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INVN > SEC Filings for INVN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for INVENSENSE INC

Form 10-Q for INVENSENSE INC


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, the Consolidated Financial Statements and Notes thereto for the year ended April 1, 2012, and with management's discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K filed with the SEC on June 19, 2012.

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would", "could", "will", "may", "expect", "believe", "should", "anticipate", "outlook", "if", "future", "intend", "plan", "estimate", "predict", "potential", "targets", "seek" or "continue" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These forward-looking statements include our expectations as to future sales of consumer electronics devices that could potentially integrate motion processors, our expectation that our products will remain a component of customers' products throughout any such product's life cycle, our belief that users of our products are likely to introduce these products into other devices as well as to adopt our more advanced devices, our belief that certain end-markets pose large growth opportunities for motion processing functionality, our ability to protect our intellectual property in the United States and abroad, our freedom to manufacture and sell our product without infringing the intellectual property of third parties, our belief in the sufficiency of our cash flows to meet our needs and our future financial and operating results. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Form 10-Q. These factors include, but are not limited to, the risks described under Item 1A of Part II - "Risk Factors," elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.

Overview

We are the pioneer and a global market leader of devices for the motion interface market that detect and track an object's motion in three-dimensional space. Our MotionTracking devices combine micro-electro-mechanical system, or (MEMS) motion sensors, such as accelerometers, gyroscopes and compasses, with mixed-signal integrated circuits (ICs) and proprietary algorithms and firmware that intelligently process, synthesize and calibrate the output of sensors for use by software applications via an application programming interface (API). Our MotionTracking devices are differentiated by small form factor, high level of integration, performance, reliability and cost effectiveness. While our solutions have broad applicability, we currently target consumer electronics applications such as smartphones and tablets, console and portable video gaming devices, digital still and video cameras, smart TVs (including digital set-top boxes, televisions and multi-media HDDs), 3D mice, navigation devices, toys, and health and fitness accessories. We utilize a fabless model, leveraging current CMOS and MEMS foundries and semiconductor packaging supply chains.

Our current strategy is to continue targeting the consumer electronics market with integrated MotionTracking devices that meet or exceed the performance and cost requirements of consumer electronics manufacturers, are easy to integrate and set industry performance benchmarks. Our ability to secure new customers depends on winning competitive processes, known as design wins. These selection processes are typically lengthy, and, as a result, our sales cycles will vary based on the market served, whether the design win is with an existing or a new customer and whether our product being designed into our customer's device is a first generation or subsequent generation product. Because the sales cycle for our products is long, we can incur design and development support expenditures in circumstances where we do not ultimately recognize any net revenue. We do not receive long-term purchase commitments from any of our customers, all of whom purchase our products on a purchase order basis. While product life cycles in our target market vary by application, once one of our solutions is incorporated into a customer's design, we believe that it will likely remain a component of the customer's product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution. The trend is also supported by the increased likelihood that once a customer introduces one of our products into one of their devices, we believe they are likely to introduce it into others. Additionally, once a customer introduces one of our lower functionality sensors into their platforms, we believe they are more likely to adopt our more advanced integrated MotionTracking devices.


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The history of our product development and sales and marketing efforts is, on a calendar year basis, as follows:

From our inception in 2003 through 2005, we were primarily engaged in the design and development of our analog gyroscopes. In this period, we also developed and refined our fabrication process, which we refer to as the Nasiri-Fabrication platform.

In 2006, we began volume shipments of our IDG family of integrated X-Y dual-axis analog gyroscopes for the compact digital camera market, the first commercially available sensors of that type. Subsequently, through 2008, we developed and shipped successive generations of these gyroscopes with enhanced performance and reduced die sizes. We began high-volume shipments of our IDG-600 to Nintendo beginning in May 2008.

In 2009, we began shipping enhanced and alternative versions of our single- and dual-axis analog gyroscopes as well as our ITG family of X-Y-Z three-axis digital output gyroscopes. We also significantly accelerated shipments of our products due to the broad market adoption of the Nintendo Wii MotionPlus accessory. In addition, we migrated our manufacturing processes to larger wafer sizes enabling significant cost efficiencies.

