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3 Things InvenSense, Inc. Management Wants You to Know

By Ashraf Eassa – Feb 1, 2016 at 11:15AM

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Shares of struggling motion processor vendor are in the dumps, but can management offer investors any hope?

Motion processor vendor InvenSense (INVN) reported results that were fairly good but issued some weak forward guidance. A portion of the weakness on the guidance was due to weakness at its largest customer -- widely believed to be Apple (AAPL 0.20%) -- and another chunk of it appears to be due to fairly significant market-share loss at another major customer, Samsung (NASDAQOTH: SSNLF).

Management spent about an hour on its most recent earnings call providing in-depth insight into these results and providing some longer-term perspective on the business. Here are three items from the call that stood out as particularly interesting.

What's going on with gross profit margins?
InvenSense reported gross margin on a GAAP basis of 41%, flat to what the company saw in the prior quarter. On a non-GAAP basis, this figure came in at 44% -- no change from the prior quarter.

It's worth noting that these numbers are down fairly substantially from levels seen several years ago, as InvenSense has grown its business with very demanding, high-volume customers.

Image source: YCharts.

One of the key things that investors have been looking for (and that management is aiming for) is gross profit margin expansion from current levels.

According to InvenSense CFO Mark Dentinger, the company's margins in mobile-oriented products are "stabilizing," particularly as a result of "work that [InvenSense has] put in in terms of improving product yields and what-not."

Dentinger also reminded investors that as the company shifts gears toward other non-mobile applications (i.e., Internet of Things), it will enjoy a "tailwind" to gross profit margins.

"I don't know whether or not it's a quantum leap anytime soon, but I do think we're going to see some slow and steady improvement in the margin profile in fiscal 2017,"

Looking ahead to future design wins
Although the share loss at Samsung is having a negative impact, management was upbeat about its design win pipeline going forward. In particular, CEO Behrooz Abdi seemed optimistic about winning designs with its electronic and optical image stabilization technologies, as well as with its MEMS microphone technology (acquired from Analog Devices in late 2013) in mobile devices.

Abdi also offered some words of encouragement around its non-mobile business (still just 21% of total revenue in the most recent quarter), noting that the company has a "pretty healthy pipeline" of design wins. It's worth noting that although InvenSense says that "more than 80%" of the company's new design wins are outside of mobile, each win typically doesn't bring anywhere close to the kinds of unit volume/revenue that a big-name mobile win does.

Is InvenSense investing at the appropriate rate for its business?
Analyst Matthew Ramsay pointed out on the call that InvenSense is guiding to "slightly above break-even on a non-GAAP basis" and asked management about "how [it is] thinking about managing current investment levels" in this "tumultuous period in the smartphone market."

It sounds to me that the analyst is really asking whether InvenSense management is thinking about potentially cutting operating expenses to potentially boost profitability.

Dentinger indicated, as he has in prior calls, that the company is "fairly fully invested right now" as far as both employee count and "resource deployment" go. Interestingly, the executive did suggest that InvenSense might "move resources around a bit" in a bid to "create opportunities to invest further and get quicker returns."

From this, I'd imagine that InvenSense may be planning to shift some resources away from mobile and more toward other, incremental opportunities such as the Internet of Things.

Commenting on InvenSense's potential spending in fiscal year 2017, Dentinger said that operating expenses may increase slightly.

Finally, Dentinger pointed out that if the smartphone market sees signs of recovery, channel inventory clearing happens at "one or two" major customers, and the company continues to see strength in its non-mobile segments, he believes that "[earnings] leverage in [InvenSense's business] model will return quickly."

Ashraf Eassa has no position in any stocks mentioned. 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.

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