InvenSense Management Discusses Q4 2013 Results - Earnings Call Transcript

May. 2.13 | About: InvenSense (INVN)

InvenSense (NYSE:INVN)

Q4 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

Alan F. Krock - Chief Financial Officer, Principal Accounting Officer and Vice President

Behrooz Abdi - Chief Executive Officer, President, Director and Member of Nominating & Corporate Governance Committee

Analysts

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Joseph Moore - Morgan Stanley, Research Division

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

Auguste P. Richard - Piper Jaffray Companies, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Mark McKechnie - Evercore Partners Inc., Research Division

Mark McKechnie - ThinkEquity LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 InvenSense Inc. Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Alan Krock, Chief Financial Officer. Please proceed, sir.

Alan F. Krock

Thank you, operator. Good afternoon, and welcome to all. I need to begin our call with the forward-looking statements. Statements in this conference call that are not historical are forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally in the future tense and/or preceded by words such as will, expects, anticipates or other words that imply or predict the future state. Forward-looking statements include any projection of revenue, gross margin, expense or other financial items discussed in this call, including the expansion of our customer design pipeline and potential for continued gains in our share of the mobile, computing, consumer market segments. Investors are cautioned that all forward-looking statements in this release involve -- or in this call involve risks and uncertainties that cause actual results to differ from those currently anticipated due to a number of factors, including, without limitation, the continued adoption of motion tracking and motion sensing as an interface in the consumer electronics products; our achievement of design wins; consumer acceptance of our customers' products that incorporate our solutions; intense competition in our industry; our dependence on a limited number of customers for a substantial portion of our revenues; our lack of long-term supply contracts that are dependent on limited sources of supply; our ability to continue to develop and introduce new and enhanced products in a timely basis; and potential decreases in average selling prices for our products, as well as changes in economic conditions in our markets and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, SEC, from time to time. Copies of InvenSense's SEC filings are posted to the company's website and are, therefore, available from the company without charge. Forward-looking statements are made as of the date of this conference call, and the company does not undertake an obligation to update any forward-looking statements to reflect future events or circumstances.

With that, I'll turn the over the call to Behrooz Abdi, our President and CEO.

Behrooz Abdi

Thank you, Alan, and good afternoon, everyone. Welcome to our fiscal 2013 fourth quarter call. First, let me start by saying that fiscal 2013 was a phenomenal year for InvenSense as our revenue grew by an impressive 36% over fiscal 2012, driven mostly by significant penetration into mobile and computing segments and transition to integration or higher integration of 6-axis MotionTracking solutions at existing and new customers. We believe this is a start of a multiyear trend into this nascent and exciting market segments. We also continued in our tradition of announcing several world's firsts, and are now recognized in several market segments as an innovator and the leading fabless MEMS solution provider to the mobile, computing and consumer markets.

In the fiscal 2013 fourth quarter, the InvenSense team continued to deliver solid results in a highly competitive market, as we achieved higher than our stated revenue outlook for Q4 of $52 million to $54 million, with revenue for the quarter of $55.2 million. Our revenue declined only 6%, sequentially, which was better than our historical seasonal pattern of double-digit percentage declines relative to seasonally strong fiscal Q3 period and increased 67% year-over-year in the March quarter, with smartphones and tablets leading the growth, representing over 80% of total revenue.

We saw seasonal unit volume reduction in the gaming segment, which was partially offset with unit volume growth in the mobile and computing segment. We also continued to exert significant unit volume growth in our world-leading optical image stabilization or OIS products, as more of our customers recognize the value of improved camera performance in mobile phones.

Our 6-axis product family and, specifically, MPU-6050 comprised over 50% of the unit shipments as driven by our mobile and computing customers. While we enjoyed increased demand in MPU-6050, our gross margins came under pressure due to continued price erosion and delays in transitioning to our next-generation flagship 6-axis product, namely MPU-6500. These delays were largely due to factors, such as receiving final customer qualification, customer transition to our new products and our manufacturing ramp. We are pleased to report that we have now started production shipments of MPU-6500, which at 3x3x0.9 millimeter is the world's smallest 6-axis MotionTracking device in production.

While this device brings additional value to our customers with higher performance and lower power, it also provides InvenSense with additional cost reduction opportunities in future quarters. In the last quarter of fiscal 2013, our customer design pipeline continued to expand significantly across all of our products, with solid traction for the 6-axis MPU-6500 and 9-axis MPU-9250 MotionTracking solutions, as mobile customers recognized more than ever before the value of our highly integrated high-performance, low-power solutions and their applications.

We are also pleased to see strong design traction for the IDG-2020 device in OIS applications, where we're helping bring the digital SLR camera to smartphones and tablets. We look forward to ramping these design wins as they contribute to our continued market penetration in mobile and consumer markets, giving us the ability to sell multiple devices and enhancements in tablets.

On the new product front, our world-class R&D continues to deliver, yet again, on several game-changing MotionTracking solutions, combining best-in-class MEMS system on chip or SoC performance, with efficient software solutions optimized for low-power mobile applications in very small packages.

We announced MPU-9350, which at 3x3x1 millimeter and 6.7 milliwatt is the world's smallest and lowest power 9-axis MotionTracking SoC. We also announced, ITG-3501, the lowest power and slimmest 3-axis gyroscope in the market at 5.9-milliwatt power and 0.75-millimeter profile.

