Immersion Corporation Coming Conference Call: A Shareholder's Wish List

by: Paolo Gorgo

Since it moved to a license only business model, Immersion Corporation (NASDAQ:IMMR) has also improved its communication to shareholders, releasing annual guidance for 2010 and a few more data about its business model.

Investors tend to be extremely demanding, and we are no exception. Here is our (shortened) shareholders' wish list for the incoming Q4 conference call, due on next Thursday, March 10:

Annual and quarterly guidance

Immersion introduced its first annual guidance in Q3 2009, due to the change in business model, to give investors a frame on what to expect in 2010. Guidance was for revenues of at least $25 to $30 million, a number that will most probably be exceeded by the Company.

At the Q4 2009 conference call, Immersion also gave guidance for Q1 2010, but reminded investors that it was to be considered a “one time event” (SA conference call transcript):

While we don’t expect to provide quarterly guidance regularly, given that we are at March 30, it seems prudent to give you a little color on expected Q1 results. We anticipate total revenues of approximately $8 million with royalty and license revenues comprising approximately $6 million.

There are so many reasons why we believe that giving out both quarterly and annual guidance is even more appropriate this year, that this article could become a long, boring list of arguments. In summary, the year just past was a key turnaround period for the company, but still included revenues from discontinued lines (and costs associated with these lower margins activities). Some royalties derived, for example, from the laparoscopy, endoscopy and endovascular medical product line sold to CAE Healthcare (NYSE:CAE) only impacted a limited part of the year (second half).

As 2011 will be the first full year based on the new business model, guidance will be key to let analysts and investors understand what’s happening and model what to expect from the company going forward. Quarterly guidance would also help understand Immersion's seasonality better.

Give out as many details as possible on past results

This is a two faced problem. Perhaps not all investors have followed the latest developments very closely, so it will be necessary to break down 2010 results, impacted by discontinued products lines, as much as possible. Management should really try to make an “apples to apples” comparison easy for new investors, to avoid a wrong comparison between 2010 results and 2011 forecast. There's nothing worse than a growth story that looks like a declining one. There have been a few “one time events” in 2010, like the reconciliation of certain customers royalty reports in the gaming market in Q2, or non-recurring gains in the medical business, that need to pointed out again for a proper understanding of the company's performance.

Inside the main “royalties” revenue stream, there is very little visibility on the categories contributing to Immersion's numbers. While the company may not feel it appropriate to disclose actual numbers, at least a mention, in percentage, of the main contributors (among mobility, automotive, medical, semiconductor, gaming, etc.) would help. There's nothing wrong in mobility being the main driver, right now, or automotive and chips relatively modest – it would still give a frame to investors for modeling purposes (revenues from semiconductor partners have been growing nicely, and new products should impact 2011, while automotive is probably a 2012 story).

Latest wins in the mobility segment and Nokia future developments

Immersion's success derives from the introduction of successful products by it partners. The recent Mobile World Congress 2011 saw several new phones and tablets launched by its main Korean partners, Samsung (OTC:SSNLF) and LG (OTC:LGERF) – see also my recent instablog.

There is no doubt that these products should positively impact future revenues. Tablets will also represent a “new” category, that will help introducing haptics to more end users as much as represent additional revenues for the company.

Nokia (NYSE:NOK), on the other side, has mainly been in the news for its new strategy of embracing Windows Phone 7 (NASDAQ:MSFT) as its smartphone operating system. Any comment on what this might mean for Immersion-- in the short and long term-- would certainly help investors remove an uncertainty about this key partner in the mobility space.

Activist funds

There are at least two activist funds, Ramius and Dialectic Capital, that recently proposed new candidates for Immersion's Board of Directors.

Immersion has been, so far, very quiet on this front. While there may be very good legal and practical reasons for this behavior, there is no doubt that management will be asked to comment on this matter. We still believe that a key point of discussion is on what could bring investors a better return, whether an immediate sale of the company or giving Immersion more time to develop its full potential. If management is convinced of the latter, we believe it should also try to give investors as many good reasons as possible to support this view. Shareholders should be put in a position to take an informed decision when they will be asked to vote for the new Board of directors.

Disclosure: I am long IMMR.