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InvenSense, Inc. Delivers as Promised Amid Mobile Weakness

By Steve Symington – May 10, 2016 at 8:00AM

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But disappointing guidance shows the motion sensor chip company's pain isn't over yet.

Image source: InvenSense.

InvenSense (INVN) released fiscal fourth-quarter 2016 results Monday after the bell. And with shares of the motion sensor specialist down more than 7% in after-hours trading as of this writing, it's apparent the market isn't swayed by what appears at first glance to be a solid performance. 

But that disappointment isn't entirely unmerited. Before we get there, however, let's take a closer look at how InvenSense closed its latest fiscal year.

Quarterly revenue fell 19.9% year over year, to $79.5 million. That's slightly below the midpoint of InvenSense's guidance for revenue in the range of $77 million to $83 million, but almost exactly inline with Wall Street's expectations. Meanwhile, adjusted gross margin climbed by one percentage point, to 45%, or to the high end of InvenSense's 44% to 45% guidance range.

Based on generally accepted accounting principles (GAAP), that translated to a net loss of $22.9 million, or $0.25 per share, below guidance for a GAAP net loss per share of $0.09 to $0.11. But on an adjusted (non-GAAP) basis, net income was $1.5 million, or $0.02 per share, at the high end of InvenSense's guidance for breakeven results to earnings of $0.02 per share. During the subsequent conference call, management explained the wider $0.27-per-share difference between GAAP and non-GAAP earnings consisted partly of $0.13 per share related to normal recurring items like stock-based compensation and amortization of intangibles. But adding to that was a $0.14-per-share impact from income taxes resulting from increasing their valuation allowance reserves during the quarter. 

InvenSense CEO Behrooz Abdi called it a "solid quarter, capping off a productive year for InvenSense." He elaborated:

Throughout fiscal 2016, we drove significant technology advancement in key use cases that are fueling sensor adoption today. These use cases can be applied across a variety of vertical markets and applications, which we believe will enable us to maximize our R&D investments and drive significant TAM expansion. Our market-leading solutions continued to gain traction in emerging Internet of Things (IoT) platforms such as drones, virtual and augmented reality, wearables, smart home, and industrial applications. We believe that the broad applicability of our portfolio positions us for continued diversification and growth in these exciting markets.

In short -- and keeping in mind the market primarily looks at adjusted earnings and revenue -- InvenSense effectively delivered as promised, continuing to diversify its revenue streams as last quarter's prediction of a softening mobile market came to fruition.

To be sure, this decline is evident in InvenSense's segment breakdown. Smartphones and tablets comprised around 54% of revenue in fiscal Q4, down from 65% last quarter. Optical Image Stabilization (OIS) was 14% this quarter, roughly flat from fiscal Q3. And all other segments -- or the "Other Bucket," as management often refers to products including Internet of Things solutions -- represented 32% of total sales, up from 21% last quarter. 

There also remained just two customers who individually accounted for at least 10% of total revenue during the quarter, with one accounting for 39% and the other accounting for 34%. These figures almost certainly describe sales to Apple (AAPL -3.00%) and Samsung (NASDAQOTH: SSNLF), respectively. On a geographic basis, U.S.-based clients drove 43% of total revenue during the quarter (down from 51% last quarter), while Korea was 11% (down from 16%), China was 32% (up from 22%), Japan was roughly flat sequentially at 5%, Taiwan increased from 4% to 6%, and the rest-of-world segment was 3% (up from 2%).

Of course, that would have been all well and good, as to this point InvenSense's results contained little in the way of surprises. During the subsequent call, however, management also offered a discouraging peek at the coming quarter.

For its fiscal first-quarter 2016, InvenSense anticipates revenue of $58 million to $62 million, adjusted gross margin of 45% to 46%, and an adjusted net loss per share between $0.05 to $0.06. On a GAAP basis, InvenSense's per-share net loss should be between $0.13 and $0.15. By contrast -- and with the caveat that we don't lend much credence to Wall Street's near-term demands -- analysts' consensus estimates predicted InvenSense would achieve quarterly adjusted net income of $0.05 per share on significantly higher revenue of $85.4 million. 

So why the massive gap between InvenSense's reality and Wall Street's projections? According to Abdi during the call, "[T]he overall mobile market has softened significantly in the past several months and is expected to continue to experience weakness in the coming quarters. We expect to see similar relative weakness in our revenue from mobile customers, and are planning our business accordingly."

To be fair, that's not to say InvenSense will be losing market share in the meantime. Rather, only that sustained weakness in the mobile market overall will hurt its business in the short term. That said, InvenSense continues to make admirable progress with its diversification efforts, particularly with Internet of Things products under the "Other Bucket" section. 

"On a fundamental level," Abdi added, "we have taken significant steps in our transformation from a mobile-concentrated single product company toward a broad-based multi-sensor solution company."

For now, however, InvenSense's continued (over)reliance on smartphones and tablets will make it undeniably difficult for IoT and other supplemental solutions to pick up the slack. So while InvenSense's long-term growth story appears to remain firmly intact, it's unsurprising to see the market stepping back from its shares today.

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.

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