Description

Summary:

• Immersion Corp. is a 60%+ EBITDA margin licensing business trading at 2.7x TTM EBITDA with zero debt and a substantial amount of balance sheet cash currently being invested. Over the last twelve months, Immersion has generated 39% of the current enterprise value in cash.

• Immersion has reached a settlement with Meta regarding a patent infringement lawsuit that should see Immersion releasing a press release in the coming weeks. The settlement value alone could exceed the current Enterprise Value. 

• In 2018, Immersion’s settlement press release with Apple caused the share price to increase 40%+ - Immersion and Apple filed their case dismissal shortly after in court. The Western District Court of Texas has ordered Immersion and Meta to file their dismissal by Feb. 16th, 2024. 

• We believe a similar release is not being priced into the current share price due to the obscurity of finding and paying for these court documents on PACER - investors may not be aware that negotiations have concluded and a settlement has been reached. 

• The core haptic technology licensing business conservatively covers the current valuation in a downside scenario - any settlement value is pure upside.  

Company Overview: 

Immersion Corporation (“The Company”) is HQ’d in San Jose, California, and originally IPO’d in 1999. The company is run by Eric Singer and William Martin who own a cumulative ~7% of S/O. Both have years of hedge fund experience, with Eric Singer founding VIEX Capital and William Martin founding Raging Capital Management and serving as its CIO. 

The company licenses their haptic technology to corporate customers that use technology that is covered by Immersion’s patent portfolio. Customer agreements are typically structured with fixed, variable or a mix of fixed and variable royalty and/or license payments over certain defined periods, as well as, in certain cases, fees for support or other services. Immersion will frequently sue companies for patent infringement in order to protect their haptic licensing technology, and have collected large settlements in the past. Notably, the company has not held an earnings call since 2Q21 and does not communicate with the Street. 

Immersion has two main business activities - their haptic licensing business, and investing the cash the licensing business generates. The breakdown of the $151.8M in current fair value of Immersion’s marketable securities invested is below:

Notably, the $64.9M in equity securities is deployed into concentrated bets in small-cap technology companies, under the direction of Singer and Martin. Immersion currently has a  $13.4M / 11.9% stake in Universal Electronics (NASDAQ: UEIC), and a $10.6M / 4.9% stake in Turtle Beach Corp. (NASDAQ: HEAR), and has had activist involvement in both companies.

Financial Overview:

After a long history of activism at the company that dates back to 2018, in 2020 the company entered into an agreement with Eric Singer’s fund Viex Capital Advisors to appoint Stephen Domenik, William Martin and Singer to the Strategy Committee to review capital allocation, cost structure and corporate strategy. After this agreement, Immersion essentially eliminated all possible OpEx associated with the business, including R&D spend on the development of new haptic IP, S&M expenses associated with customer acquisition and massively reducing G&A through headcount reductions. See a historical financial summary below:

Summary Financials:

• Operating margins increased from (59.7%) in 2019 to 63.5% in 2022 following Eric Singer and William Martin’s activist involvement. 

• Note: 2018 revenue boost driven by one-time ~$70M+ Apple settlement - see below for more details

Valuation:

As of December 31, 2022, Immersion had more than 1,200 currently issued or pending patents. Each patent has a useful life of 20 years from the time of filing. Although the patent portfolio will slowly runoff over time as patents expire and new applications are not filed, we believe this to be more than priced in by the TTM multiple of 2.7x GAAP EBITDA and TTM FCF Yield of 39%. 

Given new management’s commitment to returning capital to shareholders; for instance, in conjunction with Eric Singer’s appointment as CEO, the company announced the issuance of a one-time special dividend of $0.10/ share, declared a quarterly dividend program of $0.03/share and established a $50M share repurchase program for 2023 (~22% of shares outstanding and ~43% of non-institutional / insider shareholders). 

So far, management has repurchased $6.1M worth of shares in 2023. We believe that this buyback program in itself could be a catalyst and at this price, none of a potential Meta settlement is baked in. Another catalyst for the stock to rerate would be the performance of the balance sheet equity investments; notably, we are bullish on $HEAR as described in our previously posted write-up. Given William Martin's impressive track record at Raging Capital Management, we would not be surprised if they continued to create value using the balance sheet for activism. While we would appreciate it if management would communicate their capital allocation strategy going forward, we don’t have reason to believe that this will change.

