[Saul, you did so well to get out of this. Great timing and I would say some very astute thinking. Listening to the call, I 'm seriously considering revisiting the investment.]
I just finished listening through the prepared portion of the call. I 'm not so impressed with the CEO’s preachy style - he rambles a lot about the opportunities ahead. The thing that stuck me is that they are continuously trying to up the game, six axis to now seven axis and so on. On the surface, this looks good, but it can also be problematic. If one has to keep making new products at breakneck speed, it adds to R&D costs, and you don’t really have the time to amortise the expenses made to design the product. Anyways, I was left feeling a bit uneasy about this investment after hearing the prepared part of the call. I need to listen to the Q&A session to form an opinion of how things are going.
It appears the current quarter suffered from:
- margin pressures because they had some large tier-1 customers (read Apple)
- the mix of sales showed significant jump for North America (read Apple again)
- inventory write down for older generation products, which they claimed was an one off event. I 'm a bit uneasy about this. The chip making business is notorious for being highly competitive. Big customers such as Apple and Samsung will always squeeze these guys out, or at least try to squeeze as much they can. The inventory management needs to be very very good here, otherwise there will be more write downs in quarters ahead. I 'm not suspecting Invensense’s ability to innovate, but I 'm questioning their inventory management.
With respect to guidance for the next quarter, this is what they said:
- Revenues b/w $108 - $115M. That would be about 20+% increase in revenue sequentially assuming they make the mid-point.
- Non-GAAP eps b/w $0.17 and $0.21 cents. They don’t expect write downs etc in the next quarter, so that’s good. Now, here’s the rub. I believe the analysts were looking for
** about $116.32 million in revenue, and
** approximately $0.30 per share in earnings.
See this link for further details:
The guidance is well shy of that. This I figure is the reason for the After Hours action
A few other things, they did note that they expect margin pressure to continue next quarter (46-47% margin), expect to spend more on R&D (potentially good), and also expect to have more SSGA expense (not so good!).
It may be good to compare the guidance with what has been happening in the past several quarters (showing non-GAAP EPS):
============= Quarter EPS ============= Q2 15 0.05 Q1 15 0.08 Q4 14 0.07 Q3 14 0.15 Q2 14 0.21 Q1 14 0.14 Q4 13 0.15 Q3 13 0.19 =============
The table suggests that the business is pretty cyclic as far as earnings are concerned. It has some distinct peaks and valleys. Most component suppliers probably suffer from this sort of earnings fluctuations. New products have a ramp-up costs, which starts digging into the earnings from the previous generation of products. Then, when the new product is out and selling the earnings go up, only for the cycle to repeat … I know this is a big simplification but this can potentially explain the fluctuations at a very high 60,000 ft level.
Is it time to revisit this investment? Hang on for couple more quarters to see how the Apple relationship progresses? Thoughts?