Immersion Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Immersion licenses haptic technology, software and patents, principally for mobile devices, gaming and automotive applications.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $111.0 million | $35.0 million |
| Operating income (loss) | $53.1 million | ($45.4 million) |
| Net income (loss) | $54.3 million | ($45.3 million) |
| Diluted earnings (loss) per share | $1.73 | ($1.55) |
| Operating cash flow | $69.9 million | ($43.8 million) |
| Cash, cash equivalents and short-term investments, year-end | $124.9 million | $46.5 million |
| Working capital, year-end | $120.5 million | $29.0 million |
| Total liabilities, year-end | $46.3 million | $42.3 million |
- Reported gross margin was approximately 99.8%; operating margin was 47.8% and net margin was 48.9%.
- The balance sheet reports no borrowings or debt. Current liabilities were $15.3 million, against current assets of $135.8 million.
- Fourth-quarter revenue was $10.9 million and net loss was $3.1 million. The first quarter supplied most of reported annual revenue and income, reflecting revenue-recognition timing.
Material changes versus the prior period
- Revenue increased 217% year over year, but the comparison is substantially affected by adoption of ASC 606 on January 1, 2018. Under the new standard, fixed-fee license revenue can be recognized largely when an agreement is signed, and per-unit royalties are recognized in the period of underlying sales rather than one quarter later.
- Management attributed $76.6 million of the reported year-over-year revenue increase to ASC 606 adoption: $68.1 million from fixed-fee licenses and $8.5 million from per-unit royalties. On an ASC 605-comparable basis, FY2018 revenue would have been $34.4 million and net loss $22.2 million—not reported revenue of $111.0 million and net income of $54.3 million.
- Apple accounted for 69% of FY2018 revenue; no customer accounted for 10% or more in FY2017. Mobile, wearables and consumer products generated 81% of FY2018 revenue, compared with 48% in 2017. Geographic mix shifted to 77% North America from 22%, with Asia declining to 12% from 63%.
- Operating expenses fell by $22.6 million, including lower legal expense after Apple and Fitbit litigation was settled. The company had restructured in late 2017, eliminating approximately 41% of its worldwide workforce; it reported 64 full-time employees at year-end 2018.
Outlook, risks and unusual items
- Management expected licensing and royalty revenue, particularly from mobility customers, to remain the main revenue source in 2019, but anticipated that timing and structure of new agreements could make 2019 mobility revenue lower than 2018. It also cited gaming patent expirations and uncertainty around contract renewals. No specific 2019 revenue or earnings guidance was provided.
- Revenue is highly concentrated: Apple represented 69% of FY2018 revenue, and management identified dependence on major licensees, renewals and licensee product sales as key risks.
- The company settled its disputes with Apple in 2018 and reached a global settlement with Fitbit. Patent litigation against Samsung and Motorola remained ongoing. In China, three patents asserted against Samsung were ruled invalid; Immersion said it intended to appeal.
- Samsung sought approximately $6.9 million plus interest and costs in arbitration over Korean withholding taxes and penalties. Immersion denied liability and described a material charge as remote, while noting the proceedings were unresolved at the filing date. LG Electronics also sought reimbursement of Korean withholding tax; Immersion likewise considered a material charge remote.
- ASC 606 makes reported revenue more dependent on contract signing dates, estimates of licensee sales and subsequent royalty true-ups. Management disclosed quarterly downward adjustments of $326,000 and $333,000 and an upward adjustment of $189,000 during 2018.
- Operating cash flow benefited from a $21.4 million increase in deferred revenue; the cash-flow improvement should therefore be considered alongside revenue-recognition changes and contract balances. Management said available cash and investments were sufficient for at least 12 months.
- The company reported an accumulated deficit of $98.5 million and maintained a substantial valuation allowance against deferred tax assets. It did not expect to pay cash dividends in the foreseeable future.
Most important facts for investors to verify
- Review the ASC 606 reconciliation and contract asset and deferred revenue balances; distinguish reported results from the ASC 605-comparable figures.
- Assess the sustainability and terms of Apple-related revenue, the concentration of revenue in mobility, and the status of major license renewals.
- Track 2019 revenue against management’s expectation of possible lower mobility revenue, as well as gaming patent expirations and royalty trends.
- Monitor the Samsung and Motorola patent cases, Samsung tax arbitration and appeal, and the related potential cash, legal expense and intellectual-property effects.
- Evaluate cash flow quality, litigation spending, the company’s reduced workforce and the continuing ability to support licensing and technology development.