Immersion Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless otherwise noted. Amounts are in U.S. dollars; financial-statement figures below are in thousands unless stated otherwise.
Business context
Immersion develops, licenses and supports haptic technologies and products that add touch interaction to digital devices. It operates as one reportable segment and focuses on mobile and consumer electronics, automotive, gaming, commercial and industrial, and medical markets. Licensing is its principal business model.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Royalty and license revenue | $9,085 | $8,353; up 9% |
| Product sales | $272 | $1,001; down 73% |
| Development contracts and other | $334 | $414; down 19% |
| Total revenue | $9,691 | $9,768; down 1% |
| Operating income | $324 | $1,877 |
| Operating margin | 3.3% | 19.2% |
| Income (loss) from continuing operations | $(219) | $1,345 |
| Net income (loss) per diluted share | $(0.01) | $0.05 |
| Net cash provided by operating activities | $1,789 | $4,678 |
General and administrative expense rose 53% to $4,771, primarily reflecting approximately $1.5 million of additional litigation expense and $331,000 of increased patent-related legal costs. The income-tax provision was $553,000 despite $334,000 of pretax continuing income, producing a 165.6% effective rate; the filing cites foreign withholding taxes, valuation allowance effects and unrecognized tax benefits.
At March 31, 2012, cash and cash equivalents were $8.587 million and short-term investments were $48.968 million, totaling $57.555 million, versus $56.285 million at December 31, 2011. Current assets were $61.686 million and current liabilities $11.554 million, implying working capital of approximately $50.132 million. Total liabilities were $24.807 million, including deferred revenue; the balance sheet reports no borrowings or debt line item. Stockholders’ equity was $53.006 million.
Operating cash flow was $1.789 million; investing cash use was $1.403 million and financing cash inflow was $903,000. Cash increased by $1.289 million during the quarter. Operating cash flow was supported by higher accounts payable and deferred revenue, and partly offset by receivables growth and the net loss.
Material changes and management outlook
- Higher gaming and medical royalties lifted license revenue, partly offset by lower mobility revenue. Product sales fell mainly because of reduced demand for the Virtual IV medical simulator.
- Management expects royalties and licensing to remain the main revenue source during 2012; it expects product sales to remain reduced and development-contract revenue not to be significant.
- Management believes cash, cash equivalents and short-term investments will fund working-capital needs for at least the next 12 months. It expects 2012 property-and-equipment capital expenditures below $1.5 million and patent filing/application cost capitalization of approximately $3.5 million.
- Management expects ongoing litigation and intellectual-property defense to consume significant resources. It also expects continued investment in sales and marketing and increased research and technology development.
- The board’s repurchase authorization had $25.2 million remaining; no shares were repurchased under the program in Q1 2012.
Risks, contingencies and unusual items
- Immersion filed patent-infringement actions against Motorola and HTC. The ITC instituted an investigation on April 2, 2012, after quarter-end; related Delaware court cases are stayed pending that investigation. The company cannot predict outcomes or estimate potential liability.
- A securities class action relating to 2007–2009 financial statements was dismissed with prejudice, but plaintiffs appealed. A related derivative action is stayed, and a shareholder records-inspection dispute remains contested. The separate IPO litigation concluded in January 2012 without a required contribution by Immersion.
- Two customers represented approximately 31% of Q1 2012 revenue. Long-term deferred revenue included $11.885 million related to Sony Computer Entertainment.
- Management identifies licensing growth, licensee product shipments and adoption, revenue timing, competition, macroeconomic conditions and intellectual-property litigation as significant business risks. It warns litigation may increase expenses and impair licensing relationships or results.
- Short-term investments were U.S. Treasury securities due within one year. The filing estimates that a 100-basis-point interest-rate increase would reduce the fair value of cash equivalents and short-term investments by approximately $243,000.
- The company maintained a full valuation allowance against deferred tax assets. Unrecognized tax benefits totaled approximately $677,000, including interest; about $249,000 could affect the effective tax rate if recognized. The timing of any cash settlement was not estimable.
Most important facts for investors to verify
- Whether license revenue growth, particularly in gaming and medical, continues to offset weak product sales and mobility fluctuations.
- Whether elevated litigation and patent-related legal costs persist, and the outcomes and financial effects of the Motorola/HTC proceedings and other pending cases.
- Revenue dependence on major customers and licensees, including the significance and recognition timing of Sony-related deferred revenue.
- Cash generation, working-capital movements and the adequacy of liquidity as litigation and patent investments continue.
- Tax provision drivers, valuation-allowance assumptions and possible cash settlement of unrecognized tax benefits.