Immersion Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Immersion develops and licenses haptic technologies and products, with one reportable segment. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $6.476m | $6.682m | $16.167m | $16.450m |
| Royalty and license revenue | $5.930m | $5.882m | $15.015m | $14.235m |
| Operating income (loss) | $(2.310)m | $(1.113)m | $(1.986)m | $0.764m |
| Continuing-operations income (loss) | $(2.308)m | $(1.328)m | $(2.527)m | $0.017m |
| Net income (loss) | $(2.155)m | $(1.310)m | $(2.374)m | $0.078m |
| Basic and diluted EPS | $(0.08) | $(0.05) | $(0.09) | $0.00 |
Q2 operating margin was approximately negative 36%, compared with negative 17% a year earlier; six-month operating margin was approximately negative 12%, versus positive 5%. The filing does not present a separate gross-margin figure. Q2 and six-month net losses include $0.153m gains from discontinued operations, related to payments on the 2009 sale of the 3D product line.
Liquidity, cash flow and balance sheet
- At June 30, cash and cash equivalents were $8.397m and short-term investments were $43.964m, totaling $52.361m, down from $56.285m at December 31, 2011. Current assets were $56.470m; current liabilities were $10.654m.
- Six-month operating cash flow was a use of $0.966m, compared with $3.130m provided in 2011. Investing activities provided $2.960m; financing activities used $0.895m. Cash increased $1.099m to $8.397m.
- Total liabilities were $23.211m, including $16.847m of current and long-term deferred revenue and customer advances. The balance sheet reports no borrowings or financial debt.
- Stockholders’ equity was $49.712m and accumulated deficit was $108.531m. The company repurchased 387,288 shares for approximately $2.048m in Q2; $23.113m remained under the authorization.
Changes versus prior period and management outlook
- Revenue fell 3% in Q2 and 2% for the first half. Royalty and license revenue rose 1% and 5%, respectively, while product sales declined 37% and 60%, mainly due to lower demand for the Virtual IV medical simulator. Development and other revenue declined 20% in both comparisons.
- Management attributed the larger losses primarily to higher general and administrative expense, including litigation expense increases of approximately $1.5m in Q2 and $3.0m for the first half. G&A rose 42% in Q2 and 48% for the first half.
- Management expects royalty and licensing to remain the principal revenue source during the remainder of 2012. It expects product sales to remain at reduced levels and development-contract revenue not to be significant. It also expects continued investment in sales and marketing and research and development, and significant future spending to protect and enforce its intellectual property.
- Management said cash, cash equivalents and short-term investments should meet working-capital needs for at least 12 months. Expected 2012 capital spending on property and equipment was less than $1.5m; patent filing and application costs to be capitalized were expected to be approximately $3.5m.
Risks, contingencies and unusual items
- Major exposure is litigation. The company’s securities class action dismissal was appealed; a derivative action remains stayed. The company reached an agreement in principle to settle the Kasmer matters, subject to approval. It also filed patent actions against Motorola and HTC; the ITC investigation was instituted and related district-court cases were stayed pending that investigation. The company could not estimate potential liability for the referenced actions.
- Litigation contributed to sharply higher expenses and is expected to continue consuming financial resources. Accrued legal costs were $1.019m at June 30.
- Two customers represented approximately 32% of first-half 2012 revenue. Royalty revenue depends on licensee product shipments, sales and reporting; revenue can be volatile, seasonal and subject to out-of-period adjustments. The filing notes a $0.420m first-half mobility royalty adjustment from compliance-program efforts.
- Deferred revenue from Sony Computer Entertainment was $11.135m at June 30. The company maintains a full valuation allowance against deferred tax assets; unrecognized tax benefits were approximately $0.680m, including interest, with about $0.252m potentially affecting the effective tax rate if recognized.
- Interest-rate sensitivity: a hypothetical 100-basis-point increase was estimated to reduce the fair value of cash equivalents and short-term investments by approximately $0.252m. The company reported no foreign-exchange hedging arrangements.
Key facts for investors to verify
- Whether licensing growth and licensee shipment trends can offset continued weakness in medical product sales and any softness in gaming.
- Future litigation costs, the status and outcomes of the patent proceedings and shareholder matters, and whether any resulting liability or settlement can be estimated.
- Customer and deferred-revenue concentration, including the durability and timing of Sony-related revenue recognition.
- Cash burn, share repurchases, and management’s 12-month liquidity assessment in light of expected legal and patent-related spending.
- Whether the filing’s reported effective tax rates and tax benefits are understood alongside the full deferred-tax valuation allowance and unrecognized tax positions.