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InvenSense (NYSE:INVN)

Q4 2014 Earnings Call

May 01, 2014 4:30 pm ET

Executives

Leslie Green

Behrooz Abdi - Chief Executive Officer, President and Director

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

Analysts

Mark McKechnie - Evercore Partners Inc., Research Division

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

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

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

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

Cody G. Acree - Ascendiant Capital Markets LLC, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2014 InvenSense, Inc. Earnings Conference Call. My name is Chris, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Leslie Green with Investor Relations for InvenSense. Please proceed.

Leslie Green

Thank you, Chris, and good afternoon, everyone. I'd like to begin the call today with a Safe Harbor disclaimer related to our 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 are preceded by words such as will, expect, anticipate or other words that imply or predict a future state. Forward-looking statements include any projection of revenue, gross margin, which can be significantly impacted by product deals and inventory-carrying values, expense or other financial terms discussed in this conference call, including the expansion of our customer design pipeline and the potential for continued gain in our share of the mobile, computing and consumer segments.

Investors are cautioned that all forward-looking statements involve risks and uncertainty that could cause actual results to differ from those currently anticipated, due to a number of factors, including, without limitation, the continued adoption of microphone, MotionTracking and motion sensing as an interface in customer and consumer electronics products, our achievement of design wins, consumer acceptance of customers' products that incorporate our solutions, intense competition in our industry, our dependence on a limited number of customers who are a substantial portion of our revenues, our lack of long-term supply contracts and dependence on limited source of supply, our ability to continue to develop and introduce and enhance products on a timely basis, and potential decreases in average selling prices for our product, 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 this date of the conference call and the company does not undertake an obligation to update 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 fourth quarter call. First, let me start by saying that fiscal 2014 was an amazing year for InvenSense, as our revenue grew by 21% over fiscal 2013 despite the continually weakening gaming sector and in a very competitive pricing environment. This growth was achieved due to significant share gain in our served markets, coupled with steady increase in attach rates of gyroscopes in a wide variety of applications.

We also expanded our lead in the nascent and fast-growing markets of optical image stabilization, or OIS, and wearable and fitness devices. Furthermore, our increased investments in R&D culminated in the introduction of several industry firsts and highly-differentiated solutions. These solutions combine extremely accurate sensors with sophisticated software and algorithms, allowing us to command premium value for our products and maintain the stable gross margins, with further leverage for improvement.

This is all in line with our strategy to transition from a MEMS motion sensor company to a MotionTracking solutions company offering a full suite of motion and audio system on chip, or SoC, and embedded software.

In the March quarter, the InvenSense team achieved higher than our stated revenue outlook of $55 million to $58 million, with revenue for the quarter of $59 million. We observed continued strength in China, with both our 6-axis MotionTracking solutions and our 2-axis optical image stabilization products, as not only did gyro attach rates continue to increase in mid- and high-end smartphones such as Xiaomi and OPPO, but also several high-end brands began to adopt OIS. This allowed us to capture additional content within the same OEM product.

We're also pleased to commence volume shipments in several flagship customer products, including Samsung's Galaxy S5 and wearable devices such as Samsung Gear 2 and Gear Fit. Our 6-axis product family, including the MPU-6500 and 6515 Android-compatible products, comprised more than 70% of unit shipments last quarter. Within our 6-axis product family, increased shipment of the higher-value MPU-6515 helped partially offset lower gross margins associated with legacy 6-axis products such as MPU-6050 at top-tier customers.

However, our modest decline in gross margin performance in Q4 reflected a larger percentage of legacy products in our sales mix. These products are expected to represent a smaller percentage of the mix in the June quarter, as newer smartphones that leverage over higher value products continue to ramp in volume.

In the last half of fiscal 2014, we saw an acceleration of customer design wins with our MotionTracking SoCs, which utilize our Digital Motion Processing or DMP, coupled with our motion algorithms and MotionApps. We believe that we are gaining significant market share in mobile devices, including all of the top 10 Android smartphone makers. We have achieved this impressive feat in a very competitive environment and oftentimes with additional value for our performance, power and algorithms.

One of our key initiatives in fiscal 2014 was to increase investment in R&D to support 3 primary areas of activity: New product development; expansion of our software and algorithm capabilities that extend our competitive differentiation; and the increased costs associated with extensive new customer qualification activities.

This increased investment in R&D has enabled us to take a decisive competitive lead in the market and has allowed us to lay the foundation for exciting growth opportunities in fiscal 2015. For example, during the year, we increased the number of SoCs that integrate our third-generation DMP, allowing for faster and more efficient algorithm and software. Among them is our latest generation ultra low-power 6-axis device with self-calibration and integrated sensor fusion. We have already won multiple designs with this product and its various derivatives, which will ramp into production later this year.

In the last quarter, we also introduced the first integrated 7-axis device, with gyro, accelerometer and pressure sensor all integrated into silicon die. The addition of pressure sensors will enable a significantly improved navigation and contextual experience. In the wearable device category, we introduced a reference design, complete with automatic activity recognition, or AAR, software library and low-power wireless connectivity. We are already seeing strong interest from various segments of the market, such as smartphone OEMs, health and fitness applications and brands, immersive gaming, wearable computing and big data customers that are interested in collecting, tracking and monetizing activity data.

