Immersion (IMMR) reported 1Q 2009 results on May 4^th.

Total revenues were $ 7.5 million, including $ 0.5 million related to the discontinued 3D line of business. Net loss for the quarter was $(7.5) million, or $(0.27) per share. Both numbers were worse than consensus ($7.5 million in revenue, excluding the CyberGlove (3D) segment, and a loss of $(0.23) a share).

Shares had closed at $ 4.47, before the conference call, and lost about 10% the following trading day. After a few other negative days, they seem now to be recovering, being in the $4.25 range, as we write this article.

The market obviously did not like the fact that both revenues and bottom line were worse than expected. Let’s see have a closer look:

· The medical segment posted a poor result, with revenues of $ 2.5 million, less than in the 1Q 2008 ($ 3.0 million) and also a sequential decrease from $ 4.3 million in the 4Q 2008. While some seasonality is to be expected in this business segment, it seems that the decision to move the headquarters to California and a few layoffs, also related with the relocation, were a distraction and probably impacted 1Q results negatively.
· The touch segment, on the other hand, delivered a good result, with $ 4.5 million in revenues, although the number, as we explained in our forecast, was impacted by approximately $700,000 of repeating license revenues that were not recognized in the 4Q 2008, due to accounting rules.

Going beyond the actual numbers, the Company achieved a few goals in the quarter:

· Signed an exclusive distribution agreement for its medical simulation products with Gadelius K.K., one of Japan’s prominent distributors of medical devices, with common participation at several medical events foreseen throughout 2009 (see Immersion medical events web page for more info);
· Introduced two new products into the medical segment, including the first-ever haptic medical simulation, Endobronchial Ultrasound with Transbronchial Needle Aspiration (EBUS-TBNA);
· Sold its CyberGlove® (3D) business to a private equity firm to concentrate on two business segments, medical and touch;
· Started cost cut initiatives throughout the business to lower its break-even point and achieve the goal of cash neutrality in the second half of 2009;
· Achieved shipping over 15.3 million haptic enabled mobile phones in 1Q, up from 12.5 million in 4Q of 2008;
· Signed the first two licensees in the semi conductor segment, Leadis and Imagis;
· And finally announced its first licensee in the high-growth robotic surgery market (MAKO Surgical), which means that the Company is going beyond simulators and trying to approach a new market in the medical segment.

The tone of the conference call, in spite of an unimpressive quarter, was quite upbeat. As we discussed in our first article about Immersion, “Can It Bring Great Potential into Actual Revenues?”, the real problem of the Company, now that haptic seems to be gaining more and more popularity, is to understand if (or hopefully when…) Immersion will be able to translate this trend into real revenues. The impression is that the next quarter will still be similar, in results, to the first quarter, while the Company is restructuring to reach significant milestones in the second half of 2009.

After earnings, Immersion CEO and one Director bought a few shares on the open market, which is usually a sign of confidence for the future.

Let’s now have a look at some highlights from the conference call, thanks to Seeking Alpha Immersion 1Q 2009 earnings call transcripts. But first, a different approach to the conference call.

Thanks to Worldle I have generated a “word cloud” of what’s been said on that occasion (excluding, on purpose, management and analysts names) – an unusual approach to underline what’s been discussed the most. Apparently, medical had even more mentions than Touch, and, excluding words like business, quarter or million, cash was one of the most mentioned items – not surprisingly, given today’s economic environment and as the Company set the target to be cash neutral in the second half of the year.

More seriously, a few notes are worth being quoted from the call (emphasis added):

On growth:

· Clent Richardson – CEO
· While Immersion is making operational progress and we are signing a number of exciting deals that bode very well for the future and growth of the company, we fully understand that we must improve our results both on the top and bottom line.
· Our plan is to operate the business with a goal of cash neutrality in the second half of 2009 by lowering each expense line of our business to cross the important break even milestone and then drive for and deliver sustained profitability in 2010 and beyond.
· Immersion is backed by an extremely strong balance sheet ending Q1 with approximately $81 million in cash. We have added further emphasis to our cash preservation plans and will maintain a very strong balance sheet as we exit 2009. I'll note the gross margins increased sharply to 84% in Q1. Maintaining healthy margins is a key element of our go forward financial plan and a focus area for our company.

Demand:

· Clent Richardson
· Demand for our Haptics solutions across the various sectors of our Touch line of business including mobile, gaming, automotive and touch interface products is in fact intensifying.
· Interest in Touch based solutions is greater than ever before and industry trends such as the emphasis on touch and Windows 7, demonstrates just how focuses major OEM's are in creating a touch based product portfolio. And, despite current softness, interest in medical simulation is quite high as well.

