InvenSense Management Discusses Q1 2014 Results - Earnings Call Transcript

 |  About: InvenSense (INVN)
by: SA Transcripts


Good day, ladies and gentlemen, and welcome to the InvenSense, Inc. First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today, Mr. Alan Krock, CFO, InvenSense, Inc. Please proceed.

Alan F. Krock

Thank you, operator. Good afternoon, and welcome to all.

I need to begin our call with this forward-looking statement. Statements in this conference call that are not historical are forward-looking statements as the term is defined by 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 in the mobile computing and consumer market segments.

Investors are cautioned that all forward-looking statements in this release involve risks and uncertainties that can 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 the motion sensing as the interface in consumer electronic 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 and dependence on limited sources of supply; our ability to continue to develop and introduce new and enhanced products on a timely basis; and potential decreases in average selling prices of our products, as well as changes in economic conditions in our market; 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 its forward-looking statements to reflect future events or circumstances.

With that, I will turn the call over to Behrooz Abdi, InvenSense President and CEO.

Behrooz Abdi

Thank you, Alan, and good afternoon, everyone. Welcome to our fiscal 2014 first quarter call. Our fiscal 2014 started with a culmination of our efforts in enabling new markets and transitioned to higher-value MotionTracking solutions at existing and new customers, as we enjoyed continued strong ramp in optical image stabilization opportunities or OIS, as we refer to in the market, and even stronger design win traction with our 6-axis and 9-axis MotionTracking system and software solutions.

The mobile market is quickly recognizing the complexity of managing multiple sensors and their impact on end-product features. As a result, they are starting to see more value in total system solutions as reflected in our design wins. Our world-leading performance and design simplicity offers a true plug-and-play experience for any product requiring a MotionTracking solution, which our customers increasingly value.

In the fiscal 2014 first quarter, the InvenSense team achieved higher than our stated revenue outlook for Q1 of $53 million to $55 million, with revenue for the quarter reaching $55.9 million, while also improving our gross margin percentage by 200 basis points sequentially. Our revenue increased 43% year-over-year in the June quarter, with smartphones and tablets leading the growth, representing over 75% of total revenue.

While the gaming segment remained seasonally slower this past quarter, we observed strength in unit volumes with our OIS products, as well as in emerging markets such as China on smartphones, where both the cash rates and shares of our products continue to increase.

Our 6-axis product family, including our world-leading MPU-6500 product, comprise close to 50% of unit shipments, while 2-axis OIS and 3-axis gyro volume ramps also increased substantially, driven by existing and new mobile and computing customers.

Within the Android-based ecosystem, we are pleased to see an accelerated transition to the MPU-6500, with volume manufacturing occurring as new customer programs went into production, and we increased market share at our lead customers who are simply unable to offer several key product features with competing solutions.

In the first quarter of fiscal 2014, our customer design pipeline continued to expand significantly across all of our products in multiple applications, regions and customers. We won several new designs with our 2-axis OIS products, as customers seek to differentiate by improving camera image quality in mobile products with DSLR-like camera features such as aperture control and lowlight and zoom photography. Furthermore, InvenSense 3-axis and 6-axis System on Chips or SoCs were designed in by several new mobile and computing customers across multiple regions.

Our world-leading 6-axis MPU-6500 serves as a platform, which combines superior MEMS performance with our patented Digital Motion Processor or DMP, and our MotionApps software to enable OEMs with new and improved product features for imaging, navigation and context-aware applications, while providing InvenSense with additional cost-reduction opportunities in future quarters.

Finally, we're especially pleased with the traction of our second- and third-generation 9-axis MotionTracking solutions in applications where both space and battery consumption are at a premium, such as with wearable devices, immersive gaming, motion remote controls and, of course, smartphones.

The combination of our world-leading MEMS performance, along with DMP and MotionApps and development tools, has enabled our customers with the first seamless 9-axis MotionTracking design experience in the industry. In fact, we are very excited to see our customers placing increasing value on our signal processing and software solutions.

Additionally, our strategy of close collaboration with application processor suppliers, as well as with operating systems such as Google Android, Windows 8, BB 10 and Windows RT, was validated again as it uniquely positioned us for multiple design wins and further enhanced our market reach.