The wearable market is an exciting segment for InvenSense, as it is fast-growing and fully leverages our high-performance MotionTracking sensors, DMP, algorithms and software. In Q4, we also introduced a number of leadership MEMS microphone products, such as an ultra low-power, always-on microphone, an industry-leading 70 dB microphone and high-performance top-port microphone for smartphones. Audio sensing is highly complementary to motion sensing and we will continue to drive synergies between the 2, as context-aware applications and always-on functionality becomes increasingly important to our customers.

We were pleased to announce a joint collaboration with Sonion, a leader in hearing aid technology and solutions. This multiyear collaboration is a validation of the differentiated MEMS microphone technology offered by InvenSense. We're excited for this collaboration to lay the groundwork for future market diversification.

Finally, during fiscal 2014, we invested considerably in new customer qualification and test activities that we expect to yield significant growth and market share gains in fiscal 2015. We are excited about the incremental opportunity for InvenSense and believe that the design wins that resulted from these efforts underscore our technology leadership, as well as our customer support and operational excellence.

To this end, as we shared with you in the last earnings call, we believe fiscal year 2015 to be another year of significant growth for InvenSense. We expect to see continued increases in gyroscope adoption, combined with sizable share gain in our core mobile segment, as well as growth in new markets such as wearable devices. As such, we made a strategic decision in both fiscal Q3 and Q4 to build inventory, mostly in wafer form, in our core markets and core products such as MPU-6500 and MPU-6515. We believe the additional inventory allows us to increase our capacity in a more linear fashion at optimum costs to us while we prepare for multiple significant customer ramps in the coming quarters.

I will now turn the call over to Alan for more details on the fiscal Q4 '14 financial results. I will then provide an update on our product and other development, and Alan will discuss the first quarter fiscal 2015 financial outlook.

Alan F. Krock

Thank you, Behrooz. Please note that all financial results will be discussed on the 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, settlement costs, purchase accounting-related cost, 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 and 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 fourth quarter of 2014 ended March 2013 -- excuse me, for the fourth quarter of our fiscal 2014 ended March 2014, net revenue was $59 million, an increase of 7% from the fourth quarter of fiscal 2013, down 12% sequentially from the seasonally-high third quarter of fiscal 2014. The fiscal year 2014 net revenue was $252.5 million, increase of 21% over fiscal year 2013 revenue of $208.6 million.

Our customer segment splits for the fourth quarter of fiscal '14 were: Smartphones and tablets, 85%; gaming, 3%; and all other segments including imaging, 12%. For our Q4, our 10% customers were: Samsung Electronics, 47% of sales; and LG Electronics, 11% of sales.

For fiscal year 2014, our customer market splits were: Smartphones and tablets, 79%; gaming, 7%; and all other segments including imaging, 14%.

Gross margin for the fourth fiscal quarter of 2014 on a non-GAAP basis was 50%, excluding stock-based compensation, the amortization of acquired intangibles and the gross up of MEMS microphone inventories from Analog Devices. Including these costs, on a GAAP basis, our gross margin was 46%.

For the comparable period in fiscal 2013, gross margin was approximately 50% on a GAAP and non-GAAP basis. For fiscal 2014, gross margin was 51% on a non-GAAP basis and was 49% on a GAAP basis. For the comparable period, fiscal year 2013, gross margin was 53% on a GAAP basis and 53% on a non-GAAP basis, given there was no purchase accounting elements in that period.

Turning to operating expenses. On a GAAP basis, our total Q4 fiscal year '14 operating expenses were $31.6 million for the quarter, versus $44.7 million in the immediately prior quarter. Excluding stock compensation, nonrecurring acquisition-related expenses and patent litigation, legal expenses and settlement costs, operating expenses were $21.9 million on a non-GAAP basis, versus $18.7 million in the prior quarter.

R&D expenses were $16 million, or 27.1% of revenue, for fiscal Q4 on a GAAP basis, as compared to $14.5 million, or 21.8% of revenue, in the prior quarter. Excluding stock compensation and nonrecurring acquisition-related expenses, R&D expenses were $13.5 million, or 22.9% of revenue, on a non-GAAP basis in fiscal Q4, versus $11.9 million, or 17.9% of revenue, in the prior quarter.

SG&A expenses were $15.6 million, or 26.4% of revenue in fiscal Q4, as compared to $30.2 million, or 45.2% of revenue in the prior quarter. This is on a GAAP basis. Excluding stock compensation, nonrecurring, acquisition-related expenses and patent litigation legal expenses and settlement costs, SG&A costs were $8.3 million, or 14.1% of revenue on a non-GAAP basis, versus $6.7 million, or 10.1% of revenue in the prior quarter.