Turning now to our ecosystems activities, we continue to deliver solutions that are closely integrated within Google Android, Windows 8 and Windows RT operating systems, providing OEMs with a one-stop sensor subsystem solution. We also continued to focus on strengthening our partnerships with several leading application processor providers, which will further enhance our market and customer channels.

As we enable new customers, partners and markets, we continue to grow a vibrant developer community. At the end of fiscal fourth quarter, we had well over 7,000 registered developers across many application segments. We expect these developers to proliferate our solutions inside many new and exciting products. Last quarter, we also announced and delivered development kits for applications, such as contextual awareness and wearable devices that will help enable markets beyond mobile and computing.

In the fiscal fourth quarter, we continued to add significant manufacturing capacity while keeping within our efficient capital expense model. This includes shipping high-volume wafers from global foundries, as well as additional production ramps at multiple TSMC facilities. We also continued to increase our back end packaging and test capacity. We are not executing a multi-fab strategy, with cumulative capacity of close to 0.5 billion annually of MEMS SoC units.

I will now turn the call over to Alan for more details on the fiscal Q4 2013 financial results. I will then provide an update on our products and other developments, and Alan and will discuss first quarter fiscal 2014 financial outlook.

Alan F. Krock

Thank you, Behrooz. Please note that all financial results will be discussed on a generally accepted accounting principles or GAAP basis, and additionally, the company provide certain non-GAAP financial information that excludes stock-based compensation expense and other non-GAAP financial adjustments, such as cumulative benefits associated with changes in our estimated effective tax rate, and severance costs associated with our former CEO transition.

The company uses these non-GAAP measures in its own financial and operational decision-making processes. Further, the company believes that these non-GAAP measures offer an important analytical tool to help investors understand the company's core operating results and trends, and to facilitate comparability with the operating results of other companies that provide similar non-GAAP measures. Realizing some analysts wish to track our financial information on a GAAP and non-GAAP basis, I will provide information that includes both these financial measures.

For the fourth quarter of our fiscal 2013, net revenue was $55.2 million, down seasonally 6% from the third quarter of our fiscal 2013 and up 67% from the fourth quarter of fiscal year 2012. For our fiscal year 2013, revenues were $208.6 million, up 36% from our fiscal year 2012. Our market splits for the fourth quarter of fiscal '13 were smartphones and tablets, 81%; gaming, 3%; all other segments including optical imaging, 16%. For Q4, our 10% customers were Samsung Electronics, LG Electronics and Sony Mobile. For fiscal 2013, market splits for smartphones and tablets, 71%; gaming, 19%; and all other segments, including optical imaging, 10%.

Seasonally, the March quarter has historically been a weaker revenue opportunity for us relative to the September and December quarters, which were strengthened by the holiday shopping period. Our Q4 fiscal '13 year-over-year revenue growth was 67% from the fourth quarter of fiscal 2012 and represented only a single-digit sequential decline of 6% from Q3 of fiscal '13, which is Q4 being the historically weaker quarter. We believe our Q4 revenue has very strong revenue results.

Gross margin for both the fourth quarter of 2013 on a GAAP basis and non-GAAP basis was approximately 50%. Gross margin for fiscal year 2013 was within our target operating range of 53.1% on a GAAP basis and 53.4% on a non-GAAP basis. The lower sequential gross margin in Q4 when compared to the immediately prior quarter reflects the relative maturity of some high-volume customer platforms in their markets in the competitive pricing environment for certain of our mature products.

To offset these current customer competitive dynamics, we believe that our new generation 3-, 6- and 9-axis MotionTracking products, which are designed in next-generation customer products, together with our own supply chain cost reduction initiatives, provide us the opportunity to maintain our target financial model in our new fiscal year.

Turning to operating expenses. On a GAAP basis, our total Q4 fiscal '13 operating expenses were $13.9 million for the quarter versus $15.1 million in the immediately prior quarter. Excluding stock-based compensation, operating expenses were $11.9 million on a non-GAAP basis.

R&D expenses were $6.4 million or 11.5% of revenue for the fiscal Q4 on a GAAP basis, as compared to $6.7 million or 11.4% of revenue in the prior quarter. For fiscal year 2013, R&D expense was $24.6 million on a GAAP basis, or 11.8% of revenue, generally consistent with our targeted operating range of 13% to 15% of revenue. Excluding stock compensation, R&D expenses were $5.7 million on a non-GAAP basis in fiscal Q4 and $21.9 million on a non-GAAP basis for fiscal 2013.

SG&A expenses were $7.5 million or 13.6% of revenue in fiscal Q4, as compared to $8.4 million or 14.3% of revenue in the prior quarter. Excluding stock compensation, SG&A costs were $6.2 million on a non-GAAP basis for fiscal year 2013. SG&A expenses were $29.4 million or 14.1% of revenue or $28.0 million and 13.4% of revenue, excluding the CEO transition costs incurred in fiscal Q3. Excluding stock compensation and CEO transition, SG&A expenses for the fiscal year were $23.4 million on a non-GAAP basis.

