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pre-earnings thoughts on INVN and Coursa ?7

14:57 03-May-16

INVN is back down towards the bottom of the $7 to $8.75 value range I specified just after the last earnings report.  Apple media and sales woes are a minor negative, but really I think not being in the S7 or the latest FitBit has people worried about who (besides Apple) is buying the chips.  Ironically, these are probably some of the same people who worried about margins when sales were dominated by two big names.  Hopefully sales are much more dispersed now, to companies like Tag Heuer at higher margins.  The wearables market has been growing, but as I've documented, there is reason to worry about how much market share InvenSense is capturing. 

That's why I've been saying that we really need to hear about progress on the new fingerprint sensor and especially the Coursa Sports and Retail initiatives in the upcoming report.  Of the two, I think Coursa Retail holds the most promise.  My thinking continues to be that Coursa Sports will require partnerships, perhaps from the likes of Under Armour, Apple, or maybe large event organizers to take off.  By contrast big box retailers are hurting. That plays perfectly to Coursa Retail's pitch of being the low-cost bridge between online and in-person sales. 

Incumbents

I've been trying to get pricing info on competing options, but it's been hard to come by.  In fact, I get the impression that the higher-tech outfits are on the way out.  They fall into three general categories:

• Low Tech: retailers employee "greeters" at each store entrance, with clickers that do simple head counts.  Deployment cost scales by number entrances to the stores.
  
• Wireless Beacons: ShopperTrak would be an example this approach, which tracks mobile phone locations by triangulating connections.  This has the advantage of potentially tracking unique customers.  Deployment cost scales linearly with physical store volume.  By contrast Coursa Retail requires just one bluetooth beacon at each entrance.
  
• Specialized Cameras: are more accurate means of tracking customer location, but lack the uniqueness factor.  (Facial recognitiion software has come a long way, but is not deployed for these sorts of purposes, so far as I know.)  Prodco would be an example of this sort of operation, and deployment cost should also scale by store area (as opposed to volume).
  

Coursa Retail can undoubtedly be cheaper than the latter two options.  Unlike them, integrating InvenSense's indoor navigation software could eventually make a retailer's smart-phone app sticky with customers, thereby creating greater free promotional opportunity.  Coursa Retail is also better than the low-tech approach in almost every way, and could potentially charge more than it would cost to deploy greeters.

Quantifying the Minimum Opportunity

Nonetheless, given that I am unable to quantify high-end pricing for the other solutions, I'll simply do some calculations on the low-tech approach in order to take an educated guess at the minimum TAM (total addressable market) for Coursa Retail using stats from Walmart's U.S. operations.  That example is chosen because Walmart not only dominates Big Box retail, it also dominates IT spending and innovation in that sector.  Sadly, to my mind, the U.S. still dominates retail.

So, Walmart pays its U.S. employees a minimum of $10 an hour.  Minimum wages elsewhere in the U.S. may be cheaper, but I think $10 is a good figure when excluding the cost of benefits, etc.  Walmart has over 5000 locations in the U.S., and more than 11.5K worldwide, but I'll only count the U.S. supercenters, of which there are 3,465.  My local store is open 6am to 12am 7 days a week, but let's say Walmart were only to employ a single greeter for the busiest 12 hours of each day.  The very conservative annual cost for employing greeters would then be 3465 x $10 x 365 x 12 = $151767000.

Walmart's percentage of overall retail is in the low double-digits.  However, its locations are probably a much larger percentage of Coursa Retails target market. If we generously estimate Walmart as 40% of the big box retail chain opportunity, that would mean that the conservatively priced annual revenue opportunity for Coursa Retail in the U.S. alone is approximately equal to InvenSense sales for all of 2015.  The impact to the bottom line would be FAR higher as the product should have much lower costs which do NOT scale linearly like hardware does.  Walmart would of course, be the acid test for Coursa Retail.  It reports again in the second half of May, and I will continue to examine the conference calls and tech progress for hints.  That said, I would be very happy to hear news of smaller deployments first, thereby proving the concept and enabling better terms with larger organizations later on.

Summary

To wrap things up, I have no way of knowing the pace at which InvenSense can penetrate the big box market, and pace will probably be crucial to investor sentiment.  Even so, I hope you can see why I make such a big deal about the opportunity, which seems almost completely unrecognized in investment circles.  As a result, next week's earnings report probably holds more highly bifurcated risk/reward prospects than any in the company's history.  However, whereas the reports following Apple's adoption of InvenSense products held mostly risk, I think InvenSense's rebuilt balance sheet and lowered stock price makes the current situation much more evenly balanced.

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