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InvenSense, Inc. Delivers Revenue, but Can It Deliver Operating Leverage?

By Ashraf Eassa – May 4, 2015 at 8:12PM

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InvenSense's revenue growth is strong, but it still needs to deliver better profitability.

Following the market close, sensor specialist InvenSense (INVN) reported earnings for its fiscal fourth quarter of 2015 and issued guidance for the coming quarter. Headed into earnings, there were a number of things that I believed InvenSense needed to prove to investors this quarter.

Is InvenSense on the right track, or is it -- as its share price might suggest -- struggling?

Non-GAAP profit on track; revenue ahead of expectations
Going into the report, the analyst consensus for revenue and non-GAAP earnings per share for the most recent quarter were $97.21 million and $0.12 per share, respectively. InvenSense delivered $99.3 million, cruising past consensus and even the high end of the revenue guidance range it gave last quarter.

On the EPS side, InvenSense delivered $0.12 per share -- right in line with the analyst consensus.

On the call, InvenSense also guided to $100 million to $105 million for the first quarter of InvenSense's fiscal 2016, which is ahead of analyst consensus of $98.37 million. At the midpoint of that range, InvenSense would see 53.72% year-over-year revenue growth.

However, InvenSense guided to non-GAAP EPS of between $0.11 and $0.13, with the midpoint of that range coinciding with analyst consensus. The good news, though, is that this would represent a 50% increase in earnings per share year over year.

The problem with these results
At first glance, investors should laud InvenSense's revenue performance; the kind of year-over-year revenue growth InvenSense is delivering is impressive and ahead of what the analyst community expected.

The problem here is that even with the strong revenue results and forecast, InvenSense actually only delivered, and expects to deliver, "in-line" EPS results. Better-than-expected revenue is great, but if it doesn't generate better-than-expected profits, that's not a good sign.

There's some good news, though
On the call, management acknowledged that the company has been investing aggressively in future opportunities, which has suppressed profitability. That said, management also suggested that InvenSense's current operating expense run rate is at the right rate to drive future growth, suggesting that the company should be able to see better operating leverage going forward.

That notion fits well with analyst consensus for InvenSense's fiscal 2016, in which the company is expected to grow revenue by approximately 19.4% (after the fiscal Q1 2016 revenue guidance came in ahead of consensus, this number should move up) and non-GAAP earnings per share by about 47.8%.

At this point, I think the operating-leverage question is key. If InvenSense can show investors that it can deliver robust revenue growth and can turn that growth into honest-to-goodness profits, then that should be good for investor confidence and the share price. 

If this story fails to play out over the next few quarters, then I think some investors will be tempted to throw in the towel on the stock. 

So, about the Apple Watch ...
One of the things I was looking forward to on the earnings call was any sort of explanation as to why InvenSense didn't win the Apple (AAPL -1.76%) Watch, as Apple went with competitor ST Micro's (STM -2.10%) gyroscope/accelerometer product. CEO Behrooz Abdi had this to say:

What we've said in the past is that our product shines in the wearables that need to be very, very power conscious and need to be recharged, maybe, once a week or once every two weeks. So as long as you're not doing something like that, as long as you have to charge it every day, there's different sets of values, different sets of requirements for that.

This isn't the place for a deep dive into Abdi's explanation, but it at least rules out technical issues as a reason InvenSense wasn't selected.

Ashraf Eassa owns shares of InvenSense. The Motley Fool recommends Apple and InvenSense. The Motley Fool owns shares of Apple and InvenSense. 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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