The year-over-year changes in absolute dollar OpEx to comparable current and prior year periods are: one, for R&D, primarily engineering headcount and project-driven mask and wafer costs, and the result of the company addressing the substantial leverage opportunities available within the InvenSense fabrication platform to drive further integration and innovation in MotionTracking in the consumer electronics mobile markets. Two, additions to SG&A are primarily sales and headcount driven to address the company's substantial global customer opportunity, including sales channels and geographies like China, where the adoption of MotionTracking solutions by major customer electronics consumers, represent a significant opportunity for the company and expansion of our market efforts, targeting a new market opportunities. Three , higher public company costs. Four, increased legal expenses related to current patent litigation activities.

Stock-based compensation included in the March quarter for fiscal Q4 was $2.1 million in total versus $2.8 million in the immediately prior quarter, which included $0.6 million related to our CEO transition and $1.2 million for Q4 fiscal 2012. For fiscal year 2013, stock-based comp was $8.5 million and $3.7 million in fiscal year 2012.

Operating margins were 25% this quarter on a GAAP basis versus 27% in the prior quarter on a non-GAAP basis. Excluding stock comp, our Q4 fiscal year '13 operating margin was 29%.

Our long-term operating margin remains in the high 20s to low 30s percent, but will very primarily based on sales seasonality. Considering Q4 seasonality, we are in line with our target operating model for Q4 and remain a very profitable business.

On a GAAP basis, our income tax provision was 2% of income before tax for fiscal Q4 and reflected the impact of the current and prior period of enactment of the federal R&D tax credit. On a non-GAAP basis, we expect our effective tax rate to be approximately 15% currently and in future quarters.

On a GAAP basis, net income for the fourth quarter of fiscal 2013 was $13.6 million compared with net income of $16.8 million in the third quarter of 2013 and net income of $5.9 million for the same period in fiscal year 2012, an increase of 130%. On a GAAP basis, for fiscal year 2013, net income was $51.7 million versus $36.9 million in the comparable period in fiscal year 2012, an increase of 40%. On a non-GAAP basis, for fiscal year 2013, net income was $56.4 million versus $39.5 million for the comparable period in 2012, an increase of 43% year-over-year.

Fully diluted GAAP earnings per share was $0.15 in Q4 fiscal 2013 and based on fully diluted shares of $87.7 million. On a non-GAAP basis, EPS was also $0.15. For fiscal year 2013, fully diluted GAAP EPS was $0.59. Non-GAAP EPS was $0.65.

Cash generated from operations in the fourth quarter of fiscal 2013 was $4 million, increasing our cash and investments balance to $200 million, with essentially 0 debt. Cash generated from operations for fiscal year 2013 was $35 million, and year-over-year increase in cash and short and long-term investments was $42.6 million.

Working capital increased, primarily resulting from increased receivables from higher shipments and volumes in the latter half of the quarter and increased inventories resulting for ordering products for projected customer demand in the following quarters.

As a result of the increase in accounts receivable, our net day sales outstanding were 53 days, up slightly from 48 days in the prior quarter. All customer accounts are substantially current to payment terms. As of the end of Q4 2013, our total inventories stood at $24 million versus $19 million at the end of the prior quarter.

Finally, with respect to legal matters, we've provided a Legal Matters Update press release on April 24, 2013. We are pleased with the progress of these matters, with all of the claims associated with ST Microelectronics patents asserted in both cases, subject to reexamination by the United States Patent and Trademark Office, where preliminary work has been completed on these claims by the USPTO, all of the ST claims in these cases have been invalidated. We will be happy to answer any questions about Legal Matters Update press release during the question-and-answer session of this conference call.

With these remarks, I will now turn the call back to Behrooz Abdi.

Behrooz Abdi

Turning our attention to the fiscal first quarter, we expect a more than seasonal weakness in unit shipments to the gaming segment, partially offset by growth in the unit shipments in the mobile handset and computing segments. We expect that our 6-axis product line to continue to comprise over 50% of our unit and revenue shipments, and we expect to make a significant transition in unit shipments for our second-generation 6-axis MotionTracking SoC MPU-6500 at our lead customers, which will contribute to improvements in our gross margin in the current quarter. We are encouraged by the expanding numbers of customer qualifications for the MPU-6500, which we expect will ramp in the later part of this quarter and will contribute to unit and revenue growth in second quarter and beyond fiscal 2014. We also continued to see strong traction with OIS-enabled camera modules, and as the market develops, we're very well positioned with new design wins.

As we start our fiscal year 2014, we are very encouraged with the number of trends that are well aligned with our execution in product roadmap. As customers strive to deliver new and improved sensory user experiences to the market for navigation, gaming and contextual awareness, they are increasingly driven by stringent MotionTracking specs, such as system-level accuracy, noise and battery drain. They are also daunted by the increased complexity of managing multiple sensors and applications, and looked to partners who can offer them innovative solutions, which are well integrated within their ecosystem of application processors and operating systems.

As a result, they are increasingly drawn to our solutions, which are uniquely positioned to serve their needs with uncompromising performance in ever smaller and thinner packages unmatched in the industry.

With our new generation of products sampling and ramping to production and our a multi-fab strategy firmly in place, the fabless MEMS business model is now overwhelmingly validated. All the while, our established competitors continue to struggle with outdated integrated device and manufacturing business models. The leverage of our business model will allow us to continue on investing differentiated R&D innovations that will help improve end user experiences and enable increased attach rate of MotionTracking solutions to mobile devices.

At this point, I will turn the call back over to Alan to discuss guidance for the fourth fiscal quarter, and then we'll open up the call for your questions.

