, in the second quarter of 2015, variable royalty based on shipping volumes and per unit prices totaled $6.3 million and fixed payment license fees totaled $9.6 million. This compares to variable royalties of $3.9 million and fixed license fees of $7.7 million in the prior year period. While revenue mix per line of business fluctuates on a quarterly basis due to seasonality patterns, for the second quarter of 2015, a break down by line of business as a percentage of total revenues was as follows. 71% from mobility, 17% from gaming, 8% from auto and 4% from medical. Mobility revenues were up 51% from the second quarter of 2014, principally due to new one-time license fees, higher ASPs and increased device sales by our customers. Additionally, this was the first quarter that we generated revenues as a result of the HTC settlement agreement. Automotive revenues were up 96% over the same quarter last year due to increased volume of vehicles sold and the timing of reporting from our customers. Medical revenues were down 21% year-over-year primarily due to lower fixed licensing revenue while gaming revenues were up 1% over the second quarter of 2014. Gross profit was $16.1 million or 99% of revenues compared to gross profit of $11.7 million in the second quarter of 2014. Turning now to our operating expenses. Excluding the cost of revenues, total GAAP operating expenses were $13.9 million in…

Thanks, Paul. Q2 was an exciting quarter for Immersion as we reached the significant milestone with over 3 billion devices having been sold into the marketplace using Immersion technology. This milestone not only illustrates how critical the sense of touch is to today’s devices and interfaces, but also shows how companies are investing in haptics for more advanced user experiences. As we look forward over the next few years, we see three key market trends driving even greater adoption of haptics in consumer devices. The first is emotional communications. As we expand our modes of communicating, we move away from talking in person and miss the intuition and connection the sense of touch brings to our communications. Haptics will be used to create a sense of presence and a unique tactual language between users creating more personal and meaningful digital interactions. The second market trend is immersive entertainment. As we consume shorter, richer media on our personal devices, haptics can add value by amplifying action, enhancing user engagement and creating more immersive mobile movies, ads, games and social media experiences. This market trend extends beyond traditional mobile devices. As we look at virtual reality being used to create experiences that remove users from the world around them and immerse them in a virtual environment, haptics is critical in making those experiences more believable. At this year’s F8 conference, Oculus chief scientist Michael Abrash identified haptics as one of the key technologies for immersive virtual reality experiences. Finally, the third trend is the connected world. Gartner has forecast that there will be 25 billion connected things online by 2020. This includes your mobile phones and tablets but also your car, wearables, smart home appliances, televisions, the list goes on and on. With so many things online, the risk for information overload…

Thank you. [Operator Instructions]. We’ll now take our first question from Charlie Anderson.

Thanks so much for taking my question and congrats on the solid results.

Thanks, Charlie.

Thank you. I want to start with the mobile. It was really strong in the quarter. Is there a seasonal impact or was there any sort of one-time licensing from a new customer or does that feel like a good run rate going forward?

I would say that we anticipated a good strong quarter and it’s based on the licensing activity that we had going on for some time now. I think you can see through the guidance that we expect the first half to be stronger than the back half and now I think that is consistent as it has been in the past. So I wouldn’t necessarily look at the Q2 as a poor quarter run rate, but it was a strong quarter and so we’re still looking at good solid Q3, Q4. The quarter did benefit from continued increasing ASPs, increased volume of devices shipped with our technology. And there was some additional revenue booked in the quarter tied to a fixed license contract that did benefit the quarter. So, all in all, it was a great quarter and I think consistent with what our expectations were.

Is there anything in there on the revenue that you would describe as one-time in nature, Vic?

There’s always timing issues, Charlie, so depending on the timing of royalty reports, compliance activity, deliverables, so there is always some amount of unique activity in a quarter. We did benefit in this quarter I think to the tune of a couple of million dollars from a license arrangement that we were able to record in the quarter. So there was some benefit from that. But overall, it was across the board increased growth in most of our sectors. I think everything but medical was up and contributed to a great quarter.

Great. And then last one from me. You’re sitting on a very nice balance sheet, no buyback. Just wondering if you could sort of update us on use of cash and how you look at the buybacks since you have authorization?

