Sensor System On Chip

Source: InvenSense.

InvenSense (NYSE:INVN) announced fiscal third-quarter 2016 results Wednesday after the bell, and the market isn't happy. After declining nearly 6% in Wednesday's regular session, shares of the motion sensor chip company dove another 7% in after-hours trading.

The bad quarter that wasn't
That's not to say the quarter was terrible. Quite the contrary: InvenSense's revenue climbed 4% year over year to $120 million, reaching the high end of its $115 million to $120 million guidance range, and translated to GAAP net income of $5.7 million, or $0.02 per diluted share. On an adjusted basis, which offers perspective by excluding items such as stock-based compensation and acquisition expenses, net income came in at $16.7 million, or $0.18 per diluted share. That's down from non-GAAP net income of $0.21 per share in the same year-ago period, but it also stands right at the midpoint of InvenSense's EPS guidance range of $0.17 to $0.19.

InvenSense CEO Behrooz Abdi insisted the quarter was "solid," despite what he described as a "tumultuous business and financial environment."

"We maintained careful adherence to our business model," Abdi elaborated, "while continuing a rapid pace of innovation across our product portfolio. We also executed well to our plan of diversification, growing our revenues in a wide range of Internet of Things applications, while continuing to drive strategic value and competitive differentiation within our mobile customer base."

For perspective, this could explain InvenSense's slightly better-than-expected quarterly revenue performance. Recall that three months ago, Abdi hinted that any success in what it calls the "other bucket" -- essentially consisting of products targeting the Internet of Things market -- could potentially drive upside relative to guidance. 

Breaking it down
But that traction still didn't have a significant change on the per-segment composition of InvenSense's results. During the subsequent conference call, CFO Mark Dentinger elaborated that smartphones and tablets accounted for 65% of revenue during the quarter, up from 62% in fiscal Q2. Optical image stabilization came in at 14% of total sales, down from 18% last quarter. And all other segments, including Internet of Things, made up the remaining 21%, up only slightly from 20% in Q2.

Once again, just two customers individually accounted for at least 10% of InvenSense's revenue this quarter. At 47% and 13% of total revenue, respectively, these customers are almost certainly Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF). Last quarter, Apple and Samsung accounted for 34% and 19% of InvenSense's total sales, respectively.

Sure enough, based on the geographic headquarters of its customers, the United States represented 51% of revenue in Q3, up sequentially from 38% last quarter, and South Korea fell to 16% of sales from 22% in Q2. In addition, China remained relatively steady, falling sequentially to 22% from 23% last quarter, and Japan fell to 5% from 7%. Finally, Taiwan was 4% this quarter, down from 7% last quarter, and rest-of-world customers fell one percentage point to 2%.

In particular, according to Abdi, InvenSense remains happy with its increasingly diversified presence in Apple's ecosystem of products and described its status with the Cupertino-based tech giant as a "multi-year, multi-generational relationship of mutual value." Meanwhile, Samsung's contribution was in line with expectations given current market dynamics.

Looking forward
However, Abdi also noted that while InvenSense remains happy with its leadership position in the marketplace going forward, the overall device market is likely to face near-term headwinds, given the current economic environment. 

So for the current quarter, InvenSense anticipates revenue to be in the range of $77 million to $83 million, well below analysts' consensus estimates for revenue of $102.4 million. Adjusted gross margin should remain steady at 44% to 45%, and adjusted operating expenses are expected to increase $2 million, albeit partly because of an extra week in the quarter. As a result, InvenSense expects adjusted earnings in the range of breakeven to $0.02 per share, which is also significantly below Wall Street's estimates for non-GAAP earnings of $0.12 per share. On a GAAP basis in fiscal Q4, InvenSense anticipates that it will incur a per-share loss of $0.09 to $0.11.

Management elaborated that some seasonality came into play with guidance, but that the primary culprit for its shortfall is the impending softness in its bread-and-butter smartphone market. At the same time, long-term investors can take solace in knowing that more than 80% of InvenSense's new design-win pipeline continues to be outside mobile. But given mobile's current outsize role and the gravity of InvenSense's near-term challenges, it's no surprise to see the stock trading lower after the report.

Steve Symington owns shares of Apple and InvenSense. The Motley Fool owns shares of and recommends Apple and 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.