Immersion Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Immersion licenses haptic technology and related intellectual property, principally for mobility, gaming and automotive uses. Results are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $7.0 million | $8.0 million | $14.1 million | $15.3 million |
| Operating income | $3.1 million | $4.1 million | $6.4 million | $7.7 million |
| Net income (loss) | $7.0 million | $(1.8) million | $15.3 million | $3.3 million |
| Diluted EPS | $0.21 | $(0.05) | $0.47 | $0.10 |
| Operating margin | 44.6% | 51.5% | 45.3% | 50.4% |
Revenue was almost entirely royalty and license revenue. Q2 fixed-fee license revenue was $1.2 million and per-unit royalties were $5.7 million. The filing does not report gross profit or gross margin. Net income benefited substantially from investment and derivative gains: interest and other income was $6.8 million in Q2 and $13.3 million for the half-year, versus losses in the comparable 2022 periods. These gains make reported net income notably different from operating performance.
- Cash flow: First-half operating cash flow was $8.8 million, down from $18.6 million. Investing activities used $22.7 million and financing activities used $9.0 million. Cash and cash equivalents declined $23.0 million to $25.8 million.
- Liquidity: Cash, cash equivalents and current investments totaled $157.5 million at June 30, up from $149.7 million at year-end. Total assets were $202.5 million and total liabilities $32.5 million. The filing reports no borrowings or debt balance.
- Capital returns: First-half dividends paid were $5.4 million; the company repurchased 413,696 shares for $2.9 million. $47.1 million remained authorized under its repurchase program at quarter-end.
Changes versus comparable periods
- Q2 revenue declined 13%; first-half revenue declined 8%. Q2 per-unit royalties fell 14%, chiefly from mobility licensees; gaming and automotive royalties partly offset the decline. For the first half, mobility royalties fell $1.7 million while gaming royalties increased $1.2 million.
- Operating expenses were broadly flat in Q2 and rose 1% for the half-year. First-half general and administrative expense increased 16%, including higher compensation and legal consulting costs; research and development expense declined 74%, primarily due to lower headcount.
- First-half net income increased year over year, driven largely by the swing in investment and derivative results rather than revenue growth. The effective tax rate was 28.8% in Q2 and 22.1% for the first half, compared with 8.7% and 10.6%, respectively, in 2022.
Outlook, risks and unusual items
- No revenue or earnings guidance is provided. Management expects royalty and license revenue to remain a major component of future revenue, but says fixed-fee revenue depends on the timing of new agreements and royalties fluctuate with customer unit shipments. Management anticipates less than $1.0 million of capital expenditures for the remainder of 2023 and believes resources are sufficient for working capital needs for the next twelve months and beyond.
- Investment gains and losses can materially affect reported earnings; the portfolio includes marketable equity and debt securities and derivatives. The filing reports $6.2 million of derivative liabilities at June 30.
- Litigation: The company is pursuing patent-infringement cases against Meta, Xiaomi-group companies and Valve. Meta filed six inter partes review challenges to Immersion patents; Valve moved to dismiss. Outcomes, timing and any recoveries are uncertain, and litigation may increase legal expense.
- Korean tax matter: A Korean court ruled in June 2023 that withholding taxes and penalties assessed on LG Electronics for 2012–2014 should be cancelled, but Korean tax authorities appealed. Immersion also made a provisional deposit of approximately $2.3 million related to LGE’s 2018–2022 tax assessments and has appealed those assessments. The company had accrued $0.3 million related to the newer period; recoverability remains subject to the proceedings.
- The filing adds acquisition-related risks, including management distraction, costs, integration challenges, and possible financing or dilution. It reports no other material change to previously disclosed risk factors.
- Deferred revenue was $15.0 million for fixed-fee license obligations to be recognized over time, including $9.3 million over one to three years and $5.7 million beyond three years.
Important facts for investors to verify
- How much future earnings and cash flow depend on recurring licensing activity versus volatile investment and derivative results.
- Whether mobility royalty declines persist and whether gaming, automotive or new-market licensing offsets them.
- Developments and potential costs or recoveries in the Meta, Xiaomi and Valve cases, including Meta’s patent challenges.
- Outcome and recoverability of the LGE deposits and the effect of any adverse Korean tax rulings.
- Future investment-portfolio values, dividend decisions and use of the remaining share-repurchase authorization.