We continue to nurture and grow our community of over 8,000 registered developers who continue to create innovative new applications for MotionTracking and proliferate our solutions inside many new and exciting products. Cultivating this community with developing kits and software solutions will remain an area of intense focus for InvenSense.

On our new product front, we continue to raise the bar on size and performance with several new product introductions. We announced the MPU-6521, which at 3 x 3 x 0.8 millimeter, is the thinnest 6-axis MotionTracking device on the market and over 30% smaller in volumetric size versus the closest competitor product.

Our latest OIS products, the IDG-2030 and the IXZ-2030 are only 2.3 x 2.3 x 0.65 millimeter, close to 60% smaller than any computing product in this category. We also introduced the world's first industrial 6-axis MotionTracking device, which disrupts this market with superior performance, reliability and integration at a compelling price point.

In the fiscal first quarter, our fabless model allowed us to further scale our business with additional manufacturing capacity at our partner fabs, PSFC and GLOBALFOUNDRIES, in order to serve our growing customer demand. We also continued to increase our back-end packaging and test capacity and believe that we are in the best position to serve the fast-growing and dynamic MEMS MotionTracking SoC market.

I will now turn the call over to Alan for more details on the fiscal Q1 2014 financial results. I will then provide an update to our products and other developments, and Alan will discuss second 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 principle or GAAP basis, and additionally, the company provides 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 prior-year executive transitions.

The company uses these non-GAAP measures in its own financial and operational decision-making processes. Further, the company believes 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 financial measures.

For the first quarter of fiscal 2014, in the June 2013, net revenue was $55.9 million, an increase of 43% from the first quarter of fiscal 2013 and up 1% from the fourth quarter of fiscal 2013.

Our market splits for the first quarter of fiscal '14 were smartphones and tablets, 77%; gaming, 3%, all other segments, including imaging, 20%. For Q1, our 10% customers were Samsung Electronics, Sharp Electronics and Sony Mobile. Seasonally, the June quarter has historically been a weaker revenue opportunity for us relative to the September and December quarters, which are strengthened by the holiday shopping period, especially for tablet and gaming-related applications. Given that June quarter is a historically weaker quarter, we believe our Q1 fiscal year '14 revenue is a strong result.

Gross margin for the first fiscal quarter of 2014 on a GAAP basis and on a non-GAAP basis was approximately 52% and 53%, respectively. As anticipated, a mix shift towards 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, resulted in more than a 200 basis points sequential improvement in gross margin from 50% in the immediately preceding quarter.

Turning to operating expenses. On a GAAP basis, our total Q1 fiscal year '14 operating expenses were $17.3 million for the quarter versus $13.9 million in the immediately prior quarter. Excluding stock compensation, operating expenses were $14.7 million on a non-GAAP basis.

Research and development expenses were $8.1 million or 14.5% of revenue for fiscal Q1 on a GAAP basis as compared to $6.4 million or 11.5% of revenue in the prior quarter. Excluding stock compensation, R&D expenses were $7 million or 12.6% of revenue on a non-GAAP basis in fiscal Q1.

SG&A expenses were $9.2 million or 16.4% of revenue in fiscal Q1 as compared to $7.5 million or 13.6% of revenue in the prior quarter. Excluding stock compensation, SG&A costs were $7.6 million or 13.7% of revenue on a non-GAAP basis.

The year-over-year changes in absolute dollar OpEx spend to comparable current and prior year periods are: For R&D, primarily engineering headcount and for product-driven mask and wafer costs and is the result of the company addressing the substantial leverage opportunities available within the InvenSense fabrication platform and related software applications to drive further integration, innovation and customer product features in MotionTracking in the consumer electronics mobile markets. Addition 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 adoption of MotionTracking solutions by major consumer electronics customers represents an important or a significant opportunity for the company and expansion of our marketing efforts targeting new market opportunities.

Increased legal expenses related to current patent litigation activities. Currently, we are in the discovery phase of litigation in the lawsuit initiated by STMicroelectronics against us, which can be costly. Stock-based compensation included in the June quarter for fiscal Q1 was $2.8 million versus $2.1 million in the immediately preceding quarter and $1.7 million for Q1 of fiscal year 2013.

