Immersion Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context
Immersion is a haptics technology licensing company. It licenses patents and software, and provides related tools and technical services, primarily in mobility, gaming, automotive, and medical markets. It reported one operating segment and held more than 2,100 issued or pending patents worldwide. Approximately 97% of FY2015 revenue came from royalties and licenses.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $63.4 million | $52.9 million |
| Operating income | $4.7 million | $6.0 million |
| Net income | $2.9 million | $4.1 million |
| Diluted EPS | $0.10 | $0.14 |
| Operating cash flow | $10.0 million | $0.3 million |
- Revenue increased 20% year over year; royalty and license revenue rose 19% to $61.7 million. Operating margin was 7.4%, down from 11.2%; net margin was 4.5%, down from 7.8%.
- Variable royalties increased to $29.8 million from $21.6 million; fixed-payment license revenue rose to $31.9 million from $30.2 million. The latter included a non-recurring $2.0 million completed-contract fee. Development and service revenue was $1.7 million, including a non-recurring $0.6 million fee.
- Costs and expenses increased 25% to $58.7 million. Management attributed the increase principally to higher compensation and benefits, legal and professional fees, and consulting and outside services. R&D expense rose 25% to $14.8 million.
- Net income declined despite higher revenue, principally because expenses increased by $11.7 million, partly offset by higher gross profit and a lower tax provision. FY2014 included a $2.2 million tax provision; FY2015 provision was $1.6 million. FY2013 net income of $40.2 million included a substantial tax benefit from releasing part of the deferred-tax valuation allowance and is not directly comparable.
- Fourth-quarter revenue was $16.6 million versus $13.6 million a year earlier; net income was $1.1 million versus $1.0 million.
- Cash, cash equivalents, and short-term investments totaled $64.9 million at year-end, up from $57.4 million. Working capital was $53.7 million; total liabilities were $18.8 million, including $9.2 million of deferred revenue. The balance sheet reports no borrowings. Operating cash flow was $10.0 million; capital expenditures were $4.4 million.
- Management stated that available cash and investments should meet working-capital needs for at least 12 months. It expected 2016 capital expenditures below $1.0 million. No cash dividends were anticipated.
Material changes and outlook
- Mobility remained the largest market at 62% of revenue, followed by gaming at 24%, automotive at 7%, and medical at 7%. Samsung represented 32% of FY2015 revenue, down from 38% in FY2014; two other customers represented 18% and 14% each.
- Samsung’s agreement expired on December 31, 2015. Management cited renewal timing and uncertainty as potential sources of revenue decline; the filing does not establish the renewal outcome.
- Management expected royalties and license fees, particularly from mobility, to remain the principal revenue source in 2016. It warned that gaming revenue could be affected by several gaming-patent expirations in 2015. It did not provide specific revenue or earnings guidance.
- The company reorganized its international corporate structure and transferred certain IP rights to a foreign subsidiary, aiming to reduce its effective tax rate. The expected benefit depends on business results and acceptance by tax authorities; the transfer also contributed to FY2015 tax expense.
- In February 2016, Immersion filed patent-infringement complaints against Apple, AT&T, and AT&T Mobility concerning specified iPhone and Apple Watch products. The outcome is uncertain, and litigation may be costly.
- Immersion settled its HTC patent litigation in 2015 for undisclosed compensation and a license, while preserving an appeal of a ruling invalidating three patents. The appeal outcome could affect enforceability and future licensing revenue.
- Key risks include customer and geographic concentration (Korea generated 46% of revenue), dependence on license renewals and licensee product sales, patent challenges and expirations, litigation costs, competing or internally developed haptics, and uncertain adoption of newer content offerings. Management said its mobile content development kits had not generated revenue by year-end and did not anticipate meaningful related revenue in 2016.
Investor verification priorities
- Check the status and economics of the expired Samsung agreement, given Samsung’s 32% revenue share and the filing’s stated renewal uncertainty.
- Review subsequent developments in the Apple/AT&T litigation and the appeal concerning the three patents invalidated in the HTC case.
- Assess whether FY2015 revenue growth is repeatable, excluding the disclosed non-recurring license and service fees, and monitor the effect of expired gaming patents.
- Reconcile operating cash flow with working-capital movements, including deferred revenue, prepaid taxes, and the reported tax-related changes.
- Monitor realization of tax-reorganization benefits, uncertain tax positions of $6.3 million, and customer and country concentration.
The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of December 31, 2015.