On Medical:

· Clent Richardson

· At is evident from the results; our Medical line of business has not met revenue expectations. We believe this is due to a very challenging current macro economic environment, especially domestically. On a seasonal basis, it's important to note that Q1 has been the slowest quarter for our Medical line of business for each of the past four years.

· I am pleased to report that as of today, we are commencing Medical operations based here in San Jose. The time line of this transition has been managed aggressively and effectively to ensure that we have seamless operations for the most important selling month of the quarter, to avoid any unnecessary rent payments and eliminate expenses wherever we can.

· From an expense standpoint, we are reducing head count in Medical from roughly 80 down to 50 full time equivalents and we have taken significant cost of our the business in terms of consultants, temps and contractors.

· International demand for simulation remains strong and we are making progress globally as we continue to add and expand relationships with important distribution partners. As mentioned at the top of the call, one such partnership is an exclusive new distribution agreement with Gadelius K.K., one of Japan's prominent distributors of medical devices and industrial equipment.

· Demand for simulation solutions also remains extremely high in China and on my recent trip there, I observed the construction of a 90,000 square foot stimulation training center outside Beijing. Another 100,000 square foot center was also highlighted in the Wall Street Journal recently, a remarkable illustration for that country and its focus on providing health care to its enormous population.

On Touch:

· Clent Richardson
· The top three handset makers in the world, Nokia, Samsung and LG are all licensees for Immersion's Haptics solutions which are shipping in their high volume touch enabled phones.
· In fact, our partners shipped over 15.3 million hand sets in Q1, up from 12.5 million in Q4 of '08. This means that on a cumulative basis, more than 58 million Immersion enabled hand sets have been delivered to the world wide market.
· we believe that by the end of 2009 we will be designed into approximately 25% of the touch screen phones shipped during this calendar year.
· Last quarter I commented on our strategy of vertically integrating Immersion solutions with semi conductor companies and our progress relative to signing our first two licensees in this area Leadis and Imagis. Not surprising, the integration of Immersion's technology is of substantial interest to a number of chip makers as it allows them to embed and deploy Haptic functionality ubiquitously across a wide spectrum of devices.
· We are engaged in discussions with most of the auto manufacturers in the world and as previously announced two additional 2010 car models have designed in our technology; one from Toyota that is already in the Japanese market and another from a new licensee that will be available later this year.
· While confidentiality agreement preclude us from disclosing progress in this area (consumer and office product sector) at this time, we are working closely with category dominant brands and household name OEM's to bring a number of innovative products to market and will update you as we are able to share more details.

The fact that immersion decided to stop reporting revenues in the touch segment divided by mobility, touch interface and gaming has actually made it more difficult to analyze the trends within these sub-categories. It’s true that the small revenues reported probably do not justify such a detailed analysis.

An interesting quarter overview has also been posted on the Investor Village Message Board by immr_oldie, and is available at this link.

After the conference call, a few other news confirmed some of the positive trends surrounding the Company:

· a new Android OS update introduced touch-screen haptics into Google's mobile phones operating system (it’s worth remembering that Immersion made its technology available for implementation in phones powered by Android:

http://www.youtube.com/watch?v=zpfQISmjmVs

· both Samsung and LG announced having surpassed the 20 million touchscreen handset sales level
· Gartner recently reported 1Q 2009 mobile phones sales, and the smart phones category is the only growing one, with a 12.7 per cent increase from the same period last year. Nokia, Samsung and LG are now the largest producers in this sector, accounting for 61.5 % of the total mobile phone market (all three are Immersion partners).
· Immersion keeps innovating in the field, as noticed by cellodude on the Investor Village Message
Board, who posted a few new patent applications made by the Company, including this one:

Thermal Haptic Effects

[Abstract

A thermal haptic feedback device includes a plurality of cells coupled to a processor. The processor controls each of the cells so that each cell can independently generate heating or cooling effects. Unique haptic effects, such as a simulated wind effect, can be generated by causing some cells to be hot or cold, or changing some of the cells from hot to cold.]

No doubt this could give a new meaning to the text message “I’m hot for you” sent to a mobile phone… jokes apart, Immersion keeps the leading edge as far as innovation in the sector, while management is now required to translate all this into actual products in the market place.

Some highlights from Immersion’s 1Q 2009 10-Q are resumed in this blog entry.