Immersion Settles With Google And Motorola: Basic Haptics Become A Revenue Stream

| About: Immersion Corporation (IMMR)

Immersion Corporation (NASDAQ:IMMR) announced it entered into a settlement and license agreement with Google (NASDAQ:GOOG) and Motorola Mobility LLC, resolving the patent infringement litigation pending between Immersion and Motorola.

The settlement validates the value of Immersion's IP portfolio

The settlement represents a key step for the company in the mobility sector, for several reasons.

First of all, it allows Immersion to favorably conclude a court case, which is always a risky, lengthy, expensive and often distracting process for any company.

Immersion's ITC lawsuit against HTC remains ongoing, although we believe that Google's and Motorola's decision should push additional pressure on HTC to settle as well. HTC's recent wording after ending its dispute with Apple (NASDAQ:AAPL) might give another indication that something positive might arrive on that front as well for Immersion (emphasis added):

"HTC is pleased to have resolved its dispute with Apple, so HTC can focus on innovation instead of litigation," said Peter Chou, CEO of HTC.

It is also very interesting that Immersion's settlement includes Google, which was never part of any litigation, and Google-branded smartphones containing Basic Haptics.

As we noticed in our previous articles, Immersion's lawsuit was really about Android's use of haptic technology, which was believed to include some "basic" haptic effects covered by the company's extensive patent portfolio (more than 1,200 patents and patent applications). Having settled with the developer of the OS, Immersion is now in a much stronger position when approaching other OEMs licensing Android from Google.

After settling with Motorola, Immersion adds another key OEM to its already impressive lineup in mobility, which includes Samsung, Nokia (NYSE:NOK), LG, Fujitsu, NEC and Pantech, among others. These licensees may also be using basic haptics in some of their lower market offering, becoming a target for the company.

Some tea leaves seemed to indicate a settlement was coming

During the last conference call, management hinted at some sort of potential settlement coming:

Our current and ongoing settlement and licensing discussions lead us to believe that prior to December 31, 2012 it is possible we may conclude one or more basic haptics agreements that would lead to our achieving the higher end of our guidance.

Digging through the information available from the ITC court case, we had noticed that Immersion had been granted a motion to preclude an expert from serving in the investigation. What was interesting was that Motorola was claiming that "there are only a limited number of experts in the field of haptics and most have had some past experience with Immersion". We could not have found a better way to underline that Immersion Corporation is the key company for the development and implementation of haptic technology, but we did not expect it to come from Immersion's opponent in court.

Immersion's business model

Basic haptics will not carry, most probably, high royalties per unit, but it will add a nice revenue stream and will play a key role to convince OEMs to upgrade to the company's more advanced programmable haptics.

Here is how we see Immersion's current approach to licensing in mobility, which represents roughly 50% of its revenue stream:

Click to enlarge

The recent introduction of Immersion's Integrator for OEMs will also contribute to simplify the addition of haptic effects to Android handsets, and speed up the implementation of haptics into new devices. Integrator offers a unique set of modules that provide build-time integration options that automatically add touch feedback into the Android UI.

Conclusion

The happy ending of Immersion's litigation against Motorola may represent the much needed inflection point for the company.

Immersion's high margin (95%) licensing business model, combined with relatively modest fixed costs, allows the company to start generating positive net income on revenues of slightly more than $30 million a year, absent litigation costs. An additional revenue stream from basic haptics can help the company achieve those double-digit growth rates in 2013 that are needed to attract investors' attention.

Smartphones and tablets are one of the fastest growing product categories in the market. Immersion is now present in about 20% of all touchscreens sold, and including basic haptics technology the company can probably target a market share in excess of 30% of all touch screen handsets. Android is the most sold OS in the world as far as smartphones, and the major OEMs using this operating system are already working with Immersion.

Apple's iPhone triggered the migration from mechanical buttons to touchscreens. Although the company hasn't implemented haptics as much as Android across its iOS, given its recent patents and patent applications in the haptic fields, we consider the possibility of Apple using now or in the future at least part of Immersion's IP (and having to license it) as a lottery ticket that might easily bring the company under everybody's radar screen on Wall Street, if it ever happens.

Outside of the mobility sector, touchscreens are becoming part of more and more consumer products, and in some applications, like cars, haptics is seen as a winning proposition as it allows to avoid driver distraction. Even recently, Immersion had nice wins among niche car producers like Aston Martin, while also working with higher volume players in this industry, like GM (NYSE:GM), for its Cadillac CUE system, Visteon, Daesung (Hyundai), Alps Electric Co and Valeo.

The first major large volume applications in the automotive sector may come out in 2013 and beyond. Royalty rates have historically been much higher in this sector for Immersion (about $7 per unit), so that the vertical might become a good revenue contributor for the company even on a relatively small number of cars implementing haptics. Said in a different way, Immersion was probably included in less than 1% of the vehicles sold in 2011 (high end models mainly), but the move toward the use of rotary knobs and touch screens in mid of the range cars might dramatically increase this number.

Lastly, this settlement might be seen as a strong validation of the company's IP, and attract attention for the company as an acquisition target at a time that patents are becoming a key element especially when dealing with competitors in the mobility sector.

Disclosure: I am long IMMR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.