Immersion Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company licenses haptic technology and derives nearly all revenue from fixed-fee licenses and per-unit royalties. Results are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $7.2m | $7.6m | $25.3m | $19.5m |
| Operating income (loss) | $3.7m | $2.6m | $12.0m | $(3.0)m |
| Net income (loss) | $3.8m | $2.9m | $11.1m | $(2.7)m |
| Diluted EPS | $0.12 | $0.11 | $0.36 | $(0.09) |
- Revenue mix: Q3 royalty and license revenue was $7.1m, including $5.8m per-unit royalties and $1.2m fixed-fee licenses; development, services and other revenue was $0.1m. Nine-month per-unit royalties were $20.7m and fixed-fee licenses $4.3m.
- Margins: Operating margin was approximately 51% in Q3 2021 versus 34% in Q3 2020; approximately 47% for the first nine months of 2021 versus negative 15% in 2020. Cost of revenue was immaterial.
- Cash flow: Nine-month operating cash flow was $10.7m, compared with cash use of $3.0m in 2020. Investing used $32.8m, primarily for securities purchases; financing provided $53.1m, mainly from stock issuance.
- Liquidity and debt: Cash and cash equivalents were $90.6m at September 30, up from $59.5m at year-end 2020. Current marketable securities were $28.0m, bringing cash and current securities to $118.6m. The company also held $7.5m of non-current corporate debt securities. Total liabilities were $29.7m; the filing reports no borrowings. Management believed resources were sufficient for at least the next 12 months.
- Equity: Stockholders’ equity was $130.8m, versus $64.0m at year-end. The company raised $50.1m net through 2021 at-the-market offerings and issued 6.0m shares during the nine-month period. Shares outstanding were 33.0m on October 22, 2021.
Changes versus prior comparable periods
- Q3 revenue declined 6%, mainly because per-unit royalty revenue fell 7%. Mobility royalties decreased $1.2m and automotive royalties $0.1m, partly offset by a $0.9m increase in gaming royalties. Fixed-fee license revenue was essentially flat.
- Nine-month revenue increased 30%, driven by a 33% rise in per-unit royalties, including increases from gaming, mobility and automotive licensees, and a 14% rise in fixed-fee license revenue.
- Q3 net income rose by $0.9m despite lower revenue, primarily as operating expenses fell $1.5m. Nine-month results swung from a $2.7m loss to $11.1m income, reflecting higher revenue and $9.2m lower costs and expenses.
- Nine-month selling and marketing expense declined 33%, R&D declined 12%, and general and administrative expense declined 51%. The filing attributes reductions to lower headcount, stock compensation, legal and professional costs, and facility-related expenses.
Outlook, risks and notable items
- No numerical revenue or earnings guidance is provided. Management expects royalties and licenses to remain the principal revenue sources; revenue may vary with license signings, customers’ unit shipments and royalty true-ups. It expects targeted R&D investment and 2021 capital expenditures below $1m.
- Management cited continuing COVID-19 and macroeconomic uncertainty, including possible effects on customer demand and manufacturing. It also warned that electronic-component shortages could reduce licensees’ shipments and royalties.
- Revenue concentration, license renewals, intellectual-property enforcement, customer product discontinuations, automotive program lead times and gaming-market changes are material business risks. Samsung accounted for a significant portion of Q3 revenue; the filing does not provide a clear percentage in the supplied text.
- Q3 per-unit royalty revenue included a $0.5m downward adjustment to estimates from prior periods. Equity-security and derivative activity contributed approximately $0.5m of net gains in interest and other income for the nine months; these investments expose results to market-value changes.
- Legal and tax contingencies: In October 2021, after quarter-end, a Korean High Court cancelled about $5.2m of Korean withholding taxes and penalties relating to Samsung royalties from 2012–2014, while upholding about $1.4m relating to 2015–2016 in part. Both sides appealed. The company had previously paid Samsung approximately $6.9m and recorded a related long-term deposit; recovery depends on the appeals. A separate approximately $5.0m deposit relating to LGE remains subject to litigation, with a court decision expected by February 2022.
- Immersion is pursuing arbitration against automotive licensee Marquardt for unpaid royalties; its last reported royalty was approximately $0.5m for Q3 2020, and Marquardt counterclaimed for approximately $138,000. Separately, a Chinese court upheld invalidation of three Immersion patents; the company had a right to appeal by December 1, 2021.
- The company’s 2021 Executive Incentive Plan was cancelled. Francis Jose became CEO in August 2021 following the interim CEO’s resignation. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of royalty growth and future revenue depends on a limited number of licensees, particularly Samsung, and on gaming royalties?
- What are the eventual outcomes and financial effects of the Samsung and LGE Korean tax disputes, Marquardt arbitration, and Chinese patent appeal?
- How will the $28.0m current securities portfolio and $7.5m non-current debt securities perform, and could investment volatility affect reported earnings or liquidity?
- What additional shares, if any, may be sold under the remaining $60m at-the-market agreement, and what dilution or use of proceeds will result?
- Can the company sustain profitability as cost reductions normalize, and what is the effect of component shortages, COVID-19 and customer product changes on royalty shipments?