Immersion Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Immersion develops and licenses patented haptic technology and software. The company reports as one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $16.2 million | $11.8 million | $32.5 million | $27.3 million |
| Operating income | $2.2 million | $0.1 million | $2.1 million | $3.1 million |
| Net income | $1.6 million | $0.2 million | $1.5 million | $2.0 million |
| Diluted earnings per share | $0.06 | $0.01 | $0.05 | $0.07 |
| Operating margin | 13.7% | 1.0% | 6.6% | 11.3% |
Q2 revenue rose 37% year over year, principally from mobility and automotive licensees. Six-month revenue grew 19%. Royalty and license revenue was $15.9 million in Q2 and $32.0 million for the half-year; development, services and other revenue was comparatively small. Q2 operating income improved substantially, but first-half net income fell as higher expenses outweighed revenue growth.
Operating expenses increased 20% for the first half to $30.4 million, including higher compensation and headcount, sales and marketing investment, and professional and licensing-related legal fees. Q2 included a $2.0 million non-recurring license fee from a completed contract. Six-month variable royalty revenue was $14.9 million versus $11.4 million a year earlier; fixed-payment license revenue was $17.1 million versus $15.3 million.
Cash, liquidity and capital
- Cash, cash equivalents and short-term investments totaled $71.6 million at June 30, 2015, up $14.2 million from year-end 2014. Cash and equivalents were $52.6 million and short-term investments $19.0 million.
- Six-month operating cash flow was $16.7 million, compared with $9.7 million in 2014. Deferred revenue increased $7.9 million, mainly from customer upfront payments.
- Investing cash flow was $20.7 million, primarily reflecting $29.0 million of investment maturities; capital expenditures were $3.3 million. Financing cash flow was $0.9 million.
- Current assets were $87.7 million and current liabilities $25.4 million. No borrowings or debt balance is shown in the balance sheet presented.
- Stockholders’ equity was $82.0 million; accumulated deficit was $81.3 million. The company made no share repurchases in the first half; $34.4 million remained authorized under its repurchase program.
Changes, outlook and risks
- Mobility and automotive revenue increased; gaming and medical revenue declined for the first half. Asia represented 68% of first-half revenue, versus 63% a year earlier.
- Samsung accounted for approximately 31% of first-half 2015 revenue, and two other customers accounted for 19% and 14%, respectively, creating significant customer concentration.
- Management expected royalty and license revenue, particularly from mobility, to remain the main revenue source. It expected sales and marketing and R&D spending to increase, forecast 2015 capital expenditures below $5.0 million, and believed available liquidity would cover working capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- An international corporate reorganization, expected to be completed by December 2015, may reduce the share of pretax income subject to the U.S. federal statutory rate; benefits depend on tax-authority acceptance and other factors. The Q2 tax provision included a discrete benefit related to the reorganization. Management expected limited cash tax impact in 2015 through use of tax attributes.
- Immersion settled its HTC patent litigation and licensing dispute in March 2015 for undisclosed compensation and license payments, while preserving its right to appeal a ruling invalidating three patents. The appeal was pending at filing. Patent enforcement costs, litigation outcomes, patent expirations, licensing renewals, and fluctuations in licensee product sales remain material risks.
- Management cited no material change to previously disclosed critical accounting policies. Adoption of the new revenue standard was scheduled for January 1, 2018; the impact was still under evaluation. Disclosure controls were reported effective, with no material change in internal controls during the quarter.
Investor verification priorities
- Confirm the sustainability of revenue growth, particularly the contribution of the one-time $2.0 million license fee and royalty rates and shipment volumes.
- Assess exposure to major customers, especially Samsung, and to mobility and Asia-related revenue concentration.
- Track the Federal Circuit appeal concerning the three patents invalidated in the HTC matter, the settlement’s undisclosed economics, and ongoing IP litigation costs.
- Verify whether the international restructuring delivers expected tax benefits and monitor uncertain tax positions, including $1.8 million of unrecognized tax benefits.
- Monitor expense growth, deferred-revenue conversion, and cash generation; first-half net income declined despite higher revenue.