Immersion Corporation — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. Immersion licenses haptics software and patents, primarily for mobile devices, gaming, automotive and medical applications. It had more than 1,900 issued or pending patents and had ceased product sales by the end of 2013.
Financial results
Amounts below are in millions of dollars, except per-share data. Fiscal-year comparisons are 2014 versus 2013; Q4 comparisons are the quarters ended December 31.
| Metric | FY2014 | FY2013 | Q4 2014 | Q4 2013 |
|---|---|---|---|---|
| Revenue | $52.94 | $47.47 | $13.62 | $12.07 |
| Operating income | $5.97 | $3.60 | $1.19 | $0.65 |
| Net income | $4.12 | $40.16 | $1.02 | $37.40 |
| Diluted EPS | $0.14 | $1.37 | $0.04 | $1.26 |
| Operating cash flow | $0.29 | $21.15 | Not stated | Not stated |
- FY revenue rose 12%, driven by royalty and license revenue, which increased 12% to $51.80 million and represented 97.9% of revenue. Operating margin improved to 11.2% from 7.6%; net margin was 7.8% versus 84.6%, with the prior-year figure distorted by a tax benefit.
- FY2014 variable royalties were $21.6 million, up from $19.5 million; fixed-payment license revenue was $30.2 million, up from $26.7 million. Gaming revenue increased 50%; automotive revenue 13%; mobility revenue 2%; and medical revenue 1%.
- Q4 revenue increased about 13% year over year. Q4 operating income was $1.19 million versus $0.65 million. Q4 2013 net income included a $36.8 million tax benefit; Q4 2014 reported a $0.42 million tax provision.
- Cash, cash equivalents and short-term investments totaled $57.36 million at year-end, down from $71.11 million. Working capital was $58.03 million; total liabilities were $20.92 million and equity $76.60 million. The balance sheet does not separately identify borrowings.
- Operating cash flow fell to $0.29 million from $21.15 million, including a $6.76 million decrease in deferred revenue. Investing activities provided $13.27 million, largely from investment maturities; financing activities used $13.32 million, including $15.0 million of share repurchases.
Changes, outlook and risks
- Revenue grew from $32.17 million in 2012 to $47.47 million in 2013 and $52.94 million in 2014. Product sales ended, leaving a predominantly licensing-based business.
- FY2014 net income fell sharply from 2013, principally because the prior year included a nonrecurring $36.5 million income-tax benefit from a partial valuation-allowance release. Excluding that unusual tax benefit, operating performance improved; operating expenses rose by $3.1 million while gross profit increased by $5.5 million.
- Management expected licensing revenue, mainly from mobility and gaming, to remain the major revenue source in 2015. It anticipated higher sales and marketing expense, significant increased R&D investment, and 2015 capital expenditures below $4 million. It expected cash and investments to cover working-capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Customer and geographic concentration are substantial: Samsung generated 38% of FY2014 revenue (47% in 2013); two other customers contributed 17% and 12%. Asia accounted for 68% of revenue, and Korea alone 51%.
- Key risks include dependence on licensing renewals and customer shipments, patent validity and enforcement, competition from customers’ internal designs and alternative haptic technology, and volatility in royalties and revenue recognition. Several gaming patent licenses were due to expire in 2015.
- HTC litigation remained material. In February 2015, the court found three patents invalid, found no literal infringement of two others, shortened a damages period, and limited the damages expert’s testimony; trial was scheduled for March 2015. Outcomes and any potential liability remained uncertain.
- The company reported an $83 million accumulated deficit despite recent profitability. It also disclosed $7.49 million in operating lease commitments and $1.8 million of unrecognized tax benefits, including interest.
Important facts for investors to verify
- Whether the 2015 mobility and gaming license outlook translated into sustained revenue growth, and how renewals and gaming patent expirations affected royalties.
- How much revenue and cash flow depended on Samsung and the other major customers, and whether customer concentration changed.
- The eventual HTC litigation outcome, related legal costs, and effects on patent licensing and enforceability.
- Whether operating cash flow recovered after the FY2014 decline and whether deferred-revenue recognition or collections materially affected cash conversion.
- The durability of profitability apart from tax benefits, and the extent to which R&D, sales and marketing spending affected margins.