Alan F. Krock

Thank you, Behrooz. Now to conclude, I'll provide our financial outlook for the first quarter of fiscal 2014. As you have heard from us before, end markets are seasonally slower during the first half of our fiscal year and particular, in the consumer electronics gaming markets. As such, our fiscal Q2 ending September and fiscal Q3 ending December are generally our strongest revenue quarters.

We continue -- we see continuing progress in strength in adoption of our products across customers in our mobile markets due to the product's higher performance and attractive features and size, as Behrooz mentioned. We see this progress at a number of existing and new major customers in our mobile handset and tablet market, and we believe our products strength at all of these customers offers an important opportunity to continue our revenue growth in fiscal period beyond the current quarter and year.

We expect fiscal '14 Q1 revenue post the holiday period to be in the range of $53 million to $55 million. To support this Q1 fiscal year 2014 revenue outlook, we currently have backlog in place, representing the majority of this current quarter revenue target. In fiscal Q1, we expect to a slightly lesser extent than was present in Q4, the impact of timing of customer product model transition in the mobile market and the competitive pricing considerations noted in our markets in Q4 to also impact our gross margin in fiscal Q1. We also note that the product mix this quarter continues to favor our highest volume mobile customers, who, based on volumes purchased, are traditionally entitled to our best pricing. As a result of these considerations, we believe that on a GAAP basis, our Q1 fiscal '14 gross margin will improve slightly from Q4 fiscal '13 and be in the range around approximately 51% this quarter. And that in future quarters, our new lower cost products and additional production volumes will continue to have a favorable impact and improve our gross margins in those quarters.

In Q1, on a GAAP basis, we expect operating expenses to total approximately $15.4 million, made up of $7.5 million for R&D and $7.9 million for SG&A. On a non-GAAP basis, we expect operating expenses of $13.1 million, made up of $6.6 million for R&D and $6.5 million for SG&A. We, therefore, expect a current quarter operating margin in a range of 23% on a GAAP basis and 27% on a non-GAAP basis. We expect a fully diluted share count of approximately 89 million shares, a GAAP income tax rate in a range of 13% to 15% and, therefore, GAAP basis earnings per share of approximately $0.10 to $0.12, primarily depending upon levels of revenue achieved. We expect a non-GAAP tax rate of 15% and, therefore, earnings per share of approximately $0.12 to $0.14 per share on a non-GAAP basis, excluding stock compensation expense.

Now with respect to our annual business model, we plan for our margins and operating expenses to stay within our long-term model -- gross margin model of mid-50% range, R&D expense of 13% to 15% of sales and SG&A expense of 9% to 10% of sales. We expect operating margins in the high 20s% to low 30% of sales. We expect the tax rate of 15%. As a result, we expect net income after-tax percentage in a range around approximately 25%.

That completes our remarks. With respect to earnings and business aspects of this call, I'd like to turn our call over to the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And please standby for you first question, which is from the line of Tristan Gerra from R. W. Baird.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

You reiterated the target model for the new fiscal year. How should we look at the shape of the gross margin recovery? And to be clear, given the pricing environment, which seems to be a little bit more difficult, I'm assuming you expect your new product ramp to fully offset that new pricing environment?

Alan F. Krock

Thank you, Tristan. It's Alan speaking. In general, we expect that our second fiscal quarter will enjoy a product mix, which favors many of the newer products, which Behrooz mentioned, and are in our press release. Therefore, we expect the margin outlook that we've given is hopefully fairly conservative around our Q1 opportunity. But thereafter, in the second and third fiscal quarter especially, we would expect that with the new products and the mix, the margin will improve a couple of percentage points within those quarters. So that would be the general mix dynamics where, as we've said in the past, the current margin is primarily driven by the mix of products sold. And so therefore, there are some other mix-related dynamics for the recovery. Is that helpful?

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Yes, it is. And then a quick follow-up in gaming. Are we looking at anything else beyond just seasonality and weak units? Is there any potential share loss? And if you could just provide an update on what your expectations are for the whole year.

Alan F. Krock

Relative to the gaming segment, we expect for the whole year, this will be below 10% of our total sales. Currently, it's in the mid-low to mid-single-digit range included within the outlook offered for Q1 and the results posted for Q4. It's more market dynamics that impacts the end customer base, we believe, in the gaming console market than is particular to share-related considerations amongst competitors. So therefore, really, it's just the evolution and the strength of the opportunity in tablets in our view and our own opportunities relative to our historic gaming-related element of our products. Hopefully that helps.

Operator

The next question comes from the line of James Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I think on last quarter's call, you talked about providing a little bit more color on the fiscal '14 revenue outlook when we got to this quarter. So I was wondering if you could give us any kind of sense about directionally, how would you expect revenue to trend for the full fiscal year?

Behrooz Abdi

Let me just give you some qualitative, and maybe we can talk about that. In terms of overall, we're joining the other semiconductor companies in not planning guidance for the year. There's just so many knobs and so many variables that creates a wide range. But if you look at the knobs that you can use, the model of the business, the smartphone shipment last year was 600 million plus and growing at about 30%. Mature markets, like U.S., have high attach rates for gyros, typically 80% and higher. Whereas attach rate in regions like China, still well under 10% due to lack of content. I would estimate that the worldwide attach rate is in the low 30s and growing at about 30%. And also most of those are discrete devices transitioning to 6-axis and higher over the next year or so. So when you look at all this and combine all these figures and knobs together with additional opportunities for us, such as additional customers that we don't have today, the OIS camera module attach rate, which is well under 5% and growing, transition to the higher integration, 6-axis and 9-axis MotionTracking, we believe that combined with comment that Alan made regarding the seasonality, whereas typically, our second half fiscal year is stronger than the first half, we're pretty excited about the year about this market and would never been better positioned with our technology, products and design wins, and we're focused on winning those. But in terms of guidance for the year, we've looked at it in many different ways, and there are just too many ways knobs right now for us to zoom in on that.

