InvenSense Inc. Earnings: Beating Expectations, but Analysts Want More

Shares of InvenSense fell after hours on Monday, after the company reported its fourth-quarter earnings. The MEMS chipmaker earned $0.12 per share -- in line with expectations -- on revenue of $99.3 million. Analysts were expecting $97.2 million in revenue.

The decline in share price after hours may be due to expectations ahead of the earnings release that the company would provide a bigger beat to expectations. The share price had increased 3% during regular trading hours.

InvenSense's $99.3 million in revenue represents a 68% increase from the fourth quarter of fiscal 2014. Undoubtedly, Apple provided a large boost to InvenSense's results. InvenSense produces a six-axis sensor for the iPhone 6 and iPhone 6 Plus.

Source: InvenSense.

Here are the key takeaways from InvenSense's earnings report:

Gross margin remains depressedWhile the Apple deal certainly provides a boost to InvenSense's revenue, it's put significant pressure on the company's gross margin. Gross margin remained flat sequentially, coming in at 46% on a non-GAAP basis (43% on a GAAP basis).

Management warned investors in its third-quarter conference call that it expects gross margin to remain in the 46% to 47% range. It also said that investors can expect margins in that range through the first half of fiscal 2016. Long term, however, management's goal is to return to 50% gross margin -- the level it was at before winning the iPhone socket.

While InvenSense doesn't disclose the details of its contract with Apple, it does note that larger customers receive its best pricing. InvenSense's two largest customers -- Apple and Samsung -- accounted for 32% and 29% of total revenue. While that's down from the prior quarter, when they made up a combined 69% of revenue, it's still a significantly larger amount concentrated in big buyers compared with the same period a year ago.

Optical Image Stabilization continues to growInvenSense's OIS chips are seeing strong adoption. Last quarter, the company's OIS business accounted for 18%, or about $17.9 million, of total revenue. That's up from $11.6 million in the prior quarter. In the year-ago period, OIS was lumped in with InvenSense's other category, which accounted for about $7.1 million.

InvenSense expects the strength in OIS to continue going forward, and that's excellent news for investors concerned about the company's heavy reliance on a small number of customers. More content per device, like OIS chips or even MEMS microphones, helps make InvenSense's products more sticky.

Of course, winning a socket in one device is no guarantee that it will win the design in another device. The Apple Watch, for example, doesn't use InvenSense chips, even though Apple uses them in the newest iPhone models.

Management expects OIS attach rates across mobile devices to double in fiscal 2016 to reach 20%. Considering how low the attach rate is at this point, OIS could become a big revenue driver for InvenSense going forward.

Guidance in line with expectationsFor the first quarter of 2016, CFO Mark Dentinger forecasts revenue in the range of $100 million to $105 million and EPS between $0.11 and $0.13. The consensus estimate currently sits at $0.12 in earnings per share on revenue of $98.4 million. However, he also guided for gross margin to decline to 45% to 46%, which may have irked investors hoping for an early recovery in profitability.

The company is currently focused on meeting the demand of its two biggest customers, as well as the increased demand for OIS gyroscopes. As a result, it's sacrificing margins to gain revenue. Overall, InvenSense expects to come in around analysts' profit expectations, just with lower margins than they were hoping.

Comments from management on the conference call indicated that there may be some leverage in gross margin from an increasing demand of OIS, as well as new products it's rolling out in 2016.

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Adam Levy owns shares of Apple and InvenSense. The Motley Fool recommends Apple and InvenSense. The Motley Fool owns shares of 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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