Changes in absolute dollar OpEx compared to comparable current and prior-year periods can be attributed to the following: For R&D, increased investment in research and development in order to support an expanded roadmap; strategic customer development initiatives and extensive new product and customer qualification activities; and the addition on November 1, 2013, of the audio sensor-related engineering resources associated with the MEMS microphone product line from Analog Devices.

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 adoption of MotionTracking and audio solutions by major consumer electronics customers represent a significant opportunity for the company and expansion of our marketing efforts targeting new -- marketing efforts targeting new opportunities.

Increased legal expenses and settlement costs related to the resolution of patent litigation activities with microelectronics. Also included in these costs, increased late in fiscal 2014 as litigation activities approached the trial phase and then as we ultimately resolve the matter with STMicroelectronics.

Stock-based compensation included in the March quarter for fiscal Q4 was $5.4 million in total, versus $4.7 million in the immediately-prior quarter and $2.1 million for Q4 fiscal year 2013. Operating margin on a non-GAAP basis, excluding stock-based compensation, nonrecurring acquisition-related expenses and patent litigation legal expenses and settlement costs, was 13%. On a GAAP basis, operating margins were minus 7% this quarter, versus minus 20% in the immediately-prior quarter.

Our long-term non-GAAP operating margin target is in the mid- to high-20% range, but will primarily -- vary primarily based upon sales seasonality, average selling prices and the degree to which we manage manufacturing cost, including product yields, inventory-carrying values and operating expenses. I note that generally, with respect to our fiscal year 2015 expectations, we do expect to be able to achieve quarterly non-GAAP results within our operating margin targets.

On a non-GAAP basis, our income tax provision was 13% of income before tax for fiscal Q4. On a GAAP basis, our income tax provision was a benefit for the period. On a non-GAAP basis, net income for the fourth quarter of fiscal 2014 was $6 million, compared with net income of $13.9 million in the third quarter of 2014, and a net income of $15.6 million for the same period in fiscal year 2013.

For fiscal year 2014, non-GAAP basis net income was $52.3 million, compared with $56.4 million for fiscal year '13. On a GAAP basis, net income for the fourth quarter of fiscal year 2014 was a net loss of $5.6 million, compared with a net loss of $12.2 million in the third quarter of 2014, and a net income of $13.6 million for the same period in fiscal year 2013. For fiscal year 2014 GAAP basis, net income was $6.1 million, compared with $51.7 million in fiscal year 2013.

On a non-GAAP basis, EPS for the fourth quarter of fiscal 2014 was $0.07. Fully-diluted GAAP EPS was a loss of $0.06 for Q4 fiscal year 2014 based upon a fully-diluted share count of 87.7 million. For fiscal year 2014, non-GAAP EPS was $0.58 and fully-diluted EPS on a GAAP basis was $0.07, based on fully-diluted shares of 89.9 million, as compared to the fiscal year 2013 non-GAAP EPS of $0.65 and GAAP EPS of $0.59.

The cash and investments balance decreased to $246 million in the fourth quarter of fiscal year 2014. Cash used in operations for the fourth quarter of fiscal year 2014 was $21.7 million, primarily due to working capital increases and payment of litigation settlement costs. Working capital increased primarily due to increased inventories resulting from ordering product and managing capacity for significant increases and projected customer demand for our 6-axis motion sensor products and slightly increased receivables. Our net days sales outstanding were 56 days, up slightly from 51 days in the prior quarter, due primarily to the timing of customer shipments. As of the end of Q4 2014, our total inventory stood at $73 million, versus $58 million at the end of the prior quarter.

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

Behrooz Abdi

Turning our attention to the fiscal first quarter, we're excited to be entering a period of growth, especially in the second half of the fiscal year, that will not only transition the company to a higher level of revenue and market share, but also bring about greater customer diversification and scale. We expect volume shipments of our 6-axis MotionTracking SoCs to existing and new customers to contribute to the majority of this growth.

In the current quarter, we expect to see our 6-axis MotionTracking SoC product line continue to comprise more than 70% of our unit and revenue shipments, with our second-generation 6-axis MotionTracking SoCs, MPU-6500 and MPU-6515, making up the majority of the shipments. As articulated in the past, MPU-6515 will help us capture additional value by performing sensor fusion and calibration, as well as other algorithms often tailored to Android and customer applications.

We always -- we also look forward to ramping into production several of our third-generation ultra low-power MotionTracking SoCs, including one that enables always-on MotionTracking features with self-calibration and integrated sensor fusion. We're excited about the rapid adoption of these SoCs at existing customers, as well as at several new customers where we previously had no content. In addition to increasing market share, we're also encouraged by several other market and product dynamics that should contribute to our growth over the next several quarters. For example, in China, where the attach rate of gyros continues to rise in mid- and high-end smartphones, OEMs are looking to differentiate their products in not only in the domestic market, but also global market as well, through features such as always-on activity tracking, improved camera experience and location-based services.

