InvenSense Management Discusses Q3 2014 Results - Earnings Call Transcript

Jan.29.14 | About: InvenSense (INVN)

InvenSense (NYSE:INVN)

Q3 2014 Earnings Call

January 29, 2014 4:30 pm ET


Leslie Green

Behrooz Abdi - Chief Executive Officer, President and Director

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


James Schneider - Goldman Sachs Group Inc., Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

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

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

John Vinh - Pacific Crest Securities, Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Quarter 3 2014 InvenSense, Inc. Earnings Conference Call. My name is Sally, 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 Leslie Green, Investor Relations for InvenSense. Please proceed, ma'am.

Leslie Green

Thank you, Sally, and good afternoon and welcome to all. I'd like to begin our call today with a Safe Harbor disclaimer related to 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 a future state. Forward-looking statements include any projection of revenue, gross margin, expense or other financial items discussed in this conference call, including the expansion of our customer design pipeline and the potential for continued gains in our shares in mobile, computing and consumer segments.

Investors are cautioned that all forward-looking statements involve risks and uncertainties that could cause actual results to differ from those currently anticipated due to a number of factors, including, without limitation: the continued adoption of microphones, motion tracking and motion sensing as an interface in customer 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 and dependence upon 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 for our products, as well as changes in economic conditions and other risk factors discussed in documents filed by us with the Securities and Exchange Commission from time to time.

Copies of InvenSense's SEC filings are posted on 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 now turn the call over to Behrooz Abdi, President and CEO. Behrooz?

Behrooz Abdi

Thank you, Leslie, and good afternoon, everyone. Welcome to our fiscal 2014 third quarter call. In the last quarter, as expected, an unseasonal downturn in our gaming business was partially offset by continued market share gain at our top mobile customers and growth in the emerging markets, such as China. We believe overall market and customer dynamics will continue to position us well for growth in the coming quarters.

Furthermore, we're pleased to report multiple customer design wins with our MotionTracking system on chips, or SoCs, which utilize our Digital Motion Processing, or DMP, coupled with our motion algorithms. These design wins validate our strategy of providing customers with a true plug-and-play motion tracking solution, including our value-added MotionApps software.

In the fiscal 2014 third quarter, the InvenSense team achieved revenue above the midpoint of our stated revenue outlook for Q3 of $65 million to $68 million, with revenue for the quarter reaching $66.7 million, while delivering consistent gross margins. Our revenue increased 13% year-over-year in the December quarter, with smartphones and tablets leading the growth, representing 83% of total revenue.

While the gaming segment experienced unseasonably weak unit shipments, we continued to observe strength in the last quarter's unit volumes with our 6-axis MotionTracking solutions and our 2-axis optical image stabilization, or OIS, products. This strength was due to a broad-based increase in demand from several areas: emerging markets such as China smartphones, including Xiaomi and OPPO, and share gain of top-tier customers and adoption in flagship products, such as Samsung's Galaxy Note 3, Google's Nexus 5 by LG and Amazon's Kindle Fire, drove demand for our 6-axis MotionTracking devices, while OIS-enabled smartphones, such as LG's new G2 and the Nexus 5, contributed to robust demand for our 2-axis OIS gyro. Within the Android-based ecosystem, where, in the course of the past year, the majority of customers have transitioned to 6-axis, we continue to gain share with our market-leading 6-axis MotionTracking product, the MPU-6500, with volume shipments in several flagship customer products, including smartphones and wearable devices.

Our 6-axis product family, including the MPU-6500 product, continued to comprise more than 65% of the unit shipments last quarter. We were especially pleased to begin the production ramp of our recently announced MPU-6515, the world's first MotionTracking SoC optimized for Google's Android KitKat operating system. The MPU-6515 SoC features our second-generation Digital Motion Processor hardware accelerator, or DMP 2, and algorithms for low-power system operation, thus enabling the first AlwaysOn motion tracking experience in the market. We look forward to transitioning a number of customers to MPU-6515 throughout this calendar year.

