Immersion Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 7, 2012. Financial amounts below are in millions of dollars unless stated otherwise. Immersion develops and licenses haptic technologies and products, with one reportable segment.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7.142 | $6.495 | $23.309 | $22.945 |
| Royalty and license revenue | $6.371 | $5.875 | $21.386 | $20.110 |
| Operating loss | $(2.938) | $(1.042) | $(4.924) | $(0.278) |
| Net loss | $(2.990) | $(1.412) | $(5.364) | $(1.334) |
| Basic and diluted loss per share | $(0.11) | $(0.05) | $(0.19) | $(0.05) |
- Revenue rose 10% in Q3 and 2% for the nine-month period. Royalty and license revenue grew 8% and 6%, respectively. Product sales rose 53% in Q3, mainly on Virtual IV simulator sales, but fell 39% for the nine months.
- Operating loss margin widened to about 41% in Q3 from 16% a year earlier, and to about 21% for the nine months from about 1%. The deterioration principally reflected higher general and administrative expense, including litigation costs.
- At September 30, cash and cash equivalents were $13.9 and short-term investments were $34.0, totaling $47.9 versus $56.3 at December 31, 2011. Current assets were $50.6 and current liabilities $11.3. The balance sheet reports no borrowings or other debt balance.
- Nine-month operating cash flow was $(1.3), versus $2.2 provided in 2011. Investing activities provided $12.0, largely from investment maturities; financing used $4.2, including $5.2 of share repurchases. Cash increased $6.6 to $13.9, while cash plus short-term investments declined.
- Total assets were $67.5, total liabilities $23.1, and stockholders’ equity $44.4. Deferred revenue included $11.0 of long-term balances, of which $10.4 related to Sony Computer Entertainment.
Changes, outlook, and significant matters
- Q3 general and administrative expense increased 80% to $5.750; management attributed approximately $3.0 of litigation expense to the quarter. For the nine months, the category increased 59% to $14.882, including approximately $6.0 of additional litigation expense.
- Management expected royalties and licensing to remain the major revenue source and product sales to remain at reduced levels in 2012; development revenue was not expected to be significant. No specific revenue or earnings guidance was provided.
- Management said cash, cash equivalents, and short-term investments should cover working-capital needs for at least 12 months, while cautioning that intellectual-property enforcement would continue to consume significant resources. Expected 2012 property and equipment capital spending was below $1.5; patent filing and application capitalization was expected below $3.5.
- Four customers generated approximately 53% of nine-month revenue. Gaming royalties declined 15% in Q3 amid a soft console market; mobility, medical, automotive, and chip-related royalties contributed to growth. The nine-month mobility comparison included approximately $0.420 of out-of-period adjustments related to compliance efforts.
- Immersion’s ITC complaint against Motorola and HTC over six patents was under investigation; related Delaware cases were stayed pending the ITC matter. The company said it could not predict litigation outcomes or estimate potential liability. Separate shareholder litigation settlements and intended dismissals were subject to finalization steps described in the filing.
- The company repurchased 581,200 shares for $3.2 in Q3 at an average $5.51 per share; approximately $19.9 remained under the authorized program. Management also cited market adoption, licensee product timing and sales, competition, litigation expense, and macroeconomic conditions as risks.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter. Management cautioned that controls provide reasonable, not absolute, assurance.
Investor verification priorities
- Track litigation developments, including the ITC investigation and related patent claims, and compare subsequent legal costs and outcomes with the company’s estimates.
- Review customer concentration and royalty trends by licensee and market; verify whether the $0.420 mobility out-of-period adjustment affects comparisons.
- Reconcile cash generation and the decline in cash plus investments, including the effects of deferred-revenue recognition, patent spending, and repurchases.
- Monitor whether elevated general and administrative costs persist and whether revenue growth can support a return to operating profitability.
- Confirm the status and finalization of the shareholder settlements and intended derivative-action dismissals described in the filing.