In 2010, we began volume shipments of our MPU-3000 family of Motion-Processors consisting of three-axis gyroscopes digital outputs and software development kits, designed to enable faster motion interface application development. In addition, we started shipping our ITG- and IMU-3000 family of products, which address a broader array of consumer applications than our analog products. We also started sampling our MPU-6000 family of integrated six-axis Motion-Processors that integrate a three-axis gyroscope and three-axis accelerometer on one chip used with our MotionApps software platform.

In 2011, we began high-volume shipments of our ITG/IMU/MPU-3000 family of Motion-Processors for the portable gaming, smart TV, smartphone and tablet markets. In addition, we began volume shipments of our MPU-6000 family of six-axis motion processors for the smartphone and tablet markets. We also introduced our IDG-2020 and IXZ-2020 families of dual-axis gyroscopes, which address the need for optical image stabilization (OIS) technology in camera phones and digital still cameras.

In January 2012, we introduced our nine-axis MPU-9150 Motion-Processor, which is available for sampling to selected customers and is targeted for the smartphone, tablet, gaming controller and wearable sensor markets.

In June 2012, we introduced our MPU-3300, a single-chip, high performance integrated 3-axis gyroscope for industrial applications.

In July 2012, we introduced the MPU- 6500, the Company's next-generation 6-axis MotionTracking device for smartphones, tablets, wearable sensors, and other consumer markets.

Our fiscal year is a 52 or 53 week period ending on the Sunday closest to March 31. Our most recent fiscal year ("Fiscal 2012") ended on April 1, 2012 ("April 2012"). The second fiscal quarters in each of the two most recent fiscal years ended on September 30, 2012 ("three months ended September 30, 2012" or "September 2012") and October 2, 2011 ("three months ended October 2, 2011" or "October 2011"), respectively, and each quarter period included 13 weeks.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenue, costs, and expenses, and any related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and our actual results, our future financial statement presentation, financial condition results of operations and cash flows will be affected.

We believe that the assumptions and estimates associated with revenue recognition, income taxes, inventory valuation, and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

There have been no material changes to the our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed with the SEC on June 19, 2012.


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Basis of Presentation

Net Revenue

We derive our net revenue from sales of our MotionTracking devices. We primarily sell our products through our worldwide sales organization directly to manufacturers of consumer electronics devices. To date, a significant majority of our net revenue has been derived from these direct sales, and we expect this trend to continue for the foreseeable future. We also sell our products through an indirect channel of distributors that fulfill orders for our products from manufacturers of consumer electronics devices, original design manufacturers and contract manufacturers.

We believe that a substantial majority of our net revenue will continue to come from sales to customers located in Asia, where most of the manufacturers of consumer electronics devices that use and may in the future use our products are located. As a result of this regional customer concentration, we may be subject to economic and political events and other developments that impact our customers in Asia. For more information, see the section titled "Risk Factors" in this Quarterly Report on Form 10-Q - "Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business".

Gross Profit

Gross profit is the difference between net revenue and the cost of revenue. Cost of revenue primarily consists of manufacturing, packaging, assembly and testing costs for our products, shipping costs, costs of personnel, including stock-based compensation, warranty costs and write-downs for excess and obsolete inventory.

We price our products based on market and competitive conditions and periodically reduce the price of our products as market and competitive conditions change. Typically we experience price decreases over the life cycle of our products, which may vary by market and customer. As a result, if we are not able to decrease the cost of our products in line with the price decreases of our products, we may experience a reduction in our gross profit and gross margin. Gross margin has been and will continue to be affected by a variety of factors, including:

demand for our products and services;

product manufacturing yields;

write-downs of inventory for excess quantity and technological obsolescence;

a reduction in inventory reserves due to the sale of inventories previously reserved;

product mix;

erosion of average selling prices, as required by agreements entered into with our customers and in anticipation of competitive pricing pressures, new product introductions by us and our competitors, product end of life programs, and for other reasons;

the proportion of our products that are sold through direct versus indirect channels;

our ability to attain volume manufacturing pricing from our foundry partners and suppliers; and

growth in our headcount and other related costs incurred in our organization.