These dynamics, along with the need for shorter time to market, are in the sweet spot of our higher-value MotionTracking SoCs and OIS gyros in this key market. With the wider acceptance of wearable devices, the second-generation of OEM products is evolving beyond simple pedometers and step counters to always-on activity tracking devices that require always-on gyros for precision. We're excited about this trend, as our very low-power 6-axis and 9-axis SoCs, along with our proprietary automatic activity recognition software, are uniquely suited for this growing market. Our solutions are already designed into a number of OEM products and we expect to ramp to production at multiple customers over the course of the fiscal year.

In the fiscal year 2015, we look forward to leveraging our additional scale towards improving our operating margin, while continuing to invest in differentiated R&D. Our strategy of system-level hardware and software innovation has been validated as we capture additional value for enabling lower system power, increase in performance and shorter time to market for our customers. Our most recent motion and audio roadmap enables a new generation of always-on, context-aware devices and applications and positions us very well for the coming year of the "Internet of Everything" in motion.

At this point, I will turn the call back over to Alan to discuss our financial outlook for the first 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 our fiscal year 2015. As you heard from us before, our markets -- our end markets are seasonally slower during the first half of the calendar year and particularly in the consumer electronics, gaming and tablet segments. As such, our fiscal Q4 ending March is generally our slowest revenue quarter, with revenue opportunities seasonally improving in the quarters ended June, September and December. 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 it -- we see this progress at a number of major customers, including some representing new sizable market share gains and additionally, some new major customers in China, and we believe our product strength at all of these customers offers an important opportunity to continue our revenue growth in fiscal periods beyond the current year.

We expect fiscal year '15 Q1 revenue to be in a range of $63 million to $66 million. To support this Q1 fiscal year '15 revenue outlook, we currently have backlog and customer forecast product usage 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, will be in the 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.

Additionally, we expect LG and Xiaomi to represent 10% customers in the June quarter. As mentioned before on this call, we also have broader opportunities at new and existing mobile customers, some of which 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 microphones and optical image stabilization, to contribute to revenue growth, albeit with somewhat uncertain timing.

In fiscal Q1 of 2015, product mix this quarter is expected to continue to favor our highest-volume mobile customers, and we should generate a gross margin in line with recent fiscal 2014 levels. We believe that on a GAAP basis, our Q1 fiscal year '15 gross margin will be 49%, reflecting primarily the impact of additional cost of purchase accounting for intangibles acquired from Analog Devices, and that on a non-GAAP basis, Q1 fiscal year '15 gross margin can be in a range around 51%. In future quarters, lower cost of products, additional production volumes and improving product yield can have a favorable impact on our gross margin.

In Q1, on a non-GAAP basis, we expect operating expenses of $23.8 million, made up of $14.9 million for R&D and $8.9 million for SG&A. On a GAAP basis, we expect operating expenses to be approximately $30 million, made up of $17.8 million for R&D and $12.6 million for SG&A. We expect a current quarter operating margin of approximately 14% on a non-GAAP basis and in a potential range around 1% on a GAAP basis.

We expect the fully-diluted share count of approximately 91.3 million shares. We expect the non-GAAP tax rate of approximately 13%, and therefore earnings per share of approximately $0.07 to $0.08 per share on a non-GAAP basis, excluding litigation expenses, if any, acquisition-related expenses, convertible note accretion expense and stock compensation expense.

We expect the GAAP income tax rate in a range of 13% to 15%, and therefore GAAP basis net income per share of around a loss of $0.02 per share, primarily depending upon levels of revenue achieved.

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% or more 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 continue to believe that our fiscal year 2015, we are well-positioned to enjoy year-over-year revenue rate of growth of between 25% to 35%. This outlook opportunity includes incremental gyroscope-based market penetration and market share gains at high-end smartphone OEMs, generally consistent with prior year's experience, and excludes the potential for accelerated growth in new market opportunities discussed, such as audio, optical image stabilization and consumer electronics wearable devices.

With respect to our spending and margin opportunities for our fiscal year '15, we expect gross margins generally consistent with our recent past fiscal year 2014 on a non-GAAP basis and in a range around 50% on a GAAP basis.

For Q4 fiscal -- from Q4 fiscal 2014 levels, we expect modest increases in quarterly operating expenses, with full year R&D expenses in fiscal year '15 on a non-GAAP basis approximating a range around 17% of fiscal year 2015 sales, and SG&A on a non-GAAP basis approximating a range around 11% of fiscal year 2015 sales.

On a GAAP basis, we expect R&D expenses to approximate a range around 21% of fiscal year '15 sales, and SG&A on a non-GAAP basis approximating a range around 15% of 2015 sales.

With respect to estimated fiscal year 25% non-GAAP GAAP reconciling items, stock-based compensation is the largest difference between the measures, which is estimated at approximately $30 million. Convertible note accretion is approximately $8 million. Additionally, the amortization of purchased intangibles is expected to approximate $5 million. Other expenses are estimated to be approximately $500,000 per quarter on a non-GAAP basis and $2.4 million on a GAAP basis, which includes our convertible note accretion. For capital spending in fiscal year 2015, we expect investment primarily in property, plant and equipment of approximately $20 million.

