Immersion Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Immersion licenses haptic technology and provides related software and services. Unless noted, figures are in millions of dollars.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8.6 | $11.9 | $100.1 | $28.1 |
| Operating income (loss) | $(5.2) | $(5.4) | $56.6 | $(33.2) |
| Net income (loss) | $(4.6) | $(5.3) | $57.5 | $(33.0) |
| Diluted EPS | $(0.15) | $(0.18) | $1.83 | $(1.13) |
- Q3 revenue fell 28% year over year; operating expenses declined 21% to $13.7 million. Lower expenses and higher interest and other income helped reduce the quarterly net loss.
- For the first nine months, reported revenue rose 256%, driven principally by fixed-fee license revenue. This comparison is substantially affected by adoption of ASC 606, not solely by underlying business growth.
- Under the prior revenue standard, ASC 605, nine-month 2018 revenue would have been $25.4 million and net loss $17.2 million, versus revenue of $28.1 million and net loss of $33.0 million in 2017. ASC 606 increased reported nine-month revenue and income by $74.7 million versus ASC 605.
- Reported nine-month operating margin was 56.6%; on the ASC 605 comparison basis, the operating loss was $18.0 million. The reported profit therefore should not be treated as a straightforward measure of recurring operating performance.
- Cash and cash equivalents were $112.6 million, with short-term investments of $17.8 million, totaling $130.5 million at September 30, up from $46.5 million at year-end 2017. Current assets were $139.5 million and current liabilities $13.7 million. No borrowings are shown on the balance sheet.
- Operating cash flow was $75.5 million for the nine months, versus cash used of $42.1 million in 2017. The 2018 figure includes a $22.7 million increase in deferred revenue; ASC 606 adoption also affected working-capital movements. Investing activities provided $4.2 million and financing activities provided $8.2 million, including $8.0 million from stock-option exercises.
Changes, accounting, and business commentary
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method; prior-year periods were not restated. Fixed-fee license revenue may be recognized at contract inception for existing patent rights, while revenue for evolving portfolio rights is recognized over time. Per-unit royalties are recognized in the period of underlying sales, requiring estimates and subsequent true-ups.
- Q3 royalty and license revenue declined 27% to $8.5 million. Fixed-fee license revenue fell 37%, partly because a nonrecurring mobility license fee was recorded in Q3 2017; new customer fees, including Fitbit, partly offset the decline. Per-unit royalties decreased 13%.
- Nine-month reported fixed-fee license revenue was $82.0 million. On the ASC 605 basis, total revenue declined year over year, reflecting lower shipments among mobility, medical, and gaming customers. Management expects license revenue to vary with the timing of new agreements and royalties to fluctuate with customer shipments; the elimination of the reporting lag shifts expected holiday-sales seasonality to Q4.
- Sales and marketing, R&D, and G&A expenses declined year over year, reflecting the 2017 restructuring, lower headcount, and reduced litigation expense. The restructuring eliminated about 56 positions, or 41% of the workforce; no new restructuring actions were reported in the quarter.
- Management said existing cash, cash equivalents, and short-term investments should cover working-capital needs for at least 12 months. It expected 2018 capital expenditures below $1.0 million. No quantitative revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Revenue recognition depends on estimates of licensee sales and allocation of contract prices between performance obligations. Q3 included a negative $0.3 million royalty true-up. Contract assets totaled $11.1 million, including $7.1 million current and $4.0 million noncurrent; management reported no impairment evidence for the quarter.
- ASC 606 increased deferred revenue and altered the timing of reported results. At September 30, deferred revenue totaled $36.1 million. The company expects to recognize $36.1 million relating to future performance obligations under fixed-fee licenses, including $14.0 million over one to three years and $22.1 million over more than three years.
- Samsung’s arbitration seeks approximately $6.9 million plus interest and costs over Korean withholding taxes and penalties. Immersion disputes liability and considers a material charge remote, but the outcome was pending. LG also sought reimbursement for Korean withholding taxes; the company disputes the claim.
- Patent litigation against Samsung and Motorola remained ongoing, with related patent-validity challenges. Apple and Fitbit disputes were settled during 2018. Litigation costs, patent outcomes, and the ability to secure or renew licenses remain material business risks.
- One customer represented more than 10% of nine-month 2018 revenue. Management cited risks from customer concentration, licensing renewals, patent enforcement, market volatility, and the interim CEO position. The company maintained a $37.6 million valuation allowance against certain deferred tax assets.
Important facts for investors to verify
- Separate ASC 606 timing effects from underlying revenue trends; review the ASC 605 comparison and future license-signing cadence.
- Assess the sustainability of operating cash flow, including deferred-revenue movements, and monitor the size and recoverability of contract assets.
- Track royalty trends by customer and market, customer concentration, and the impact of Samsung’s unrenewed license relationship.
- Follow the outcomes of Samsung and Motorola litigation, Samsung’s tax arbitration, and LG’s tax claim, including any changes in management’s assessment.
- Review future expense levels after restructuring, stock-based compensation and dilution, and any updates to cash-use plans or capital allocation.