Immersion Corporation — Q2 2016 Form 10-Q
Business and period: Haptic-technology developer and licensing company using a hybrid model of software/services and patent licensing. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $7.9m | $16.2m | $21.5m | $32.5m |
| Operating income (loss) | ($9.6m) | $2.2m | ($14.2m) | $2.1m |
| Net income (loss) | ($5.6m) | $1.6m | ($8.3m) | $1.5m |
| Net income (loss) per share | ($0.20) | $0.06 | ($0.29) | $0.05 |
| Operating cash flow | Not separately provided | Not separately provided | ($11.5m) | $16.7m |
- Revenue and margins: Q2 revenue fell 52%; six-month revenue fell 34%. Royalty and license revenue, about 98% of six-month revenue, declined 52% for the quarter and 34% for the half. Cost of revenue was small relative to revenue, but operating expenses drove operating losses; the filing does not state a gross-margin measure.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $56.3m at June 30, down from $64.9m at December 31, 2015. Current assets were $60.9m and current liabilities $15.0m. Management said available funds should meet working-capital needs for at least 12 months.
- Debt: No debt balance is reported in the supplied financial statements. Total liabilities were $17.3m, including deferred revenue and other operating liabilities.
Changes, outlook and notable items
- Revenue decline: The principal driver was lower mobility revenue, especially the absence of Samsung revenue after its license expired at year-end 2015, plus a $2.0m non-recurring license fee recorded in Q2 2015. Gaming and medical revenue partly offset the declines. For Q2, mobility royalty and license revenue decreased 76% year over year; fixed-payment license revenue fell to $2.0m from $9.6m.
- Higher legal spending: General and administrative expense rose 64% in Q2 and 40% for the first half, primarily from litigation and other legal costs. The company said these expenses would continue to increase significantly as it enforces and defends IP and contractual rights. Sales and marketing and R&D investment also remain priorities.
- Samsung settlement after quarter-end: On July 12, 2016, the company agreed to amend its Samsung license, end related arbitration proceedings and provide mutual releases on specified matters. It received $19.0m in July and planned to recognize the payment as license revenue in Q3 2016. The agreement also restricts certain actions against Samsung for a period of time.
- Cash use and capital plans: First-half operating cash use was $11.5m, versus $16.7m provided in the prior-year period, reflecting the net loss, lower deferred revenue and other working-capital/tax movements. Management expected 2016 capital expenditures below $1.0m; it also expected continued significant cash use for IP investment and enforcement.
- Other unusual items: A final $1.0m payment relating to the 2009 sale of the 3D product line generated $649,000 of discontinued-operations income, net of tax, in Q2 and the first half. The six-month tax benefit included discrete tax items; the company reported $6.2m of unrecognized tax benefits and maintained valuation allowances against certain deferred tax assets.
- Litigation and uncertainty: ITC and federal-court proceedings against Apple and AT&T Mobility were ongoing over alleged patent infringement; Apple and AT&T Mobility denied the allegations and asserted defenses. Apple also filed inter partes review petitions challenging three patents. The company cautioned that litigation is costly and outcomes are uncertain. Other Sony-related arbitration and appeals were also pending.
- Business risks and guidance: No specific revenue or earnings guidance is stated in the supplied filing text. Management expected royalty and license revenue to remain the main revenue source, with results subject to license renewals, product shipments, litigation outcomes, customer reporting timing and market adoption. It noted that certain gaming patents expired in 2015 and could affect 2016 gaming royalties.
Most important facts for investors to verify
- Whether the $19.0m Samsung payment was recognized as Q3 revenue as planned, and how the amended wind-down rights affect future Samsung-related revenue.
- Quarterly revenue trends and customer concentration: three customers represented 21%, 20% and 16% of first-half 2016 revenue, respectively.
- Actual legal spending, cash burn and outcomes or developments in the Apple, Sony and other IP disputes.
- Whether the company sustains its stated liquidity outlook while funding IP enforcement, R&D and sales efforts.
- Tax benefits from the international reorganization, the status of tax uncertainties, and the eventual impact of new revenue-recognition rules expected to be adopted in fiscal 2018.