Immersion Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparison is the three months ended March 31, 2015. Immersion develops and licenses haptic technology and operates as one reporting segment. Figures below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $13.623 million | $16.287 million; down 16% |
| Royalty and license revenue | $13.448 million | $16.012 million; down 16% |
| Operating loss | $4.608 million | $70,000 |
| Net loss | $2.695 million; $0.09 per diluted share | $59,000; approximately break-even per share |
| Operating cash flow | Used $5.856 million | Provided $21.498 million |
| Cash, cash equivalents and short-term investments | $60.806 million at March 31 | $64.931 million at December 31, 2015 |
| Total assets / total liabilities | $105.448 million / $17.430 million | Liabilities were $18.800 million at December 31, 2015 |
Royalty and license revenue represented about 99% of total revenue. Variable, per-unit royalty revenue was $8.5 million versus $8.6 million; fixed-payment license revenue was $4.9 million versus $7.4 million. The company reported a $1.701 million income tax benefit and a 38.7% effective tax rate. Operating expenses totaled $18.231 million; research and development rose 16% and general and administrative expenses rose 22%, while sales and marketing fell 10%. Gross profit before separately presented operating expenses was approximately $13.6 million; the filing does not present a gross-margin percentage.
Liquidity and cash flow
Cash and short-term investments declined by $4.1 million from year-end. Operating cash use reflected the net loss, higher receivables, lower accrued compensation and liabilities, lower deferred revenue, and deferred-tax movements; stock-based compensation was a $2.334 million noncash expense. Investing activities used $10,000 and financing activities provided $1.732 million, principally from option exercises and employee stock purchases. Current assets were $68.259 million and current liabilities $15.472 million, a current ratio of approximately 4.4. No borrowings or debt balance are reported in the presented balance sheet.
Management said available cash, cash equivalents and investments should cover working-capital needs for at least 12 months. It expected 2016 property-and-equipment capital expenditures below $1 million. The company had $34.4 million remaining under its authorized share-repurchase program but made no repurchases in the quarter.
Material changes and management commentary
- Revenue declined mainly because Samsung revenue was absent following expiration of its license agreement on December 31, 2015. Mobility royalty and license revenue fell 60%; increases in gaming and automotive revenue and a one-time $3 million medical license fee partly offset the decline.
- Net loss widened as revenue fell and expenses rose. General and administrative costs increased primarily with legal and professional fees, including preparation for litigation, and compensation and stock-based compensation. The company also reduced headcount while rebalancing employee skills.
- Management expects royalties and license fees to remain the main revenue source. It expects mobility revenue to fluctuate with enforcement outcomes, product launches and mobile OEM demand; it also noted possible 2016 gaming revenue pressure from patents that expired in 2015.
- Management expected sales and marketing and R&D investment to increase in 2016, including investment in content and media. It did not provide a numerical revenue or earnings forecast and said it did not anticipate significant content-and-media revenue in 2016.
- Revenue was geographically distributed 57% in North America, 10% in Europe and 33% in Asia, compared with 36%, 4% and 60%, respectively, a year earlier. Three customers accounted for 24%, 19% and 16% of Q1 revenue; the filing text does not clearly identify those customers in this disclosure.
Legal matters, risks and contingencies
- Samsung: Immersion initiated ICC arbitration seeking payment for continued sales of previously licensed products and other relief. The arbitration was in the arbitrator-selection process; the outcome and any recovery were uncertain.
- Apple and AT&T: Immersion’s February 2016 ITC and Delaware complaints alleged patent infringement by certain Apple iPhones and Apple Watch products. The ITC investigation was underway; the district court case was stayed pending the ITC outcome. Immersion filed additional complaints in May 2016 alleging infringement involving iPhones and MacBooks. These matters were at an early stage and outcomes were uncertain.
- Patent challenges and Sony: A third party petitioned for inter partes review of certain claims in one Immersion patent; the Patent Office had not decided whether to institute review. Immersion reported a favorable Sony arbitration ruling concerning Japanese controllers, confirmed by a district court in April 2016, and a separate arbitration over U.S. game controllers remained pending.
- Management said routine legal matters and contractual disputes were not expected to materially affect financial condition, results or liquidity. However, it cautioned that litigation is costly, uncertain and may divert resources. The company also provides IP indemnifications whose maximum potential impact it could not estimate.
- Other principal risks include dependence on license renewals and a limited number of customers, unpredictable royalty timing and licensee sales, patent enforceability and expiration, competitive or in-house haptic solutions, and the possibility that litigation or adverse tax interpretations affect results.
Investor facts to verify
- Whether Samsung arbitration produces damages, a new license or continued loss of Samsung-related revenue.
- Customer identities and concentration underlying the disclosed 24%, 19% and 16% revenue shares, and the durability of offsetting gaming, automotive and medical revenue.
- Legal outcomes and costs in the Apple/AT&T matters, patent review proceedings and Sony arbitration; assess any effects on IP licensing or enforceability.
- The quality and timing of operating cash generation, particularly receivable collections and deferred revenue, and the adequacy of liquidity if litigation and operating spending continue.
- Tax disclosures differ within the filing: the financial-statement note reports $6.2 million of unrecognized tax benefits, of which $2.4 million would affect the effective rate, while MD&A reports $6.3 million and $2.6 million, respectively. Confirm the applicable figures and potential cash exposure.
Controls: Management concluded disclosure controls were effective as of March 31, 2016 and reported no material change in internal control over financial reporting during the quarter.