Immersion Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Immersion is a single-segment haptics technology licensing company; most revenue comes from licensing patents and software. This is an annual filing, not a standalone fourth-quarter report.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $57.1 million | $63.4 million |
| Operating income (loss) | $(15.3) million | $4.7 million |
| Net income (loss) | $(39.4) million | $2.9 million |
| Basic and diluted EPS | $(1.37) | $0.10 basic; $0.10 diluted |
| Cash from operations | $22.0 million | $10.0 million |
| Cash, cash equivalents and short-term investments | $89.8 million | $64.9 million |
| Stockholders’ equity | $55.3 million | $86.6 million |
- Royalty and license revenue was $56.0 million, 98% of total revenue, down 9%; development, services and other revenue was $1.1 million, down 38%.
- Gross profit was $56.9 million, approximately 99.7% of revenue. Operating margin was negative 26.7%, versus positive 7.4% in 2015; net margin was negative 69.0%, versus positive 4.5%.
- General and administrative expense rose 54% to $44.2 million, largely from litigation and patent-related legal costs. Research and development expense declined 9% to $13.4 million; sales and marketing expense was essentially flat at $14.6 million.
- Operating cash flow was positive despite the net loss, supported in part by higher deferred revenue and non-cash deferred-tax adjustments. Long-term deferred revenue increased to $26.4 million from $2.5 million, primarily from upfront license billings to be recognized over contract terms.
- Current assets were $94.0 million and current liabilities were $21.0 million. The filing reports working capital of $73.0 million; its narrative definition excludes cash and cash equivalents, which does not reconcile to that reported figure.
- No borrowings or debt balance is identified in the presented balance sheet; total liabilities were $48.4 million, including deferred revenue and other liabilities.
Changes, unusual items and outlook
- Revenue declined 10% year over year, primarily due to expired or non-renewed mobility licenses, lower mobility and gaming royalties, and a $2.0 million one-time license fee in 2015 that did not recur. Medical revenue increased, partly reflecting a non-recurring $3.0 million license fee.
- In July 2016, Samsung paid $19.0 million for product-life-cycle wind-down rights under an amendment to its expired license agreement. The payment was recognized as license revenue and drove the sharp increase in third-quarter revenue. Samsung represented 33% of 2016 revenue. Immersion had not renewed coverage for Samsung products released after December 31, 2015.
- The 2016 net loss included a $28.1 million non-cash deferred-tax valuation allowance charge recorded in the fourth quarter. The company established a full valuation allowance against its U.S. federal deferred tax assets; the year-end net deferred tax asset was $359,000.
- For 2017, management expected mobility to remain the primary revenue source, while warning that gaming revenue could be pressured by gaming-patent expirations and that renewals and their timing were uncertain. Management expected higher sales and marketing spending, continued R&D investment, and no significant decrease in general and administrative expense. Expected 2017 capital expenditures were less than $1.0 million.
- Management said existing cash and investments should fund working-capital needs for at least 12 months. The company reported $33.7 million remaining under its share-repurchase authorization; future repurchases were not assured.
- Major risks include customer and revenue concentration, particularly Samsung; dependence on license renewals and licensees’ product sales; patent expiration and challenges to patent validity; substantial IP-litigation expense and uncertain outcomes; international exposure; and reliance on a limited number of customers. Three customers each contributed at least 10% of 2016 revenue, collectively 60%.
- Apple and AT&T Mobility litigation and related patent reviews remained ongoing at filing. Sony-related royalty arbitrations were also in progress. The company stated that litigation outcomes were uncertain and potential liability could not be estimated.
- The 2016 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether Immersion renewed or replaced the Samsung license for post-2015 products, and how much future revenue depends on Samsung and the other major customers.
- Whether the $19.0 million Samsung wind-down payment is non-recurring and how deferred upfront fees will convert to reported revenue and cash.
- Progress, cost and outcomes of the Apple/AT&T and Sony proceedings, including patent-review decisions and the effect of patent expirations.
- Whether recurring licensing revenue and operating performance can recover after 2016’s revenue decline and litigation-driven expense increase.
- Future realizability of deferred tax assets, potential tax-authority challenges, and the impact of the valuation allowance and international tax restructuring.