James Schneider - Goldman Sachs Group Inc., Research Division

That's fair, at least a helpful color. Maybe if we could drill down on the customers for second. Can you maybe, as you look at it into the fiscal year, talk about 2 customer sets in terms of -- how do you see gaining traction with the digital large smartphone customers? And then within the Chinese kind of white box, smartphone market, can you talk about how big that was as a percentage of sales for you in the fourth quarter, and then how much you expect that group of customers to grow in the next quarter?

Behrooz Abdi

Basically, you pick on the 3 big customers, right? The 2 big ones, 1 Asian, 1 U.S. and then China Inc. Let me talk about the customer that we can talk about, which is Samsung. While we can't really disclose specific customer product plans, I can tell you that our relationship with them is stronger than ever. And as you know, they have several platforms, and within each platforms, they have multiple versions based on geographic regions, features, operators and all that. And we continue to work closely with them on their platform. We have gained significant share over the last 2 years and -- with them, and I see no reason that we cannot continue to improve our position and our market share within that customer. And in general, as sensors become increasingly more strategic to mobile and computing customers, we get invited to collaborate with them at the architectural level, MotionTracking and sensor architectures. So that position, very, very good there. One customer that I cannot talk about, and I know you guys are always anxious to ask about that, all I can say is that we don't know they're -- because they make their decisions, and every customer makes decision their way. But I can tell you that sensors are becoming increasingly more strategic to all mobile and computing OEMs. And according to market feedback, we have the most compelling technology and the best performing product solution for MotionTracking. So again, we'll continue to engage with everyone in the market to win their confidence and their business.

Regarding China, China, the attach rate of gyro has been low in China, mainly because there hasn't been content. Android has not been -- not a lot of people really get onto Android market and download games. And Android has not been highly penetrated on the content side when it comes to gaming or navigation. Those features just have not been really valued in the past, and that's why the attach rate has traditionally been very low and very much related -- tied to very, very high-end products. That dynamic is changing. Either both internally -- internal consumptions as well as export models. So we see tremendous opportunity in China. There is a lot of white boxes out there, and we feel that we're very well positioned, especially they are looking increasingly to someone who cannot just give them a, what I would call, a thin sensor that has just sensor in there, but more at the system level. And when it comes to that, we are very, very well positioned there.

Operator

The next question comes from the line of Joseph Moore from Morgan Stanley.

Joseph Moore - Morgan Stanley, Research Division

Can you elaborate a little bit on the full year gross margin commentaries, sort of, getting back to the target level? You're a little bit I think below that in Q1. Does that mean it gets -- what are the drivers of gross margin improvement beyond Q1, and if you look at both the new product and the GLOBAL FOUNDRIES transition and mix?

Alan F. Krock

So Behrooz, in his remarks, pointed to a fair number of specific product dynamics, namely size. A lot of different features come with the smaller size. But also the greater number of the higher chips you can fit from every semiconductor wafer you purchase, the lower the overall cost. So we have 2 different supply chain sources of wafers: GLOBAL FOUNDRIES and TSMC. We have the new generation of products, which Behrooz highlighted, the specifics of their smaller size and other very desirable features for the customer base, and we have new customer programs that are going into production later on this particular quarter and on to the rest of the fiscal year that feature many of these new products as the elements of certain flagship programs. And therefore, it's just a transition in mix from the existing mature products that were introduced approximately a year ago within the customer base, which should have been subjected to ASP erosion over the course of this fiscal year, giving way to the new products, the more integrated products, and more cost effective, cheaper to produce for the dynamics that I mentioned, product families. And that really gets -- gathers momentum as far as the transition in the mix, beginning more on our second fiscal quarter, but the 100 basis point improvement indicated for this quarter is those products being used by customers later this quarter and then the momentum continues into the future. So hopefully, that's enough color on some of the specifics of the transition and the improvement.

Behrooz Abdi

Let me add a little bit more to that. If you look at the MPU-6500, there's 2 sides to the equation. Obviously, there's a value, as Alan articulated, and then there's a cost side of it. On the value side, MPU-6500, it is a very small device, and that's very much valued as these mobile phones are just getting more and more compressed for volume, for size, and they want to fit larger batteries. And the thinner and the smaller, the more value and also power. Again, ties back to the battery power. So this MPU-6500 adds quite a bit of value. On the other hand, it's also lower cost, and I won't get into specifics of that, but it is lower cost. On top of that, we'll be, at some point in the year, we'll source that at multiple fabs as we start to ramp up that product. The other product is the OIS product line. And we just announced this morning a very small product in terms of volume, in terms of size. It's a 2.3x2.3x0.65mm. There's no one in the industry who can build a device like that. If you look at our competitors today, they're stacking 3, 4, 5 dye on top of each other. And so in terms of volume, the size of those products are much, much larger than what we have. And you just can't get them into these camera modules or even in the phones. So there's a lot of value that we bring. And also on the cost side, we can reduce quite a bit more than our competition. And that's the product side, the IDG-2020 and the 2030 that we just introduced for OIS. So those are products that as they ramp up, allows us to expand a little bit on the value side and contract on the cost side.

