Immersion Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Immersion is an intellectual-property and technology licensing company focused on haptics, reporting as one segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $11.831 | $10.201 | $27.267 | $24.061 |
| Royalty and license revenue | $11.602 | $9.980 | $26.759 | $23.629 |
| Operating income | $0.117 | $0.448 | $3.071 | $2.142 |
| Net income | $0.169 | $0.466 | $2.033 | $2.153 |
| Diluted EPS | $0.01 | $0.02 | $0.07 | $0.07 |
| Operating margin | 1.0% | 4.4% | 11.3% | 8.9% |
| Net margin | 1.4% | 4.6% | 7.5% | 8.9% |
Cost of revenue was $0.101 million in Q2 and $0.221 million for the six months. The resulting gross margins were approximately 99.1% and 99.2%, respectively. The company reported no product sales in 2014, having discontinued product sales at the end of 2013.
For the six months, operating cash flow was $9.689 million, versus $14.365 million in 2013. Investing activities used $0.635 million; financing activities used $5.973 million, including $6.991 million of share repurchases. Cash and cash equivalents increased to $17.217 million from $14.136 million at year-end. Cash, cash equivalents, and short-term investments totaled $74.197 million.
At June 30, current assets were $84.423 million and current liabilities $23.565 million, a current ratio of approximately 3.6. Total liabilities were $34.503 million, including deferred revenue; the filing does not report interest-bearing debt. Deferred revenue, current and long-term combined, was $28.482 million. Stockholders’ equity was $79.660 million.
Changes and management commentary
- Revenue increased 16% in Q2 and 13% for the six-month period, driven by royalty and license revenue. Gaming was a key growth contributor, including royalties associated with new consoles such as Sony PlayStation 4.
- Six-month gaming revenue increased 63%; medical and automotive revenue also grew. Mobility revenue declined 4% for the six months, including an approximately $2 million prior-year overlapping receipt of tail and new license revenue that did not recur.
- Q2 operating income and net income fell year over year despite revenue growth. Management attributed this mainly to higher operating expenses, particularly legal and professional costs. Six-month net income also declined, primarily because the income-tax provision rose to $1.175 million from $0.027 million.
- General and administrative expense rose 28% in Q2, including higher patent-related legal costs and litigation expenses. Stock-based compensation was $2.927 million for the six months, up from $2.189 million.
- Operating cash flow declined year over year, with a $6.121 million contribution from increased deferred revenue partly offset by lower accrued compensation and other liabilities, and higher receivables.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects royalty and license revenue, particularly from mobility and gaming, to remain the main revenue source; development and services revenue is not expected to be significant.
- Management expects sales and marketing expense to increase in 2014 and anticipates significant further R&D investment, including in its content and media initiative. It does not expect meaningful revenue from that initiative in 2014.
- The company said available cash and investments should meet working-capital needs for at least 12 months. 2014 capital expenditures were expected to be less than $2 million. The share repurchase authorization had approximately $12.4 million remaining.
- Key risks include reliance on licensing renewals and a limited number of customers: Samsung represented approximately 37% of six-month revenue and another customer 11%. Gaming and mobility revenue may fluctuate with licensee product sales, product launches, and seasonality.
- Patent enforcement and litigation may require significant spending. The HTC patent case remained active, with a claim-construction and dispositive-motion hearing scheduled for November 2014 and trial for March 2015. A separate securities-litigation appeal was under submission after oral argument in February 2014. The company said it could not predict outcomes or estimate potential liability in the patent matter.
- Unrecognized tax benefits were approximately $1.7 million, including interest; $0.268 million would affect the effective tax rate if recognized. Management expected reserve releases and a tax benefit from expiring statutes of limitations within the next six months. It expected limited cash-tax impact from using tax attributes.
- The company retrospectively changed its accounting for external patent-related costs in 2013: internally developed patent and trademark costs are now expensed as incurred rather than capitalized. Management was evaluating the impact and adoption method for new revenue standard ASU 2014-09, effective for the company in 2017.
Most important facts for investors to verify
- Whether gaming and mobility license revenue, key customer relationships, and licensing renewals remain durable, given revenue concentration and the dependence on licensee product shipments.
- How legal and patent-enforcement spending develops, and the outcomes of the HTC litigation and securities-litigation appeal.
- Whether expense growth, especially legal, sales and marketing, R&D, and stock-based compensation, continues to pressure quarterly profitability.
- The conversion and timing of deferred revenue into recognized revenue, and the reasons operating cash flow fell from the prior-year period.
- The effective tax rate, use of tax attributes, and expected resolution of uncertain tax positions.