For fiscal year 2015, we expect the fully-diluted share count of approximately 92 million shares. We expect a non-GAAP tax rate of approximately 15% and a full year GAAP tax rate of approximately 10%, and therefore earnings per share of approximately $0.70 to $0.75 per share on a non-GAAP basis. And on a GAAP basis, we expect earnings per share of approximately $0.30 to $0.35 per share, including such items as litigation expense, if any, acquisition-related expenses, convertible note accretion expense and stock compensation expense.

For those of you wishing to estimate our earnings before interest, taxes, depreciation and amortization, relevant estimates are: Interest including note accretion, $10 million; income taxes on a GAAP basis, $4.6 million; depreciation and amortization, $8.3 million; amortization of purchased intangibles, $5 million; and if relevant to some, stock compensation expense, $30 million.

That completes our remarks with respect to the 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

[Operator Instructions] So it looks like you have a question coming in from the line of Mark McKechnie with Evercore Partners.

Mark McKechnie - Evercore Partners Inc., Research Division

So Alan or Behrooz, if you could talk -- this June guidance seems a little light, relative to what I was looking. So it sounds like you're counting for the big customer ramps to start in September and December. But maybe you could tell us a little bit about what pushed out, if anything, relative to what were you thinking about in terms of a stronger June quarter?

Behrooz Abdi

Let me take a stab at it, and then Alan can jump in. As you know, our business, being seasonal, really, the strong quarters for us are September and December. Year-on-year, it's been that way. So I don't think that there's anything unusual in this regard that creates a different dynamic. Alan, if you want to chime in there?

Alan F. Krock

Sure. No, I mean, it is seasonally, the year builds as customers launch new products and new platforms. And certainly, there's a large seasonal gain, both in some of the historical business we've had and the expected launch in new important platforms in the September quarter.

Mark McKechnie - Evercore Partners Inc., Research Division

And how much variance do you see? It sounds like you're pretty well fully booked for June. But is there variance related to any major new product ramps that you're factoring into that near-term outlook?

Alan F. Krock

Near-term outlook would be based on a lot of the same historic dynamics, including some of the new product information that Behrooz mentioned in his call. So the rate at which customers purchase products for their platforms and their new platforms can have a significant percent -- impact on our own outlook, especially given that our largest customer is one of those new opportunities that Behrooz cited, in the Samsung Galaxy S5, and a lot of that opportunity is just depending on how fast they build their product.

Mark McKechnie - Evercore Partners Inc., Research Division

Got you. And then for China, it fell off as a top geography. I expected that in March, but do you expect China to contribute a much more meaningful piece in June? Or when does that start kicking in?

Alan F. Krock

Yes, on the outlook, given Samsung was cited as being a 10% customer, mid-30s percent of sales. The other 2 mentioned for 10% was LG and Xiaomi, expected to be 10%. So the rate at which the Chinese OEMs consume product and build product can be a little volatile between the quarters. So overreliance on any one particular platform is probably not overly-prudent. But yes, no, it -- we expect it to be, in aggregate, generally consistent in the mid-teens, high-teens percent of total sales, with the largest customer we have in the geography, Xiaomi, at 10% or plus.

Mark McKechnie - Evercore Partners Inc., Research Division

Got you. And then, this is the last one and I'll turn it over. But the 7-axis product, when do you expect that to start becoming meaningful in your revenue mix?

Behrooz Abdi

This is going to be more of a next year calendar year. We are starting to sample in the next couple of months, as we announced it back in MWC. We expected to sample in midyear this year, and we're on track for that. There's quite a bit of interest for that.

Operator

So it looks like you have another question coming from the line of John Vinh with Pacific Crest Securities.

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

Behrooz, you talked about kind of the inventory build for the year, I was wondering if you could talk about whether that inventory was mostly 6500 or 6515? And does that inventory build support your full year outlook of 25% to 35%? Or does that support a potential upside scenario to that?

Behrooz Abdi

At this point, it supports that range that we just talked about, 25% to 35%. And the nice thing about that product line is that the wafer at the die level is pretty much the same part. So really, what we do is enable features through programming for the 6515 that we normally would not enable on the 6500. So they're very close. It's towards the end of the process on the wafer, if there's any difference. And that's -- so we made it very fungible at that point.

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

Great. And then, my follow-up question is, can you talk about the progress that we've seen with OIS? It seems like we really haven't seen the kind of major adoption at the Tier 1 level on the OIS front. Can you talk about how you're looking at that trending into the back half of the year? And are there any sort of supplier capacity constraints that's limiting OIS adoption?

Behrooz Abdi

Well, the dynamics really hasn't changed. So this is not at all unexpected. Every time I've gotten that question, in terms of OIS adoption, I've always said that the Tier 1s will take more time, perhaps another year or 2 years, to adopt it. And that's exactly what we see. So more of Tier 2, Tier 3s, we are seeing wider adoption. We see quite a bit of adoption, not just in Korea, but also in China, companies that want to bring the camera experience as a differentiated experience. So that trend has continued, and there is going to be a lot more variety of products with OIS. But the Tier 1s, our expectation is -- my expectation at least, is that it will still be a, maybe towards the end of this year, best case.