Hi, Charlie. This is Paul. We still feel like our stock price is very favorable for a buyback in general but we’re happy to have a strong balance sheet. We’re looking at a variety of different things. We do tend to get a lot of cash in the beginning of the year from some of our fixed payment agreements and then use some of that as the year goes on. We see a lot of different opportunities coming up. So right now we’re not actively in the market for our shares but we may well get back into the market at some point in the future. And as a licensing company, again, it’s nice to have a strong balance sheet both to deal with any kind of licensing activities or even litigation that might be necessary and there’s a signal to prevent it from being necessary in the first place.

Great. Thank you so much.

Thanks, Charlie.

We’ll take our next question from Tony Stoss.

Hi, Vic; Hi, Paul. It’s Jeanette Omdalen in for Tony Stoss.

Hi, Jeanette.

Hi. A couple of questions from me. Could you guys give a little more color on how you see revenue growth from new customers versus growth from existing customers, let’s say, both near term, 6 to 12 months out and then looking a bit farther out here?

Sure. So, Jeanette, we have active engagement with many of the leading OEMs that are currently unlicensed and those activities are all the way from demoing our capability to porting our technology to platforms to enable them to launch products all the way to business negotiations and sharing of technical information. So there’s a lot of activity ongoing to bring in new OEMs. I would say the bulk of our revenues we look out and the basis for our guidance is really primarily around existing customers and the confidence we have in their existing products or their new design launches that we anticipate over the next few quarters. So given our visibility, the bulk of the revenue that we expect over the next few quarters are based on mostly existing customers and launching of current products as well as new products.

I’d add that as we look further out, we’re really pleased that there are so many different opportunities for haptics. It seem like they’re gelling and coming to market. And so if you’re looking longer term, then we might start seeing results from our content initiative. There are all kinds of new types of product, wearables and others that are coming in and new parties who are coming to the table with haptic implementations that offer opportunities for us. So I think there’s going to be a good opportunity for us to grow the breadth of our licensing platform over time as well.

Perfect. Thanks. And then just a follow up, could you give us a sense maybe on which segments in the overall mobility market you see the most opportunities to monetize your patent IP and TouchSense software?

Well, I think it’s clearly the smartphone sector is the biggest mobile opportunity and we don’t really distinguish between smartphones and tablets. We don’t currently anticipate high volume of wearable devices but we’re very excited by the promise of the wearable not only as a platform that really benefits greatly from haptics but a new way of delivering rich information. So we’re excited by that as a platform. But I don’t look to that as a near-term high volume revenue generator. In terms of overall revenue and the impact it has on our P&L, clearly Samsung continues to be a large customer of ours. I believe in the quarter there were somewhere in the neighborhood of around 30% as a customer, so they continue to be a significant revenue source. LG is also an important customer in terms of revenue. And then from there we see tremendous opportunities with the new relationships we have in China; Gionee, Huawei and a number of others. So geographically, there are a couple of key areas that seem to be having real success in the marketplace and we’re benefitting because they’re active and satisfied customers of the Immersion TouchSense solution.

Perfect. That’s all from me. Thanks, guys.

Thanks, Jeanette.

We’ll take our next question from James [indiscernible] with Cowen.

Good afternoon, gentlemen, and thanks for taking my questions.

You’re welcome, James.

Hi. So the first question I have has to do with the second half revenue profile and trajectory. So we hit the midpoint of guidance, it looks like about 55% of revenue took place in the first half. And with the above consensus performance in Q2, I guess the question would be would we see the normal seasonal trend of Q3 higher than Q2 and then Q4 higher than Q3 or how should we think about that? I guess if we took out the 2 million that you mentioned and think about 14.24 for Q2, how should we think about the trajectory for Q3 and Q4? Sorry, a longwinded question.

