Immersion Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Immersion is an intellectual-property and software licensing company focused on haptic technology, with one reportable segment.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $16.287 | $15.436 | +5.5% |
| Royalty and license revenue | $16.012 | $15.157 | +5.6% |
| Development, services and other revenue | $0.275 | $0.279 | -1.4% |
| Operating expenses | $16.357 | $12.482 | +31.0% |
| Operating income (loss) | $(0.070) | $2.954 | Declined |
| Net income (loss) | $(0.059) | $1.864 | Declined |
| Basic and diluted EPS | $0.00 | $0.07 / $0.06 | Declined |
| Operating cash flow | $21.498 | $16.439 | +$5.059 |
| Cash and cash equivalents | $40.355 | $14.380 at Dec. 31, 2014 | +$25.975 |
| Cash, cash equivalents and short-term investments | $78.342 | $57.361 at Dec. 31, 2014 | +$20.981 |
Operating margin was approximately -0.4%, versus 19.1% a year earlier. Net margin was approximately -0.4%, versus 12.1%. The filing reports no debt balance. Current assets were $90.218 million and current liabilities $33.151 million at quarter-end; the current ratio was approximately 2.7. Current liabilities rose substantially, primarily because current deferred revenue increased to $25.082 million from $7.779 million at year-end.
Cash flow from operations was supported chiefly by a $15.789 million increase in deferred revenue, mainly from additional upfront customer payments. Investing activities provided $4.223 million, including $10.0 million of investment maturities, offset by investment purchases and $0.783 million of property and equipment purchases. Financing activities provided $0.254 million. Cash generation therefore benefited materially from customer prepayments and working-capital movements.
Changes and management commentary
- Revenue rose 6%, driven by higher mobility and automotive royalties. Variable per-unit royalties increased to $8.6 million from $7.5 million; fixed-payment license revenue declined to $7.4 million from $7.7 million.
- Automotive royalty and license revenue increased 37% and mobility increased 25%; gaming declined 21% and medical declined 8%. Management cited sales-volume changes and lower medical license fees.
- The shift from prior-year profit to a small loss was primarily attributed to higher compensation, benefits and related costs, mainly associated with increased headcount, and a $0.906 million increase in litigation expense. Higher royalty revenue partly offset these costs.
- Sales and marketing expense increased 52%, research and development increased 22%, and general and administrative expense increased 27%. Management expected sales and marketing and R&D investment to rise during 2015, including spending related to its content and media initiative.
- Management expected royalty and license fees—particularly from mobility and gaming—to remain the major revenue source. It gave no quantified revenue or earnings guidance and cautioned that Q1 results are not necessarily indicative of full-year results.
Liquidity, risks and contingencies
- Management believed cash, cash equivalents and short-term investments would meet working-capital needs for at least 12 months. It anticipated 2015 capital expenditures below $4 million and continued cash spending to protect and defend its IP portfolio. Approximately $34.4 million remained available under the share repurchase authorization; no shares were repurchased in Q1 2015.
- The company settled its patent litigation with HTC on March 23, 2015. HTC agreed to pay undisclosed amounts for prior device shipments containing Basic Haptics and for an ongoing license. The settlement resolved the litigation while preserving Immersion’s right to appeal rulings invalidating three patents. The Court entered final judgment on March 31.
- Management said routine legal matters and third-party infringement claims were not expected to materially harm financial condition, results or liquidity. However, the HTC patent rulings and appeal create uncertainty; the filing does not provide a clear value for settlement proceeds.
- Customer concentration is significant: Samsung represented approximately 31% of Q1 revenue, and two other customers represented 14% and 13%. The company also identified licensing renewals, licensee product sales, litigation outcomes, competition, and gaming-market fluctuations as material business risks.
- The company reported $1.8 million of unrecognized tax benefits, including interest, with approximately $0.275 million potentially affecting the effective tax rate if recognized. It expected to release some reserves and record a tax benefit following statute-of-limitations expirations within 12 months.
- All short-term investments matured within one year. Management estimated that a 100-basis-point interest-rate increase would reduce the fair value of cash equivalents and short-term investments by approximately $0.197 million. It reported no foreign-exchange hedging arrangements and no material foreign-currency exposure.
- ASU 2014-09, the new revenue standard, was expected to be adopted January 1, 2017; the company was evaluating its effect and adoption method.
Most important facts for investors to verify
- HTC settlement payments, their recognition and cash-collection timing, and the status and potential impact of the patent appeal.
- Whether the sharp increase in operating costs—especially legal expense and compensation—continues, and how it affects profitability.
- Revenue durability and customer concentration, including renewal terms and reported royalty sales from major licensees.
- How much operating cash flow reflects recurring operations versus upfront customer payments and deferred revenue movements.
- The company’s progress and spending on content and media initiatives, and whether those investments produce material revenue.