4 Catalysts for Growth at InvenSense Inc

InvenSense  (NYSE: INVN  ) reported its fiscal third-quarter results earlier this week. Although the company forecasted some near-term weakness, it still has plenty of growth opportunities ahead as it forecast another year of 25% to 35% revenue growth in 2015. The company, which specializes in Google (NASDAQ: GOOGL  ) Android motion sensors, believes that it is positioned to outperform the competition like STMicroelectronics (NYSE: STM  ) in the coming years.

In the conference call, management outlined four potential catalysts for future growth.

China
Last quarter, InvenSense experienced record sales to China-based companies. Xiaomi alone accounted for 16% of InvenSense's revenue.In a market where low-end Android phones are growing much faster than the high-end, InvenSense's solution offers a less-expensive alternative than sensor hubs due to its software advantage. Per management:

We have more traction with our software and better traction with the products in terms of pricing, because in those categories of devices, customers cannot afford to have any kind of a sensor hub or any kind of a higher-end apps processor that does the functionality that we do. So they take our products lock, stock, barrel and -- with software, and they just plug it in and they go with a lower-cost apps processor.

InvenSense's biggest advantage over STMicroelectronics is its close relationship with Google. InvenSense's work on the Android ecosystem makes its chips essentially plug-and-play, and requires less external processing power. Thus, InvenSense is able to charge a premium, because it's saving money for manufacturers elsewhere.

The relationship with Google is further exemplified by InvenSense's newest 6-axis chip, the MPU-6515, which is the first 6-axis sensor optimized for Android KitKat.

Optical image stabilization
A growing portion of InvenSense's business over the past year has been its 2-axis OIS chips. OIS has strong potential in second and third-tier manufacturers looking to differentiate their products with their camera. OIS facilitates DSLR-like capabilities in smartphone cameras, and the market is just beginning to adopt the technology. Per management, "We feel that the attach rate of the OIS is still in the early adoption ... it's still in the low teens, overall."

Although InvenSense holds a slight technology lead over STMicroelectronics in OIS chip design, the competitor has been very aggressive on pricing. InvenSense will rely on its strong integration with the Android ecosystem as well as its relationship with Samsung among others to maintain its position in the market as the attach rate grows.

Wearables
One of the biggest themes at CES this year was wearable devices specializing in health and fitness. In other words, many upcoming wearables will focus on tracking the users motion, and InvenSense is poised to capitalize on the trend. Management agrees:

We believe the wearable device category, which includes health and fitness tracking, smart watches, wearable computing and immersive gaming, is in the early stages of a multiyear expansion that will create new and exciting growth opportunities for InvenSense.

InvenSense's portfolio leads the way in low-power solutions. Its newest MotionTracking SoC provides a 60% improvement over its previous generation as well as AlwaysOn capabilities. Wearable manufacturers will look to InvenSense to support their designs.

The wildcard
Last quarter, management told investors that it's working on an opportunity with a large mobile OEM. The message hasn't changed. "We also believe that we continue to have near-term opportunity at a large mobile OEM customer, which we're working to realize in the coming months and quarters, but have not incorporated into our outlook."

It's not clear who this OEM is, but depending on its size it could further bolster InvenSense's revenue going forward. If the potential customer is on the same scale as Samsung, say Apple, the increase in revenue could weigh on the company's already declining gross margin. Still, I think investors would be happy with top line growth outpacing the bottom line if the increase is that sizable.

Accelerating growth
An increase of 25% to 35% in revenue for fiscal 2015 would indicate that growth at InvenSense is accelerating over fiscal 2014. Analysts had originally expected 2015 revenue growth to be around 23%, so it's very encouraging. Adding the opportunity at "a large mobile OEM" would increase that outlook, but it's obviously no guarantee. Still, its opportunities in China, OIS, and wearables are strong enough to support the company's outlook.

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