Immersion Earnings: The Good, The Bad And The Ugly

| About: Immersion Corporation (IMMR)

Last week, Immersion Corporation (NASDAQ:IMMR) reported Q3 2011 earnings.

Total revenues for Q3 2011 were $6.5 million, unchanged from Q3 2010, and less than the consensus estimate of $7.52 million. Net loss for the quarter was $(1.4) million, or $(0.05) per share, less than analysts' expectations of a ($0.02) loss. The company also lowered yearly guidance, and now expects 2011 revenues to be in the range of $29.5 to $30.5 million, with a net loss of $(1.0) to $(2.0) million.

While Immersion remains optimistic about the accelerating adoption of haptics and the strengthening of the company's IP in fundamental haptic technologies, Q3 represented a disappointing quarter, with guidance for Q4 confirming some sort of near-term softness in revenues.

In spite of a disappointing general picture, the conference call also gave management the opportunity to disclose a few interesting information about some key developments which might lead to future improvements in some of the company's verticals. As it often happens with Immersion there are downsides, potential upsides and parts that could, or should have been done better – reminding us of Sergio Leone's famous spaghetti western.

The good

Royalty and license revenues totaled $5.9 million in Q3 2011, an increase of 14% compared to the same period last year, and basically flat compared to Q2 2011.

Here is a quick look at Immersion's royalty stream in the last few quarters:

(Click to enlarge)

A comparison between revenues in the first 9 months of 2011 ($22.9 million) and normalized revenues in the same period of last year's (i.e. excluding true ups and discontinued or transferred product lines) shows an improvement of about 15%.

The company signed new licensees in the quarter, including Sirius XM (NASDAQ:SIRI) for its new Lynx satellite radio receiver, Lexmark (NYSE:LXK) for its high end office printers, and broadened its relationship with Mako Medical (NASDAQ:MAKO).

More interestingly, the company confirmed that it is behind General Motors (NYSE:GM) new haptic infotainment system recently introduced for its high end Cadillac range:

We’re also pleased to announce that Immersion's technology was highlighted in the recent launch of the Cadillac CUE navigation system at the CTIA Conference in San Diego. The revolutionary infotainment interface, combines capacitive controls, proximity sensing and Haptics to deliver a safe and connected automotive control interface. This design, over three years in development, is one of the early examples of the new automotive applications for Haptics that will be coming to market in 2012.

In other words, 2012 might finally see a few new products launched by Immersion’s partners in the automotive vertical, which probably represents the company's largest sleeping potential.

Another company's partner, Visteon (NYSE:VC), just released a similar announcement concerning a new Fisker Automotive product launch, the Karma EV (emphasis added):

The Karma incorporates Visteon's advanced infotainment platform that allows technologies to be quickly added and customized for any market. The system provides state-of-the-art onboard navigation, AM/FM/satellite radio, USB/iPod connectivity, and Bluetooth wireless technology audio streaming and hands-free phone functionality. Visteon designed the user interface for all major vehicle infotainment and climate controls, accessed through a 10.2-inch haptic touch screen display that eliminates the need for mechanical dials and buttons, reducing materials and production tooling.

The company also noticed that Fujitsu recently launched the very first MOTIV enabled smart phone available in the market, called the F-12C and a MOTIV tablet, called the Arrows, and remains confident as far as its negotiations with 2 other leading OEM in the smart phone segment.

The bad

Q3 numbers were certainly disappointing compared to consensus, and confirm a persisting softness in a few verticals, like medical and automotive. The former is probably more cause of concern, as it seems that the company's partners are not really growing their revenues as expected. The weaker than expected result in the automotive sector can be explained by lack of new products in the market and the consequences of the Japanese earthquake that hurt the production capacity of a few partners (it should be remembered that Immersions receives royalties one quarter in arrears).

One major OEM in the handset vertical stopped its negotiations for implementing Immersion's haptic technology in its product range, and, in general, given the strong smart phone sale results achieved in particular by one of Immersion's partners, Samsung, it seems that the company is kind of under-performing investors' expectations.

