Immersion Corporation — Q3 2023 Form 10-Q
Business context and reporting period. Immersion licenses patented haptic technologies for applications including mobile devices, gaming, automotive and AR/VR. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. The company reports one operating segment.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $9.482 million | $14.006 million | $23.539 million | $29.297 million |
| Operating income | $6.519 million | $10.930 million | $12.891 million | $18.639 million |
| Net income | $2.680 million | $7.705 million | $17.986 million | $10.962 million |
| Diluted EPS | $0.08 | $0.23 | $0.55 | $0.32 |
| Operating margin | 68.8% | 78.0% | 54.8% | 63.6% |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $12.779 million | $32.234 million |
Q3 revenue declined 32% year over year, primarily because fixed-fee license revenue fell $6.5 million, partly offset by a $2.0 million increase in per-unit royalties. For the first nine months, revenue declined 20%: fixed-fee license revenue decreased $7.1 million, while per-unit royalties rose $1.4 million. Royalty and license revenue made up nearly all reported revenue.
Nine-month net income increased despite lower revenue and operating income, principally because interest and other income shifted to a $10.731 million gain from a $6.413 million loss in the prior-year period. The company attributes the swing mainly to gains on marketable equity securities and derivatives, and higher interest income. Q3 interest and other income was a $2.554 million loss, versus a $2.348 million loss a year earlier.
Financial position and liquidity
- At September 30, 2023, cash and cash equivalents were $28.701 million; current investments were $121.997 million and noncurrent investments were $29.855 million. Cash, cash equivalents and current investments totaled $150.7 million, approximately $1.0 million higher than at December 31, 2022.
- Total assets were $204.681 million, total liabilities $35.248 million, and stockholders’ equity $169.433 million. The balance sheet reports no borrowings or debt.
- Current assets of $160.845 million exceeded current liabilities of $25.815 million. Other current liabilities included $11.689 million in derivative instruments and $6.963 million in income taxes payable.
- Nine-month cash flow: $12.779 million provided by operations, $19.366 million used in investing, and $13.532 million used in financing. Cash declined by $20.119 million to $28.701 million.
- Financing uses included $6.419 million of dividend payments and $6.180 million of share repurchases. The company repurchased 898,757 shares for $6.2 million and reported $43.8 million remaining under its repurchase authorization.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management said it expects sufficient capital resources to meet working-capital needs for the next twelve months and beyond, and expects less than $1.0 million of capital expenditures for the remainder of 2023.
- Management expects fixed-fee license revenue to vary with the timing of new agreements and per-unit royalties to fluctuate with licensees’ unit shipments. Q3 included a $0.5 million upward adjustment to estimated per-unit royalty revenue.
- Investment results are a material source of earnings volatility. At quarter-end, marketable securities had $8.938 million of unrealized losses against $4.168 million of unrealized gains; the portfolio included $76.531 million of marketable equity securities. Derivative liabilities were $11.689 million.
- The effective tax rate was 32.4% for Q3 and 23.9% for the first nine months, versus 10.2% and 10.3% in the respective 2022 periods. Management cited higher U.S. taxable passive income. Unrecognized tax benefits were approximately $7.3 million, plus $0.1 million of interest.
- In the LGE Korean withholding-tax matters, a Korean court ruled in June 2023 for cancellation of the earlier assessment, but tax authorities appealed. A separate matter covering 2018–2022 remains in appeal; the company deposited approximately $2.3 million with LGE and recorded a $0.3 million impairment reduction to that deposit. The outcome could affect recoverability of deposits and tax expense.
- Material IP disputes include lawsuits against Meta, Xiaomi and Valve. Outcomes, potential recoveries and costs are uncertain. A further Meta complaint concerning the Quest 3 was filed November 10, 2023, after quarter-end. Management also notes that IP litigation may substantially increase general and administrative expenses.
- The company added a risk factor concerning its acquisition and investment strategy, including potential management distraction, costs, integration challenges, financing needs and dilution. It reported no other material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether recurring per-unit royalties can offset the decline and timing variability in fixed-fee license revenue.
- How much of reported earnings is attributable to recurring operations versus volatile investment, derivative and interest results.
- Developments in the Meta, Xiaomi and Valve litigation, and the Korean tax appeals, including potential costs, recoveries and deposit impairment.
- Future capital allocation: dividend approval and sustainability, actual repurchases, and the remaining repurchase authorization.
- Portfolio composition, derivative exposures and unrealized losses, together with the effects of market movements on earnings and liquidity.