InvenSense (NYSE:INVN) reported its earnings results following market close on Oct. 28, delivering disappointing third-quarter results and fourth-quarter guidance. Fiscal second-quarter revenue came in at $90.2 million, which was near the high end of the guidance that management gave at the last call of $86 million to $91 million. This did, however, miss analyst consensus of $90.48 million, per Yahoo! Finance.

However, InvenSense reported a couple of pretty ugly data points that are causing the stock to drop significantly as of this writing. First, InvenSense significantly missed on earnings per share, reporting $0.05 against analyst estimates of $0.16 and its own guidance of between $0.15 and $0.16, as a result of two factors:

  1. Inventory writedown of older products. InvenSense's CFO explained it best: "We did move some older material at reduced margins during the quarter that [InvenSense doesn't] expect to repeat going forward." This move hurt gross margins by "approximately eight percentage points."
  2. Margin squeeze at the hands of its two largest customers. InvenSense reported that its two largest customers made up an unexpectedly high proportion of its business. According to management, sales to these customers -- probably Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) -- carries lower gross margin than sales to other, less powerful customers.

InvenSense expects that it should continue to see gross margin pressure as sales to its two largest customers continue to dominate its mix. However, management expects that this gross-margin hit from selling older inventory at reduced margins is a one-time thing.

Next, InvenSense's forward guidance given on the call was far worse than expected. Revenue is expected to come in between $108 million and $115 million, missing the analyst consensus of $116.32 million, and earnings per share are expected to come in at between $0.17 and $0.21 per share, a significant miss against the analyst consensus of $0.30.

In other words, the current quarter and the guidance for the upcoming quarter were disappointments all around. There was one bright spot, though.

Management reiterated full-year revenue growth estimates
InvenSense had guided to fiscal 2015 revenue growth of approximately 25%-35%. An analyst on the call asked management about whether it would be reducing guidance, but management reaffirmed guidance and even suggested that the company might come in above the high end of that range.

That's good news in the sense that management isn't taking down its full-year forecast, but do note that analyst consensus for the full year is currently calling for 48.5% year-over-year growth. These expectations make for a high bar for management to clear, and even if the company does deliver greater than 35% year-over-year revenue growth for the current year, it may still prove disappointing.

What happens now?
The story isn't likely to be easy for the next quarter or so. Analysts will probably ratchet down their full-year revenue growth estimates in light of the fiscal third-quarter guidance miss. Naturally, full-year earnings-per-share estimates will come significantly down in light of the poor second-quarter results and disappointing third-quarter guidance.

Over the long term, InvenSense is in an interesting position. Management pointed out that it now has very high market share in the premium smartphone market, so it'll need to block and tackle, so to speak, by defending its current market share while expanding elsewhere. 

InvenSense executives pointed to pushing into the midrange of the smartphone market as a potential growth driver and talked up potential content gains within smartphones, with things such as software, optical image stabilization, and so on. Gaming consoles and wearable devices also got a mention.

It seems that the growth opportunity is still there for the taking, but InvenSense needs to execute on it.