A terrible earnings quarter and lower future margins prompts this sell alert.
InvenSense (INVN)
from 100% Letter Updated from Investment Digest Issue 754, February 19, 2014
InvenSense (INVN) reported quarterly revenue growth of 35% (to $90.2 million) and non-GAAP EPS of $0.05. Revenue was basically in-line with expectations, but the non-GAAP EPS number was absolutely terrible, coming in a full $0.11 short of $0.16 consensus.
I’m typically able to see some bright spots when a company misses by this much. There are usually some one-time adjustments that aren’t symptomatic of a bigger issue.
But in InvenSense’s case, I’m not seeing the bright spots. Gross margin was terrible, falling from 52% a year ago (and from 49.6% in Q1) to a mere 37.2%.
The hit came from three things, the first of which is a move toward “lower margin, high volume customers” which trimmed around 3%. I can only assume this is related to sales to Apple (APPL), which is something we had looked forward to. But now I’m dubious—new, cutting edge chips are supposed to add high-margin revenue, not drag the average down as appears to be the case here, no matter how great the customer is. And, management said this negative margin impact wasn’t expected, which leads me to believe that they had to give up too much to land new contracts.
The second drag on margins was a $7.4 million inventory write-down, which took 8% off. As you may recall, I was closely watching INVN build its inventory and I expected this to lead to revenue growth. The fact that it had to write-off so much signals a big miscalculation too me. Even if the company states that the write-off was related to “earlier generation inventory that is now excess or obsolete”, the fact remains that it built the wrong chips at some recent point.
And finally, there was a 2% hit due to higher manufacturing costs. These will continue.
So now management expects gross margins will run closer to 46%-47% for the foreseeable future, which I think may be optimistic given that more inventory write-downs are on the table.
The bottom line here is that while revenue growth appears to be heading toward 35% for this year and there are certainly opportunities in the wearable tech market, margins are going to keep a lid on profits. That’s not good, since it makes INVN’s stock considerably more expensive on a price-to-earnings basis. And in the semi-conductor space, investors just aren’t happy paying a higher premium for a less profitable company.
After this quarter, I just don’t have faith in INVN and I don’t see the positive catalysts I expected moving shares meaningfully higher over the next year.
Action to take: Sell InvenSense (INVN).
Tyler Laundon, The 100% Letter, 100percentletter.wyattresearch.com, 866-447-8625,October 29, 2014