Immersion Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 5, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Immersion develops and licenses haptic technology and reported as a single operating segment, following its 2010 medical-product divestiture.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $30.6 million | $31.1 million |
| Royalty and license revenue | $26.9 million | $23.3 million |
| Product sales | $2.6 million | $6.8 million |
| Operating income (loss) | $(0.1) million | $(4.8) million |
| Net income (loss) | $(1.6) million | $(5.9) million |
| Operating cash flow | $2.4 million | $(1.8) million |
| Cash, cash equivalents and short-term investments | $56.3 million | $61.2 million |
| Working capital | $49.5 million | $56.8 million |
- Royalty and license revenue was 87.9% of FY2011 revenue, up from 74.7% in FY2010. Mobile communications accounted for 44% of revenue and PC/console gaming for 31%.
- Reported cost of revenues was $1.3 million, implying gross profit of approximately $29.4 million and a 96% gross margin on that cost measure. Operating margin was approximately negative 0.2%.
- At year-end, total liabilities were $23.1 million, including $17.3 million of current and long-term deferred revenue. The filing reports no debt balance. Accumulated deficit was $106.2 million.
- Investing cash outflow was $3.3 million and financing cash outflow was $4.0 million, including $6.5 million of share repurchases. The company repurchased 1.14 million shares during 2011.
Changes versus FY2010
- Total revenue declined 2%, as a 16% increase in royalty and license revenue was more than offset by a 62% decline in product sales, primarily following the divestiture of medical simulation product lines.
- Gaming royalty and license revenue increased 25%; mobility increased 21%, reflecting higher licensee shipments and wider adoption. The company also recorded approximately $820,000 from customer adjustments to previously reported amounts.
- Operating loss narrowed substantially as expenses declined following the divestiture, headcount reductions and other cost savings. General and administrative expense fell 16%, while R&D expense fell 4% to $8.4 million.
- Operating cash flow improved by $4.2 million, helped in part by a $3.3 million change in prepaid expenses and other current assets, primarily reflecting a tax refund. Cash and investments declined by $4.9 million.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expects royalties to remain the principal revenue source in 2012, product sales to remain low, R&D investment to increase, and litigation costs to rise as it enforces its IP rights.
- Management said cash resources should cover working-capital needs for at least 12 months. It anticipated 2012 capital expenditures below $1.5 million and patent-cost capitalization of approximately $3.5 million. The board-authorized repurchase program had $25.2 million remaining.
- Revenue is concentrated: two customers represented 20% and 12% of FY2011 revenue. Customer identities are anonymized in the filing’s customer-concentration note. Licensing revenue also depends on licensee product volumes and timing, which Immersion does not control.
- Immersion reported a $1.8 million income-tax provision despite $151,000 of pretax income from continuing operations; the unusually high effective rate reflected foreign withholding taxes and other tax items. Deferred tax assets were fully offset by a valuation allowance.
- In February 2012, Immersion sued Motorola over alleged infringement of six patents; in March it added HTC and related entities in ITC proceedings and filed a separate HTC district-court complaint. Outcomes and potential financial effects are uncertain. A securities class action dismissal was appealed in January 2012; derivative litigation remained stayed.
- Other key risks include dependence on a limited number of licensees, competition and alternative technologies, patent validity and enforcement, long design-win and product cycles, and market adoption. The CEO was also serving as interim CFO while the company sought a permanent CFO.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether royalty growth, particularly in mobility and gaming, continues to offset declining product sales and customer concentration.
- Cash generation, investment liquidity, deferred revenue recognition, and the effect of ongoing repurchases and litigation spending on cash reserves.
- Developments and potential costs or outcomes in the Motorola/HTC patent cases, the securities-litigation appeal, and the stayed derivative action.
- The basis and sustainability of the FY2011 tax provision, including foreign withholding taxes and the valuation allowance on deferred tax assets.
- Execution of 2012 spending plans and any formal outlook updates; this filing provides qualitative expectations, not numerical guidance.