InvenSense (NYSE:INVN) will release its fourth-quarter earnings on Thursday. The MEMS manufacturer could see a boost from the new Samsung (NASDAQOTH:SSNLF) Galaxy S5, for which it makes the 6-axis sensor. Competitor STMicroelectronics (NYSE:STM) likely got a piece of the S5, as well, but InvenSense has steadily taken designs away from ST at Samsung.

The fiscal fourth quarter is typically InvenSense's slowest due to the seasonality of consumer electronics. As such, tablet and gaming products with InvenSense chips in them will see a slowdown in orders, but InvenSense hopes to offset this by gaining market share with companies like Samsung, Xiaomi, and LG.

Let's see what we can expect from InvenSense on Thursday.

Stats on InvenSense

Analyst EPS Estimate


Year-Ago EPS


Revenue Estimate

$57.42 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance

Make sense of the Street
Since InvenSense's last earnings report, the Street's consensus earnings estimate has fluctuated between $0.10 per share to $0.11 per share. Oppenheimer downgraded the stock to "Perform" from "Outperform" at the beginning of April, when the stock was trading near its all-time high of $24.34.

The stock has come down a bit from there, but it's still up over 11% since its last earnings release. Comparatively, the S&P 500 is up a little less than 6%.

For the third quarter, InvenSense reported revenue of $66.7 million and EPS of $0.15. Both numbers disappointed investors, as they came in well below expectations and guidance.

The news got worse when the company announced its near-term guidance. For the fourth quarter, InvenSense guided for revenue between $55 million and $58 million and EPS of $0.09 to $0.11. Analysts originally expected earnings of $0.15 per share on $62.8 million in revenue. Nonetheless, long-term bullishness outshined the short-term pressures, and the market sent shares higher.

Recent developments
There were two big developments last quarter: InvenSense settled its lawsuit with STMicroelectronics, and Samsung unveiled the Galaxy S5.

InvenSense's court battle with STMicroelectronics weighed heavily on the company's GAAP earnings for seven quarters. The two companies finally settled in February, and it will save InvenSense about $3 million to $5 million in legal fees every quarter.

In the third quarter, InvenSense spent $3.5 million on legal fees, which was higher than anticipated. As a result, the company was only break-even on a GAAP basis, although it originally guided for GAAP earnings of $0.10 to $0.11 per share.

The Street may be looking at the non-GAAP earnings number, as they give a better indicator of the company's growth, but GAAP earnings better indicate the company's profitability. That extra $3 million to $5 million can now be reinvested in the business instead of spent on legal fees, allowing the company to grow revenue faster.

The second major development was Samsung's release of the Galaxy S5. A teardown revealed that InvenSense, as expected, won the 6-axis sensor slot. Samsung sold 10 million units of its flagship smartphone in the first month of sales last year. One executive expects the S5 to outperform its predecessor despite a tough market for high-end smartphones.

This is great news for InvenSense as that indicates Samsung likely made a bigger order than in the fourth quarter last year for a larger anticipated launch. Reports are that Samsung's S5 launch was much stronger than the S4.

What's more, InvenSense may be the sole supplier of 6-axis sensors for the Galaxy S5. Last year, it shared the market with STMicroelectronics. On InvenSense's third-quarter earnings call, CEO Behrooz Abdi indicated that the company's relationship with Samsung is getting stronger, and he expects to the company to take 70% of Samsung's MEMS designs in the near future. The Galaxy S5 is a key component of that.

What to watch for
When InvenSense reports, keep an eye on its top suppliers. The company expects sales to Samsung to be in the mid-to-high 30% range as a portion of total revenue. Watch for progress in China and with Xiaomi.

A large concentration of revenue, however, is not only risky, it also puts pressure on the company's margins, so watch for gross margin to see it remain stable from last quarter. Overall, the company expects gross margin to climb back to the mid-50% range.

Finally, watch for any color on the conference call regarding a "near-term opportunity at a large mobile OEM customer."

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends InvenSense. The Motley Fool owns shares of InvenSense. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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