Immersion Corporation — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013, Immersion operated as an intellectual-property and technology licensing company focused on patented haptic technology. It reported one operating segment. The comparable period is Q1 2012; financial statement amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $13.860 | $9.691; up 43% |
| Royalty and license revenue | $13.649 | $9.085; up 50% |
| Operating income | $2.260 | $0.324 |
| Net income (loss) | $2.253 | $(0.219) |
| Diluted earnings (loss) per share | $0.08 | $(0.01) |
| Operating margin | 16.3% | 3.3% |
| Net margin | 16.3% | (2.3)% |
| Operating cash flow | $19.656 | $1.789 |
| Cash, cash equivalents and short-term investments | $64.217 at March 31 | $43.546 at December 31, 2012 |
Q1 operating cash flow included a $14.565 million increase in deferred revenue and customer advances, primarily associated with new customer agreements and projects. Receivables used $1.480 million of cash. Investing activities provided $4.234 million, including $15.0 million of investment maturities and $10.0 million of investment purchases; financing activities provided $1.775 million, mainly from option exercises.
Current assets were $68.323 million and current liabilities were $25.740 million at quarter-end. Total liabilities were $36.084 million, including deferred revenue; the filing reports no borrowings. The company said available cash and investments should cover working-capital needs for at least 12 months.
Material changes versus the prior period
- Mobility royalty and license revenue rose 138%, driven partly by a new multi-year Samsung agreement and higher device volumes from Korean and Japanese licensees. Medical revenue rose 40%; gaming revenue fell 27% amid a softer console market and lower shipments.
- Samsung represented approximately 51% of Q1 revenue, versus 20% in Q1 2012. Far East markets generated 69% of revenue, compared with 39% a year earlier.
- Product sales declined 93% to $19,000. Following a December 2012 licensing agreement, Immersion no longer produces its Virtual IV system. Development-contract and other revenue fell 43% to $192,000.
- General and administrative expense increased 29% to $6.138 million, with litigation expenses up approximately $1.6 million. Sales and marketing rose 29% and R&D rose 17%, partly reflecting higher compensation and headcount. Stock-based compensation was $1.037 million, up from $0.720 million.
- Current deferred revenue and customer advances increased to $19.139 million from $3.934 million at year-end; long-term deferred revenue was $9.581 million, including $8.887 million related to Sony Computer Entertainment.
Outlook, risks and contingencies
- Management expects royalty and license revenue to remain the principal revenue source. It expects product sales and development-contract revenue not to be significant, while continuing investment in sales, marketing, and R&D. No specific revenue or earnings guidance was provided.
- Management cited seasonality in mobility and gaming royalties, dependence on licensee shipments and reported sales, and difficulty forecasting variable per-unit royalties. It said IP litigation may consume significant resources. The company expects legal expenses to be reduced in 2013 compared with Q1, citing 2012 settlements and an anticipated change in litigation strategy.
- The company maintained a full valuation allowance against deferred tax assets because of uncertainty about future taxable income. Management said stronger projected results could support releasing a substantial portion in Q4 2013, but emphasized uncertainty; such a release would increase income in the period recognized.
- A securities class action dismissal with prejudice was appealed; the derivative action was dismissed with prejudice in January 2013. The Motorola dispute was settled and related proceedings terminated. The HTC ITC investigation was terminated, while a related district-court case was reopened after quarter-end. HTC patent reexaminations included non-final rejections of claims in two patents. Outcomes and potential liability were not estimable.
- Other key risks include customer concentration, possible adverse outcomes in patent litigation or reexaminations, competition from internal or alternative haptic solutions, and exposure to changing licensee product demand. Accumulated deficit was $109.468 million despite Q1 profitability.
Most important facts for investors to verify
- Samsung agreement terms, revenue recognition, and whether the unusually high customer concentration and mobility royalty growth persist.
- How much of operating cash flow reflects customer advances and deferred revenue, and when associated obligations will be recognized as revenue.
- Developments in HTC litigation and patent reexaminations, related legal costs, and the $2.603 million accrued legal liability at quarter-end.
- Whether operating performance supports management’s possible Q4 release of deferred-tax valuation allowance; the filing provides no guarantee of a release.
- Whether variable royalties, seasonality, and licensee shipment trends sustain profitability beyond this quarter; interim results are not necessarily indicative of full-year results.