Operating margins were 22% this quarter on a GAAP basis versus 25% in the prior quarter. On a non-GAAP basis, excluding stock-based compensation, our Q1 fiscal '14 margin was 27%. Our long-term operating margin targets remain in the high 20s to low 30s, but will vary primarily based on sales seasonality. Considering Q1 as a seasonally slower quarter, we are in line with our target operating model for Q1 fiscal year '14 and fiscal year '14 in total. Thus, we expect the operating margin in the current quarter to be higher than the 2 prior quarters.

On a GAAP basis and non-GAAP basis, our income tax provision was 15% of income before tax for fiscal Q1. We expect our effective tax rate to be approximately 15% in future quarters. On a GAAP basis, net income for the first quarter of fiscal 2014 was $10.3 million compared with net income of $13.6 million in the fourth quarter of 2014 -- fiscal -- fourth quarter of fiscal 2013, and a net income of $7.7 million for the same period in fiscal 2013, an increase of 35%.

Fully diluted GAAP EPS was $0.12 for Q1 fiscal year '14 based on fully diluted shares of $87.9 million. On a non-GAAP basis, EPS was $0.14. Cash generated from the first quarter of fiscal year 2014 was $6.4 million, increasing our cash and investments to $209 million, with essentially 0 debt. Working capital increased primarily due to increased inventories resulting from ordered product for significant increases and projected customer demand for our 2-, 3-, and 6-axis motion sensor products and slightly increased receivables.

Our net day sales outstanding were 52 days, slightly down from 53 days in the prior quarter. All customer accounts are substantially current to payment terms. As of the end of Q1 2014, our total inventories stood at $34 million versus $24 million at the end of the prior quarter.

Finally, with respect to legal matters, we are pleased with the progress to date in both United States-based cases involving STMicroelectronics of Switzerland. While we remain disappointed that STMicroelectronics sought to resolve its concerns with the way that companies serve the growing MEMS sensor markets through litigation, we are satisfied with our progress in defending the company from ST's allegations and in demonstrating that ST has created for itself potentially significant financial exposure from the use of InvenSense intellectual property and products sold in volumes through the markets today, including to ST's own largest consumer electronics customers.

We'll be happy to answer any questions about the legal matters update during the question-and-answer session in this conference call.

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

Behrooz Abdi

Turning our attention to the fiscal second quarter, we expect to see significant seasonal growth in unit shipments for the gaming and tablet segments, as well as significant growth in unit shipments in smartphone, mobile handsets and computing segments as a result of design wins and market share gains across multiple customers and regions. We expect our 6-axis integrated gyroscope and accelerometer product line to continue to comprise close to 50% of our unit and revenue shipments, with continued transition to our second-generation 6-axis MotionTracking SoC, MPU-6500, at several customers.

We also expect our 3-axis gyroscope unit shipments to increase and contribute meaningfully to our revenue growth in the current quarter, driven primarily by new customer penetration, as well as seasonal strength in our gaming customer demands. We also continue to see strong market demand with our OIS 2-axis gyroscope products at our camera module partners.

We are encouraged to see the increasing attach rates of motion-based applications demanding high-performance MotionTracking hardware in very small package sizes. We are at the start of a mega-trend, whereby context-aware devices and applications, such as wearable computing, activity recognition, navigation and imaging, all drive big data services based upon information gathered from these sensor products, which will demand always on, always connected hardware.

Moreover, for the first time in several years, mobile device OEMs can differentiate their hardware and create a myriad of experiences, which in turn enable new services. This mega-trend is creating new and exciting opportunities for service providers, mobile devices and accessories, as well as for their component suppliers, including InvenSense. We're also very excited to see several of our customers transitioning from motion sensing components to MotionTracking solutions, whereby the identified system overall performance and features have focused their efforts on higher-level product innovation, while leaving it to our solution to deal with the complexities of multisensory integration within their operating system.

This trend is well aligned with our strategy of delivering world-class MEMS and signal processing hardware specs within the motion SoC, coupled with software solutions well-integrated with the operating system and other components in order to enable a plug-and-play product development experience for our customers and accelerate their time-to-market.

