Immersion Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Immersion develops and licenses haptic technology and related software, principally for mobility, gaming, automotive and medical markets.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $6.1 million | $91.6 million |
| Operating income (loss) | $(8.3) million | $61.8 million |
| Net income (loss) | $(7.8) million | $62.1 million |
| Basic EPS | $(0.25) | $2.06 |
| Operating cash flow | Not separately reported for the quarter | $82.0 million |
- Q2 gross margin was approximately 98.5%, based on revenue of $6.1 million and cost of revenue of $94,000; the company nevertheless reported an operating loss.
- At June 30, cash and cash equivalents were $116.4 million and short-term investments were $20.2 million, totaling $136.7 million. Current assets were $143.5 million and current liabilities $15.4 million.
- Total liabilities were $49.1 million, including $37.3 million of current and long-term deferred revenue. The balance sheet reports no borrowings or debt.
- Cash and investments increased $90.2 million from year-end 2017. Management attributed much of the operating cash generation to increased deferred revenue and the accounting-standard adoption; option exercises provided $8.0 million of financing cash.
Changes versus prior periods
- Reported Q2 revenue fell 13% year over year, from $7.0 million to $6.1 million; net loss narrowed from $14.8 million to $7.8 million, primarily reflecting lower operating expenses.
- Reported six-month revenue rose 463% to $91.6 million and net income was $62.1 million, versus a $27.7 million loss in the prior-year period. The increase was primarily due to $77.6 million of fixed-fee license revenue recognized under ASC 606.
- Comparability is materially affected by ASC 606 adoption on January 1, 2018. The company used the modified retrospective method, so 2017 figures remain under the former standard. On a stated ASC 605 basis, 2018 six-month revenue would have been $17.4 million and net loss $12.0 million, rather than reported revenue of $91.6 million and net income of $62.1 million. For Q2, the filing gives ASC 605-basis revenue of $8.7 million and net loss of $5.2 million.
- Q2 royalty and license revenue decreased 12% as reported; per-unit royalty revenue declined 18%. The company said lower mobility, medical and gaming shipments weighed on six-month per-unit royalties, while the timing of new fixed-fee agreements materially affected reported results.
- Operating expenses declined year over year: six-month sales and marketing fell 59%, R&D 16%, and G&A 30%. Lower litigation expense, reduced headcount following the 2017 restructuring, and lower marketing costs were key factors.
Outlook, commentary, risks and unusual items
- Management said cash, cash equivalents and short-term investments should fund working-capital needs for at least 12 months. It expected 2018 capital expenditures below $1.0 million.
- The company expects licensing and royalty revenue to remain central, but fixed-fee revenue may fluctuate with contract timing and per-unit royalties with customer shipments. With the elimination of the prior one-quarter royalty-reporting lag, management expects historical holiday-season royalty effects to shift into Q4.
- Based on signed contracts and payments received, Immersion expected to recognize $37.3 million of revenue over time for a continuing fixed-fee performance obligation: $14.1 million over one to three years and $23.2 million over more than three years.
- ASC 606 adoption changed the timing of fixed-fee license recognition and requires estimates of current-period royalties. The company reported a Q2 negative royalty true-up of approximately $326,000. Contract assets totaled $9.2 million, including $5.1 million current and $4.1 million non-current.
- Material legal matters include ongoing Samsung patent litigation and a Korean tax-withholding arbitration. Samsung seeks approximately $6.9 million plus interest and costs; management said it believes the claims are without merit and considers a material charge remote, while also stating the ultimate outcome cannot be predicted. LGE has separately requested reimbursement of Korean withholding taxes; management likewise assessed a material charge as remote.
- The Apple litigation was settled in January 2018; the ITC and district court proceedings concluded. Immersion voluntarily dismissed appeals concerning certain patent-review decisions in July 2018. A global Fitbit settlement and dismissal occurred in July 2018, after quarter-end. Samsung and Motorola infringement cases remained active.
- Other disclosed risks include dependence on licensing renewals and a limited number of customers, patent enforceability and costly litigation, revenue volatility, restructuring execution, and key executive departures. One customer represented more than 10% of six-month revenue. Management reported effective disclosure controls as of June 30.
Important facts for investors to verify
- Reconcile reported 2018 revenue and earnings to the ASC 605-basis figures; assess the timing and sustainability of large fixed-fee license revenue.
- Review royalty estimates, the negative Q2 true-up, minimum-royalty contract assets and deferred-revenue recognition assumptions.
- Determine the identity and ongoing contribution of the customer exceeding 10% of six-month revenue, and monitor customer concentration and Samsung licensing exposure.
- Track outcomes and potential costs of Samsung and Motorola litigation, the Samsung arbitration and LGE tax claim; review developments occurring after June 30.
- Assess whether lower operating costs after restructuring can be sustained while funding IP enforcement, sales and R&D, and whether management’s 12-month liquidity assessment remains appropriate.