The rapid and wide adoption of our second-generation DMP 2 and MotionApps-embedded software by OEMs is a clear validation of our strategy to bring customers a complete system solution for motion tracking and enabling significant system power savings. Customers are using our patented DMP algorithms and software to implement high-performance, low-power features for gaming, imaging and navigation applications. Additionally, we're working closely with a number of our top-tier customers to tailor our motion algorithms to their specific applications, which increases our customer intimacy and platform stickiness.

In emerging markets such as China, gyro attach rate continues to increase as smartphones based on the Android Operating System proliferate and drive features based on previously unavailable local content, such as motion-based games, as well as improved electronic and optical images stabilization. Motion-based features offer China OEMs further differentiation within an increasingly competitive landscape. We are very well positioned in this rapidly growing market and remain excited about the opportunities that it presents to us.

In the last quarter, we continued to capture additional design wins in OIS, further extending our leadership in this exciting acquisition. The smartphone OEMs across most regions are adopting OIS in order to improve the camera experience as yet another differentiating factor in their products. As the camera module ecosystem and supply chain continues to expand, we believe there are significant opportunities for top-tier OEMs to adopt OIS, which will increase the total available market for gyros. Given the unseasonably slower unit shipments in the fiscal third quarter and in anticipation of unit shipments growth over the next 9 months associated with anticipated gains in share and attach rates, we took the opportunity to build inventory in our core products, such as the MPU-6500 and MPU-6515. This inventory, which is mostly in wafer form, allows our manufacturing partners to run at increased utilization and improved cost to us, while helping to avoid unnecessary capital expense as our anticipated demand substantially increases in the following quarters.

We believe this inventory increase will be mostly consumed in the next -- in the coming 3 quarters, while allowing us to increase our capacity in a more linear fashion. We were excited last quarter to see increased designing activity with our 6-axis and 9-axis solutions for wearable devices, where health and fitness applications are driving demand for higher-accuracy activity monitoring and tracking. While the first generation of these wearable devices were based only in accelerometers, the adoption of additional sensors, such as gyroscope and magnetometers, allows for more accurate activity classification, which, in turn, enable new business models for our customers around consumer activity tracking. We see enthusiastic traction from OEMs and operators for our wearable device reference kit, which includes our 9-axis MotionTracking solution and other sensors, along with our MotionTracking algorithms and embedded software for activity recognition and monitoring. This reference kit also includes short-range wireless connectivity and a reference mobile app. We believe the wearable device category, which includes health and fitness tracking, smart watches, wearable computing and immersive gaming, is in the early stages of a multiyear expansion that will create new and exciting growth opportunities for InvenSense.

Furthermore, our development community of now close to 12,000 registered developers continues to create innovative new applications for MotionTracking and other exciting and innovative applications, all on the InvenSense platform.

In the fiscal third quarter, we announced the acquisition of Analog Devices' MEMS microphones business line for $100 million in cash. While this acquisition, which closed in November of 2013, increases the total addressable content in mobile and wearable devices, it also provides exposure to other markets, such as industrial and automotive. We view audio as a strategically important sensor technology, which complements motion in enabling much more intuitive interaction between users and their mobile devices. We are very excited to welcome to InvenSense an exceptionally experienced and talented MEMS technology team with a rich portfolio of product and IP, and we look forward to bringing the same spirit of innovation and market disruption, as well as the power and leverage of the fabless MEMS business model, to the audio market.

I will now turn the call over to Alan for more details on the fiscal Q3 2014 financial results. I will then provide an update to our products and other development, and Alan will discuss the fourth 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 patent litigation costs, purchase accounting-related costs, cumulative benefits associated with changes in our estimated 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 that these non-GAAP measures offer an important analytical tool to help investors understand the company's core operating results and trends to facilitate comparability with the operating results of other companies that provide similar non-GAAP measures. Realizing that 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 third quarter of our fiscal 2014, ended December 2013, net revenue was $66.7 million, an increase of 13% from the third quarter of fiscal year 2013, down 6% sequentially from the second fiscal quarter of 2014.

For the first 3 quarters of the fiscal year 2014, net revenue was $193.5 million, an increase of 26% over the first 3 quarters of fiscal year 2013 revenue of $153.4 million. Our customer segment splits for the third quarter of fiscal '14 were: smartphones and tablets, 83%; gaming, 7%; and all other segments, including imaging, 10%.