Research and Development

Research and development expense primarily consists of personnel related expenses (including stock based compensation), intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and processes and design of test methodologies, including hardware and software to ensure compliance with required specifications. All research and development costs are expensed as incurred. We expect our research and development expenses to increase on an absolute basis as we continue to expand our product offerings and enhance existing products.

Selling, General and Administrative

Selling, general and administrative expense primarily consists of personnel related expenses (including stock based compensation), sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs. We expect selling, general and administrative expenses to increase on an absolute basis in the future as we expand our sales, marketing, finance and administrative personnel, and we incur additional expenses associated with operating as a public company.


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Income Tax Provision

The provision for income taxes consists of our estimated federal, state and foreign income taxes based on our pre-tax income. Our provision differs from the federal statutory rate primarily due to expenses that are not deductible for income taxes such as certain stock-based compensation and due to foreign tax rate differentials.


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Results of Operations

The following table sets forth certain condensed consolidated statement of
income data as a percentage of net revenue for the periods indicated.



                                           Three Months Ended                             Six Months Ended
                                   September 30,            October 2,           September 30,            October 2,
                                       2012                    2011                  2012                    2011
Net revenue                                   100 %                 100 %                   100 %                 100 %
Cost of revenue                                45                    45                      45                    44

Gross profit                                   55                    55                      55                    56

Operating expenses:
Research and development                       11                    12                      12                    12
Selling, general and
administrative                                 13                     9                      14                    11

Total operating expenses                       24                    21                      26                    23

Income from operations                         31                    34                      29                    33
Other income, net                              -                     -                       -                     -

Income before income taxes                     31                    34                      29                    33
Income tax provision                            7                     8                       6                     8

Net income                                     24 %                  26 %                    23 %                  25 %

Net Revenue



                            Three Months Ended                    Six Months Ended
                      September 30,       October 2,       September 30,       October 2,
    (in thousands)        2012               2011              2012               2011
    Net revenue      $        55,294     $     43,034     $        94,496     $     78,661

Net revenue for the second quarter and first six months of fiscal year 2013 increased by $12.3 million and $15.8 million, or 28% and 20%, respectively, compared to the same periods of the prior fiscal year, primarily due to higher volume shipments to an expanded customer base, including manufacturers of smartphones, tablet devices and digital television and set-top box remote controls. Total unit shipments for the three and six months ended September 30, 2012 increased by 53% and 50%, respectively, compared to the same periods of the prior fiscal year. Our overall average unit selling price declined for the second quarter and six months ended September 30, 2012, compared to the same periods of the prior fiscal year, as a result of the change in our product mix and declines in average selling prices associated with products primarily introduced in prior years.

Cost of Revenue and Gross Profit



                                          Three Months Ended                              Six Months Ended
                                  September 30,             October 2,            September 30,         October 2,
(in thousands)                        2012                     2011                   2012                 2011
Cost of revenue                 $          24,923          $     19,372          $        42,562       $     34,381
% of net revenue                               45 %                  45 %                     45 %               44 %
Gross profit                    $          30,371          $     23,662          $        51,934       $     44,280
% of net revenue                               55 %                  55 %                     55 %               56 %

Gross profit for the second quarter and first six months of fiscal year 2013 increased by $6.7 million and $7.7 million, or 28% and 17%, respectively, compared to the same periods of the prior fiscal year, due to an increase in unit sales of our products, changes in product mix sold, the effect of decreases in average selling price per unit sold for comparable products, decreases in manufacturing costs, improvements in manufacturing related product yields for comparable products, the favorable effect of a reduction of inventory reserves due to the sale of inventory previously reserved, and the unfavorable effect of an impairment charge taken in the current period related to purchase deposits provided with a manufacturing vendor which we no longer expect to utilize. We expect gross margins to fluctuate during the remainder of fiscal year 2013 due to changes in product mix, average unit selling prices, manufacturing costs, manufacturing yields and levels of product demand.


