Immersion Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statement amounts below are in millions, except per-share data. Immersion is an intellectual-property and technology licensing company focused on haptics; it reports as one segment.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $12.1 | $11.3 | $39.3 | $35.4 |
| Operating income | $1.7 | $0.8 | $4.8 | $3.0 |
| Operating margin | 14.1% | 7.2% | 12.1% | 8.3% |
| Net income | $1.1 | $0.6 | $3.1 | $2.8 |
| Diluted EPS | $0.04 | $0.02 | $0.11 | $0.09 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $3.1 | $14.7 |
- Royalty and license revenue was $11.7 million for Q3, up 7%, and $38.5 million for nine months, up 11%. Product sales ended after December 31, 2013; development, services, and other revenue remained small.
- For the first nine months, cash flow from investing was positive $3.3 million, while financing used $10.4 million, primarily for $12.0 million of share repurchases. Cash and cash equivalents were $10.1 million at September 30, down from $14.1 million at year-end.
- Cash, cash equivalents, and short-term investments totaled $63.1 million, versus $71.1 million at December 31, 2013. Current assets were $75.0 million and current liabilities $17.2 million. No borrowings are reported; liabilities are substantially deferred revenue and other operating liabilities.
- Deferred revenue totaled $22.0 million, including $9.0 million long-term; $8.5 million of long-term deferred revenue related to Sony Computer Entertainment. The company had an accumulated deficit of $83.8 million.
Material changes and management commentary
- Q3 revenue growth reflected higher gaming and automotive licensing revenue, partly offset by declines in medical and mobility. Gaming revenue increased 61% for Q3 and 62% for nine months, supported by products including Sony PlayStation 4; automotive revenue increased 17% and 16%, respectively.
- Nine-month royalty and license growth also reflected higher gaming, medical, and automotive revenue. Mobility revenue was lower year over year, in part because 2013 included approximately $2 million of overlapping tail and new revenue from a renewed agreement.
- Operating expenses increased 6% to $10.3 million in Q3 and 6% to $34.5 million for nine months. Higher nine-month sales and marketing, R&D, and legal-related spending partly offset gross-profit improvement. Stock-based compensation was $4.1 million for nine months.
- Nine-month operating cash flow declined $11.6 million year over year. The filing attributes this chiefly to changes in accrued compensation and other liabilities, receivables, and deferred revenue; 2013 also had a more favorable working-capital contribution.
- Management expects royalties and license fees to remain the principal revenue source, particularly from mobility and gaming, and expects development and services revenue to be an insignificant portion. It anticipates increased sales and marketing and R&D investment, including in content and media; it did not provide numerical revenue or earnings guidance.
Risks, contingencies, and unusual items
- Customer concentration is significant: Samsung accounted for approximately 38% of nine-month 2014 revenue, and two other customers accounted for 17% and 10%. Asia contributed 67% of nine-month revenue.
- HTC patent litigation remained active. HTC filed motions for summary judgment and other relief in October 2014; a hearing was scheduled for November 25, 2014 and trial for March 23, 2015. The company said it could not predict the outcome or estimate potential liability. Three patents had undergone reexamination, with certificates issued after claim cancellations or amendments.
- The Ninth Circuit affirmed dismissal with prejudice of the securities class action on August 7, 2014. Management said routine legal matters and other contingencies were not expected to materially harm financial condition, results, or liquidity; the company also provides IP indemnities whose maximum potential impact it cannot estimate.
- The nine-month effective tax rate was 36.4%, versus 9.4% in 2013, principally reflecting federal and foreign taxes and permanent differences. Unrecognized tax benefits were approximately $1.7 million, including interest; approximately $270,000 could affect the effective tax rate if recognized. Management expected a reserve release and tax benefit from statute expirations within 12 months.
- Management said available liquidity should meet working-capital needs for at least 12 months. It expected 2014 capital expenditures below $2 million. The existing repurchase authorization had approximately $7.4 million remaining at September 30; on October 22, the board authorized an additional $30 million.
- Interest-rate sensitivity: a hypothetical 100-basis-point rate increase was estimated to reduce fair value of cash equivalents and short-term investments by approximately $282,000. The company reported no foreign-exchange hedging arrangements.
- The company retrospectively applied a 2013 accounting-method change: external patent-related costs for internally developed patents and trademarks are expensed as incurred rather than capitalized. It was evaluating the impact and adoption method for new revenue standard ASU 2014-09, required from January 1, 2017.
Investor verification priorities
- Review the Samsung and other major-customer exposure, license renewals, and how fixed-fee versus per-unit arrangements affect revenue timing.
- Track HTC litigation and patent reexamination developments, including potential effects on enforceability, royalties, and legal expenses.
- Reconcile the sharp year-over-year decline in operating cash flow with receivables, accrued liabilities, deferred revenue, and cash collections.
- Verify the scope and pace of the October 2014 additional $30 million repurchase authorization and its implications for liquidity and share count.
- Monitor the tax provision, utilization of deferred tax assets and NOLs, and expected release of uncertain-tax reserves.