For Q3, our 10% customers were: Samsung Electronics, 32% of sales; Xiaomi, 16% of sales; and LG Electronics, 10% of sales.

For the first 3 quarters of fiscal 2014, our customer segments were: smartphones and tablets, 77%; gaming, 8%; and all other segments, including imaging, 15%.

Record sales to China-based customers is especially noteworthy during the period.

Gross margin for the third fiscal quarter of 2014 on a non-GAAP basis was approximately 51%, excluding stock compensation expense, the amortization of acquired intangibles and the gross up of MEMS microphone inventories from Analog -- purchased from Analog Devices. Including these costs, especially the gross up of the cost of the inventories acquired from Analog Devices, on a GAAP basis, our gross margin was 47%.

For the first 3 quarters of fiscal 2014, gross margin was 52% on a non-GAAP basis and was 50% on a GAAP basis. For the comparable period in fiscal year 2013, gross margin was 54% on a GAAP basis and 54% on a non-GAAP basis, given that there were no purchase accounting for inventories in that period.

Turning to operating expenses. On a GAAP basis, our total Q3 fiscal year '14 operating expenses were $30.2 million for the quarter versus $21.2 million in the immediately prior quarter. Excluding stock compensation, nonrecurring acquisition-related expenses and patent litigation legal expenses, operating expenses were $19.1 million on a non-GAAP basis versus $15.1 million in the prior quarter.

R&D expenses were $14.5 million or 21% of revenue for fiscal Q3 on a GAAP basis, as compared to $9.8 million or 13.8% of revenue in the prior quarter. Excluding stock compensation and nonrecurring acquisition-related expenses, R&D expenses were $11.9 million or 17.8% of revenue on a non-GAAP basis in fiscal Q3 versus $8.6 million or 12.1% of revenue in the prior quarter.

GAAP-based SG&A expenses were $15.7 million or 23.5% of revenue in fiscal Q3, as compared to $11.4 million or 16.1% of revenue in the prior quarter. Excluding stock compensation, nonrecurring acquisition-related expenses and patent litigation legal expenses, SG&A costs were $7.2 million or 10.8% of revenue on a non-GAAP basis versus $6.5 million or a 9.2% of revenue in the prior quarter.

The year-over-year changes in absolute dollar operating expense spend to comparable current and prior year periods can be attributable to the following: For R&D, primarily engineering headcount increases and project-driven mass [ph] wafer and outside services costs and 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 space and the addition on November 1, 2013, of audio sensor-related engineering resources associated with the MEMS microphone product line from Analog Devices. Two, additions to SG&A are primarily sales- and headcount-driven to address the company's substantial global customer opportunity, including the growth of sales channels in geographies like China, where adoptions of motion tracking and audio solutions by major consumer electronics customers represent a significant opportunity for the company and the expansion of our marketing efforts targeting new opportunities. Increased legal expenses related to the ongoing patent litigation activities. We are transitioning to the trial phase of litigation in the ITC lawsuit initiated by STMicroelectronics, which is costly, and we continue to pursue our own claims against ST as well.

Stock-based compensation in the December quarter for fiscal Q3 was $4.7 million in total versus $4.3 million in the immediately prior quarter and $2.8 million for Q3 fiscal 2013.

Operating margins on a non-GAAP basis including stock -- excluding stock-based compensation, nonrecurring acquisition-related expenses and patent litigation legal expenses were 22%. On a GAAP basis, operating margins were 2% this quarter versus 22% in the prior quarter. Our long-term non-GAAP operating margin target remains in the high 20s to low 30s percent but will vary primarily based on sales, seasonality and costs, such as litigation and those related to purchase accounting.

On a non-GAAP basis, our income tax provision was 7% of income before tax for fiscal Q3. On a GAAP basis, our income tax provision was a benefit for the current period.

On a non-GAAP basis, net income for the third quarter of fiscal 2014 was $13.3 million, compared with net income of $18.8 million in the second quarter of 2014 and net income of $16.8 million for the same period in fiscal year 2013.