No, James, I think it’s a good question. We usually have the seasonal benefit of Q1, which picks up the shipping volume of the previous year’s fourth quarter. We have that this year. We also have signaled last quarter that we saw a fairly strong Q2. We had enough visibility to see that our royalty reports were coming in at or above our forecast that we were looking positive in terms of new licensees. So we felt like we had a somewhat unusual Q2 that would be stronger than it has seasonally been in the past. Now with that said, I think what we’re saying is that the back half of the year is usually seasonally slower than the first half. We continue to see that. And I think if you do the math, you’re looking at something in the neighborhood of roughly 14 million a quarter in the third and fourth quarter. And we feel pretty comfortable that that is the trajectory, which again reflects the typical early year seasonality and then lower levels in Q3 and Q4. The only thing a bit unusual this year is Q2 was just a really strong quarter, and again it was for multiple reasons but across the board solid in most areas.

Okay. And then my other – my follow-up question is on the tax rate. I wasn’t clear exactly on are you guiding us to use a 78% tax rate for the second half of the year?

There are a number of different factors which could be moving during this interim period as we transition into the new structure, but I do think it would be appropriate to use a higher tax rate than the statutory rate of 35 that we’ve suggested in the past. And for modeling purposes right now, I do think also that the high 70s might be a good place to look at it. That’s what we’re basing annual guidance as far as non-GAAP net income right now. But again, there could be some changes as we actually execute during the next couple of quarters and complete the transition into this new structure.

James, I would point you to the data that Paul gave earlier in the script where we see a Q3 provision that will be higher than normal and you’ll see a couple of million dollars a year or roughly 500,000 a quarter added to the tax provision. So I think if you do that calculation, you’ll end up somewhere in the high 70% provision level.

And then looking into next year, on the same question looking into next, I guess the transition to period runs for how long?

That too depends a bit on some contemplated changes in the rules relating to these kinds of reorganizations. It could be for as long as five years or it could end as early as 2017. But for the next couple of years at least I would look at the $2 million as an additional tax adding to our tax provision on an annual basis. The amount per quarter will vary a bit depending on the relative performance in a particular quarter. But that will be on top of whatever the blended effect of tax rate would otherwise be. So you’ll see two trends going on. One is going to be the decrease on average of our tax rate due to the tax planning, due to the fact that we’re going to have more tax at lower rates internationally and less tax at the high 35% rate in the U.S. And that will be a counter balance just during the transitional period by this additional $2 million that we’ll have for the next one and a half to five years. Now, I do want to emphasize too that we have a lot of deferred tax assets and we’re not expecting any of this to be cash tax.

Okay. And just – again, sorry to beat the dead horse on this but will you be backing out that 2 million for non-GAAP purposes?

We weren’t planning on doing that. We will have a – obviously by the end of the year, we will have a little bit of a clearer picture for where we’ve ended up this year. And to the extent that more disclosure of even a different approach is appropriate, we’ll look at that. But at this point, no.

So, James, I think we want to stick to the non-GAAP being a GAAP measure after tax adjusted for the stock-based compensation. But I think that as Paul said, as we move forward we’ll be giving more color each quarter because it will depend on revenue and profit trends, but I think overall what you’re seeing is a pretty efficient tax planning strategy and one that we will provide you more information as we know more about the results.

I think we said, for example, give you the specific amount of the $2 million per year that’s allocated to the particular quarter when we give the results.

Okay. And just finally on that, the underlying tax rate, where do you see that – sort of what’s the target for that a couple years out?

Well, it depends a good bit on how the profile of our revenue geographically evolves over time. Right now, a large amount of our revenue comes from overseas, Korea in particular. We’re looking at growing in China as well. And that international income should be subject to an effective tax rate in low single digits, whereas our U.S. based revenue will be more like it currently, as more like 35%. So it will depend on the breakdown. Right now, it’s more 50% I would say by some amount just coming from internationally that would be subject to this much lower rate. To the extent, however, we started generating a lot of revenue in the U.S. because of customer relationships here, because perhaps the content business has a number of add back clients in the U.S. and that would tend to shift it back towards the 35% rate. But overall, I would expect the run rate to come down as it were today and borrowing the transitional effect, it would come down to less than 17%.

Okay. Well, thank you. That’s all very helpful. Thanks.

Thanks, James.

We’ll take our next question from David Williams with Ascendiant.

Good afternoon and congratulations on the quarter.

Thanks, David.

