The majority of information in this article was obtained from the most recent Immersion (IMMR) conference call and 10-K, which was released on February 27th.
Haptic technology is built into smartphones, gaming systems, and cars to create vibrations so a user feels sensations when interacting with the computer screen. A Research and Markets Corporation report projects the global haptic touchscreen market is expected to grow at a CAGR of 41% from 2013 to 2018. The report also states that Immersion is the major haptic solution provider, and covers about 95% of the overall market. Smaller rivals based on market share are Finland's Senseg and SMK Electronics.
I originally covered the organization in December of 2012. My thesis in the article was that the company showed much promise based on the burgeoning haptic market, but that it was a risky stock because of its small market capitalization and history of poor price performance. After signing a multiyear licensing agreement with Samsung (OTC:SSNLF) in March of 2013, the stock took off, rising from $6 to $18. Now that the stock has dropped into the $11 range, I've taken a position in Immersion, although it's still a risky bet. 2013 revenues were a very small $47.5 million, 97.2% of which was derived from royalty and licensing.
That multiyear deal with Samsung was a coup for Immersion. Samsung accounted for approximately 47% of Immersion's total revenues for the year ended December 31, 2013, up from roughly 24% of total sales for 2012. Although you always want to have Apple (AAPL) as a customer, Google's (GOOG) Android operating system (where Samsung is a significant player), will account for 78.9% of smartphone market share in 2014. Apple comes up short with a projected 14.9% piece of the pie. However, a fat contract with Apple would certainly be a feather in the company's cap.
Even if a lucrative Apple contract can't be obtained, globally positioned mobile OEMs are solidly in the picture. According to CEO Vic Viegas in the conference call:
In 2013, Immersion achieved key milestones that have established the foundation for future growth in the immediate and long-term. These milestones include extending existing licenses, and securing additional new licenses with key mobile OEMs, including Samsung in Korea, Sharp in Japan, and Xiaomi in China.
Although Immersion has experienced lumpy quarters in regards to revenues, on a year-over year basis, they're in growth mode. 2014 and 2015 should be particularly good years for the company, especially in the smartphone market. Sixty-six percent of Immersion's 2013 sales were derived from smartphones. Further breakdown of revenues are: gaming 26%, medical 7%, and 6% from automobile.
Sony (SNE) utilizes Immersion TouchSense technology in the PlayStation 4 in the gaming sector. In the automobile arena, CEO Viegas elaborates: "Cadillac (GM), Aston Martin, Opel and Acura bring the very first haptically enhanced automotive touch surfaces to market, signaling a bright future in which haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces." Although these two areas of expertise are a smaller part of the revenue stream than smartphones, you can see where the adoption is in the incubation stage. Especially with automotive. Nevertheless, it demonstrates how things are moving forward.
Most, if not all technology firms have patent infringement problems. With 1,500 haptic patents to its name, litigations ensue for Immersion. In 2013, litigation expenses were $5 million. That's a tidy sum for a small company. Management states that figure will decrease by a couple million dollars in 2014. The most notable case is with HTC (OTC:HTCKF), an OEM with 6.7% smartphone market share in the United States as reported by comScore. This trial is slated to begin in March of 2015. A favorable outcome in the trial for Immersion could goose equity value next year, above and beyond the projected growth for the company.
Significant Statistics
For a small company with a market capitalization of $342 million, Immersion seems set for the future. It has no debt and a cash reserve of $71 million. That's impressive for an organization that had revenues of about $48 million for 2013. Looking forward, the company expects revenue to be in a range of $54 million to $62 million for the current year. That reflects a growth of 14% to 31% over 2013 based primarily in gains in the gaming and mobile sectors.
At roughly $12/share, the equity trades very close to the 50 day and 200 day moving averages of $11.63 and $12.32 respectively. As of January 31st, it had a short float of just 1.9% with 72% of the shares held by institutions. Consensus twelve month price projection is $16.33, so you can make money on this stock, if you can stomach the volatility.
Some Accounting Notes
If you look at the quote page for Immersion on Yahoo Finance, you'll notice the trailing twelve month P/E ratio is 8.7 and EPS is $1.37. Those are misleading statistics. This is because net income for Q4 2013 included an income tax benefit of $36.8 million, or $1.24 per diluted common share, resulting primarily from the release of a tax valuation allowance relating to net deferred tax assets. Coupled with that, those results reflect the impact of a change in accounting methods for Immersion beginning in that same quarter.
According to the annual report:
Under the new method of accounting, external patent-related costs are expensed as incurred, and classified as general and administrative expenses in our consolidated statement of operations consistent with the classification of internal legal costs associated with internally developed patents and trademarks. Costs associated with acquired patents and other intangible assets continue to be capitalized as incurred.
Addendum
In closing, it should be noted that Seeking Alpha contributor Paolo Gorgo was at the conference call representing his company Nortia Research. Mr. Gorgo has written a series of articles on Immersion which you may find valuable if you wish to drill deeper.
Disclosure: I am long IMMR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)
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