Based on these trends and with visibility into the significant growth ahead in the current quarter, we decided to invest ahead in R&D and ecosystem development last quarter in order to accelerate the pace of execution on several innovative products, which we plan to introduce in the coming quarters.

Over the past 9 months, we have been hard at work creating a compelling roadmap of hardware and software solutions to fully take advantage of the coming market trends and opportunities. Our roadmap to date is the strongest and richest it has been in the history of the company, and we believe these products and solutions, in combination with our innovative MEMS fabless business model, will allow InvenSense to scale efficiently and further solidify our position in the market as the leader in MotionTracking solutions.

At this point, I will turn the call back over to Alan to discuss financial outlook for the second 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 second quarter of our fiscal '14. As you have heard from us before, our end markets are seasonally slower during the first half of the calendar year, in particular, in the consumer electronics, gaming and tablet markets. As such, our fiscal Q2 ending September and fiscal Q3 ending December, are generally our strongest revenue quarters.

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

We expect fiscal '14 Q2 revenue to be in the range of $68 million to $70 million or more than 20% sequential growth. To support this Q2 fiscal year '14 revenue outlook, we currently have backlog in place representing the majority of this total current quarter revenue target. As in past quarters, we expect sales at our largest customer, Samsung Electronics, to be in the low- to mid-30% range of this target, reflecting strength in applications where we have existing designs, as well as opportunities to participate in new design launches in the second half of the calendar year.

We expect our tablet and gaming opportunities to be seasonally stronger this quarter. As mentioned before on this call, we have broader opportunities at new customers and in new applications, such as optical image stabilization, which we also expect to contribute to our financial outlook.

In fiscal Q2, we expect continued growth of our new 3-, 6-, and 9-axis MotionTracking products which, along with product mix this quarter that continues to favor our highest-volume mobile customers who are traditionally entitled to our best pricing, should stabilize gross margins in Q2 at approximately Q1 or slightly higher level.

We believe that on a GAAP basis, our Q2 fiscal '14 gross margin will be in the range around approximately 52% to 53% this quarter, and that in future quarters, our new lower product -- new lower-cost products and additional production volumes will continue to have a favorable impact on our gross margin in those quarters.

In Q2, on a GAAP basis, we expect operating expenses of approximately $17.1 million, made up of $8.5 million for R&D and $8.6 million for SG&A. On a non-GAAP basis, we expect operating expenses of $14.4 million, made up of $7.4 million for R&D and $7.0 million for SG&A. Within SG&A, the spending on litigation-related costs can be somewhat variable within a given quarter. We therefore expect a current quarter operating margin in the range of 28% to 29% on a GAAP basis and approximately 31% on a non-GAAP basis.

We expect a fully diluted share count of approximately 89 million shares, a GAAP income tax rate in the range of 15% and therefore, GAAP-based earnings per share of approximately $0.18 to $0.19, primarily depending upon levels of revenue achieved. We expect a non-GAAP tax rate of 15% and therefore, earnings per share of approximately 19% to 20% per share on a non-GAAP basis, excluding stock compensation expense.

With respect to our annual business model, we plan for our margins and operating expenses to stay within our long-term model of gross margins in the mid-50s; R&D expense of 13% to 15% of sales; and target SG&A expense of 9% to 10% of sales, which is currently achievable, but for the existing run rate of ST litigation-related costs. We expect operating margins in the high-20s to low-30s percent of sales. We expect the tax rate of 15%, as a result, we expect net income aftertax percentage in the range around approximately 25%.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Mr. James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could comment a little bit on the smartphone outlook for the September quarter. Clearly, some of your biggest customers, including Samsung, has had some well-publicized inventory adjustments from some of your competitor's standpoint. Can you comment on the profile of what's going on with maybe that largest customer in the September? And then also, what contribution do you expect to see from 3-axis products and from potential other new customers in the quarter?