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Research and Development



                                            Three Months Ended                          Six Months Ended
                                    September 30,           October 2,          September 30,          October 2,
(in thousands)                          2012                   2011                 2012                  2011
Research and development           $         5,918         $      4,965        $        11,574        $      9,341
% of net revenue                                11 %                 12 %                   12 %                12 %

Research and development expense for the second quarter and first six months of fiscal year 2013 increased by $1.0 million and $2.2 million, or 19% and 24%, respectively, compared to the same periods of the prior fiscal year. The increase for the second quarter of fiscal year 2013 were primarily attributable to increased payroll and fringe costs of $0.7 million and increased stock compensation cost of $0.4 million. The increase for the first six months of fiscal year 2013 were primarily attributable to increased payroll and fringe costs of $1.6 million and increased stock compensation cost of $0.7 million. Research and development headcount was 104 at the end of the second quarter of fiscal year 2013 and 94 at the end of the second quarter of fiscal year 2012.

Selling, General and Administrative



                                                 Three Months Ended                          Six Months Ended
                                         September 30,           October 2,          September 30,          October 2,
(in thousands)                               2012                   2011                 2012                  2011
Selling, general and administrative     $         7,202         $      3,898        $        13,459        $      8,409
% of net revenue                                     13 %                  9 %                   14 %                11 %

Selling, general and administrative expense for the second quarter and first six months of fiscal year 2013 increased by $3.3 million and $5.1 million, or 85% and 60%, respectively, compared to the same periods of the prior fiscal year. The increase for the second quarter of fiscal year 2013 were primarily attributable to increased payroll and fringe costs of $1.2 million, increased stock compensation costs of $0.7 million and increased outside service costs of $1.2 million. The increase for the first six months of fiscal year 2013 were primarily attributable to increased payroll and fringe costs of $2.1 million, increased stock compensation costs of $1.2 million and increased outside service costs of $1.5 million. Selling, general and administrative headcount was 99 at the end of the second quarter of fiscal year 2013 and 88 at the end of the second quarter of fiscal year 2012.

Income from Operations



                                            Three Months Ended                          Six Months Ended
                                     September 30,          October 2,          September 30,          October 2,
(in thousands)                           2012                  2011                 2012                  2011
Income from operations              $        17,251        $     14,799        $        26,901        $     26,530
% of net revenue                                 31 %                34 %                   29 %                33 %

Income from operations for the second quarter of fiscal year 2013 increased by $2.5 million, or 17%, compared to the same period of the prior year primarily due to an increase in gross profit of $6.7 million, offset by an increase in research and development expenses of $1.0 million and an increase in selling, general and administrative expenses of $3.3 million. Income from operations for the first six months of fiscal year 2013 increased by $0.4 million, or 1%, compared to the same period of the prior year primarily due to an increase in gross profit of $7.7 million, offset by an increase in research and development expenses of $2.2 million and an increase in selling, general and administrative expenses of $5.1 million.

Other Income, Net



                                              Three Months Ended                              Six Months Ended
                                     September 30,             October 2,           September 30,             October 2,
(in thousands)                           2012                     2011                  2012                     2011
Other income, net                   $            54           $         28         $            90           $        209
% of net revenue                                 -  %                   -  %                    -  %                   -  %

Other income, net for the second quarter and first six months were comparable to the same periods of the prior year and the changes were primarily attributable to foreign exchange gains (losses) and interest income (loss) for all periods.


Table of Contents

Income Tax Provision



                                             Three Months Ended                          Six Months Ended
                                     September 30,           October 2,          September 30,          October 2,
(in thousands)                           2012                   2011                 2012                  2011
Income tax provision                $         3,641         $      3,372        $         5,676        $      6,260
% of income before income taxes                  21 %                 23 %                   21 %                23 %

For the second quarter and six months ended September 30, 2012, we recorded an income tax provision of $3.6 million and $5.7 million respectively. For the three months and six months ended October 2, 2011, we recorded an income tax provision of $3.4 million and $6.3 million respectively We estimated 2013 effective tax rate differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate partially offset by the unfavorable effects of non-deductible stock-based compensation expense.

Net Income



                           Three Months Ended                      Six Months Ended
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