For the first 3 quarters of fiscal year 2014, non-GAAP-basis net income was $45.9 million, compared with $41.1 million for the first 3 fiscal quarters of 2013. On a GAAP basis, net income for the third quarter of fiscal 2014 was approximately breakeven compared with net income of $13.6 million in the second quarter of 2014 and net income of $16.8 million for the same period in fiscal year 2013.

For the first 3 quarters of fiscal year 2014, GAAP basis net income was $23.8 million, compared with $38.1 million for the first 3 quarters of fiscal year of 2013. On a non-GAAP basis, EPS was $0.15. Fully diluted GAAP EPS was 0 for the fiscal quarter -- fiscal third quarter based on fully diluted shares of 90.3 million.

For the first 3 quarters of fiscal year '14, non-GAAP EPS was $0.51 per share and fully diluted GAAP EPS was $0.27 based on fully diluted shares of 89.3 million, as compared to fiscal year 2013 first 3 quarters with non-GAAP EPS of $0.47 per share and GAAP EPS of $0.44 per share.

Cash and investment balance increased to $266 million in the third quarter of fiscal 2014. Cash used in operations for the third quarter of fiscal 2014 was $7.1 million, primarily due to working capital increases. As Behrooz mentioned, working capital increased, primarily due to increased inventories resulting from ordering products for significant increases in projected consumer demand -- customer demand for our 2-, 3- and 6-axis motion sensor products and slightly decreased receivables.

Our net days sales outstanding were 51 days, slightly improved from 54 days in the prior quarter. As of the end of Q3 2014, our total inventory stood at $58 million versus $38 million at the end of the prior quarter. Cash used in investing activities during the quarter included $100 million for the acquisition of the Analog Devices' MEMS microphone assets and cash generated from financing activities, including the placing of a $150 million offering of convertible senior notes due in 2018.

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

Behrooz Abdi

Turning our attention to the fiscal fourth quarter. With continued significant weakness in the gaming segment and the seasonally strong holidays behind us, we expect lower unit shipments to most existing customers, offset partially by growth at our top customers due to increased share within their flagship product categories, as well as growth in emerging markets such as China. We also believe that we continue to have near-term opportunity at a large mobile OEM customer, which we're working to realize in the coming months and quarters but have not incorporated into our outlook.

We expect to see our 6-axis integrated gyroscope and accelerometer product lines to continue to comprise over 60% or more of our unit and revenue shipments, with continued transition to our second-generation 6-axis MotionTracking SoC, MPU-6500 and MPU-6515, at multiple customers.

With the transition of existing and new customers from motion sensing components to MotionTracking solutions, such as MPU-6515, we will capture additional value by performing sensor fusion and calibration, as well as other algorithms custom-tailored to their applications. While this trend will help our customers shorten their development time by offering a complete solution that removes the complexities of managing multiple sensors, it also helps us to slow down price erosion, presenting us with margin expansion opportunities in the future.

Our world-class MEMS, SoC development and algorithm R&D teams have been busy developing an expanded portfolio of ultra low-power multiaxis MotionTracking solutions. Our intensified R&D investment within the last year culminated in the announcement of several innovative motion and audio products at the 2014 Consumer Electronic Show in January. These products are truly game changing and enable a new era of AlwaysOn consumer experiences in the next generation of mobile devices. Our AlwaysOn platform announcement included our latest generation of 6-axis MotionTracking solutions, the ICM-20628. This highly integrated and ultra low-power SoC is a completely autonomous MotionTracking subsystem, which sets a new bar in performance and integration with continuous self-calibration and motion fusion.

At a mere 20 milliwatts of power, the ICM-20628 represents an amazing 60% power reduction over our already low-power leadership product and drawing significantly lower power than even the most competitive -- the competitive 6-axis components most recently announced.

Our platform announcement also included a best-in-class analog microphone, the ICS-40160, and the world's lowest-current microphone, the ICS-40310, with an unprecedented 17-microamps current drain for AlwaysOn applications.

In the wearable device category, we introduced a family of AlwaysOn Automatic Activity Recognition, or AAR, solutions for the wearable device market. These solutions include very low-power 6-axis and 9-axis ICM-20655 and ICM-20955 MotionTracking solutions, as well as a best-in-class digital microphone, the ICS-43430. These solutions also include our proprietary AAR library, which allows for remote tracking of multiple activities, such as walking, running and biking.