I wanted to touch on the ASP growth that you kind of talked about and just kind of curious. Is that maybe more of a blended ASP if you look at maybe you had some new sign ups during the quarter or are you talking about your new sign ups actually being better ASPs? Can you kind of help me I guess understand how that ASP, what the magnitude is and then maybe how you’re getting there? What you’re able to move?

Sure. So it’s from a multiple different paths. One is new licensees. We’re quoting higher prices as we gain a bigger footprint in the marketplace and as our IP is being validated in court proceedings and new license agreements. So new agreements are typically getting signed at higher prices. Then we have a number of existing licensees where they come up for renewal and in the renewal process, we typically offer more value, maybe more rights, access to our tools, more investment on the content side. And so as a result, we’re typically able to raise prices in the renewal negotiation. And then you have within any particular agreement, you may have revenue accelerators, increases per year or increases per unit that you implement throughout the contract.

Great. Thanks for that. And then secondly, I wanted to kind of get your thoughts on the health of the Chinese handset market. It seems like some of the components in it are seeing a slow down there, at least maybe a positive on softness. Kind of want to get your thoughts just kind of thinking about your revenue split between the fixed and the variable? And then it looks like we’re also seeing some share shift going on, maybe Huawei taking up some, some maybe coming down a bit. And just kind of thinking about the backdrop of your fixed versus variable. Can you talk about how you see that share shift and then obviously the health of the Chinese market as well?

Yes, I’ll let Paul talk about the split between variable and fixed, but today the trends are moving in the favor of Immersion. Our Korean royalties tend to be – those customers are increasing their volumes. Across the entire group of customers, there’s a greater interest in haptics from Immersion. And so we’re seeing more design wins with TouchSense. We’re seeing more implementation of haptic capability and new used cases. We’re seeing broader adoption on the content side whether it’s games or in advertisement or video. All of these are creating pull and energy and excitement by our customers that use us in a higher number of their products. So I do believe – I’ve seen the same statistics probably that you have that the market is flat to shrinking in China and in some other territories. But in general, I think the top end of the market for us is still growing, still robust. There still seems to be a strong appetite for growing the adoption of more haptics in their devices to stay competitive and take advantage of this richer content that’s now been enabled and out there.

David, I’d add that as far as the split between fixed and variable, we’ve got some customers in China who are in fixed structures and some who have variable relationships. And we generally will look to maximize the benefit to us and to the customer in doing that. So in other words, we can – we’re flexible about that. We’ll do either structure if all of the pieces makes sense. We’ve got a renewal coming up with Gionee at the end of September. They are on a fixed basis right now. Were we to move to a variable relationship with them – of course they’re shipping a lot more phones than they were when we signed the fixed deal. But comparably if we were going to do a fixed structure with them as their renewal that would be based on their larger volume. So we should capture similar economics overall regardless of structure. Other OEMs like Huawei are doing very well. I think you mentioned Huawei. They’re on track to sell over 100 million phones this year and so to the extent that we’re building relationship with them, obtaining more design wins for a particular product, that should really benefit us quite a bit. So we’re excited by China. We’re seeing it generally growing sometimes at the expense of other markets. And whether we end up with fixed or variable relationships, we think it should become an increasingly important part of our business.

Thanks. That’s all from me, guys. Thanks.

Thanks, David.

We’ll take our next question from Mike Crawford with B. Riley & Co.

Hi, Mike.

Hi. Just to continue on that theme with Gionee and Huawei, so Huawei clearly is benefitting you giving their increasing units. And so the variable royalties that you’ll recognize from Huawei in the September quarter, is that for handsets that shipped in the June quarter?

That’s correct, although do keep in mind that we’re not in large numbers of different models at this point. We started out with them and they’re on our sixth phone and from there we’ve been working to build the base. But it’s an ongoing process, much the way we had with LG and Samsung some years ago. So we’re seeing their phones that were in selling very well, but it’s not necessary matching the overall growth profile of Huawei one for one.

Okay. And then with Gionee, as you mentioned that license ends at the end of September. So given your guidance this year of a ceiling of 60 million revenue for the year, does that assume that Gionee continues at a slightly higher rate as you were just implying in your earlier discussion of either enter into a variable rate contract or a higher fixed rate contract, or are you being more conservative in your guidance and assuming that Gionee goes away?