Joseph Moore - Morgan Stanley, Research Division

And if I heard you right on the numbers, it sounds like, of the revenue categories, that the other was up quite a bit. Can you elaborate on what's in that sequential in other?

Alan F. Krock

Sure. Other contains the optical image stabilization products. Once they gain mass some and continued momentum, we'd probably break them out. But they are below 10% in total. But the rest of the contents of others is substantially unchanged, so I could just sum in order of magnitude of way to estimate the OIS content there.

Operator

The next question is from the line of Richard Shannon from Craig Hallum.

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

A couple of questions for me. I guess, first of all on your second foundry source, GLOBAL FOUNDRIES, curious what percentage of sales those guys might generate for you in the June quarter? Or if it's not a full run rate, maybe in the quarter following that?

Behrooz Abdi

We have not broken that out, but they are going to be significant. I don't know if -- Alan, can you add any more color to that? But they are definitely significant, shipping in the million, but we haven't really broken out in terms of percentage.

Alan F. Krock

Yes. They're likely to be 10%, 15% of the total for the prior quarter going forward, as Behrooz says, that probably accelerates quite a bit, given some of the new applications that are gaining -- gathering momentum in the marketplace that feature those products. But it's still predominantly TSMC-sourced products today.

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

Okay. And can you remind us what products you currently make there? And I think you alluded to potentially expanding the range of products from GLOBAL FOUNDRIES?

Alan F. Krock

Sure. The products that are currently made are Dual-Axis Gyroscopes for Optical Image Stabilization, which we've touched upon previously, and 3-axis gyroscopes for those customers that would use those for various applications, including smartphones, tablets, gaming and so forth. There are still quite a few customers that use 3 axis discretes versus integrated 6 and 9 axis. And those would primarily be viewed to come from GLOBAL FOUNDRIES in the future.

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

Okay, great. Next question for me. You started to see some penetration of the sensor hubs in the mobile platforms with some newer phones announced. How does the introduction of sensor hub into those platforms affect your design engagements with customers? And you've talked in the past about having strong relationships with applications processors, although -- which seems like the sensor hubs will get in between in that. How does that impact your approach to customers and design win?

Behrooz Abdi

A very good question. The more that we learn about sensor hubs and what our customers are trying to accomplish with that architecture, the more we find that it's actually aligned with our strategy and execution. What customers are trying to do is address the system at software level complexity and power challenges and battery drain challenges with the application processor. Some of them like to use an apps processor resources and blocks or cores within the apps processors, and some choose to have a separate microcontroller to offload the apps processors so they can select different apps processors. So in either case, they're increasingly looking at our MotionTracking solution to offload complex calculations. A lot of calibration, a lot of fusion and sensor fusion and various different control channel, controls that they have to do on the software level that for the most part, it's bringing the sensor hub guys, the controller guys as well as the apps processors closer to us. Because at the end of the day, there's a lot that you got to offload still and they rely on our software to actually partially run on their processors. So it's actually -- we haven't seen negative impact. If anything, we just have to expand our ecosystem even beyond what we had before and we're doing that.

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

That's very helpful. And just one last quick question for me on your 9-axis parts. How many different customers do you currently engage with and selling to? And how do you expect that roster to transition over the next few quarters?

Behrooz Abdi

The number is probably is in the low double digits, probably it's still -- it's starting to come up very significantly. There are customers that are starting to use it for -- it started out in very compact phones, where there was no space and they had to integrate the magnetometer. And what it did -- what it's doing now is proliferate it into wearables and also into situations wherein mobile phones where not only real estate, it's really becoming more precious commodity, but also they're recognizing what we can to with that magnetometer integrate it in terms of the sensor fusion and calibration against gyro and accelerometer for navigation and augmenting navigation and positioning reference points and all that. So those are areas that is becoming increasingly more interesting to our customers. So it's still -- the numbers are still pretty small, but it is getting a lot more interesting, especially the size that we announced, 3-millimeter on the side and 1-millimeter height. People are -- competitors are struggling, quite frankly, to fit 6 axis into 1 millimeter, let alone 9.

Operator

The next question comes from the line of Auguste Richard from Piper Jaffray.

Auguste P. Richard - Piper Jaffray Companies, Research Division

Just along the lines of the 9-axis, is that an integrated single solution or is it co-packaged?

Behrooz Abdi

It is co-packaged, but it's a fairly elegant solution how we've done it. And we have multiple sources on the magnetometer, and we have brought in higher-performance magnetometer in that, so it is a package, co-packaged, but it is -- we've been able to do some innovative things with it to fit it inside the 1 millimeter and 3x3.

Auguste P. Richard - Piper Jaffray Companies, Research Division

And then does that have a negative or positive or neutral margin implication as you make the transition from 6 to 9?

Behrooz Abdi

Actually, it's -- I would say it's positive for the most part because the value that it brings. And also on that side, I mentioned, we brought in multiple sources, and it's allowing us to drive the cost down quite rapidly on that. So it's actually -- we're anxious to see more design wins with it.