Finally, we announced the world's first 70 dB low-noise microphone, the ICS-40720, the highest-performing MEMS microphone for mobile and fixed devices that require crisp audio sensing for demanding applications, as with background noise cancellation and far-field audio communications, such as required by high-end TVs. Despite short-term seasonal weakness and current market challenges in the gaming sector in total, we remain optimistic and excited about several trends in our business that will serve as growth catalysts for the coming quarters.

Mobile OEMs continue to add new and improved product features that make gyros more relevant in mobile devices, such as in imaging, navigation activity tracking and context-aware applications. This trend continues to expand our addressable market as an increasing number of platforms are incorporating motion sensor technology, creating opportunity at both new and existing customers.

This is particularly true in China, where we are encouraged to see a launch of a number of new platforms that leverage our solutions.

Finally, more than ever, customers are realizing the value of an integrated solution that combines world-class MEMS with SoC design and algorithms to enable the lowest possible system power. Our continued share gain of existing customers complements well our success in capturing additional content in motion and audio at existing and top-tier OEMs. New markets, including OIS, present exciting growth vectors for our business and are key areas of focus for us.

Finally, we believe this calendar year, wearable devices will continue to get wider acceptance with consumers. And as those devices evolve from simple pedometers towards activity tracking, there will be a wider adoption for gyros that will create additional opportunities for our MotionTracking SoC products.

Our most recent motion and audio platform rollout and roadmap is intended to enable a new generation of AlwaysOn context-aware devices and applications, which, in turn, are expected to drive Big Data services and position us very well for the coming year of interconnected sensors within the Internet of Things.

At this point, I will turn the call back over to Alan to discuss our financial outlook 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 fourth quarter of our fiscal 2014.

During our most recent quarter, the announced MEMS microphone asset purchase transaction between Analog Devices and InvenSense is closed. However, as before, given the relatively insignificant amounts associated with near-term results from operation, which are essentially breakeven impact, we will not be providing specific financial outlook nor financial remarks associated with that asset acquisition during this call. This information is also indicated in our press release announcing the transaction and subsequent investor communications.

As you've heard from us before, our end markets are seasonally slower during the first half of the calendar year, in particular, the consumer electronics, gaming and tablet segments. As such, our fiscal Q4, ending March, is generally our slowest revenue quarter. We see continuing progress and strength in adoption of our products across customers in the mobile markets due to our products' higher performance and attractive features and size. We see this progress with a number of major customers, now including some in China, and we believe our product strength at these customers offers an important opportunity to continue our revenue growth in fiscal periods beyond the current year.

We expect fiscal year '14 Q4 revenue to be in a range of $55 million to $58 million. To support this Q4 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 to our largest customer, Samsung Electronics, to be in the mid-to-high 30% range of this target, reflecting strength in applications where we have existing designs as well as opportunities to participate in new design launches.

We expect our tablet and gaming opportunities to be slower this quarter, consistent generally with historical seasonal patterns. As mentioned before on this call, we have also broader opportunities at new and existing mobile customers, some of which opportunities represent near-term market share gains, and others represent new inertial sensor, especially gyroscope, attach rate opportunities. We also expect new mobile market sensor applications, such as microphone and optical image stabilization, to contribute to revenue growth, albeit with somewhat uncertain timing.

In fiscal Q4, the product mix continues to favor our highest-volume mobile customers, and we should generate a gross margin in line with the recent levels. We believe that, on a GAAP basis, our fiscal year -- fiscal Q4 -- fiscal '14 gross margin will be approximately 49%, reflecting primarily the impact of additional cost of purchase accounting gross up of inventory acquired from Analog Devices; and that on a non-GAAP basis, our Q4 fiscal year '14 gross margin will be approximately 52%; and that in future quarters, our new lower-cost products and additional production volumes can contribute to a favorable impact on gross margin. In Q4, on a non-GAAP basis, we expect operating expenses of $19.1 million, made up of $10.7 million for R&D and $8.4 million for SG&A. On a GAAP basis, we expect operating expenses of approximately $25.7 million, made up of $12.4 million for R&D and $13.3 million for SG&A.

