Immersion Corporation — FY2013 Form 10-K
Business context and reporting period. This is an annual report for the year ended December 31, 2013, not a standalone quarterly filing. Immersion develops and licenses haptic software and intellectual property for mobile and consumer electronics, gaming, automotive, medical, and other markets. It reported as one operating segment and, by December 2013, had ceased selling manufactured products and focused on licensing.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $47.47 million | $32.17 million |
| Royalty and license revenue | $46.15 million | $28.99 million |
| Operating income (loss) | $3.60 million | ($6.73 million) |
| Net income (loss) | $40.16 million | ($7.20 million) |
| Diluted EPS | $1.37 | ($0.26) |
| Operating cash flow | $21.15 million | ($7.39 million) |
| Cash, cash equivalents and short-term investments, year-end | $71.11 million | $43.55 million |
| Working capital, year-end | $64.25 million | $38.38 million |
Revenue increased 48%; royalty and license revenue rose 59%. Operating margin was 7.6%, compared with a 20.9% operating loss margin in 2012. Net income substantially reflects a $36.5 million income tax benefit, principally from a partial release of deferred-tax valuation allowances; it is not a measure of recurring operating earnings. FY2013 gross profit was $46.? million (revenue less $0.46 million cost of revenue); the filing reports gross profit of approximately $46.?? million in its annual statements, while quarterly data show margins near 99%. The annual statement does not present a gross-profit line.
FY2013 Q4 revenue was $12.07 million, operating income $0.65 million, and net income $37.40 million, including a $36.77 million tax benefit. FY2012 Q4 revenue was $8.86 million and net loss $0.40 million.
At year-end, total liabilities were $29.90 million, including $22.36 million of current and long-term deferred revenue. The balance sheet lists no borrowings. Cash generation and the increase in investments supported liquidity; the company said available cash would meet working-capital needs for at least 12 months. Operating cash flow also benefited from an $8.21 million increase in deferred revenue.
Material changes versus prior periods
- Mobility revenue drove growth: mobile royalty and license revenue increased 121%, and Samsung accounted for 47% of total FY2013 revenue, versus 24% in FY2012.
- Gaming, automotive, and medical royalty and license revenue also increased; gaming benefited partly from new console products, including PlayStation 4.
- Product sales fell 95% to $0.11 million as the company exited Virtual IV manufacturing and discontinued product sales. Royalty and license revenue rose to 97.2% of total revenue, from 90.1%.
- Sales and marketing expense increased 38% to $9.34 million, and R&D expense increased 29% to $10.88 million. Management attributed the increases principally to staffing and investment initiatives.
- The company retrospectively changed its accounting for external patent-application costs from capitalization to expensing. Restated FY2013 income increased $3.9 million from the accounting change; FY2012 and FY2011 losses increased $1.6 million and $1.8 million, respectively. Comparatives in the filing reflect the change.
Outlook, risks and unusual items
- Management expected royalty and license revenue, particularly mobility, to remain the principal revenue source in 2014. It expected higher sales and marketing and R&D spending, and no meaningful revenue from the content and media initiative in 2014. No numerical revenue or earnings guidance is provided.
- Customer concentration is a major risk: Samsung generated 47% of FY2013 revenue. Revenue is also exposed to license renewals, licensee shipment volumes, product adoption, and royalty-reporting timing.
- Patent litigation and reexaminations create uncertainty. The Motorola matter was settled; the HTC patent case remained pending, with trial scheduled for March 2015. The filing states outcomes cannot be predicted.
- The tax benefit depends on management’s assessment that certain deferred tax assets are realizable. The company retained valuation allowances on other tax assets and expected to use net operating losses to limit near-term cash taxes.
- Microsoft holds a royalty-free, perpetual, irrevocable patent license under an existing agreement, so Immersion expects no further Microsoft royalties under that agreement, including for Xbox One.
- The company had $19.4 million remaining under its authorized share repurchase program but made no repurchases in 2013. Planned 2014 capital expenditures were less than $2 million. Operating lease commitments totaled $2.7 million.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether Samsung’s renewed license and the resulting 47% revenue concentration are sustainable, and how much revenue is fixed versus shipment-based.
- How much of FY2013’s reported profit reflects the nonrecurring tax-allowance release, and the assumptions supporting deferred-tax-asset realization.
- Current status and potential financial impact of the HTC litigation and related patent reexaminations.
- Whether operating cash flow remains positive after deferred-revenue movements and higher planned operating investment.
- Effects of the retrospective patent-cost accounting change when comparing reported results with earlier filings.