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INVN > SEC Filings for INVN > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for INVENSENSE INC


8-Nov-2013

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 March 31, 2013, and with management's discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K with the Securities and Exchange Commission (SEC) on June 14, 2013.

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 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 referred to under Item 1A. of Part I - "Risk Factors," included in the Company's Annual Report on Form 10-K filed on June 14, 2013 with the SEC and Item 2 of Part I - "Management's Discussion and Analysis of Financial Condition and Results of Operations," and discussed 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

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, industrial sensors, 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 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 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).

In May 2013, we announced the IDG-2030 and IXZ-2030 dual-axis OIS gyroscopes. OIS eliminates the effects of hand jitter to achieve blur free images and jitter free HD video.

In May 2013, we announced the MPU-6521 MEMS SoC, which is the world's smallest, lowest profile, and lowest power 6-axis solution. The slim profile MPU-6521 is targeted for the next-generation of smartphones, tablets, gaming devices, motion-based remote controls, and wearable sensors.

In June 2013, we announced a family of 6 Industrial MotionTracking solutions including 3-axis gyroscopes and integrated 6-axis gyroscopes plus accelerometers.


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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.

                          Three Months Ended                       Six Months Ended
                   September 29,       September 30,       September 29,       September 30,
 (in thousands)        2013                2012                2013                2012
 Net revenue      $        70,941     $        55,294     $       126,851     $        94,496

Net revenue for the three and six months ended September 29, 2013 increased by $15.6 million and $32.4 million, or 28 % and 34%, 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, partially offset by lower volume shipments to gaming manufacturers and by per unit sold average selling price erosion. Total unit shipments for the three and six months ended September 29, 2013 increased 81% and 81%, respectively, compared to the same periods of the prior fiscal year. Our overall average unit selling price for the three and six months ended September 29, 2013 decreased 29% and 25%, respectively, 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. We expect a continued trend of declining unit average selling prices for our products during their life cycles.

For the three months ended September 29, 2013, two customers each accounted for 36% (Samsung) and 14% (Nintendo) of total net revenue. For the six months ended September 29, 2013, one customer accounted for 31% (Samsung) of total net revenue. For the three months ended September 30, 2012, three customers each accounted for 29% (Nintendo), 19% (Samsung) and 17% (Quanta) of total net revenue. For the six months ended September 30, 2012, three customers each accounted for 22% (Nintendo), 19% (Samsung) and 15% (Quanta) of total net revenue.

No other customers accounted for more than 10% of total net revenue for the three and six months ended September 29, 2013 or September 30, 2012.

Net Revenue by End Market



                                           Three Months Ended                                Six Months Ended
                                  September 29,            September 30,           September 29,           September 30,
                                      2013                     2012                    2013                    2012
                                                                     (in thousands)
Smartphone and tablet
devices                         $          50,950         $        34,563         $        93,921         $        63,966
% of net revenue                               72 %                    63 %                    74 %                    68 %
Gaming                          $           9,647         $        15,935         $        11,607         $        21,173
% of net revenue                               13 %                    29 %                     9 %                    22 %
Optical image
stabilization and other         $          10,344         $         4,796         $        21,323         $         9,357
% of net revenue                               15 %                     9 %                    17 %                    10 %

Net revenue growth and contribution to total net revenue for the smartphone/tablet end market for the three and six months ended September 29, 2013, compared to the same periods of the prior fiscal year, 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. Net revenue growth and contribution to total net revenue for the optimal image stabilization and other end market for the three and six months ended September 29, 2013, compared to the same periods of the prior fiscal year, reflects significantly increased adoption of our technology for optical image stabilization in smartphone camera modules. The net revenue decline and contribution to total net revenue for the gaming end market for the three and six months ended September 29, 2013, compared to the same periods of the prior fiscal year, reflects a declining consumer market for console gaming and a shift to mobile devices and online gaming.


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Net Revenue by Geographic Region



                         Three Months Ended                       Six Months Ended
                  September 29,       September 30,       September 29,       September 30,
 Region               2013                2012                2013                2012
                                               (in thousands)
 Korea           $        30,503     $        15,321     $        50,365     $        27,585
 Japan                    15,533              21,442              31,077              30,597
 Taiwan                    8,871              11,859              13,059              23,005
 United States             8,755               3,229              14,974               4,567
 China                     6,366               3,087              12,218               8,082
 Rest of world               913                 356               5,158                 660

                 $        70,941     $        55,294     $       126,851     $        94,496

The net revenue increase in Korea reflects growing demand primarily by mobile device customers. The net revenue decrease in Japan reflects a declining consumer market for console gaming due to a shift to mobile device and online gaming. We primarily sell our products directly to customers and distributors in Asia which consists mainly of Korea, Japan, Taiwan and China. 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", referred to under Item 1A. of Part I in our Annual Report on Form 10-K filed on June 14, 2013 with the SEC.

