Immersion Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Immersion develops and licenses haptic technology and intellectual property, primarily for mobility, gaming, automotive, and medical markets. Its hybrid model combines technology, services, and IP licensing.
Financial performance and position
- Q3 revenue: $26.3 million, up 84% year over year. Royalty and license revenue was $26.0 million; development, services, and other revenue was $0.3 million.
- Q3 earnings: Operating income was $10.1 million and net income was $7.0 million, or $0.24 per diluted share, versus $1.3 million and $0.2 million, or $0.01 per diluted share, respectively, in Q3 2015.
- Nine-month results: Revenue was $47.8 million, up 2%. Operating loss was $4.1 million and net loss was $1.2 million, or $0.05 per share, compared with operating income of $3.4 million and net income of $1.7 million, or $0.06 per share, in the prior-year period. The 2016 net loss included $0.6 million of income from discontinued operations.
- Margins: Q3 operating margin was about 38%, compared with about 9% a year earlier. Nine-month operating margin was about negative 8%, versus about 7% in 2015. Q3 results included a nonrecurring license fee, so they are not a straightforward indicator of recurring performance.
- Cash flow and liquidity: Nine-month operating cash flow was $27.5 million, compared with $12.3 million in 2015. Cash, cash equivalents, and short-term investments totaled $94.9 million at September 30, up from $64.9 million at year-end 2015. Operating cash flow benefited substantially from a $25.9 million increase in deferred revenue.
- Balance sheet: Total liabilities were $45.9 million, including $35.1 million of deferred revenue. The filing presents no debt balance. Accumulated deficit was $81.2 million. Management said available cash and investments should meet working-capital needs for at least 12 months; 23% of the balance was held by foreign subsidiaries and subject to repatriation tax effects.
Material changes and unusual items
- Q3 revenue included a $19.0 million nonrecurring Samsung fee for product life-cycle wind-down rights. Immersion received the payment in July and recognized it as license revenue.
- Nine-month revenue was nearly flat despite the Samsung fee: mobility revenue was affected by lower recurring license revenue and shipments, while medical revenue benefited from a separate $3.0 million nonrecurring fee.
- General and administrative expense rose 45% to $30.7 million for the nine months, principally because litigation expense increased $7.7 million. Q3 G&A rose 55% to $9.7 million.
- The company received a final $1.0 million payment related to its 2009 sale of the 3D product line, recording $0.6 million of discontinued-operations income after tax.
- Deferred revenue increased materially, including long-term deferred revenue of $27.5 million at September 30 versus $2.5 million at December 31, 2015; these amounts are generally recognized over license terms.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects royalty and license revenue to remain the primary revenue source, and expects 2016 sales and marketing spending to increase and G&A spending to remain significantly higher than the prior year due to IP protection and litigation.
- Management expects gaming royalties could be affected by gaming patents that expired in 2015 and expects medical revenue to become a smaller share over time. Revenue is subject to timing of license agreements, licensee product shipments, royalty reporting, and seasonal patterns.
- Samsung accounted for about 40% of nine-month revenue. The company had not renewed a Samsung license for products released after December 31, 2016; it cautioned that future Samsung revenue was uncertain and noted the Samsung Note 7 recall.
- Litigation with Apple and AT&T Mobility was ongoing, with ITC investigations and related patent challenges. Apple filed multiple inter partes review petitions; outcomes were uncertain. The company also reported ongoing Sony arbitration matters, including an appeal of a favorable award concerning Japanese controller royalties.
- Other notable exposures include $6.2 million of unrecognized tax benefits, of which approximately $2.3 million could be payable in cash, and customer concentration, patent enforceability, license renewals, and dependence on licensees’ commercial success. Management said routine legal matters were not expected to materially affect financial condition, results, or liquidity, but litigation outcomes are inherently uncertain.
Investor verification points
- Separate recurring Samsung royalties and license revenue from the $19.0 million wind-down fee; verify whether a new Samsung agreement was reached for post-2016 products.
- Track customer concentration, including Samsung’s contribution, and the effects of the Note 7 recall on licensee shipments and royalties.
- Monitor Apple-related ITC, court, and patent-review proceedings, as well as Sony arbitration and appeal developments, including resulting legal costs.
- Assess the sustainability of operating cash flow: the nine-month increase was largely supported by deferred-revenue billings rather than reported net income.
- Review trends in G&A and litigation spending, the recognition schedule for deferred revenue, and tax benefits and uncertain tax positions.