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INVN > SEC Filings for INVN > Form 10-K on 14-Jun-2013All Recent SEC Filings

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Form 10-K for INVENSENSE INC


14-Jun-2013

Annual Report


Item 7. 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 Consolidated Financial Statements for the year ended March 31, 2013 and the Notes to those statements included elsewhere in this Annual Report on Form 10-K.

Business Overview

We are the pioneer and a global market leader in 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), 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.

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 our patented 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


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

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

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

In January 2013, we introduced the MPU-9250, an integrated accelerometer, gyroscope, compass in a 3x3x1mm package with 9.2mW power consumption, ideal for mobile devices, wearable sensors for sports and remote health monitoring, and emerging applications.

In February 2013, we introduced the MPU-9350, an integrated accelerometer, gyroscope, and electronic compass in a 3x3x1mm package that has a 28% lower power consumption than its predecessor.

In February 2013, we also introduced the ITG-3501, with an industry first 0.75mm height and lowest power consumption of only 5.9mW (3.3mA at 1.8V).

Our net revenue increased to $208.6 million in fiscal year 2013 from $153.0 million in fiscal year 2012 and $96.5 million in fiscal year 2011, respectively. At March 31, 2013, we had $200.3 million in cash, cash equivalents and investments. We achieved positive operating cash flow of $35.3 million for fiscal year 2013 compared to $44.4 million for fiscal year 2012. We achieved net income of $51.7 million, $36.9 million, and $9.3 million in fiscal years 2013, 2012 and 2011, respectively.

Net Revenue

We derive our net revenue from sales of our MotionTracking devices. We primarily sell our products through our worldwide sales organization to manufacturers of consumer electronics devices from whom we have secured a design win. The sale may be executed directly with the manufacturer or via the manufacturer's supply chain to their designated contract manufacturer. 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.

                                              Fiscal Year
                                    2013          2012          2011
                                             (in thousands)
                    Net revenue   $ 208,634     $ 152,967     $ 96,547


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Net revenue for fiscal year 2013 increased by $55.7 million, or 36%, year-over-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, partially offset by lower volume shipments to gaming manufacturers and by per unit sold average selling price erosion. Total unit shipments for fiscal year 2013 increased by 68% year-over-year. Our overall average unit selling price for fiscal year 2013 decreased 19% year-over-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. We expect a continued trend of declining unit average selling prices for our products during their life cycles.

Net revenue for fiscal year 2012 increased by $56.4 million, or 58%, year-over-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 fiscal year 2012 increased by 83% year-over-year. Our overall average unit selling price for fiscal year 2012 decreased 13% year-over-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.

For fiscal 2013 three customers accounted for 24% (Samsung), 18% (Nintendo) and 11% (Quanta) of total net revenue. For fiscal year 2012 three customers accounted for 31% (Nintendo), 15% (HTC) and 12% (Samsung) of total net revenue. For fiscal year 2011, one customer accounted for 73% (Nintendo) of total net revenue. No other customers accounted for more than 10% of total net revenue for fiscal years 2013, 2012 or 2011.

Net Revenue by Target End Market



                                                       Fiscal Year
                                            2013           2012          2011
                                                     (in thousands)
          Smartphone and tablet devices   $ 147,958      $ 85,601      $  7,279
          % of net revenue                       71 %          56 %           8 %
          Gaming                          $  38,687      $ 55,023      $ 77,673
          % of net revenue                       19 %          36 %          80 %
          Other                           $  21,989      $ 12,343      $ 11,595
          % of net revenue                       11 %           8 %          12 %

Net revenue growth and contribution to total net revenue for the smartphone/tablet end market in fiscal years 2013 and 2012 reflects significant expansion of the smartphone portion of the handset market, growth in the market for tablet computing devices, and increased adoption of our technologies in those devices during that time period. The net revenue decline and contribution to total net revenue for the gaming end market in fiscal years 2013 and 2012 reflects a declining consumer market for console gaming and shift to mobile device and online gaming during that time period.

Net Revenue by Geographic Region



            Region           Fiscal 2013       Fiscal 2012       Fiscal 2011
                                             (in thousands)
            Korea           $      69,874     $      39,827     $       3,536
            Japan                  65,663            54,754            72,475
            Taiwan                 39,203            34,040             7,603
            United States          16,667            11,916             3,678
            China                  14,742            11,855             6,929
            Rest of world           2,485               575             2,326

                            $     208,634     $     152,967     $      96,547


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We primarily sell our products directly to customers and distributors in Asia which consists primarily of Korea, Japan, Taiwan and China. Sales into Asia constituted 92% of our net revenue in fiscal year 2013 compared with 92% of our net revenue in fiscal year 2012 and 98% of our net revenue for the fiscal year 2011.