Operator

So it looks like you have another question coming in from the line of Richard Shannon.

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

A couple of questions from me. First on inventories, following up on the last question here, was there any inventory build outside of 6-axis, like in 2 or 3 or anything like that? Or is it almost entirely in 6-axis?

Alan F. Krock

It's almost entirely in 6-axis, Richard. This is Alan speaking. And it's also an element of capacity management and so forth. And a lot of the existing product will be consumed and a lot of the products that were mentioned on this call. And then we also need capacity for additional new products later in the year, in relatively significant volumes. So it's both existing inventories for known customers, known products, and futures can be used for capacity for other opportunities.

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

Okay. Perfect. A couple more from me. When you talk about some of the upside scenarios here, I'm kind of curious what product categories would be the drivers of that would be, kind of your core market in phones and tablets or would it be in wearables, or any way you can kind of flesh that out, where the upside could come from, by category.

Behrooz Abdi

Sure, let me start out with that, and Alan can chime in. Most of that is in the 6-axis and in mobile. Wearable, we definitely see traction and we see a lot of product design, but we're very conservative and cautious as to the actual number of units, as everything else, at least this year, pales in comparison with the mobile unit. So most of it is in the 6-axis for mobile and tablets.

Alan F. Krock

Yes. I mean, generally, agreed. We talked a little bit about the growth outlook of 25% to 35% being tied to sort of the traditional growth and opportunities in gyroscope functions and market share gains at the high end that we've experienced historically continuing into the current year. And certainly, in those markets, the current technology, integrated technology, low power, best performance, high-gyro sensitivity, low-gyro noise and so forth, are very desirable attributes. And the new products that we have out there that are like that are largely 6-axis based, although there is the 2-axis products for optical image stabilization. They're also very important to us, but just weighting that, clearly, the market size of the smartphone market itself versus high percent growth off of small dollar gains in OIS, is likely to be the larger driver of the growth opportunity that we have.

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

Okay. Perfect. And one last question for me, guys, I'll jump out of line, in the category of wearables. Which of the general categories within wearables look more interesting in the near term? It seems like fitness has been more of a driver for you, but what are your thoughts about watches? Are you seeing any volume commitments by certain customers in that area? Just kind of general thoughts on that, please.

Behrooz Abdi

It is really watches and fitness. For example, in the area of watches, as we mentioned, the Samsung Gear 2 and Fit. So we see good traction in that area, good momentum and dynamics in that area. Fitness, though, is much faster-growing. There's a lot of customers, a lot more customers, a lot more fragmented. Helps us on the margins and pricing and the value that we get for that, with our activity tracking software. So that market, we see a lot more growth, at least in the next few quarters, than we see with the smart watches.

Operator

It looks like you got another question coming from the line of Mark Delaney with Goldman Sachs.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

I was first hoping you can elaborate a little bit more on the revenue outlook for fiscal '15. You mentioned having multiple opportunities and building inventories. I'm hoping you can help us understand the confidence and the timing and the magnitude of the revenue guidance and what could cause us to maybe be above the range or what can maybe cause it to be lower than what you guided it to?

Alan F. Krock

Okay. Well, I'll go back to sort of the framework we set out there, where the weighting is based on incremental gyroscope attach rates to the market being the lower. And historically, we've done well with market share gains in high-end smartphones and believe that those historical trends projected forward continue and that awaiting that, generally the -- or timing of that would be in the September timeframe, I think, is when seasonally there is some -- there is generally products that are launched in -- early in the year around Mobile World Congress and then, seasonally, new products appear in advance of the hol -- the timeframe events -- in advance of the holidays and the fall timeframe. And so those are the 2 periods where you can see some really nice growth. So sometime in the September timeframe and then some reasonable follow-through in December. So the second half of the year looking seasonally very strong relative to the first part.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Okay. And that makes sense. And maybe I heard incorrectly, but I think in the prepared comments, there was also the comment made the second half of the fiscal year would be strong and so obviously that includes March, which is normally a weaker quarter on a sequential basis seasonally. So maybe you can just help me contextualize the comment about September and December being typically the strongest quarters seasonally, with the comments about the back half of the fiscal year being a bigger opportunity.

Alan F. Krock

Yes, so I mean, being a March fiscal year end, our fiscal Q3, which is the September -- sorry, our fiscal, yes, Q3, which is the December quarter, would be amongst the strongest seasonally, with opportunities launching, beginning in the prior quarter. And then you're getting the full quarter of the new opportunities in calendar Q4.