I think the range that we’ve provided, 58 to 60, captures kind of the risk and the opportunity that we have with Gionee. It will only have an incremental difference for a short period of time, a few months. And so we’ll go into that renegotiation discussion as we always do trying to maximize the value for Immersion. But the range that we have provided we think captures the risk and the reward of capturing more from Gionee.

And so just to be clear, whatever that company ships in the September quarter that will or won’t affect December quarter revenues or you need a new license in place to recognize revenue in December or was it actually in March where you would need a new license in place?

We have a fixed relationship right now. So what they ship in the September quarter we will recognize under that fixed relationships. What happens to us in Q4 is that if we have a fixed agreement, we would presumably often if we need, we’ll start picking up at the new fixed rate for that fourth quarter. I think what you’re pointing to is if we transition to a per unit, we’ll actually see a lag time and you wouldn’t see revenue from the customer in Q4 because the units that they would have shipped in that quarter wouldn’t be reported to us until Q1.

Okay. Thank you. That’s helpful. And then I think Vic you mentioned that you are in active discussions with unlicensed OEMs, which the big one we would think is Apple. Apple is selling a watch that appears to use haptics effects to create things. Does this situation where you’re waiting for more intense haptics, more featured haptics to come in a subsequent handset from Apple or do you think we could see some kind of an agreement between the two parties sooner?

Well, I don’t know that there’s any update I can provide you on the Apple front. I think things are as they have been in the past. They are beginning to invest in haptics. They’ve included it in a number of products and we have a strategy around that engagement. And so I think when we have something to share, we’ll be able to share with you. At this stage, I’d say our current position is similar to what it’s been in the past.

Okay. Thank you very much.

Thanks, Mike.

[Operator Instructions]. We’ll take our next question from Mark McMahon with LPL Financial.

Congratulations on a great quarter, guys.

Thanks, Mark.

So just a quick question, it had to do with the virtual reality handset that you mentioned earlier. And you did bring up the fact that it looks like they’re going to be using the Xbox controller. Could you speak to the licensing agreement that you have with Microsoft and whether or not they’re providing that to Rift without you having any part of negotiations or say so? How does that exactly work?

Sure. Microsoft is a unique agreement that we have. We’ve provided them with a royalty-free license that’s perpetual. So I would not anticipate generating any more revenue from Microsoft than we have already reported years ago. That license just covers Microsoft branded products and so to the extent that you have products that include our technology or IP that are not Microsoft branded, then we would expect those to become royalty bearing. So we would think that other OEMs that launch wearables or game controllers or other similar type devices of which there’s a large ecosystem opportunity for us, we would expect all those to be royalty bearing.

Okay, and specifically with the Oculus Rift, Facebook I guess from what you’re saying is going to market this as an Xbox branded controller that’s compatible and so thereby it’s not a Facebook product that you could go after them for?

Well, I don’t know if it’s – what the product is going to ultimately be. If it’s compatible that doesn’t affect the need for a license. So this would have to be a product that was branded by Microsoft in order for it to be covered under the existing Microsoft agreement. So if there were controllers produced by other companies that were not Microsoft branded, then they would be available for licensing and we would pursue licensing discussions with any of those companies.

Okay. So just to be absolutely clear, there is no discussions with you in regards to Oculus Rift at this point?

I wouldn’t say that there are no discussions. I’m simply saying that if every controller is branded and sold under the Microsoft brand, then it may not be a great revenue opportunity for us. But to the extent that Microsoft is producing and selling Microsoft branded controllers in conjunction with the Oculus Rift, that would not be a revenue opportunity for us. But to the extent that there were private labeled products or products built by other companies like Logitech or Sony or any of the other gaming companies or OEMs that produce wearables, all of those regardless of if they’re used on the Oculus Rift or built around some standard, if they’re not Microsoft branded then they would not fall into the Microsoft agreement and therefore they would be an opportunity for us to license to that company.

Okay. Thanks for the clarification.

Okay, Mark.

At this time, it appears there are no further questions in the queue. I would like to turn the call back over to management for any additional or closing remarks.

Well, thank you for being on the call with us today. And as always, we look forward to continuing to update you again on our next quarterly call. With that, have a good day please.