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 or benefits related to
excess and obsolete inventory.



                                          Three Months Ended                                 Six Months Ended
                                September 29,             September 30,            September 29,          September 30,
(in thousands)                      2013                      2012                     2013                   2012
Cost of revenue               $          34,364          $        24,923          $        60,955        $        42,562
% of net revenue                             48 %                     45 %                     48 %                   45 %

Cost of revenue for the three and six months ended September 29, 2013 increased by $9.4 million and $18.4 million, or 38% and 43%, respectively, compared to the same periods of the prior fiscal year, due to an increase in unit sales of our products, partially offset by improvements in unit cost driven by transition to smaller footprint products, and continued improvements in our production yields and efficiency.

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;


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benefit from sale of previously written down inventories;

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.

                                          Three Months Ended                                 Six Months Ended
                                September 29,             September 30,            September 29,          September 30,
(in thousands)                      2013                      2012                     2013                   2012
Gross profit                  $          36,577          $        30,371          $        65,896        $        51,934
% of net revenue                             52 %                     55 %                     52 %                   55 %

Gross profit for the three and six months ended September 29, 2013 increased by $6.2 million and $14.0 million, or 20% and 27%, respectively, compared to the same periods of the prior fiscal year, due to an increase in unit sales of our products, partially off-set by decreases in average selling price per unit sold for comparable products. For the three and six months ended September 29, 2013, gross profit as a percentage of sales, or gross margin, decreased, compared to the same periods of the prior fiscal year, due to the effect of reductions in average selling price per unit sold for comparable products and changes in product mix sold. For the three and six months ended September 29, 2013, gross margin benefit of previously written down inventories was nil and $0.3 million, or approximately nil% and 0.2% of net revenue, respectively. For the three and six months ended September 30, 2012, gross margin benefit of previously written down inventories was $0.9 million and $2.5 million, or approximately 1.6% and 2.7% of net revenue, respectively. 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.

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.

                                             Three Months Ended                              Six Months Ended
                                   September 29,            September 30,           September 29,         September 30,
(in thousands)                         2013                     2012                    2013                  2012
Research and development          $         9,810          $         5,918         $        17,924       $        11,574
% of net revenue                               14 %                     11 %                    14 %                  12 %

Research and development expense for the three and six months ended September 29, 2013 increased by $3.9 million and $6.4 million, or 66% and 55%, respectively, compared to the same periods of the prior fiscal year. The increase for the three and six months ended September 29, 2013, respectively, was primarily attributable to increases of $1.3 million and $2.5 million in employee cash compensation and benefit costs due to an increase in the number of employees, increases of $0.6 million and $0.8 million in supplies expense due to an increase in technology development activities, increases of $0.5 million and $1.0 million in stock-based compensation expense due to an increase in the number of employees and increases of $0.4 million and $0.6 million in outside services related to the increase in technology development activities. Research and development headcount was 132 at the end of September 29, 2013 and 104 at the end of September 30, 2012. Additions to headcount primarily supported expansion of new product and future technology development activities.


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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.

                                           Three Months Ended                              Six Months Ended
                                  September 29,           September 30,           September 29,         September 30,
(in thousands)                        2013                    2012                    2013                  2012
Selling, general and
administrative                   $        11,424         $         7,202         $        20,580       $        13,459
% of net revenue                              16 %                    13 %                    16 %                  14 %

Selling, general and administrative expense for the three and six months ended September 29, 2013 increased by $4.2 million and $7.1 million, or 59 % and 53%, respectively, compared to the same periods of the prior fiscal year. The increase for the three and six months ended September 29, 2013, respectively, was primarily attributable to increases of $ 2.6 million and $4.2 million in legal costs due mainly to patent litigation activities and increases of $0.8 million and $1.4 million in stock-based compensation driven by an increase in the number of employees. Selling, general and administrative headcount increased to 111 at September 29, 2013 from 99 at September 30, 2012. Additions to headcount primarily supported expanded geographic, customer and market opportunities for our products.

Income From Operations



                                           Three Months Ended                              Six Months Ended
                                  September 29,           September 30,           September 29,         September 30,
(in thousands)                        2013                    2012                    2013                  2012
Income from operations           $        15,343         $        17,251         $        27,392       $        26,901
% of net revenue                              22 %                    31 %                    22 %                  29 %

Income from operations for the three and six months ended September 29, 2013 . . .

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