Immersion Corporation — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Immersion is an intellectual property and technology licensing company focused on haptics; it reports one operating segment. It discontinued product sales at the end of 2013 and is focused on licensing software and patents.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $15.436 | $13.860 | +11% |
| Royalty and license revenue | $15.157 | $13.649 | +11% |
| Operating income | $2.954 | $1.694 | +$1.260 |
| Net income | $1.864 | $1.687 | +$0.177 |
| Basic / diluted EPS | $0.07 / $0.06 | $0.06 / $0.06 | — |
| Cash from operating activities | $16.439 | $18.962 | −$2.523 |
- Operating margin was approximately 19.1%, up from 12.2%. Revenue less cost of revenue was $15.316 million, approximately 99.2% of revenue, versus $13.712 million, approximately 98.9%.
- Operating expenses totaled $12.482 million, up from $12.166 million. Sales and marketing and R&D increased 23% and 19%; G&A decreased 9%, mainly because litigation expense was lower.
- The income tax provision rose to $1.083 million from $0.017 million; the effective tax rate was 36.7% versus 1.0%. Management said it expected limited cash tax impact because of tax-loss and other deferred tax assets.
- Cash, cash equivalents, and short-term investments were $81.345 million at March 31, 2014, up from $71.112 million at year-end. Current assets were $90.448 million and current liabilities $30.019 million. The filing discloses no borrowings or other funded debt.
- Operating cash flow was supported by a $12.947 million increase in deferred revenue, mainly from customer payments received before revenue recognition. Investing activities used $0.313 million; financing activities used $5.897 million, including $6.222 million of cash repurchases. The company also disclosed $0.660 million accrued for treasury stock purchases.
- Deferred revenue totaled $35.308 million, including $11.928 million long-term; the long-term balance largely relates to advance license payments from Sony Computer Entertainment.
Material changes and management commentary
- Gaming royalty and license revenue increased 96%, primarily reflecting new console products, including Sony PlayStation 4. Medical and automotive revenue increased 32% and 26%; mobility revenue declined 18%, including an approximately $2 million prior-year overlapping payment that did not recur.
- Samsung accounted for approximately 32% of Q1 2014 revenue; two other customers accounted for 18% and 10%. Samsung represented approximately 51% in Q1 2013.
- Management expected royalty and license fees, particularly from mobility and gaming, to remain the main revenue source. It expected sales and marketing expense to increase and planned significant additional R&D investment, including in content and media. Management did not expect meaningful revenue from the content and media initiative in 2014.
- Management said available cash and investments should meet working-capital needs for at least 12 months. 2014 capital expenditures were expected to be below $2 million. The share repurchase authorization had approximately $12.6 million remaining.
- The company changed its accounting for external patent-related costs in Q4 2013: internally developed patent and trademark costs are now expensed as incurred rather than capitalized. The change was applied retrospectively to comparative periods.
Risks, contingencies, and unusual items
- Patent and shareholder litigation remain significant uncertainties. The shareholder securities case was on appeal after dismissal with prejudice; the Ninth Circuit heard oral argument in February 2014 and had taken the case under submission. In the HTC patent case, claim-construction and dispositive-motion proceedings were scheduled for November 2014 and trial for March 2015. The company said it could not predict outcomes or estimate potential liability.
- HTC’s patent reexaminations resulted in certificates that cancelled or amended certain claims. The filing cautions that adverse rulings or narrowed patent scope could impair licensing revenue; litigation also brings expense and management distraction.
- Revenue is exposed to license renewals, customer product sales and reporting, seasonality, and a concentrated customer base. Gaming revenue depends on console and peripheral markets; mobility revenue can fluctuate with licensing arrangements. Most revenue is royalty and license revenue, and the company does not control licensees’ product launches or sales.
- Unrecognized tax benefits were approximately $1.7 million, including interest; $0.266 million would affect the effective tax rate if recognized. The company expected a reserve release and tax benefit as statutes of limitations expired within the following nine months.
- A hypothetical 100-basis-point interest-rate increase was estimated to reduce the fair value of cash equivalents and investments by approximately $0.345 million. The company reported no foreign-exchange hedging arrangements.
Important facts for investors to verify
- Review the Samsung license amendment filed as Exhibit 10.1 and assess the duration, economics, and revenue-recognition effects of the agreement.
- Track customer concentration and changes in major licensee contributions, especially Samsung, and confirm whether gaming growth offsets mobility declines.
- Monitor the HTC case, patent reexaminations, and shareholder-litigation appeal for developments affecting patent scope, legal expense, or potential exposure.
- Assess how much operating cash flow depends on advance customer payments and deferred revenue, rather than recurring earnings conversion.
- Reconcile the $6.222 million cash repurchase amount with the $6.882 million repurchase total disclosed in the note, including accrued purchases; confirm remaining authorization.
- Verify the recoverability and use of deferred tax assets, the expected timing of uncertain-tax-position reserve releases, and the resulting cash-tax impact.