Business context and reporting period
Immersion Corporation is an intellectual-property and software licensing company focused on haptic technology. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The company reports one operating segment.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $14.31 | $12.05 | $46.82 | $39.32 |
| Operating income | $1.28 | $1.70 | $3.43 | $4.77 |
| Net income | $0.18 | $1.07 | $1.72 | $3.11 |
| Diluted EPS | $0.01 | $0.04 | $0.06 | $0.11 |
| Operating margin | 9.0% | 14.1% | 7.3% | 12.1% |
- Revenue was almost entirely royalty and license revenue: $13.94 million in Q3 and $45.90 million for nine months. Development, services and other revenue was $0.37 million and $0.93 million, respectively.
- Cash and cash equivalents were $33.17 million and short-term investments $33.99 million at September 30, totaling $67.16 million, versus $57.36 million at year-end 2014. Working capital was approximately $55.13 million. No interest-bearing debt is presented on the balance sheet.
- Operating cash flow was $12.32 million for nine months, versus $3.08 million in 2014. Capital expenditures were $4.38 million. Cash, cash equivalents and short-term investments increased by $9.8 million from year-end.
- Total liabilities were $24.21 million, including $16.65 million of current and long-term deferred revenue. Stockholders’ equity was $84.40 million.
Material changes versus prior comparable periods
- Revenue increased 19% in both Q3 and the nine-month period, driven by royalty and license growth. Q3 increases included mobility and gaming; nine-month growth reflected mobility and automotive, partly offset by lower gaming revenue.
- Profitability declined despite revenue growth. Q3 operating expenses rose by $2.68 million and nine-month expenses by $8.85 million, mainly due to higher compensation from increased headcount and higher legal and professional fees. Operating income fell 25% in Q3 and 28% for nine months.
- The nine-month revenue increase included a non-recurring $2.0 million license fee from a completed contract. Nine-month variable royalty revenue rose to $21.1 million from $15.7 million.
- Cash flow benefited from deferred tax changes and working-capital movements; it should not be viewed as a simple proxy for earnings. The company also spent $4.38 million on property and equipment, compared with $0.73 million in the prior-year period.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected royalty and license revenue, particularly from mobility, to remain the main revenue source in 2015, and anticipated higher sales and marketing and R&D investment. It forecast 2015 capital expenditures below $5.0 million and said available cash and investments should meet working-capital needs for at least 12 months.
- Management was completing an international corporate reorganization, including transferring certain IP rights and establishing intercompany arrangements, expected to be completed by December 2015. It anticipates a lower share of pretax income subject to the U.S. federal statutory rate, but realization depends on future results and tax-authority positions.
- Q3’s effective tax rate was 84.7%, versus 35.8% a year earlier; the nine-month rate was 48.9%, versus 36.4%. The 2015 provision included tax effects of the reorganization, including tax expense on intercompany IP profits and an increased valuation allowance. Unrecognized tax benefits were approximately $5.9 million, including interest; $2.1 million would affect the effective tax rate if recognized.
- The company settled its HTC infringement litigation in March 2015 for undisclosed compensation and a license, while retaining appeal rights concerning a ruling invalidating three patents. The appeal remained pending; the ultimate outcome and any potential liability were not estimable. Management said routine legal matters were not expected to materially affect financial condition, results or liquidity.
- Key risks include dependence on a limited number of licensees, the concentration of revenue in a few customers, licensing and royalty-reporting uncertainty, patent validity and enforcement outcomes, litigation costs, competition and technology adoption, and international tax and operating risks. Samsung represented about 32% of nine-month revenue; two other customers represented 18% and 14%.
- The company stated that disclosure controls were effective as of September 30, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 19% revenue growth is repeatable, given the $2.0 million non-recurring license fee and quarter-to-quarter timing effects in royalties.
- How expense growth, particularly compensation and legal/professional costs, affects future operating margins and cash generation.
- Customer concentration and renewal exposure, including the ongoing contribution of major mobility, gaming and automotive licensees.
- The outcome and financial implications of the HTC appeal and the continued enforceability and commercial value of the affected patents.
- The realized tax impact of the international reorganization, deferred tax assets and valuation allowance, and uncertain tax positions.
- Cash-flow quality and planned use of liquidity, including investment in IP, the remaining $34.4 million share-repurchase authorization, and capital spending.