Immersion Corporation — Q3 2017 Form 10-Q
Business context and period: Immersion licenses haptic technology and provides related software, development and services across mobility, gaming, automotive and medical markets. This unaudited quarterly report covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $11.9 million | $26.3 million | $28.1 million | $47.8 million |
| Operating income (loss) | $(5.4) million | $10.1 million | $(33.2) million | $(4.1) million |
| Net income (loss) | $(5.3) million | $7.0 million | $(33.0) million | $(1.2) million |
| Diluted EPS | $(0.18) | $0.24 | $(1.13) | $(0.05) |
| Operating cash flow | Not separately presented for the quarter | $(42.1) million | $27.5 million |
- Royalty and license revenue was $11.6 million in Q3, down 55%; development, services and other revenue was $0.2 million. For the first nine months, royalty and license revenue was $27.4 million, down 42%.
- Cost of revenue was low relative to sales: gross margin was approximately 99% in both comparison periods. Operating margin was approximately negative 46% for Q3 2017 and negative 118% for the first nine months of 2017.
- At September 30, cash and cash equivalents were $19.3 million and short-term investments were $28.9 million, totaling $48.1 million, versus $89.8 million at December 31, 2016. Current assets were $55.6 million and current liabilities $15.7 million. The balance sheet reports no borrowings; operating leases were the principal contractual commitments.
- Total liabilities were $39.9 million and stockholders’ equity $19.8 million. Accumulated deficit was $159.3 million.
Changes versus the prior comparable periods
- Revenue fell primarily because Q3 2016 included a one-time $19.0 million Samsung license fee. Nine-month comparisons were also affected by a non-recurring $3.0 million medical license fee in Q1 2016.
- Q3 2017 variable royalties declined 10%, mainly due to expired mobility OEM contracts, partly offset by gaming volume. Nine-month variable royalties declined 16%, primarily due to lower reported volume from mobility OEMs and gaming customers.
- Nine-month general and administrative expense rose $11.1 million to $41.9 million, largely because litigation expense increased by $11.2 million, including Apple and AT&T proceedings. Total operating expenses increased $9.5 million year over year.
- Operating cash flow shifted from $27.5 million provided in the first nine months of 2016 to $42.1 million used in 2017. The company cited higher net loss, lower deferred revenue and customer advances, and increased working capital.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management said existing cash, cash equivalents and short-term investments should cover working capital needs for at least the next 12 months, while warning that continued IP investment and enforcement will use significant cash.
- Management expects royalty and license revenue to remain a major revenue source, but to fluctuate with license renewals, product launches, market adoption and litigation outcomes. It anticipates gaming revenue may continue to decline until it demonstrates the relevance of its IP in that market; medical is expected to become a less significant share of revenue.
- The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected per-unit royalties to be estimated in the period of underlying sales, with later true-ups, and fixed-fee license revenue in existing contracts generally to be recognized when licenses are granted. Deferred revenue was expected to decrease substantially; the quantitative adoption impact was still being validated.
- Material legal and tax matters include ongoing Apple/AT&T patent litigation and related patent reviews, suits involving Fitbit, Samsung and Motorola, and Samsung’s arbitration demand for approximately $6.3 million plus interest and costs relating to Korean withholding taxes. Immersion said it believed the claims were without merit and considered a material charge remote. LG separately sought reimbursement for Korean withholding taxes; the filing does not provide a clear amount, and the company planned to appeal.
- Revenue concentration and dependence on licensees, patent enforceability, costly litigation, customer renewals, international operations and uncertain market adoption are key risks. Three customers represented 20%, 17% and 10% of nine-month 2017 revenue, respectively. The company reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether the sharp cash decline and operating cash burn continue, and how much cash remains available after litigation and IP-enforcement spending.
- Customer concentration, especially Samsung-related revenue, and the timing and terms of new or renewed mobility licenses.
- Developments and potential cash exposure from the Apple, Fitbit, Samsung, Motorola and Korean tax matters, including the separate LG claim.
- The quantified balance-sheet and earnings effects of adopting the new revenue standard, including deferred-revenue changes and royalty estimates.
- Whether management’s expected liquidity runway remains adequate if licensing receipts decline or legal costs rise.