Alan F. Krock

Okay. So it's, Alan, Jim. Thanks for that question. Our sales percentage to Samsung in the most recently completed quarter was in the high-20s percent of our total sales. We believe we're positioned well in the midrange platforms within that customer, and that many of the inventory-related considerations, where you become aware of over time through discussions with third parties and the public investors and so forth, have to do with more the higher end of the customers offering that we don't have. We have some exposure to, but not as significant. So we believe that's the basis for our comment of the platforms we are in within that market, as with being in the midrange selling well. Is that helpful?

James Schneider - Goldman Sachs Group Inc., Research Division

Yes. Any way you can comment on the 3-axis contribution you expect in the September quarter?

Alan F. Krock

No, we do expect, as mentioned in the remarks, that 2-axis, 3-axis and 6-axis products, our latest and newest generation of all of those products, will sell well in the second quarter and that our increase in outlook and increase in inventories carried reflects a reasonable balance across all of those product offerings as you might expect.

James Schneider - Goldman Sachs Group Inc., Research Division

Okay. And then maybe as a follow-up, very strong performance in the other segment. Can you maybe give us some color on how much in that quarter was actually due to optical image stabilization or OIS and how much was due to other applications outside of that area? And then, to what extent is that OIS revenue going to be sustainably growing, at least on a seasonal basis, in the outquarters?

Alan F. Krock

Okay. Well, yes, consistent with generally -- the other category in the prior quarter, the better part or half of that total pertains to optical image stabilization opportunities that we serve. And looking forward, we have a lot of confidence in that opportunity in total. The adoption rate of the various camera modules that we serve can be somewhat variable between quarters and so forth, as with the adoption of any new technology. But we believe -- we continue to believe we have design wins at large numbers of optical module makers for the mobile markets. And that, looking forward, that will be an important source of -- that market will be an important source of revenue opportunity for us.


Your next question comes from the line of Tristan Gerra with R.W. Baird.

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

Could you provide us with an update on the pricing trends? And it sounds like your expectation, based on your gross margin outlook is that with your costs down, it's going to fully upset the pricing decline we can anticipate in the market for the second half?

Alan F. Krock

Thanks, Tristan, for that. Yes, generally, in the market, in the most recently completed quarter, the pricing trends are similar to what we've experienced in the past. Same is true for the numbers given in the outlook, and these have been discussed in our filings and other documents as being in the annualized 20%, 25% for any particular device and 15% for pricing overall for the total company. Now looking forward, the mix of 3-axis versus 2-axis versus 6-axis will impact the total ASPs. So the numbers I've given are in respect of all products. So therefore, as we proceed and each market grows, so 2-axis, 3-axis and 6-axis opportunities, you may have to keep track of some sort of breakdown of average selling price by number of axis or some other measure besides just lumping it all together as we have done in the past. Is that helpful?

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

Definitely. And then just to elaborate and follow up on the previous question regarding image stabilization. Should we expect a significant change in the mix from image stabilization by end of this calendar year versus what you shipped in the most recent quarter?

Alan F. Krock

Generally, we've expressed that we feel it could be a 10% or 15% of the mobile market opportunity for us over this year. And so having it be 10% of our sales, as it is primarily some of the second-tier manufacturers that have adopted the technology, sort of feels about right that should either -- the big 2 in mobile adopted, obviously, that would potentially accelerate the revenue opportunity for us. But the fact that it has continued to hang in there in a period of a 20% sequential growth at roughly 10% of our opportunity, it's encouraging to us and contributes to the idea that maybe some staying power of that revenue in the marketplace.

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

Okay. And then last quick one. 7-axis traction, is it fair to assume that indoor navigation is really going to be the primary driver? And is this something that you see happening next year or is it more of a longer-term opportunity for the mainstream smartphone market?

Behrooz Abdi

I think we -- this is Behrooz. I think we see that happening in the next year or so. I think the discrete -- the 7-axis, I assume, you're including the pressure sensor and that discrete form exists today. Some very, very high-end phones are using them and probably going to continue to be there for the next 6 to 9 months in a discrete fashion. And after that, most likely, customers will be demanding the same level of integration demanded of the accelerometer and gyroscope and will become more commonplace. So I would say it's a 9-month to 1-year-type of roadmap.


Your next question comes from the line of Mark McKechnie with Evercore.

