Immersion Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are to the same 2012 periods unless stated. Amounts are in U.S. dollars. Immersion licenses patented haptic technology and intellectual property, primarily to manufacturers in mobile, gaming, medical, automotive, and other markets.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $11.34 million | $7.14 million | $35.40 million | $23.31 million |
| Royalty and license revenue | $10.95 million | $6.37 million | $34.58 million | $21.39 million |
| Operating income (loss) | $1.42 million | $(2.94) million | $4.44 million | $(4.92) million |
| Net income (loss) | $1.21 million | $(2.99) million | $4.23 million | $(5.36) million |
| Diluted earnings (loss) per share | $0.04 | $(0.11) | $0.14 | $(0.19) |
- Revenue was up 59% in Q3 and 52% for the nine months. Royalty and license revenue rose 72% and 62%, respectively, chiefly from mobility licensing and sales.
- Gross profit, calculated as revenue less reported cost of revenues, was approximately $11.23 million in Q3 and $35.02 million year to date. Gross margin was about 99% in both periods; cost of revenues excludes separately presented intangible amortization, abandonment, and impairment.
- Operating margin was approximately 12.5% for both Q3 and the nine-month period, versus operating losses in 2012. Lower G&A expense, including reduced litigation costs, helped offset increased sales and marketing, R&D, and intangible charges.
- Cash from operations was $17.24 million for the nine months, compared with $1.30 million used in 2012. The filing attributes cash generation in part to $5.08 million of higher deferred revenue and customer advances, collections of receivables, and net income.
- Cash and cash equivalents were $16.66 million and short-term investments were $47.99 million at September 30, totaling $64.65 million, up from $43.55 million at December 31, 2012. Total current assets were $65.98 million versus current liabilities of $16.54 million.
- No borrowings or interest-bearing debt are reported on the balance sheet. Total liabilities were $25.30 million, including deferred revenue and customer advances; the filing does not present a separate debt balance.
- Stockholders’ equity was $58.84 million; accumulated deficit was $107.49 million. Nine-month stock-based compensation expense was $3.44 million.
Material changes and management commentary
- Growth was concentrated in mobility: Q3 mobility royalty and license revenue increased 137%, and nine-month mobility revenue increased 134%. The March 2013 multi-year Samsung license, other new contracts, and existing licensee activity contributed. Two customers represented 58% of nine-month 2013 revenue; one was Samsung.
- Medical royalty and license revenue increased 22% in Q3 and 29% year to date. Gaming revenue was flat in Q3 but down 7% year to date, which the company attributed mainly to softer console-market shipments.
- Product sales fell 98% in Q3 and 96% year to date as Immersion stopped producing its Virtual IV simulator after entering a royalty-generating license agreement with that customer in December 2012. Management does not expect product sales or development-contract revenue to be significant in the future.
- Sales and marketing expense increased 32% and R&D expense increased 26% in Q3; both rose 32% and 23%, respectively, year to date, reflecting investment in personnel and market initiatives. Q3 G&A decreased 21%, primarily from lower legal and professional expenses; year-to-date G&A was down 2%.
- Regional mix shifted toward the Far East, which represented 71% of Q3 and 70% of nine-month revenue, versus 51% and 46% in 2012, respectively.
Outlook, risks, and contingencies
- Management expects royalties and license fees to remain the largest revenue source, supported by additional licensees, broader inclusion of haptic technology in products, and its Basic Haptics patent-licensing program. It cautions that interim results are not necessarily indicative of full-year results.
- The company believes cash, cash equivalents, and short-term investments are sufficient for at least the next 12 months. It expected 2013 property and equipment spending below $0.5 million and patent filing and application capitalization of approximately $3.5 million. The existing repurchase authorization had $19.4 million remaining; no shares were repurchased in the first nine months of 2013.
- Management expected to complete a full evaluation of deferred tax asset realizability by year-end. A valuation allowance remained against all deferred tax assets; the company expected to move to a three-year cumulative pretax income position by December 31, 2013, subject to results and one-time adjustments. It also expected a tax benefit from release of reserves after statute-of-limitations expirations in the following three months.
- Material risks include dependence on a limited number of licensees and license negotiations, product adoption and licensee sales, seasonality and revenue timing, competition from internal or alternative haptic solutions, and the cost and outcome of patent litigation. The company warns that litigation may consume substantial resources and affect licensing prospects.
- The HTC patent dispute remained active in Delaware; trial was scheduled to begin in March 2015. Three patents had been subject to reexamination; the ’999 patent proceeding ended with some claims amended or cancelled and new claims found patentable. The company said it could not predict the litigation outcome or estimate potential liability. A separate securities class action had been dismissed with prejudice, but plaintiffs appealed; the filing’s described appeal activity had last been reported in 2012.
- Other contingencies include third-party intellectual-property claims and indemnification obligations. Management considered routine matters not likely to have a material adverse effect, but could not estimate the maximum potential impact of IP indemnities.
- A hypothetical 100-basis-point increase in interest rates was estimated to reduce the fair value of cash equivalents and short-term investments by approximately $245,000. Management reported no material foreign-currency exposure and no hedging arrangements.
Important facts for investors to verify
- Whether Samsung and other major licensees sustain royalty growth, and the identity and revenue contribution of the second customer included in the 58% concentration disclosure.
- Progress and outcomes in the HTC litigation, patent reexaminations, and the appeal in the securities class action.
- Whether operating cash flow remains positive when deferred revenue growth and other working-capital movements change.
- The year-end tax valuation-allowance assessment, including whether deferred tax assets are considered realizable and whether expected reserve releases occur.
- Whether increased investment in sales, marketing, and R&D generates durable licensing growth while litigation and stock-based compensation remain significant costs.