2023-10-12 17:39:21 ET
Summary
- Immersion Corp is a technological company focused on the development and licensing of touch technologies.
- The company has a solid balance sheet with a large number of patents and a diverse range of clients.
- Immersion Corp is pursuing patent infringement lawsuits and has an ambitious share repurchase program, which may lead to increased net sales and stock price growth.
Immersion Corporation ( IMMR ) recently signed new partnership agreements, and continues to make transformation efforts, which may bring FCF margin growth. There are also opportunities for lawsuits against large multinationals and the accumulation of know-how and patents, which may bring business opportunities in the coming years. The recent decrease in net revenue and lack of positive stock price movements are not beneficial, however I believe that the stock looks quite attractive at the current price.
Immersion Corp
Immersion Corp is a company in the technological field, specifically in the field of development of touch technologies, and its business is aimed at the acceleration, scale, and invention of these technologies through patent licensing and the development of intellectual property.
In other words, the company is dedicated to the development of haptic technologies - touch function - to sell licenses that allow other companies to develop their own products. The business is currently concentrated in the mobile device industry, video games, and automotive markets, although this does not rule out the future inclusion of these technologies in products from other industries.
The numbers reported on the corporate website are the most impressive I could find about Immersion Corp. Management noted that more than 3 billion devices use its technology, and close to 150 customers signed licensing agreements with Immersion Corp.
The business model works with the sale of licenses to its clients along with the offer of management software, related services, and permanent technical advice for the integration of these technologies within its products.
Clients belong to the field of digital products through hardware, components, software systems, and management software. The development and licensing of these products are grouped into a single operating segment, and Immersion currently has more than 1,200 patents pending approval or already issued.
According to the statistics contained in the company’s latest annual report for 2022, 60% of the revenue is concentrated in the sale to the markets of mobile devices or consumer clothing, while 21% came from video game devices, 13% from the automotive industry, and the remaining 6% from diverse industries.
In the geographical sense, 62% of the revenue for the same year came from Asian markets, with Korea and Japan as prominent markets, accounting for 33% and 27% respectively, 28% in America, represented entirely by activity in the United States, and 10% in Europe, with Germany as the main source of income, concentrating 7% of annual income.
I believe that it is a great time to review the financial figures and announcements of Immersion Corp considering the recent agreements with a new player in the automotive solutions industry as well as a manufacturer and developer of trackpad solutions. In my view, the company appears to be a bit under the radar of large partners and technology developers. New partnerships will most likely bring net sales generation and FCF growth.
We completed a multi-year license agreement renewal with Marelli Corporation, a manufacturer and developer of automotive solutions. Sensel Inc., a manufacturer and developer of trackpad solutions, signed a multi-year patent license agreement. Source: Immersion Corporation Reports Second Quarter 2023 Results
Solid Balance Sheet
As of June 30, 2023, management reported cash and cash equivalents worth $25 million, with accounts and other receivables of about $2 million, prepaid expenses and other current assets of $8 million, and total current assets worth $168 million. The current ratio is larger than 7x, and the asset/liability ratio is larger than 5x. In sum, I believe that the balance sheet appears quite solid.
Source: 10-Q
The list of liabilities includes deferred revenue close to $4 million, with total current liabilities of about $21 million and total liabilities of close to $32 million. With long term debt, I really do not think that the list of liabilities reported by Immersion Corp is worrying.
Source: 10-Q
Current Strategy, And Recent Results
The company aims to maximize business opportunities as well as to concentrate large international market promotions on developing haptic technologies, achieving the adoption and use of its products in a wide variety of diverse markets. Communicating the advantages of adopting these technologies plays a fundamental role. Along with this, Immersion manages to adopt the monetization strategy to capitalize on its business opportunities. In this regard, it is worth mentioning that the company's revenue results declined as compared to the same period of the previous year.
Also, administrative costs and budget allocation in marketing and sales channels and the capital available for research and development have increased, which does not favor the reduction in general costs, and may translate into a decrease in net income in the quarterly results.
Under my DCF model, I assumed that Immersion Corp will successfully run a transformation in the coming years, which may successfully lower costs, and may enhance FCF margin growth. I believe that the restructuring efforts announced in 2023 may have a beneficial effect on future financial figures.
Source: Immersion Corporation Reports Second Quarter 2023 Results
Patent Infringement Lawsuits May Bring Net Sales Growth Or New Key License Agreements
Immersion Corp is currently undertaking several patent infringement lawsuits against large corporations in the United States and corporations in China. If the company successfully receives beneficial results from courts, I believe that we may see large payments from these large corporations. As a result, I think that the stock price could trend north.
