Immersion Delivers a Disappointing Quarter, But Hints at New Licensees

| About: Immersion Corporation (IMMR)

Last week Immersion Corporation (NASDAQ:IMMR) reported Q2 earnings, and the numbers were quite disappointing. A quick look at some of the highlights:

  • Revenues were $6.7 million, as compared to $8.5 million for the second quarter of 2010. Excluding product revenues (of approximately $1 million) in the medical segment, primarily related to lines transferred to the company's medical licensee CAE, and true ups to gaming royalty reports (approximately $1 million) that also impacted Q2 2010, a more appropriate apples to apples comparison sees revenues basically flat from last year;
  • Royalty and license revenues totaled $5.9 million, compared to $6.3 million for the same period last year (impacted by the true ups in gaming);
  • Net loss in Q2 2011 was $(1.3) million, or $(0.05) per share, compared to net income of $180,000, or $0.01 per share, last year;
  • Adjusted EBITDA was $442,000, compared to $2.0 million in Q2 2010;
  • At the end of the quarter, Immersion's cash, cash equivalents, and short-term investments were $64.9 million, compared to $61.2 million as of December 31, 2010.

Needless to say, both revenues and earnings came below analysts consensus.

On Friday, the stock gave up about 13%, and closed the session at about $7, having lost more than 30% from its recent peak beyond $10. Almost one million shares were trading on Friday alone, more than three times the average volume, and quite a volume for a company with less than 30 million shares outstanding.

While the company does not issue quarterly guidance, these numbers came below management's expectations, as remarked in the press release issued by Immersion:

While we expected the second quarter to be seasonally weaker than the immediately preceding quarter, revenues were softer than anticipated due to specific customer issues in the medical segment, as well as disruption in the automotive market as a result of the earthquake in Japan," said Immersion CEO Victor Viegas. "Leading indicators for our business remain positive, however, as the level of design engagements has increased dramatically as compared to this time last year. We continue to gain traction with the addition of new licensees and new devices leveraging Immersion technology across a variety of markets, while continuing to strengthen and broaden our powerful patent portfolio as the demand for haptics continues to develop.

The company's conference call was quite interesting, as Immersion discussed in-depth some recent developments that might impact the second half of the year and future revenues.

First of all, the company reiterated its guidance for 2011 revenues to be in the range of $31 to $33 million, and to generate a net income for the full year. A back of the envelope calculation reveals that Immersion expects Q3 and Q4 revenues to be in the range of $7.25 to $8.25 million per quarter, which would still represent, offsetting sales derived from divested product lines, a 10% to 27% increase to last year's performance. To put it in perspective, growth in royalty and license revenue was about 12% in the first half of the year, compared to 2010 (which was impacted by gaming true ups, as noticed).

During the conference call management officially confirmed that the company's technology is now incorporated in Nokia's (NYSE:NOK) new N9 smartphone, due for launch after the holidays, and into Toshiba's (OTCPK:TOSBF) Thrive tablet, as we speculated in a previous article.

A number of prototypes with Immersion technology were demonstrated behind closed doors [at Computex]. I’m pleased to announce that the first of these to market is the Toshiba Thrive tablet incorporating our TouchSense 3000 Solutions, which launched worldwide in July. We’re excited to have extended our relationship with Toshiba following our inclusion with Toshiba Libretto dual touchscreen mini notebook announced last year.

A new licensee in mobility was also specifically mentioned during the conference call:

In addition, we’re also pleased to announce that we expect Fujitsu to bring a new handset to market with Immersion technology this summer.

Last year, Toshiba and Fujitsu merged their mobile phone businesses to create Japan's second-largest cell phone maker (after market leader Sharp). It is recent news that Toshiba decided to exit the mobile phone business by selling to Fujitsu Ltd. (OTC:FJTSF) all its stockholdings in this joint venture, which may be the reason why Immersion referred to Fujitsu as the licensee – but we see the relationship with Toshiba as probably the catalyst to this new agreement.

As separate companies, Fujitsu used to make handsets for Japan's top mobile carrier, NTT DoCoMo (NYSE:DCM), while Toshiba mainly supplied to the second-leading carrier, KDDI.

While Toshiba/Fujitsu phones may not be very popular in the USA or Europe, it is certainly an interesting win for the company and for the implications in a key and very demanding market like Japan.

More important, Immersion's CEO revealed that the company is now engaged with 6 of the top 10 phone producers:

As we sit here today at the midpoint of 2011, I can offer perspective on this market evolution and reflect back on where we were at this juncture a year ago. At that time, we are actively engaged in designs with three of the top ten handset manufacturers. Today we are working with six of the top ten.

During the Q&A session, more color was added to this comment:

Victor Viegas

So, what I said was, there are currently six of the top 10 OEMs that we’re engaged with and of those we have three announced license agreements, Samsung, LG and Nokia. Of the other three, we have – some are licensed and others are not licensed, but we are in various stages of co-development, demo, prototype, pre-production kinds of efforts. So we expect to see as we – I think I’ve mentioned apart from Fujitsu here, soon the others will really depend on their own launch plans and strategy.

The ten largest handsets producers are Nokia, Samsung (OTC:SSNLF), LG, Apple (NASDAQ:AAPL), TCL (Alcatel), Motorola (NYSE:MMI), Huawei, ZTE, HTC and Sony Ericsson. Fujitsu isn't even part of this list [that also misses Research In Motion (RIMM)], so those who are over-optimistic about the company might even assume there's room for three more licensees, in the close future, and Fujitsu. Our crystal ball is usually unreliable, but we wouldn't mind to see HTC and Sony Ericsson, among those in this list, testing Immersion's technology and potentially becoming new customers, hopefully by 2012.

Texas Instruments (NYSE:TXN) was also announced as a new licensee to Immersion's technology, although the company has been in “partnership” with Immersion for a longer time:

In fact, two weeks ago, you may have seen that TI announced their DRV8662 Piezo Haptic Driver, and it’s part of our TouchSense 5000 high definition haptics reference design.

It’s a key component in the ecosystem of enabling technologies. I am also happy to report TI as a new licensee and we’re encouraged by all their activity in space and we look forward to letting you know more about what they are working on and what products they have planned to launch in the future.

TI's press release about this new product is worth a quick mention:

TI introduces industry's most highly integrated piezo haptic driver

Ultra-fast start-up time and wide driving capabilities enable quick, flexible tactile feedback implementation in consumer and industrial application.

"Realistic tactile feedback effects considerably enhance the overall user experience of touch-enabled consumer electronics devices," said Steve Anderson, senior vice president of TI's High Performance Analog business. "The integration of the DRV8662 haptics driver makes it easy to include effects like localized vibrations and frequency variations in both touch screen-input devices and those without a touch screen, from mobile phones and tablets to computer accessories, home appliances, and industrial automation consoles."

Texas instruments is a component supplier to Nokia, as well as Apple (and many others). Soon, the company will have Immersion's software integrated into its chip solutions, which also means that Immersion will leverage, at no cost, TI sales force to promote the adoption of haptics with new customers.

Lastly, a comment on the automotive sector:

Specifically in the automotive market we have seen a recent surge of design activity with automotive partners and looking at the pipeline of opportunities, we expect to see a number of new and innovative automotive interfaces enter the market next year that take advantage of Immersion haptics.

In summary, a disappointing quarter, but also some interesting information that might bode well for Immersion's future developments – including potentially doubling the licensees in mobility and some solid growth in the automotive sector foreseen starting from next year.

Hoping no Latin teacher is reading, we could probably summarize it as “quartus horribilis, annus mirabilis?”

Disclosure: I am long IMMR.