We expect a current quarter operating margin of approximately 18% on a non-GAAP basis and a potential range around 2% on a GAAP basis. We expect fully diluted share count of approximately 91 million shares. We expect non-GAAP tax rate of approximately 15% and, therefore, earnings per share of approximately $0.09 to $0.11 per share on a non-GAAP basis, excluding litigation expenses, acquisition-related expenses, convertible note accretion expense and stock compensation expense. We expect the GAAP income tax rate in the range of around 13% to 15% and, therefore, GAAP-basis net income per share in a range around breakeven, primarily depending upon levels of revenue achieved. This near-term outlook provided assumes the ST IP-related litigation continues as historically planned for the foreseeable future. Any court-related decisions rendered or settlements agreed to between the parties can have a potentially significant impact on our outlook in the period in which any such event occurs.

With respect to our fiscal year 2015 business opportunity, we believe that our markets continue to offer significant opportunity for growth. Historically, net unit sales growth has been approximately 50% per year, with net average selling price erosion partially offsetting the effect of unit sales growth. Given the dynamics of the markets we serve and considering business outlook factors included in this call, we believe that our fiscal 2015 -- in our fiscal 2015, we are well positioned to enjoy a year-over-year rate of growth similar to the past 2 fiscal periods of between 25% to 35%. This outlook opportunity excludes potential market share gains or losses and the potential for accelerated growth in new opportunities we have discussed, such as audio, optical image stabilization and consumer electronics wearable devices.

With respect to our spending and margin opportunities for fiscal year '15, during our next planned investor relations call in April 2014, we will provide additional specific outlook information to our investors.

That completes our remarks with respect to the earnings and business aspects of this call.

With that, I'd like to turn our call to the question-and-answer session. Thank you.

Question-and-Answer Session


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

James Schneider - Goldman Sachs Group Inc., Research Division

Behrooz or Alan, I was wondering if you could talk about, broadly speaking, the inventory situation at your smartphone and tablet customers. Clearly, you're seeing a lot of seasonal weakness here going into the March quarter. Do you think there's still inventory at some of your largest customers? And then you mentioned some partial offsets in terms of new product launches. To what extent is that actually impacting it, or is it coming in at the very, very tail end of the quarter and so having a minimal impact on the outlook?

Alan F. Krock

Okay. Thanks, Jim. It's Alan. So we mentioned 3 10% customers at the beginning of the call: Samsung, Xiaomi and LG. And at those customers, generally, we find ourselves fortunate to participate in many of the new products that have been announced in the recent past and, as mentioned in my script, could be announced going forward. So with respect to our largest customer, therefore, we've given outlook which is mid-to-high 30% of total sales, which would be up from mid-30% of the prior quarter. So while there may be inventory and certain models or older generation of product that hasn't been considered or factor -- been a factor in setting of our outlook in the near term, a lot of the opportunity at our second-largest customer in the most recently completed quarter, Xiaomi, is newer related product launch and, therefore, unlikely to be impacted, given that would potentially be the ramp of new programs. With respect to LG, there has been some adoption of our optical image stabilization products there in some of the newer models of their products and Google's related product. So therefore, again, it's a similar situation where, in our top 3 customers, the products we participate in tend to be newer versions and, therefore, less impacted by inventory levels. So the seasonality we refer to with respect to gaming and tablets, yes, believe likely that traditionally, post the holidays, there are potentially some level of inventories. It's not that -- certainly lower levels of run rate of sales at those customers. And so, in the new products, driving the majority of the opportunity, we feel that the inventory situation is not a major influence. But certainly, with the seasonality included in our outlook, there could be some level of that at some of the market segments mentioned, gaming and tablets. So hopefully, that helps with some of the inventory dynamics.

James Schneider - Goldman Sachs Group Inc., Research Division

It does. And I understand you don't want to provide a lot of detailed financials on the ADI acquisition. But can you give us any kind of sense, was it -- what kind of contributor was it in the quarter? And is it basically immaterial in the March quarter? Just give us any kind of ballpark so we can compare our -- the run rate of organic business with the addition of that, please?

