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INVN morning notes ?7

In case it wasn't already clear, the guidance, though light, pretty much confirms a win in the next Apple phones and the Q&A reinforces that.  So that's a future positive.  It shouldn't be too hard for analysts to figure that one out; so I'm looking for upside, but the news is balanced by Korea looking a bit scary in the medium-term.  Management sees market share there dropping from the 80% range to as low as 50 or 60%.  Given that Korea is only 27% of InvenSense's business now, that's not as bad as it sounds.  It's also likely to be temporary.  The Koreans are looking to lead the way in flexible electronics, probably ramping late next year. That should help to alleviate the macro concerns that have InvenSense management so cautious on guidance right now.

The wildcard is a patent cross licensing deal which resulted in an $11.7M GAAP-only charge.  This is probably a modification to the deal with STMicro, and the amount of the charge roughly fits the stock increase I noted from the S-8.  The first patent-cross licensing deal with STM wasn't the positive I had hoped for, and with no details available on this one yet, it's hard to be sure of the impact. 

Markets don't like uncertainty, and price target cuts from Northland ($15 from $18, Neutral from Outperform) and Ascendiant ($17 from $20, Buy) won't help either.  Nonetheless, I'm not inclined to be too concerned about pre-market movement.  Retail investors are starting to see that the company is performing consistently, but institutional ones will continue to fret about margins.  The will also want to see harder evidence of success in the non-mobile markets that InvenSense is expanding into. 

Other significant points from the call:
  • Dead Reckoning:  the InvenSense Positioning Library is shipping to a major smartphone OEM and is in software trials at several global brands.
  • Analog Audio: "We expect to see revenue from these applications and others by the end of our fiscal year. While the mobile market still lags behind other verticals in its requirement for high-end audio performance, we do believe that sound quality particularly for video will eventually become a competitive differentiator."
  • Digital Audio: is longer term, but more important as it enables always on sensor fusion.  Management cites early interest at a number of mobile OEMs, as well as design win success in wearable applications.
One subscriber asks if I could agree that INVN will be back to the $14-15 range soon, and I think the answer is yes.  It may be immediate, if the market is as confident as I am about the next win(s) at Apple, or it could wait for the teardown of those devices.  Beyond that I still see the same potential together with increased execution risk. 

I'll be keen to hear details of the cross-licensing deal, and that could come even before hard confirmation on the Apple devices.  Just as with the first time around, I see this as clearing the way to acquisition.  In particular I note that the recent memory breakthrough at Intel/Micron points the way to single-chip mobile devices.  Those chips will want integrated sensors, and InvenSense is the clear choice.