Auguste P. Richard - Piper Jaffray Companies, Research Division

And then, if you could give us a little bit of color, what do you think the mix is going to be between 3, 6 and 9 by year end, and maybe at the end of calendar '14 as well, if you can just give a rough mix?

Behrooz Abdi

I would say, 6-axis at this quarter, last quarter and this quarter, have continued to be the higher than 50% of our shipment, although we have some customers that are still very interested in 3-axis and they have been looking at that, and that volume may go higher than it has been in the past. So it's difficult to -- if I were to take a guess, I would still say that 6-axis got to be about 50%, perhaps 3-axis would be 40%, and then other axis less than that. But that changes -- that could change rapidly. So we'll see.

Auguste P. Richard - Piper Jaffray Companies, Research Division

Okay, fair enough. And then finally, if you could just talk about sort of the competitive dynamics you're seeing, any new entrants into the market getting traction and then sort of differential performance between you all and STMicro. Is it - are you -- are they keeping up with you? Or how does the specs game go on right now?

Behrooz Abdi

Well, there is a number of different ways that we look at that. If we look at on the technology side, we see competitors really struggling to go down in terms of the volume, in terms of the size of the package. The closest thing out there to us is 3x3.5 by slightly over 1 millimeter, struggling to get below that, and we've just introduced our 35 -- I'm sorry, 6521 chip this morning. That's 3x3x0.08mm. So in terms of size, they're struggling. Our closest competitor is much larger than us because they have 4 dye -- 4 to 5 dye from what we've seen in the market. And from a performance standpoint, our customers -- this is not coming from me or my team. Our customers come back to us time after time. Every single customer we've interacted tells us that we have a much higher performance in terms of noise, drift, over-temperature, accuracy with our gyro and our accelerometer, very, very competitive. So feedback from the performance is very good. We are 1/3 of the power of our closest competitor. Again, same one that you mentioned. So in terms of technology, we believe that we are far ahead of the competition. On the business model, also, again, the fabless model should not be underestimated. If you look at the capacity we put in place with pretty much had virtually unlimited supply, and we can build even more. I mean we have a very efficient capital model, and it's very flexible in dealing with customers. When customers come to us to give us upside and give us more business, it's not a painful process for them. We're very flexible. We're very rapidly responsive, and we are able to meet a lot more capacity than we already put in place. So on the business model, I believe, that's something that we're definitely breaking away from competition. So those are all the different components on competition. And again, on the cost reduction, when you have multi-fab, when you have a smaller package and much smaller dye and not stacking 4 dye on top of each other, you have more opportunity to reduce costs. And I think if you go and dig into the cost model of these IBMs, you will find a lot of challenges there.

Operator

The next question is from the line of Krishna Shankar from Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Just a follow-on question on your relationship with Samsung. You did say that you continue to have a close partnership there. And do you sense any change in their strategy in terms of using MPU platform companies for different phones and different regions? Do you still sort of feel that you have an advantage in some regions and some models? And will that change now with the Galaxy S4 going forward?

Behrooz Abdi

I think at the end of today, what they're all looking for -- again, the trends are playing for our favor in terms of the performance. There's 3 or 4 different applications that is becoming more critical, and sensors are becoming a lot more strategic to customers like that. And those are navigation, contextual awareness, gaming. These are -- and imaging. And when you look at the performance, at the end of the day, I don't see a significant change in the strategy. Of course, they're going to use multiple sources for the foreseeable future in this -- they use -- they do it with application processors, they do with every component. And I don't see that changing anytime soon, so I'm not fooling myself into saying that that's going to change. But in terms of the relationship, in terms of design wins and market share, I'm very confident that we are well positioned to work even closer with them, and we're working very hard on that.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Great. And as you look at fiscal year '14, will the China mass-market Android, smartphone and tablets, will that be the fastest growing portion of your revenues? And what could that contribute as a percent of your total revenues for this upcoming year?

Behrooz Abdi

We have not broken it down in terms of the percentage of revenue, but it is a very fast-growing market. It's starting off small number, of course. But we see that the content and the value of these applications that I mentioned is coming en masse or getting much better in China. Gaming content is coming in, gaming content that requires higher precision gyro. Imaging is becoming more important. If you look at some product announcements, some teardowns in the last quarter, for example, the one customer that I can mention that the phone has been torn down is the HTC. If you look at the teardown and you look at the camera module and the value of the camera module with the OIS, it's very high, and we're the ones that are enabling that. So products like that are becoming more critical even in China. So we were absolutely very, very excited about that trend, but we haven't really broken out the numbers.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Great. And, Alan, with your growing cash hold, the $200 million plus, any plans to accelerate share buyback or anything in the strategic side that you folks are looking at?

Alan F. Krock

No, thanks, Krishna, no. At this time, we're accumulating it. We just want to be a substantial company and show that our presence to the capital market and the customer base and the customers in particular. And that's just -- it's just a tool for us to do so, to appear to be the substantial mature company that we are. So for now, we just expect to use it for customer -- support our customers.

Operator

Your next question comes from Mark McKechnie from Evercore Partners.

Mark McKechnie - Evercore Partners Inc., Research Division

So a couple of questions. I'll start with Alan and then Behrooz. But on some housekeepers there, you give the mix of smartphones and tablets 81%. Can you break them out with a little more detail?

Alan F. Krock

Yes. We haven't done that historically on the call. It's -- a substantial portion of it is smartphones. I mean the other tablets that were -- the Android-based, yes they are growing in total market presence and share, but the vast majority of it still is the smartphone segment itself.