Mark McKechnie - Evercore Partners Inc., Research Division

I wanted to ask you a couple of questions. First is on your operating expense, a bit of an uptick here. I guess you characterized it as -- a lot of it was due to the STM litigation. And it looks like you're expecting it again in the September quarter. But how long do you expect that OpEx to remain elevated? And how much of an impact did you see from STM from the $500,000 a quarter or so?

Behrooz Abdi

Well, let me make a comment and then I'll let Alan add some colors to that, because not all of it is because of the ST litigation cost. As I mentioned, we made the decision as we saw the opportunities ahead of us to invest ahead in the R&D and also ecosystem development. With the R&D, specifically, we have a number of opportunities both in standard product and some products that we're working close collaboration with the ecosystem and with the customers that are just really great opportunities for us, and we decided to invest in those and increase the engineering headcount. And also, software is becoming a bigger piece of our solution, and the customers really value that, and we expect to extract value from that in the future. And that's where we made the decision to invest a little bit ahead. But I'll let Alan to add a little bit more color on the OpEx and, specifically, ST costs.

Alan F. Krock

Sure. Thanks, Behrooz. So generally, what Behrooz emphasizes is that the investment in the products and development is the primary consideration. Yes, we are in what's referred to, as mentioned in my script, a discovery part of that litigation. And that can be very expensive, involving searches for documents and depositions of employees and so forth. And so that is expected to cover a 6-month period, which ended this most recent quarter and then is also included as element to the outlook for the September quarter as well. Following that, we'll see where we stand with the case. But the elevated level of expense currently is primarily associated with a particular phase of the litigation, which lasts about a total of 6 months. Again, we're halfway through that phase. So we've got our outlook in the most -- for the next 90 days or so. Hope that helps, Mark.

Mark McKechnie - Evercore Partners Inc., Research Division

Yes. That definitely helps. And then maybe for Behrooz, you talked in your prepared remarks about a shift at your customer base from components to solutions. That actually sounds pretty positive. Just trying to get a sense, do you see an impact to the ASPs and margins from that? Or is that just helping you win better design win footprints, and maybe you can talk a little bit about what your ASPs did this quarter and kind of what you think they're going to do next quarter?

Behrooz Abdi

Well, yes to both, in a sense. First of all, it really helps solidify our design win traction and our relationship with the customers. So there's a piece there that should help -- brings us closer to our customers. And as it does that, really, it helps us increase our content to a point. Now specifically, a lot of the Tier 2 customers sell our OIS. They are -- they want to differentiate, they've got features that they defined and also, they want to differentiate from the Tier 1s. And those are the ones that want to get to market faster without huge investments in software and in the solution level. And they are willing to pay a premium for the product, and they work closely with us. And they define features at a different level than somebody who's buying components. They're defining features at the imaging level in terms of type of specs that they want to see in the image or in terms of navigation, the accuracy of the navigation. And they leave it to us and our processor partners and the software partners to really deliver that solution. And that's where we believe we can get premium going forward.

Mark McKechnie - Evercore Partners Inc., Research Division

Great. It seems like the competitive threat you saw from, what, earlier in the year, that seems to be either subsiding or maybe not so much subsiding, but maybe you're addressing that fairly aggressively, yes?

Behrooz Abdi

We are. We don't take competition lightly. We're very focused on it. They will continue to play the aggressive pricing tactics, and that's nothing new to us. And we have been competing effectively with them with superior performance and higher integration, as well as continued cost reduction. And that's really the way that many successful fabless SoC providers have out on their IDM component competitors in the last 2 decades. And we're simply replicating that model in MEMS.


Your next question comes from the line of Krishna Shankar with Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

How much of the growth and your guidance for the September quarter is driven by market share gains and sort of seasonal growth on new platforms at existing customer versus from major new customers ramping InvenSense products to production?