We continue to vigorously pursue patent infringement lawsuits against Meta (META), Valve, and Xiaomi ( XIACF ) as we execute our long-term strategy of enforcing our intellectual property, renewing key license agreements and leveraging our significant balance sheet strength to pursue thoughtful capital allocation. Source: Immersion Corporation Reports Second Quarter 2023 Results
There Is An Ambitious Share Repurchase Program That May Lead To Stock Price Increases
I would also expect beneficial effects from the stock repurchases executed by Immersion Corp. Clearly, management understood that the stock is undervalued, and it decided to do something about it. In the last quarterly report, Immersion Corp provided further information about the total amount of shares outstanding retired from the market.
During the quarter we leveraged our robust balance sheet to make share repurchases, retiring 1.3% of our shares outstanding. We also extended our share repurchase program by twelve months through December 29, 2024. Our stockholders’ equity increased by $4.3 million sequentially and $12.3 million year-to-date while providing $3.9 million and $5.1 million, respectively, in stock repurchases and dividends. Source: Immersion Corporation Reports Second Quarter 2023 Results
The stock repurchase program was originally approved on December 29, 2022 and authorized the repurchase of up to $50 million of the Company’s common stock. Source: Immersion Corporation Reports Second Quarter 2023 Results
My Cash Flow Model: The Company Appears Undervalued
My financial expectations include 2027 net income close to $35 million, with depreciation and amortization of close to $0.8 million, but no amortization of goodwill and intangibles as well as losses from sale of assets.
My numbers are pretty much aligned with the numbers obtained from previous cash flow statements. I really do believe that my figures are quite conservative, but I invite readers to have a look at my numbers.
My numbers are also based on the assumptions noted previously, including successful development on the patent infringement lawsuits, further continuation of the stock repurchase program, and successful adoption of the technologies proposed by Immersion Corp.
Source: YCharts
Besides, I also included stock-based compensation of close to $1 million and changes from other operating activities close to -$33 million.
Source: Cash Flow Expectations
I also assumed change in accounts receivable of close to -$1 million, change in accounts payable of about $1 million, and change in unearned revenues of about -$4 million, which implied 2027 CFO of about $84 million. Finally, with 2027 capital expenditure close to -$0.3 million, the implied FCF would be close to $84 million.
Source: Cash Flow Expectations
Considering FCF close to $60 million and $84 million from 2023 to 2027, which is in line with previous FCFs reported, and conservative cost of capital of 12%, the net present value stood at close to $275 million. Now, if we include an EV/FCF of 1.4x, which appears in line with previous EV/FCF multiples, the implied enterprise value would be $342 million, and the forecasted equity would be $368 million. We would be talking about an IRR of close to 18% and a fair price of about $11 per share.
Source: Cash Flow Expectations Source: YCharts
Competitors
The main competition comes from internal decisions within the design departments of the original manufacturers that are part of their clientele as well as the autonomous development of this type of technologies in any of their clients.
On the other hand, competition also comes from the international licensing market. The communication of advantages and benefits in the adoption of these technologies is a key competitive factor. In any case, Immersion has competitive advantages that lie in its experience in the sector and the adoption of its products by relevant international clients.
Risks
The renewal of license contracts and the reaching of agreements for the sale of new licenses are the two factors that currently guide the business of this company, and an inability to continue with the contracts in either case could mean serious consequences in their operating margins. Furthermore, despite not offering specific percentages, the company reports that a large part of its income is currently concentrated in a few clients, mainly in licensing contracts with Samsung ( SSNLF ).
Regarding its relationship with the video game industry, Immersion signed contracts with Microsoft ( MSFT ) that maintain fixed rates and may generate a significant reduction in revenue. In addition, any inability to develop future products in this sense can complicate activity within this market.
Conclusion
Immersion operates in an innovative market, and continues to sign new agreements with partners such as Marelli Corporation or Sensel Inc, which may bring new business opportunities. Already with a massive number of devices using the technology of Immersion and lawsuits against large multinationals, Immersion does seem to have a lot of know-how and patents accumulated. I obviously did not like the recent decrease in sales, however I believe that the recent stock repurchase programs and restructuring efforts could bring stock demand and FCF margin expansion. Yes, there are many other risks like lack of renewal of license contracts or dependency on a few clients. With that, I think that the stock is currently quite undervalued.
For further details see:
Immersion: Undervalued With New Partnerships, Patent Lawsuits