Alan F. Krock

Yes, it's relatively insignificant in that the revenue opportunity that it had, as discussed and, I'm sure, by ADI as well in the past, is the vast majority is older products, older-generation products into a specific large consumer electronics OEM. And as such, it's relatively uncertain as to how long those products will continue to run, and therefore, we've just decided, rather than having people pay potentially undue attention relative to insignificant amounts tied to older products at one particular OEM, we just decided that it's best to wait for the opportunities for those new products to be designed in. And when we have something new to announce that's exciting and interesting, we'll disclose it. So therefore, the impact has been neutral, as originally suggested in previous calls. And so, for now, we'd rather focus on the potential in the future and announcements as those become relevant and just let the residual of these older platforms run out without undue attention paid to them.


Your next question comes from the line of Suji De Silva from Topeka Capital.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Can you talk, maybe, Alan, about guiding to a fully booked coverage, no turns? Is that relatively conservative versus past quarters, where you made -- expected a few percent turns?

Alan F. Krock

Yes. No, we usually provide outlook that's based on bottoms-up, product-by-product forecast, with the majority of that covered by backlog. But there certainly is some element of future business to consider. And many of our larger customers, of course, feel that they can place orders with relatively few numbers of weeks. And so historically, those orders have tended to be additive. And so, anyway, I believe that the comments made were majority is in backlog, but there is some element of incremental business to do.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Okay. And you saw Xiaomi show up as a 10% customer. Are you expecting additional China 10% customers, given your focus on emerging markets in the next few quarters?

Alan F. Krock

Yes, certainly, over a period of several quarters, that's entirely possible. They, of course, are the one that's emerged near term, but there, certainly, are several that can have that potential impact in total. We do expect growth in the total market segment that we serve in China. So the timing with which any one becomes a 10% customer, we'll see, beyond Xiaomi. But in general, the trend is for increasing percentage of sales to be derived from that market.


[Operator Instructions] Please stand by for your next question, which comes from the line of Tristan Gerra from R.W. Baird.

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

Could you elaborate on your strategy of entering the lower end of the smartphone market, where you've been getting very good momentum? Are the software features the same? And how does pricing compare with some of the top-tier customers you have?

Behrooz Abdi

This is Behrooz. Let me take that. In the lower tier -- we really don't go into the very low tier, which is accelerometer only. So in the smartphone category, you have high-tier, mid-tier and mid-to-low tier, which is -- still uses gyros. And in those categories of devices, actually, we have more traction with our software and better traction with the products in terms of pricing, because in those categories of devices, customers cannot afford to have any kind of a sensor hub or any kind of a higher-end apps processor that does the functionality that we do. So they take our products lock, stock, barrel and -- with software, and they just plug it in and they go with a lower-cost apps processor. Then there's a tier below that, that don't use the gyros, or if they use gyros, they really don't value them and it's just more of a checkmark. And there, again, we have lower-cost products, what we call raw sensors that really have no smarts in them, and we price those aggressively. So we're pretty much covering the gamut of market that requires gyro.

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

Okay. That's useful. And what's the current revenue run rate for image stabilization?

Alan F. Krock

It's included in the other category. 10%, so it is somewhat volatile by quarter as far as order of magnitude. So it's generally been in sort of mid to high single-digit percentage points of our total revenues. And again, that remains included within our other category, which is 10% this quarter.

Behrooz Abdi

We feel that the attach rate of the OIS is still in the early adoption, so it's -- generally speaking, it's still in the low teens, overall.

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

Okay. And then finally, what's the outlook for the legal expenses for the quarter?

Alan F. Krock

Oh, sorry -- oh, yes. So it would be in -- it would be a consistent sort of level, sort of where it's been in the past. We have it down for between $3 million and $5 million in the GAAP-related outlook that was given.


Your next question comes from the line of Richard Shannon from Craig-Hallum.

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

Questions for me. Wondering if you could give us a sense of what kind of share you expected your largest customers as you go throughout the year. You talked about, generally, an improving share there. And the numbers you gave on the call suggest kind of a flattish trend December to March. Give us the thought of, as you look at that customer over the year, where your share could go?