Alan F. Krock

Okay, Krishna, it's Alan. And if I'm going to get too far being able to comment on any one particular potential customer, however, I think that your question intuitively is a good one, which is seasonality in the business is significant to us. Generally, I think the seasonal component of the outlook, considering tablet opportunities that we are in within the Android ecosystem and the gaming opportunity, given our historical position in gaming, is probably about 7% to 8% of the total revenue, incremental revenue opportunity, reflecting upon gaming going from 3% or 4% to around 10%, and some of the tablet guys also being up about the same order of magnitude in total with the holidays and the seasonal expectations. Some of the opportunity is just simply the platforms we are in. Our largest customer are the midrange platforms, and those platforms are selling very well. And therefore, the run rate of business is better in the midrange, in the legacy, legacy platforms and where we have exposure vis-à-vis one of our largest competitors, which is primarily positioned at the high end of that opportunity. Looking forward, with that customer, we've also committed to have as a goal to share -- to gain share. We think based on a lot of the considerations, such as performance and price and so forth, as Behrooz has emphasized, we have a very good opportunity to make good on that long-standing goal in the second half of this year. And so a lot of the related market share comments in the prepared remarks had to do with specific opportunities that we foresee at that existing customer. More broadly, there is an opportunity in new customers and new applications that would capture third as the last possible point of revenue opportunity for us. And we've spoken in response to somebody else's call the optical image stabilization opportunity, and therefore, there's an element of that, of the new customers, broadly speaking, and the rest of the opportunities I just outlined. So as far as specifics, I think we'll just have to see how the quarter progresses with products that are announced by customers and what public teardowns occur at those new platforms. And I think over the course of the quarter, there's certainly the opportunity for people to be pleasantly surprised, but we need to actually see that evidence in the marketplace forward in any position whatsoever to comment on any of this. So hopefully, that's helpful.


Your next question comes from the line of Gus Richard with Piper Jaffray.

Auguste P. Richard - Piper Jaffray Companies, Research Division

I'd like to just dig in to the low end of the market and penetration into China and how you see the adoption rates in the low-end smartphone in that region over the next 12 to 18 months?

Behrooz Abdi

Yes. The China market is pretty exciting for us. We've been there with some key customers for the last few years as we entered the smartphone markets, and we've continued to gain share. And the thing that -- the challenge we've always had and everybody's always had with China was the lack of bandwidth and app store to download applications that fully take advantage of gyros and MotionTracking in general. And those challenges are starting to go away. In China, for example, there's a huge installment of 4G coming through and base stations. So the bandwidth challenges are going to go away. The app stores are maturing up, and consumers are demanding better performance and more features, such as navigation and gaming that you cannot do with the accelerometers alone. You really need gyroscope. And as they go into that direction and they need to have better phones and smaller phones and thinner phones, our solution is very well-positioned there. So I think that that's -- you're going to see over the next year to 2 years, that market expanding quite nicely, and we're very well-positioned there. The other thing is we, again, with the integration that we have at the system software level, those customers coming in from a less mature background, they are going to be very receptive to just getting the total solution from us that's well integrated from, let's say, an Android ecosystem. And we feel very confident that we're going to be well positioned there.

Auguste P. Richard - Piper Jaffray Companies, Research Division

All right. And then just as a follow-up, you got strong design win momentum in a number of categories and when you mentioned was wearable. Do you see that, like OIS, coming in and sort of being another vector of growth again over a 12- to 18-month timeframe?

Behrooz Abdi

I see it, whether it's over the next 12 months or the next 24 months to 2 years to 3 years, it's hard to tell. There's a lot of hype around it, similar to any new technology. And you kind of go through the hype and then you get to the classic CASM and then you get to reality. And reality is always pretty nice, it just happens to be later. So we are very much at the lever in that. And when we talk to our customers, even they don't really know what they want exactly out of the wearable. So we're definitely putting investment into that product, into that category, by building out the ecosystem of reference, design, software and really trying to solve the end-to-end challenges and features that's needed to be there. So we're definitely focused on the scenario, a great interest for us. But how that develops, even our customers don't really know it yet. So we're working through that. And I think, I definitely believe that it will happen in a very big way. It may not happen next year, but certainly after that, I believe it will happen.


[Operator Instructions] With no further question in queue, I will turn the call back over to Mr. Alan Krock for closing remarks. Please proceed.

Alan F. Krock

Thank you, all, for joining our quarterly conference call. And we look forward to the next call in about 90 days. Thank you, and have a good afternoon.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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