Key Catalyst Overview - Meta Litigation:

As mentioned previously, Immersion frequently engages in patent litigation to protect their IP. The most notable example of this historically has been Immersion’s litigation with Apple regarding use of their haptic technology in certain iPhone models. Immersion was able to settle with Apple for $70M+ (See 1Q 2018 release), causing the share price to rise ~40%+ upon Immersion’s announcement of the settlement in Jan. 2018. 

Immersion is currently in ongoing litigation with Meta in the Western District Court of Texas.  Based upon recent court document activity, it seems that Immersion could very soon announce a similar settlement agreement regarding ongoing litigation with Meta concerning the use of IMMR’s haptic technology in Meta’s Quest VR Headset products. See below for a case timeline:

• May 27th, 2022: Immersion files infringement complaint against Meta 

  • Complaint alleges that Meta’s augmented and virtual reality (“AR/VR”) systems, including the Meta Quest 2, infringe six Immersion patents that cover various uses of haptic effects.  Immersion states they seek to enjoin Meta from further infringement and to recover a reasonable royalty for such infringement.

• Nov. 10th, 2023: Immersion files an additional complaint against Meta alleging infringement for the Meta Quest 3 headset as well. 

• Jan 16th, 2024: Immersion and Meta reach settlement (Pacer Court Document) 

  • Court document is filed in which Immersion and Meta jointly inform the court they have reached an agreement to resolve the matter and related proceedings. The court responds by ordering both parties to either voluntarily dismiss the case or provide an update by Jan. 31st, 2024. 

• Jan. 31st, 2024: Immersion and Meta inform the court they have been making progress in their negotiations and expect to have a final agreement done by February 9, 2024. 

• Feb 9th, 2024: Immersion and Meta enter final agreement and inform the court they expect to be in a position to jointly dismiss the action by Feb. 16th, 2024. 

Based on the court documents, we believe that it is highly likely that Immersion files a press release soon in which Immersion announces the settlement with Meta. In their previous case with Apple, Immersion and Apple filed the court dismissal on Feb. 6th, 2018 shortly after Immersion’s  settlement press release filed on Jan. 29th, 2018. Given that Immersion and Meta must file their dismissal by Feb 16th, 2024 and that the settlement is already complete, we would expect to see a press release in the coming days which could be a huge catalyst for the share price. 

Scope of Damages / Settlement Value: 

The lawsuit covers infringement for both the Meta Quest 2 and Quest 3 headsets. Meta generates revenue from the sale of the headsets as well as the ongoing customer app and game purchases on the Quest Store.  Although Meta does not break down headset revenue or unit sale numbers specifically, they have stated that the majority of the VR revenue comes from the sale of Quest Headsets under the Reality Labs division. Meta’s Q4 report revealed that the division clocked over $1 billion in revenue in the last quarter of 2023, primarily driven by sales of its Quest headsets and the Ray-Ban Meta smart glasses. 

Meta’s initial sales forecast for the Quest 3 was over 7 million units. Now that the headset has started shipping, that number has been cut down to 2.5 million units at most, with 1 million of those being expected to happen in 2024 alone. Analysts expect Meta to sell a total of 3.5 million Quest headsets — including both Quest 2 and Quest 3 - in 2024. With the Quest 2 selling for $250 and the Quest 3 selling for $500, the patent damages cover billions of dollars in revenue from the sale of the Quest headsets over the last few years. It is also interesting as the majority of IMMR’s licensing revenue comes from a per-unit pricing structure driven by volume. Both of these facts suggest that the settlement amount could be large. Additionally, the remaining useful life of the patents is a large factor in the settlement amount given that Meta will consider the value of the ongoing patent license payments to Immersion in their decision - below are each of the 6 patents that Immersion has included in the infringement lawsuit. Because most of them are still 10+ years out from expiring, this is a positive for Immersion. 

Catalyst

• Press release in coming days regarding Meta settlement
• Continued core business cash generation
• Future share repurchases
• Balance sheet growth