Behrooz Abdi

Also within the customer, as you know, Mark, our products are, for the most part, phone factor -- agnostic whether it's a phone or tablet, so we don't always have visibility when they order parts. We just ship it to them and they break it out into different SKUs, different versions internally.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you. Okay. And then on the guidance, your OpEx is a bit higher than I was expecting. Of course, gross margin is lower, but I think you came in a penny below where I was at, but still I look at it as a transition quarter. But was the OpEx picking up? Was there a legal piece of that, or is that just increased R&D as well on some of the new products like -- and do you expect that level to hold and continue to go up? How do you look at the OpEx?

Alan F. Krock

Thanks, Mark, so the OpEx, generally, in Q1 with the outlook that we gave, it's fairly consistent with where we were and in Q3 of fiscal '13. Slightly higher, so the incremental OpEx is about -- total OpEx envisioned on a GAAP basis, $7.5 million for R&D and $7.9 million for SG&A. In SG&A, that's down on a GAAP basis from the Q3 '13 number, primarily because of the CEO transition costs or in the Q3 number. Incremental legal is a little bit of -- it's a little bit higher in the Q1 '14 outlook, but not a lot. Generally, we also share your view as a transitional quarter, much greater revenue levels looking out beyond Q1. And therefore, we've got a continuation of some of the plans and so forth and development that were put in place Q2, Q3 last year, and they're just sort of continuing at a run rate. In Q4, given the margin considerations with the mix and so forth that we've covered, it was a real effort to economize without impacting strategic development or anything else. So Q4 represents sort of an economical approach. And then Q1 shows the confidence that we've got in the outlook. And similar in order of magnitude of operations is Q3 of last year. So hopefully that's enough color there.

Mark McKechnie - ThinkEquity LLC, Research Division

Yes, for sure. And just to clarify on your gross margin outlook. I think you're sticking to your long-term target of 55. But did you -- are you expecting to get back to that mid-50s level out there in September, December, or is that going to be more gradual in this -- that 55 number is more of a long-term target?

Alan F. Krock

No, we said in the main part of the call, it's really mix dependent, and we really think that there's some mix improvement in the near term, the second fiscal quarter, particular versus the first. I mean we've got some programs ramping in the near term this quarter, but they don't really get to be a significant portion of the business and with these products and sold it later in the fiscal year. So it picks up, we believe, from where it is in Q2, and then shows a little bit further improvement, and then stabilizes for the second half of the fiscal year in the mid-50s range we've been targeting. So it moves from 50 to 51, 50 last quarter, 51 this quarter, and with some better volumes than some of these newer programs. You should see 100 to 200 basis points beyond that Q2 and then Q3, 4 gets back into the range you're looking for.

Mark McKechnie - ThinkEquity LLC, Research Division

Got you, great. And then my last question. It's a little more detail on -- maybe an update, Behrooz, on the battle, I mean, the legal -- really, more so on the market share battle with STM. It feels like a 2-horse race here for sure. And I get that your products are smaller and better performance and what have you. I'm trying to get a sense though of how do you stand on the pricing side? Do you feel like you can demand a premium relative to your competition for size and performance? Or do you have to meet them? Or is that something that you think we can realize a better premium going forward?

Behrooz Abdi

I can tell you, historically, Mark, we have not met their pricing. That's -- so I can talk about the history and the track record. We always have garnered a premium because customers value performance. And my feeling is, again, there are customers in the past that they place Gyro in there just because somebody else has it, and it's been more pressure on the pricing. But as the value of the gyro and performance goes up, I feel that we have more opportunity to break away and differentiate. Number one on performance and size and power, number two on the system level. And we're much better integrated into the ecosystem than they are, and customers value that. The time to market they value. So I believe, that, combined with the fact that, I think, we have better opportunity for cost reduction versus somebody who stacks 4, 5 dye on top of each other with a glob of wires and -- that's 50, 60 wire bonds. I think -- and again I don't want to downplay ST. They're a very respectable company, and they've done a great job. They just have a very outdated business model, but it's just not the future, and I think that we can respond much faster to customers.

Mark McKechnie - ThinkEquity LLC, Research Division

There's a lot of tools that you've got though in your war chest, I guess. You seem to be doing well on the legal side, the performance side. Do you ever get asked or do you ever end up trying to do, like for instance a pin per pin [ph] compatible? The reason I ask is I think they were pounding their chest a little bit about a pretty good share of a major Asian new flagship product. And so it seems a lot of times that, that ship seems like it sailed a bit. But without them having to actually change the -- could you actually drop in a part that would match their footprint? I mean, is that one of your strategies?

Behrooz Abdi

The short answer is no. Typically, that's a 5-minute discussion that we have with customers. No, that's not part of our strategy. And the ship has not -- might have picked up anchor, but definitely has not sailed. So stay tuned, Mark. And I know you'll be chasing me down for that one and hounding me, so I'm very comfortable with that.

Operator

I would now like to turn the call over to Alan Krock for closing remarks.

Alan F. Krock

Thanks very much, operator, and we appreciate everybody's question and participation in our fourth fiscal quarter conference call and look forward to speaking with the investor group and investor base again at the end of this quarter. Thank you very much for participating, and we'll speak with you soon. Goodbye.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a very good day.

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