Behrooz Abdi

Yes. One part of that comment is really, the comment that I made about the second half of the year, obviously, we have the seasonally strong December. And March, you're right, typically, it's seasonally weaker, but what offsets that for us this year is the market share gain. And in terms of market share, if you look at -- if you disregard the wearables and all the new opportunities that we're chasing and really focus on mobile, last year, in Android marketplace, our market share late in -- or early last year was -- fiscal year, was in the 20% to 25% overall. And of course, a part of that -- a big part of that was Samsung, Korea market. This year, going forward with the progress that we've made at Samsung and then you pile on that, the progress that China attach rates are making, we think that we'll be well north of that, just in the Android market. Now to the extent that we get opportunities outside of Android, that will be an upside into the, at least, the low end of the range. So just the Android part, and then with some of the opportunities that we have, should get us into the low end of the 25% and then in other opportunities, and to the extent that the adoption rate in China increases, that will take us towards the 30%, and other opportunities will take us higher.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Got it. So significant new customer wins in mobile devices outside of the Android ecosystem and outside of China, that would be an area -- an opportunity for revenue growth to be better than what you guided to in terms of the 25% to 35%?

Behrooz Abdi

Well, that will certainly clear the path to -- towards the upper range of the guidance that we've given and then maybe better, but that's at least -- it clears the path to that upper range.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Okay, and maybe you can help me understand the microphone acquisition that you guys, a little bit -- in a little bit more detail. How much of that acquisition was strategic, in terms of it gave you a better look, from an engineering and sales perspective, at a large customer that you've historically not sold motion sensors to, and how much of it was a financial decision, where you think there's opportunities to get the microphone designed into new customers and drive EPS at those customers?

Behrooz Abdi

Well, in my view, they go hand in hand. It was really -- we see market TAM very much expanded with the microphone. And there's not a whole lot of strong, high-performance microphone players out there. There's Knowles, of course, they're very good. But then, once you go below that, there's not a lot of players out there, and we saw that there's opportunity for the microphone itself in terms of the TAM. That's the financial part of it. In terms of the strategic part of it, we just see a lot of innovation that needs to come into that market and we believe that with the SoC part and system level knowledge that we have with audio and motion now, we can expand beyond that. And it wasn't necessarily focused on any one particular customer. Although we would go -- we are going after every customer, just like we do with motion, but it wasn't particularly that -- for that reason.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Got it. One last one for me, and I'll turn it over. On the gross margin, I understand that the product mix was a headwind this quarter and pricing is always challenging. Was there anything unusual with the pricing environment and anything that would make you think there is a change to the long-term gross margin potential of the company? Or is it just some nearer-term impacts that were headwinds?

Behrooz Abdi

The pricing environment has always been a challenge for us, for every -- anybody in the consumer market. So there wasn't anything unusual on this case. I think what we do see is that with the little bit of better mix that we have with our product, the investment we made in the R&D, does give us opportunities longer term to offset some of that with the additional content in terms of software algorithms. But without it, it would be the typical consumer price erosion. So I believe we have some opportunity there.

Operator

So it looks like your next question comes from the line of Tristan Gerra with Baird.

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

What was the mix of legacy products in the quarter for 6-axis? And what do you expect that mix to be in the June quarter? And also, if you could quantify the ASP discounts of the legacy product versus the one that you're currently ramping at Samsung?

Alan F. Krock

Sure. I think the legacy 6-axis product that Behrooz mentioned, the 6050, was about 15% of our total sales last quarter. Aggregate 6-axis sales was around 70%. So therefore, the difference was of the newer product. And with other information is wanted relative to the split of the 6-axis product, please, Tristan?

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

The discount at which the 6-axis ASP relative to the new one ramping at [indiscernible]?

Alan F. Krock

Yes, the pricing is a pricing based on the function of the product. The 6500, the newer product, is a product that is smaller and performs better than the 6050. So it's a 3x3-millimeter product versus the 6050, which is 4x4 millimeters. So it really is the fact that the other product is older and more expensive to manufacture, due to die size and other considerations, that gives us the better margin opportunity on the 6500 than the 6050.

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

Okay. And then, as a follow-up, how should we look at the mix of 7-axis, let's say, by end of this fiscal year and next year? In the past, the new products, or the higher integration level, has been an offset to ASPs. Obviously, you seem to have an opportunity at a new customer in the second half to further increase your mix of 6-axis. But beyond that, what is the concern potentially that the ramp of 7-axis isn't as fast as the transition from 3- to 6-axis and then creating potentially more ASP pressures in the future. If you could talk maybe about the ramp production rate that you expect for 7-axis?

Behrooz Abdi

Well, the 7-axis, we see it, as I said, in terms of the mix of revenue and shipments, more of a next year opportunity to become meaningful. The impact of 7-axis has -- the feature that really brings into the phone is mostly around navigation and context. And if you look at the phones out there, a lot of the smartphones today, a lot of the very high-end smartphones have a separate pressure sensor. And by integrating that, we obviously have opportunity to lower system costs and system power. So that's an opportunity for us, at least at that tier. And the more that context and activity tracking and navigation rolls into mid- to lower-tier products, that becomes more of an opportunity for us longer term. The other part of the content question that you asked is obviously this whole notion of sensor fusion and content in terms of the system level content. That is something that we are already seeing for products like the 6515. And the more that we're able to do that, and we are able to do that, that will also be another path for content for us. So it's not just purely sensor integration or additional sensor. We do see value with the fusion and calibration and some of the other features that we can enable, such as better camera experience and better navigation experience with the digital and algorithm design.

