Immersion Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unless otherwise noted, financial amounts below are in millions of dollars. Immersion develops, licenses, manufactures, and supports haptic technologies. Its business had shifted primarily toward licensing; it reported one operating segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $6.682 | $8.475 | $16.450 | $18.184 |
| Operating income (loss) | $(1.113) | $0.510 | $0.764 | $(1.915) |
| Continuing operations income (loss) | $(1.328) | $0.150 | $0.017 | $(2.535) |
| Net income (loss), including discontinued operations | $(1.310) | $0.180 | $0.078 | $(2.474) |
| Basic and diluted EPS | $(0.05) | $0.01 | $0.00 | $(0.09) |
Q2 royalty and license revenue was $5.882 million, product sales $0.546 million, and development and other revenue $0.254 million. For the first half, these were $14.235 million, $1.547 million, and $0.668 million, respectively. Cost of revenue was $0.247 million in Q2 and $0.721 million for the half. The reported income tax line was a $0.267 million benefit in Q2 and a $0.861 million provision for the half; the filing attributes tax expense primarily to foreign withholding taxes.
Cash, cash equivalents, and short-term investments totaled $64.870 million at June 30, versus $61.204 million at December 31, 2010. Current assets were $67.576 million and current liabilities $9.163 million. Total liabilities were $24.778 million, including deferred revenue; the balance sheet reports no borrowings or debt. Stockholders’ equity was $57.463 million.
First-half operating cash flow was $3.130 million, investing cash flow was $(1.388) million, and financing cash flow was $1.914 million. Operating cash flow included a $3.2 million tax refund. Capitalized intangible additions were $1.522 million. Cash and cash equivalents alone were $15.899 million at period-end.
Material changes and management commentary
- Revenue fell 21% in Q2 and 10% in the first half year over year. Product sales declined 70% and 68%, respectively, primarily following the 2010 divestiture of three medical simulation product lines to CAE.
- Q2 royalty and license revenue declined 7%, mainly because Q2 2010 included about $1 million of gaming true-ups and other one-time payments. First-half royalty and license revenue rose 12%, with growth from mobility, gaming, and medical licensees.
- Q2 moved from continuing-operations income to a loss, which management attributed mainly to lower gross margin after the divestiture and fewer one-time payments. First-half continuing results improved from a loss to near break-even, primarily from lower ongoing expenses, personnel reductions, and cost savings.
- Management expects royalties and licensing to remain the major revenue source in the remainder of 2011. It expects product sales to remain lower than in 2010 and does not expect development-contract revenue to grow significantly. The company noted seasonal revenue patterns, including typically higher first-quarter revenue from licensees’ holiday sales.
- Management said available cash and investments should fund working capital needs for at least 12 months. It anticipated 2011 property and equipment spending below $0.5 million and patent filing and application capitalization of about $3 million. In July, the board approved a proposal to repurchase shares under the existing authorization, with $31.6 million remaining.
Risks, contingencies, and unusual items
- Three customers represented approximately 44% of Q2 and first-half 2011 revenue, compared with 32% and 35% in the comparable 2010 periods. The filing warns that customer concentration and licensees’ product shipments and market success affect royalties.
- The company reported an accumulated deficit of $104.5 million and a history of losses. Management identified economic conditions, competition, licensing execution, adoption and launch timing, intellectual property protection, and litigation costs among factors that could affect results.
- Pending securities and derivative litigation remains. The company said it could not predict outcomes or estimate potential liability. A separate IPO class-action settlement had been approved, but appeals were pending; the company said it would defend the case if the settlement were reversed.
- Unrecognized tax benefits were approximately $0.670 million, including interest, and the company could not reliably estimate when settlement might require cash. Deferred tax assets remained fully offset by a valuation allowance.
- The company disclosed an interest-rate sensitivity: a hypothetical 100-basis-point increase would reduce the fair value of cash equivalents and short-term investments by approximately $0.328 million. It reported no foreign-currency hedging arrangements and considered its exposure not material.
- Management concluded disclosure controls were effective as of June 30, 2011 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether royalty growth from mobility, gaming, and medical licensees offsets lower product sales and the absence of prior-period one-time gaming payments.
- The nature and durability of first-half operating cash flow, particularly the effect of the one-time tax refund, and the company’s cash use if it proceeds with share repurchases.
- Revenue exposure to the three largest customers and to Sony-related deferred revenue, which was $14.133 million long-term at June 30.
- Developments in pending securities litigation, related potential costs, and the unresolved IPO-settlement appeals.
- Actual progress on management’s outlook, including royalty-led revenue, R&D investment, and patent-related spending; the filing provides no numerical revenue or earnings guidance.