Business context and reporting period
Immersion Corporation’s Form 10-Q covers the quarter and nine months ended September 30, 2020. The company develops and licenses haptic technology and related intellectual property, primarily for mobile, gaming, automotive and other device markets. It reports one operating segment.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $7.6m | $10.6m | $19.5m | $24.5m |
| Operating income (loss) | $2.6m | ($1.3m) | ($3.0m) | ($21.9m) |
| Net income (loss) | $2.9m | ($1.4m) | ($2.7m) | ($21.0m) |
| Diluted EPS | $0.11 | ($0.04) | ($0.09) | ($0.67) |
| Operating margin | 34% | (12%) | (15%) | (90%) |
Q3 revenue was down 29%, mainly because fixed-fee license revenue fell 70% to $1.2m; per-unit royalties declined 2% to $6.3m. For the nine-month period, revenue fell 20%: fixed-fee licenses declined 62% to $3.8m, partly offset by a 9% increase in per-unit royalties to $15.5m. Development, services and other revenue remained small.
Operating expenses were $5.0m in Q3, down from $11.9m, and $22.5m for the nine months, down from $46.4m. Lower legal costs—following litigation settlements in 2019—and reduced compensation and other costs contributed to the improvement. Q3 included a $0.3m upward royalty true-up for the prior quarter.
Cash and cash equivalents were $56.0m at September 30, 2020, versus $86.5m at year-end 2019; there were no short-term investments at quarter-end. Nine-month operating cash use was $3.0m, investing cash provided was $3.0m, and financing cash use was $30.5m, primarily from $30.6m of share repurchases. Current assets were $67.3m and current liabilities $8.5m. The filing reports no debt balance. Operating lease obligations totaled $3.6m.
Stockholders’ equity was $54.0m, down from $83.8m at year-end, including the effect of share repurchases. The company repurchased approximately 4.9m shares at an average $6.21 per share; no authorization remained available at September 30.
Outlook, risks and unusual items
- Management said available capital resources were sufficient for working-capital needs over the next 12 months. It expected 2020 capital expenditures to be less than $1m. The filing provides no specific revenue or earnings guidance.
- COVID-19 may delay customer orders and reduce shipments and royalties, particularly in automotive and gaming. The company instituted cost reductions and recorded $0.5m of Canadian wage subsidies for the nine-month period.
- Management expects royalty and license revenue to remain the principal revenue source; fixed-fee revenue may fluctuate with the timing of new agreements. It also expects targeted reductions in certain general and administrative costs while continuing selected R&D investment.
- Customer concentration, license renewals and new license wins, enforcement and validity of patents, and volatility in license timing are significant business risks. Samsung accounted for a significant amount of Q3 revenue; the filing does not state a clear percentage.
- Two Korean withholding-tax matters remain material contingencies. The company has $6.9m deposited in connection with Samsung and provided a provisional $5.0m deposit to LG Electronics (LGE). A Korean court ruled favorably in the Samsung tax appeal, but tax authorities appealed; the LGE appeal remained pending. Unfavorable outcomes could result in additional income-tax expense.
- After quarter-end, CEO Ramzi Haidamus departed on November 3, 2020, and Jared Smith became interim CEO. The separation terms include $472,498 in cash, continued health benefits, accelerated vesting of 11,208 awards, and a further $65,463 payment related to a release of claims.
Important facts for investors to verify
- Whether recurring per-unit royalties can offset lower and timing-sensitive fixed-fee license revenue, and how COVID-19 affects licensee shipments.
- The extent of revenue dependence on major customers, including Samsung, and the status and terms of significant license renewals.
- Developments and potential financial exposure in the Samsung and LGE Korean tax proceedings, including recovery of the related deposits.
- Whether expense reductions are sustainable, given the significant year-over-year decline in legal and administrative costs and the nine-month operating loss.
- Cash use, liquidity needs, and the financial and operational effects of the CEO transition.