Operator

So it looks like you have another question, and that question comes from the line of Cody Acree with Ascendiant.

Cody G. Acree - Ascendiant Capital Markets LLC, Research Division

Maybe to go back to some couple of prior questions. We've seen some of the other component vendors in the wireless space, especially the smartphone space, see a bit different trajectory into the second quarter. Even some concerns that maybe that was pulling demand forward from the second half. You're seeing a bit different trajectory. Just a question as to your comfort of the visibility in the back half, definitely weighting a lot for September and December. And is that more seasonal trends or do you have a higher degree of visibility there?

Alan F. Krock

Cody, it's Alan. So generally, the seasonality in this business is relatively predictable. And we have a fairly high degree of confidence relative to certain smartphone opportunities and platforms and growth opportunities that exist for us there. Of course, things can change. So others and industry's perspectives can be considered, but we're very confident, generally, in our normal seasonal pattern and the historical trends of the past, in gaining market share and the timing of that, of being around new product launches and so forth. We've got 2, 3 years experience with this now. And so I think the confidence in projecting historical trends forward is fairly high.

Behrooz Abdi

Yes, certainly, in terms of design wins, we have good visibility, because anything that is going to ramp, any new product that will ramp in the September quarter, for the most part, they're in later stages of component selection and placement. And so we have good visibility into that. To the extent that, that will change would be more around their market dynamics, their market share, end market share and their success in the market, more than what we would do.

Cody G. Acree - Ascendiant Capital Markets LLC, Research Division

And then you mentioned in your prepared remarks and in the press release, that the inventory build and somewhat opportunistically, is from a cost structure standpoint. So as you ramp into the production in the second half of the year, what are your expectations for benefit to gross margins?

Alan F. Krock

Generally, I mean, the margins we expect are, as discussed, something consistent with the recent past. So I mean, the reductions we receive in manufacturing costs from our supply chain partners will offset -- or being mostly offset some of the ASP erosion we expect to see. So generally, we reasonably kind of expect things to match up and for margins to be mostly consistent. Higher volumes can drive higher margins. So as the volumes pick up, we think that the factor of spreading our fixed costs for some of our back-end test and calibration facility costs can have a favorable impact on margins. So overall, we expect margins generally consistent with where, what you've seen from us over the recent past.

Cody G. Acree - Ascendiant Capital Markets LLC, Research Division

And then lastly, on the wearable side, are you seeing any successes in wearables that may be opening doors for you into some of the smartphone market that you might have previously not been able to get into?

Behrooz Abdi

Well, typically, we get into the smartphone customers through the front door. So really, the wearable device is not necessarily a backdoor. Although with our size and power, it's more of a differentiator in that market. But the big guys, if they select you, they're usually looking at you through the front door. So it's not the reason to select us, on its path to eventually get there, but we certainly see more opportunity on the wearables, just because of the size, performance and some of the other things that we're doing in that market.

Operator

So it looks like you have another question coming from the line of Suji De Silva with Topeka.

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

For the flagship customers who are designing, are you still seeing holdouts for discrete sensors or are you seeing kind of everybody migrating towards integrated? Can the folks who are still using kind of discrete solutions hold out for multiple generations? What are you seeing in the designs you're approaching...?

Behrooz Abdi

What we see is it's getting much, much tougher for them to hold out. So for the most part, we see immigration or migration towards an integrated solution. Just -- there's just not enough size or battery power to accommodate discrete solutions. And there's good enough ecosystem around more integrated solution and the risk is much lower, that people are moving much more into that direction.

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

Okay. And I believe you guys introduced the 7-axis because -- correct me if I'm wrong, but the compass [ph] had some contact glitches [ph] with the magnetism? Is that being solved and giving opportunity to the 9-axis and 10-axis down the road?

Behrooz Abdi

Definitely, we have opportunity for that. Yes, we still sell 9-axis. And in fact, 9-axis is becoming more of a player in the wearable devices and it wasn't as much a technical issue as the customer's preference to move the magnet separately around the board in terms of placement. And in the wearable, there's just not enough -- there's not much board to move it around. So 9-axis, we're definitely getting much better traction in the wearable devices. But again, we downplay the wearables, just because the volumes, until the second generation of wearables come out and make it out there. We're excited, we do see the growth. In fact, our reference design and the product that we built around that in our reference design last quarter, we shipped even several hundred thousand units to a big data company in China. So they definitely like what we're doing. There is a lot more value that we bring in the wearable devices category, but we just downplay it right now until we see how the market shapes up.

Operator

It looks like that is all the questions we have for today. I'm going to go ahead and hand it back over to Behrooz Abdi, the President and CEO.

Behrooz Abdi

Well, thank you all for participating in our conference call. This quarter, we will be participating in the R.W. Baird Conference in Chicago and the Craig Hallum Conference in Minneapolis. We look forward to seeing many of you there. And as always, feel free to contact us if you would like to schedule a call or a meeting. And we look forward to speaking with you in the near future.

Operator

All right, so ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect. And everyone, have a great day.

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