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-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."

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.



                                                Fiscal Year
                                      2013          2012          2011
                                               (in thousands)
                 Cost of revenue    $ 97,937      $ 67,571      $ 43,647
                 % of net revenue         47 %          44 %          45 %

Cost of revenue for fiscal year 2013 increased by $30.4 million, or 45%, year-over-year, due to an increase in unit sales of our products, partially offset by improvements in our production yields and efficiency.

Cost of revenue for the fiscal year 2012 increased by $23.9 million, or 55%, year-over-year, due to an increase in unit sales of our products, partially offset by improvements in our production yields and efficiency and lower warranty costs.

Gross Profit and Gross Margin

Gross profit is the difference between net revenue and cost of revenue and gross margin is gross profit as a percentage of sales.

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;

our ability to add new product features to our existing products;

the rate of adoption of our products by new markets;

product manufacturing cost and yields;

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

benefit from sale of previously written down inventories;

product mix;


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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.

                                                Fiscal Year
                                     2013           2012          2011
                                              (in thousands)
                Gross profit       $ 110,697      $ 85,396      $ 52,900
                % of net revenue          53 %          56 %          55 %

Gross profit for fiscal year 2013 increased by $25.3 million, or 30%, year-over-year, due to an increase in unit sales of our products and the favorable effect of the sale of previously written down inventories, partially off-set by decreases in average selling price per unit sold for comparable products. Gross profit as a percentage of sales, or gross margin, decreased on the effect of reductions in average selling price per unit sold for comparable products and changes in product mix sold, partially offset by the benefit of the sale of previously written down inventories for fiscal year 2013 of $3.0 million, or 1.5% of net revenue and by improvements in our production yields and efficiency. We expect gross margins to fluctuate during future periods due to changes in product mix, average unit selling prices, manufacturing costs, manufacturing yields and levels of product demand.

Gross profit for the fiscal year 2012 increased by $32.5 million, or 61%, year-over-year, due to higher volume shipments of our products to an expanded customer base, including manufacturers of smartphones, tablet devices and digital television and set-top box remote controls, year-over-year improvements in our production yields and efficiency, and lower warranty costs in fiscal year 2012. Gross profit as a percentage of sales, or gross margin, also increased due to improvements in our production yields and efficiency, partially offset by a write-down of inventory related to excess and obsolete material for fiscal year 2012 of $2.2 million, or 1.4% of net revenue.

Research and Development

Research and development expense primarily consists of personnel related expenses (including employee cash compensation and benefits, and 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.

                                                    Fiscal Year
                                          2013          2012          2011
                                                   (in thousands)
             Research and development   $ 24,648      $ 19,672      $ 15,826
             % of net revenue                 12 %          13 %          16 %

Research and development expense for fiscal year 2013 increased by $5.0 million, or 25%, year-over-year. The increase was primarily attributable to a $1.9 million increase in employee cash compensation and benefits costs due to an increase in the number of employees, a $1.3 million increase in stock-based compensation expense due to an increase in the number of employees, and a $0.9 million increase in mask and foundry


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expenses. Research and development headcount was 118 at the end of fiscal year 2013 and 109 at the end of fiscal year 2012. Additions to headcount primarily supported expansion of new product and future technology development activities.

Research and development expense for fiscal year 2012 increased by $3.8 million, or 24%, year-over-year. The increase was primarily attributable to a $2.1 million increase in employee cash compensation and benefits costs due to an increase in the number of employees, a $0.9 million increase in mask and foundry expenses, a $0.5 million increase in outside service costs and a $0.5 million increase in stock-based compensation expense due an increase in the number of employees. Research and development headcount was 109 at the end of fiscal year 2012 and 83 at the end of fiscal year 2011. Additions to headcount primarily supported expansion of new product development activities.

Selling, General and Administrative

Selling, general and administrative expense primarily consists of personnel related expenses (including employee cash compensation and benefits, and 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.