The ugly

During the conference call Immersion's management announced that the company has recently been awarded new patents that substantially strengthen the company's IP:

Since the end of the second quarter, we have had 30 new patents issued, four of which are fundamental to the implementation of Haptics on Touchscreens. The features covered by these patents, serve as a foundation of today’s Haptic user interfaces. They include experiences such as the buzz you receive on your touchscreen when you’re typing on a virtual keyboard. The vibration you receive when you’re engaged in game play or in another activity, and get a notification that you’ve received a text message or an incoming call, or the association of distinct Haptic effects to notifications such as calendar reminders, or voice mail messages.

The continued proliferation of unlicensed Haptic solution marks a yet untapped opportunity for Immersion, and we look forward to updating our investors in future quarters on our efforts to monetize these patents.

During the Q&A session, Vic Viegas, Immersion's CEO, had the opportunity to explain in more depth what strategy the company could be envisioning:

Jeff Schreiner – Capstone Investments

Vic, I’d like to follow up on your last comment because it seems to me, personally, that all the alluding you’re doing about the patents is not about possible sales, but about a possible litigation strategy. Is – what are some of the opportunities or strategies on a broader basis that you may have been looking at without maybe telling us exactly what they are to monetize? How does one monetize the patent portfolio Immersion’s had for so long and do it here quickly?

Victor Viegas

Probably the best way to describe it, Jeff, would be, you know, the situation that we’re facing today, we’re extremely excited about the opportunity; the market clearly is embracing haptics in a large and meaningful way. But this situation, I would say, is very similar to where we were ten years ago in console and gaming. You know, we had at that time launched a number of high-quality haptic solutions, had licensed a number of very successful companies and they were gaining tremendous success in the marketplace. And based on that success, others entered into the space with homegrown solutions, launched their own products and we believed, at that time, that we had the underlying IP portfolio that covered those products. We spent quite a bit of time in licensing negotiations and engaging down in ways to bring those under license. And ten years ago, that didn’t quite work out and resulted in litigation.

Today, I think we’re similarly excited about the growing adoption of haptics in the mobile marketplace with mobile device, and we believe that our underlying IP portfolio is quite strong and growing as we speak. And as a result, we’re engaged in those types of discussions with a number of different companies and we hope, we believe that they will result in a good solid licensing agreements in place that generate a substantial revenue growth for the company.

The alternative to the results of a good license agreement may include litigation, may include other types of activities. I can’t really go into any of those details at this time.

Those who have followed Immersion Corporation throughout these years will remember that the litigations alluded to were with two large companies, Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT).

This is an interesting developments, as things could get “ugly” for OEM that have implemented haptic effects on their smart phones, without licensing Immersion’s technology - or, from a different prospective, it is quite "ugly" that the company is forced to threaten legal actions for lack of capacity to convince customers to license its technology.

While it is possible that the company intends to pursue exactly the same route to defend its IP as it did years ago with Microsoft and Sony, it also seems reasonable to assume that it is not really in the interest of any OEM to risk a costly and lengthy litigation to avoid paying, at worse, a very reasonable license fee (adding a cost of about 10 cents per handset), that could also give access to a much wider range of haptic effects. This is basically to say that we do not expect Immersion Corporation to sue Apple (OTC:APPL) tomorrow morning (assuming the recently introduced haptic effects in Apple's new iOS may infringe the company's IP), but we do believe that Immersion will make a stronger use of its patents portfolio to convert potential customers into licensees or to stop OEM from using its IP without a license – something its current licensees will also appreciate, as it might mean that some competitors could be left with using very basic haptics effects.

Whether achieving this target might also include, in the future, starting a single litigation to show how serious the company is about defending its IP is a difficult guess, but there's no shortage of legal suits in the handset sector, and Immersion could end up joining the list of the many players in the patent portfolio game, on the offensive side.

Disclosure: I am long IMMR, VC.

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Tagged: , Computer Peripherals, Earnings
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