Update: Immersion And Huawei Enter Into Multi-Year License Agreement

| About: Immersion Corporation (IMMR)
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Last Thursday, Immersion Corporation announced that it had entered into a multi-year worldwide license agreement with Huawei, the third largest global supplier of smartphones, according to IDC.

This is Immersion’s first direct license with Huawei, and covers the company's haptic software, TouchSense 3000. Huawei had previously gained access to Immersion’s basic haptic through an IMMR chip partner.

We believe this is just the first of a serie of new Chinese licensees for Immersion. Lenovo and ZTE may follow soon.

The stock shot up 11% after the announcement - however, we believe the market still hasn’t properly figured out that the company has several other catalysts that may materialize.

In this update, we will analyze the latest two events that contributed to lifting the stock from its 2014 lows: Huawei and a speculation about iPhone 6 implementing haptic technology.

The Huawei announcement and an Iphone 6 speculation have been the main drivers of a 30% stock increase in the last few trading sessions

After languishing in the $10 to $11 range for several weeks, Immersion Corporation (NASDAQ:IMMR) stock has recently rallied to the $14 level.

Chart from Google finance

In our last few articles covering the company, we had speculated that the main reason for the stock weakness was probably to be found in a key fund exiting its position, and that the company's long term prospects were intact, with a few catalysts in sight.

Dialectic Capital Management, a key shareholder, which was also instrumental in Immersion's turnaround, had been selling shares and depressing the company's stock price mainly due to a short bet on the market that was not performing as hoped. Here is what we wrote back in March 2014:

Absent any unpredictable market shock, however, we believe that the current weakness may represent a good entry point for shareholders with a long term horizon. We recently added a few shares in the $ 11 range. Time will tell if we may thank Dialectic for the opportunity, or if their overall market vision will make us look like the bag holder.

Mr. Fichthorn, co-founder of Dialectic Capital Management, did not stand for re-election on Immersion's board of directors at the 2014 Annual Meeting of Stockholders.

In May, while commenting on the company's Q1 2014 results, we correctly anticipated that China could have played a role as a short term catalyst to the stock, but we were completely wrong on the player that was going to be announced:

Here is a short list of a couple of catalysts that may positively impact the company in the remaining of the year.

China as a possible 2014 catalyst

  • On a mobile contacting front we continue to engage with the number of potential OEM customers in China where we're seeing great enthusiasm for our new demonstrations and an understanding of how haptic technology can be a valuable product and platform differentiator. We've established a strong sales team in the region and are building our technical teams in order to provide rapid local response to these potential customers in China and we look forward to updating you on our progress with new licensees in the region.

This comment was made during the latest conference call by Immersion's CEO, Vic Viegas.

Right now, Immersion is licensing its basic and SD haptic technology to Samsung and Xiaomi, while Lenovo has recently acquired Motorola, that negotiated the rights to use the company's basic haptics technology in a 2012 settlement signed between Google (NASDAQ:GOOG), Motorola and Immersion Corporation.

Huawei and ZTE are currently indirect customers through the company's chip partners that incorporate Immersion's basic haptic technology [mainly Imagis, Texas Instruments (NASDAQ:TXN) and Atmel (NASDAQ:ATML) ].

We do expect one or more agreements to be announced soon, with Lenovo as the most likely candidate to sign a new agreement for both its Motorola and Lenovo brands.

Our crystal ball, however, never highlighted the possibility of a new "iPhone implementing haptic" speculation, which also came quite ahead of the official iPhone 6 launch. While the rumor moved the stock before the Huawei announcement, we'll first have a look at what the Huawei deal means for Immersion and later on we will try to analyze if the iPhone rumor may have some roots and its potential impact on the company.

A look at the Chinese market: haptics now a must have for the main players

Time for an updated look at the Chinese smartphone market, both for its overall size and importance, but also because it is mostly dominated by local players sometimes unknown in the USA or Europe.

Here is a nice chart taken from Counterpoint Research, resuming the largest Chinese players as of Q1 2014, and completed with a few notes related to Immersion's licenses:

As you may notice, Immersion has been able to finalize deals with several key Android players, so that haptics are now potentially available to players representing already more than half of that market. We see the fact that haptics are now reaching such a wide audience as a sign that Immersion's product is now considered a "must have" rather than a "nice to have" feature.

Kudos to Immersion management for having been able to close key deals in a market which is not exactly known for a high respect of intellectual property.

Unlike Xiaomi, Huawei is more of a global player.

We previously speculated that Xiaomi, the first direct Chinese deal announced by Immersion in September 2013, now represents about 10% of the company's revenues ($1.5 million in Q1 2014).

Xiaomi's smartphone sales in the first six months of 2014 reached 26.1 million units, and the company updated its expectations for its 2014 full-year target to 60 million handsets, with the ambition to surpass 100 million devices in 2015.

Huawei's target for 2014 is to ship 80 million smartphones worldwide. The company has rapidly grown into the third worldwide player in smartphone sales, as resumed by IDC in this chart:

We believe that Immersion's recently signed deal with Huawei will have mostly a fixed component, in line with similar agreements signed for basic haptics and with Xiaomi. While we do not have enough data to speculate on its exact size, we believe it will have a significant impact on the company's revenues.

The iPhone 6 speculation: earlier than expected, more than just an analyst rumor?

As anticipated at the beginning of this update, the speculation that the new iPhone 6 might include haptic support gave Immersion's shares a nice push to the upside at the beginning of July.

Feltl's analyst Jeffrey Schreiner sees a "50/50 chance" that Apple (NASDAQ:AAPL) will be a future Immersion customer if they implement haptics - an event that might drive shares up much more than the size of the agreement might justify, just because of the name of the player involved and the validation of the technology that Apple could grant.

As there have already been several unproven rumors in the past about Apple implementing haptics into its products, we remain skeptical until there will be an official announcements in this direction - however, we also notice that these rumors have recently grown in size and now come from other sources than just Feltl's analyst:

The next killer feature on Apple's expected iPhone 6 could be a display that provides tactile feedback to users -- giving users the impression, for instances, of a physical keyboard on a flat touchscreen.

This latest iPhone 6 rumor stems from a report Wednesday on Chinese site Laoyaoba, which said so-called "haptics" technology will be added into the new device.

CNET has reached out to Apple for comment and will update this story with any further details.

Our two cents: Apple has been filing patent applications in the haptic field for quite a long time.

These patent applications seem to indicate that the Cupertino company is trying to achieve an "improved" haptic implementation that could set Apple apart from the average "buzz effect" found in most smartphones.

Immersion would probably describe this target as "high definition haptics", which are the high end of its product offering (TouchSense 5000 solutions).

If this is the case, it sounds mainly a matter of when, rather than if Apple will start using haptics into its products. In other words, under this approach, haptics are not good enough for Apple, right now, but not irrelevant to improve the user experience.

Although Apple may develop some specific technology or "work arounds" that may be unique and avoid infringing some Immersion's patent, we believe that IMMR's IP in the haptic field is covering so many basic aspects that Apple would still need to negotiate a license with IMMR.

Given Apple's market share in smartphone sales, relatively small in volume, compared to Android, but with a strong high end leadership, an endorsement of haptics by AAPL probably wouldn't be a game changer for Immersion, but the impact on the stock market could be much more intense than the monetary value of the deal could justify.

Disclosure: The author is long IMMR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.