Immersion Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 5, 2013. The company licenses patented haptic technology and reports as one operating segment. Unless noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $10.20 | $6.48 | $24.06 | $16.17 |
| Royalty and license revenue | $9.98 | $5.93 | $23.63 | $15.02 |
| Operating income (loss) | $0.76 | ($2.31) | $3.02 | ($1.99) |
| Net income (loss) | $0.78 | ($2.16) | $3.03 | ($2.37) |
| Diluted earnings (loss) per share | $0.03 | ($0.08) | $0.10 | ($0.09) |
| Operating margin | 7.4% | (35.7%) | 12.5% | (12.3%) |
- Revenue rose 58% in Q2 and 49% in the first half, primarily from higher mobility royalties and licensing, including a new multi-year Samsung agreement entered into in March 2013. Management said mobility revenue was also supported by handset volumes in Korea and Japan.
- Cash from operating activities was $16.1 million for the first half, versus $1.0 million used in the 2012 period. The increase included an $8.7 million contribution from higher deferred revenue and customer advances; it should not be viewed as wholly recurring operating cash generation.
- Cash and cash equivalents were $6.9 million and short-term investments were $57.0 million at June 30, totaling $63.9 million, up from $43.5 million at year-end 2012. Investments were principally U.S. Treasury securities due within one year. The filing reports no debt balance.
- Current assets were $65.9 million and current liabilities $18.1 million; working capital was $47.8 million. Deferred revenue and customer advances increased to $14.0 million from $3.9 million, while long-term deferred revenue was $8.8 million, including $8.1 million related to Sony Computer Entertainment.
- Stockholders’ equity was $56.0 million; accumulated deficit was $108.7 million. First-half investing cash outflow was $19.9 million, including net purchases of short-term investments and $1.8 million of intangible additions. Financing provided $6.1 million, principally from option exercises.
- Royalty and license revenue represented about 98% of first-half revenue. Product sales fell 95% year over year as the company stopped producing its Virtual IV simulator under a licensing arrangement.
Changes, outlook, and risks
- Profitability improved from losses in the prior-year comparable periods, reflecting higher royalty and license revenue and lower product-related costs. Operating expenses increased in several areas: first-half sales and marketing rose 32%, research and development 21%, and general and administrative 11%. Management attributed spending growth mainly to increased headcount, compensation, and stock-based compensation; litigation costs also affected G&A.
- Management expects royalty and license fees to remain the main revenue source and expects continued significant investment in sales and marketing and research and development. It expects product sales and development-contract revenue not to be significant going forward. The filing provides no quantified revenue or earnings guidance.
- Management said available cash, cash equivalents, and investments should meet working-capital needs for at least 12 months. It expected 2013 property and equipment spending below $0.5 million and patent filing and application capitalization of about $3.5 million. The $50 million share-repurchase authorization remained available, with $19.4 million remaining; no repurchases occurred in the first half.
- The company maintained a valuation allowance against all deferred tax assets due to uncertainty about future taxable income. If second-half projected income materializes, management said it may be able to release a substantial portion in Q4, increasing income; this was not assured. It also expected a tax benefit from releasing reserves as statutes of limitation expire within six months.
- Customer concentration is significant: Samsung accounted for approximately 51% of first-half 2013 revenue. Revenue depends on licensee product sales, reported royalties, licensing renewals, and the timing of product launches; management cautioned that per-unit royalties and results can be difficult to predict.
- Patent enforcement and litigation remain material risks. The HTC Delaware patent case continued after the ITC investigation ended; HTC challenged the patents, and reexaminations produced adverse claim actions on several patents, although the ’999 patent proceeding ended with amended, canceled, and newly patentable claims. The company said it could not predict litigation outcomes or estimate potential liability. A shareholder securities-litigation appeal was also pending.
- The filing identifies risks from possible loss or non-renewal of major licenses, patent invalidation or narrowed claims, competing or internally developed haptics, gaming-market weakness, litigation expense, and variability in licensee shipments. Management stated that exchange-rate exposure was not material and disclosed a hypothetical $222,000 fair-value decrease from a 100-basis-point interest-rate increase.
Important facts for investors to verify
- Whether Samsung and other major licensees sustain shipments, renew agreements, and continue contributing at current levels; specifically, monitor the 51% Samsung revenue concentration.
- How much of operating cash generation and deferred revenue reflects advance payments or timing differences, and how deferred revenue converts into recognized revenue.
- Developments in the HTC litigation and patent reexaminations, including any effect on enforceable patent scope, licensing leverage, legal costs, or potential liabilities.
- Whether the company meets its conditional expectation of releasing deferred-tax valuation allowances, and the timing and size of any resulting tax benefit.
- Whether higher sales, marketing, research, stock-based compensation, and litigation spending can be supported by recurring royalty growth and sustained profitability.