Immersion Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; dollar amounts below are in U.S. millions unless noted. Immersion develops and licenses haptic technology and intellectual property (IP), primarily for mobility, gaming, automotive and medical applications.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $85.4 | $9.2 |
| Operating income (loss) | $70.1 | $(12.9) |
| Net income (loss) | $69.9 | $(12.9) |
| Diluted earnings (loss) per share | $2.29 | $(0.44) |
| Cash from (used in) operations | $86.2 | $(14.3) |
- Reported royalty and license revenue was $85.3 million: fixed-fee licenses contributed $75.8 million and per-unit royalties $9.6 million. Development, services and other revenue was $0.1 million.
- Operating expenses were $15.3 million, down from $22.1 million. General and administrative expenses fell $4.3 million, primarily due to lower litigation expenses; sales and marketing declined $2.1 million, largely following workforce reductions.
- Cash, cash equivalents and short-term investments totaled $139.0 million at quarter-end, versus $46.5 million at December 31, 2017. Current assets were $147.3 million and current liabilities $15.0 million. The filing reports no debt balance.
- Operating cash flow included a $25.2 million increase in deferred revenue. Financing provided $6.2 million, mainly from $6.1 million of stock-option exercises. Capital expenditures were minimal; management expected full-year 2018 capital expenditures below $1.0 million.
- Stockholders’ equity was $105.3 million at quarter-end, compared with $9.7 million at year-end, principally reflecting current-period earnings. Accumulated deficit remained $83.4 million.
Comparability and material changes
- Immersion adopted ASC 606 on January 1, 2018 using the modified retrospective method; 2017 figures remain under ASC 605. The reported revenue surge and profit therefore are not directly comparable to the prior-year quarter.
- Under ASC 606, the company recognized certain fixed-fee license revenue when the license rights transferred and accrued per-unit royalties in the quarter of licensee sales rather than one quarter later. Management attributed $72.3 million of Q1 revenue to the accounting-adoption effect for fixed-fee licenses and $4.4 million to the change for per-unit royalties.
- On a Q1 2018 basis adjusted to ASC 605, revenue would have been $8.7 million and net loss $6.8 million, compared with reported Q1 2017 revenue of $9.2 million and net loss of $12.9 million. The filing says Q1 2018 royalty and license revenue on that basis would have been slightly lower year over year.
- The adoption also changed balance-sheet presentation, including recognition of contract assets and revised deferred revenue. The filing states ASC 606 did not change total cash flows, although accounting-related movements affected reported working-capital items.
- Reported Q1 revenue included $75.8 million of fixed-fee license revenue from new customer agreements executed in the quarter. The Apple settlement and license agreement is disclosed as an exhibit, but its terms are confidential; the filing does not clearly identify the settlement’s precise contribution to reported revenue.
Outlook, risks and unusual items
- Management said cash and investments should fund working-capital needs for at least 12 months. Based on contracts signed and payments received, it expected to recognize $38.6 million related to fixed-fee license Performance Obligation B over time: $14.3 million within one to three years and $24.3 million after more than three years.
- Management cautioned that revenue may fluctuate substantially with the timing of fixed-fee agreements under ASC 606. It expected gaming royalties to continue declining unless the relevance of its IP is established, and medical revenue to become less significant. It cited seasonal royalty effects in the first quarter following elimination of the royalty-reporting lag.
- The 2017 restructuring eliminated approximately 56 positions (41% of worldwide employees), exited mobile advertising, reduced the China presence and refocused gaming and VR/AR development toward IP licensing. No new restructuring actions were reported in Q1 2018.
- Legal matters remain important. Samsung sought approximately $6.3 million plus interest and costs in an arbitration over Korean withholding taxes; management considered a material charge remote, but acknowledged a payment could be required before the tax appeal concludes. LG Electronics also sought reimbursement for Korean withholding taxes; the filing does not provide a clear claim amount.
- Immersion settled its Apple litigation in January 2018 and the related ITC and U.S. district court matters were dismissed. However, the PTAB had found certain claims of the ’571 and ’356 patents unpatentable; Immersion appealed those decisions. Patent litigation involving Fitbit, Samsung and Motorola, as well as separate Chinese proceedings, remained ongoing.
- Other risks include dependence on licensing renewals and a limited number of customers, patent validity and enforceability, litigation expense, royalty volatility, international tax exposure and retention of key personnel. One customer accounted for more than 10% of Q1 revenue. The company also disclosed the departure of its CEO and certain other executives.
- The effective tax rate was 0.6%; the company continued to maintain a valuation allowance against certain deferred tax assets. It reported $4.3 million of unrecognized tax benefits, including $12,000 interest; approximately $556,000 could affect the effective tax rate if recognized.
Investor verification priorities
- Review the Apple settlement and license agreement, including its confidential terms, and determine how much of Q1 fixed-fee revenue was associated with it or other new agreements.
- Assess sustainable revenue and earnings using the ASC 605 comparison and the timing of future fixed-fee license recognition, rather than relying on reported year-over-year growth alone.
- Track royalty-report estimates and subsequent true-ups under ASC 606, customer concentration, and whether Samsung or other major customers renew or enter new licenses.
- Monitor the outcomes and potential costs of the Samsung tax arbitration and appeals, LG tax claim, and patent disputes with Fitbit, Samsung and Motorola.
- Evaluate execution of the restructuring, leadership replacements, and the company’s ability to sustain licensing revenue while gaming and medical contributions weaken.