Behrooz Abdi

Our share has actually been increasing. We started it last year in the beginning of the calendar year, where we were in the 30% range. And we're well north of 50% range now, on the way to 70%. So on the flattish -- it's somewhat related, also, to their run rates. But in terms of our share, it continues to increase.

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

Okay. Perfect. Second question for me. Behrooz, you mentioned the ability to flatten out the SG curve of your products with the addition of your software and algorithms and other value-add there. Can you give us a sense, can you quantify or qualify that in some way? And then, what kind of ASP bump do you get from the -- I think it's 6515 versus the 6500?

Behrooz Abdi

Yes, we're starting to get early traction with that. But generally speaking, depending on the customer volume tiers and all that, we get anywhere from 10% to 15%, the increased premium on that.

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

Okay. And how do you see the mix between, not only between 6-axis and other products, but also between the 6515 and 6500 as you exit this year?

Behrooz Abdi

In terms of -- well, in the fiscal year, this year being March quarter, it's going to be pretty low, that...

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

How about calendar year?

Behrooz Abdi

Calendar year, my hope is that it will be -- that 6515 will be north of 40% of our 6-axis. But we're still starting up, and it's very early on right now.


Your next question comes from the line of John Vinh of Pacific Crest Securities.

John Vinh - Pacific Crest Securities, Inc., Research Division

I had a follow-up question on OIS. It seems like this year, at a Tier 1 level, we're seeing incremental adoption of OIS, but it seems to have fallen slightly below our original expectations. I'm wondering if you could just give us some additional color on what you're expecting in terms of Tier 1 customer uptake of OIS, and kind of what are the puts and takes that maybe drove it slightly below our original expectations and forecast there?

Behrooz Abdi

Sure. Well, from my end, hopefully, I never set any expectations on the Tier 1 adoption of OIS. We've always said that, for the time being, it's really Tier 2, Tier 3s that adopt OIS to differentiate themselves from the Tier 1s. And camera feature is very key differentiating factor. To the extent that any Tier 1 adopted, obviously, it takes the total numbers up by a significant amount. But the factors that we have talked about in the past is still consistent in terms of OIS adoption. It's really the supply chain around it. It's the actuator and the lens itself, all the supply chain that needs to come together. We have very significant design wins across the board with all the camera module guys. And to the extent that they are ready to go with that ecosystem with the supply chain, that'll help with the adoption of the Tier 1. So we're still on the sideline on that, looking to see any Tier 1 adoption, but we haven't really set any expectations. We still see Tier 2, Tier 3s incrementally adopting it, and then we see a lot more design wins right now in the Tier 2, Tier 3 categories.

John Vinh - Pacific Crest Securities, Inc., Research Division

Great. And then in your Q1 outlook, you talked about some of the seasonality being offset by new product ramps. Can you clarify if there is any OIS built into some of those new product ramps?

Behrooz Abdi

Just a little bit. Mostly, it's the continued adoption of the 6500 into new designs and 6515. And, Alan?

Alan F. Krock

Yes. I just -- a lot of the ramps, again, it's a little unclear as to whether they really benefit this quarter significantly or primarily are benefits in June. So yes, hopefully, we've been fairly cautious in the ramp rates assumed for some of these new platforms. They'll likely be announced, but maybe not in real high-volume production during the quarter. And then that should be a significant benefit, potentially, to the June quarter.

Behrooz Abdi

As you know, John, it's calendar Q1, usually, that we have the dynamic of the not just CES, but MWC and the Lunar New Year. And so a lot of the OEMs will announce products, either at MWC or shortly after, with ramps starting right around March, April and into the June quarter. So that's right on the cusp of where our quarter ends. So that's why we try and be somewhat cautious as to how those products ramp up.


I would now like to turn the call over to Behrooz Abdi, President and CEO, for closing remarks.

Behrooz Abdi

Well, thank you, all, for participating in our conference call. This quarter, we'll be participating at a number of conferences around the country and in London. We look forward to seeing many of you there. As always, please feel free to contact us, if you would, to schedule a call or meeting. And we look forward to speaking with you in the near future.


Thank you. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you.

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