                                                         Fiscal Year
                                               2013          2012          2011
                                                        (in thousands)
       Selling, general and administrative   $ 29,391      $ 18,710      $ 15,596
       % of net revenue                            14 %          12 %          16 %

Selling, general and administrative expense for fiscal year 2013 increased by $10.7 million, or 57%, year-over-year. The increase was primarily attributable to a $3.4 million increase in employee cash compensation and benefits costs due to an increase in the number of employees, a $3.2 million increase in stock-based compensation driven by an increase in the number of employees, a $2.5 million increase in legal costs due primarily to patent litigation activities, and a $0.8 million increase in outside service costs. Executive separation costs of $0.8 million were included in employee compensation and benefits costs and executive separation costs of $0.6 million were included in stock-based compensation costs. Selling, general and administrative headcount increased to 102 at the end of fiscal year 2013 from 88 year-over-year. Additions to headcount primarily supported expanded geographic, customer and market opportunities for our products.

Selling, general and administrative expense for fiscal year 2012 increased by $3.1 million, or 20%, year-over-year. The increase was primarily attributable to a increase in employee cash compensation and benefits costs of $2.4 million resulting from increased headcount, increased stock-based compensation expense of $0.9 million due to increased headcount and increased facilities and infrastructure cost of $0.5 million, partially offset by the write-off of deferred offering costs of $1.4 million in the third quarter of fiscal year 2011. Selling, general and administrative headcount increased to 88 at the end of fiscal year 2012 from 71 year-over-year. Additions to headcount primarily supported expanded geographic, customer and market opportunities for our products.

Income From Operations



                                                   Fiscal Year
                                         2013          2012          2011
                                                  (in thousands)
              Income from operations   $ 56,658      $ 47,014      $ 21,478
              % of net revenue               27 %          31 %          22 %


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Income from operations for fiscal year 2013 increased by $9.6 million, or 21%, year-over-year, primarily due to increased gross profit of $25.3 million partially offset by higher operating expenses of $15.7 million. As a percentage of net revenues, income from operations decreased by 4%.

Income from operations for fiscal year 2012 increased by $25.5 million, or 119%, year-over-year, primarily due to increased unit shipments, increased gross profit and lower operating expenses as a percentage of sales.

Other Income (Expense), Net



                                                             Fiscal Year
                                                    2013       2012         2011
                                                            (in thousands)
      Change in fair value of warrant liabilities   $   -      $   -      $ (4,025 )
      Other income, net                               348        138            31

      Other income (expense), net                   $ 348      $ 138      $ (3,994 )

      % of net revenue                                  - %        - %           4 %

Other income (expense), net increased by $0.2 million, or 152%, for fiscal year 2013 compared to fiscal year 2012. The increase in other income (expense) was primarily due to increased interest income of $0.4 million on higher investment balances, off-set by decreases in gains on sale of fixed assets compared to fiscal year 2012.

Other income (expense), net decreased by $4.1 million, or 103%, for fiscal year 2012 compared to fiscal year 2011. The change in other income (expense) was primarily due to changes in fair value of warrant liabilities in fiscal year 2011. During fiscal year 2011, we recorded charges of $4.0 million resulting from the increase in fair value of warrants to purchase shares of our preferred stock, compared to $6.4 million recorded in fiscal year 2010. Effective June 25, 2010, we amended our certificate of incorporation to remove certain provisions from our preferred stock that had resulted in our warrants being previously classified as liabilities. On that date, the fair value of the warrants, $11.9 million, was reclassified to stockholders' equity. Accordingly, for periods after June 27, 2010, we were not required to reflect changes in fair value of warrant liabilities in our consolidated statements of income.

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 foreign tax differentials, research and
development tax credits, and expenses that are not deductible such as certain
stock based compensation.



                                                        Fiscal Year
                                              2013          2012         2011
                                                      (in thousands)
          Income tax provision              $ 5,301$        10,205      $ 8,137

% of income before income taxes 9 % 22 % 47 %

In fiscal year 2013, we recorded an income tax provision of $5.3 million compared to an income tax provision of $10.2 million for fiscal year 2012. The difference between fiscal year 2013 compared to fiscal year 2012, was primarily due to a lower effective tax rate resulting from foreign rate differentials, increased research and development tax credits and stock-based compensation deductions. In addition, during fiscal year 2013, we also changed our estimate of earnings attributable to our domestic versus foreign operations earned for the fiscal year. As a result of an increase in the amount of earnings attributable to foreign jurisdictions with lower tax rates, we adjusted our tax provision in fiscal year 2013 to reflect these new estimates; to the extent that . . .

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