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IPO Pick of the Week, August 8th - Based in Sunnyvale, California, InvenSense (NYSE:INVN) scheduled a $100 million IPO with a market capitalization of $751 million at a price range mid-point of $9.50 for Thursday, August 11, 2011. The full IPO calendar for the week of August 8 includes 12 scheduled IPOs trying to raise almost $2 billion.

SUMMARY - INVN has designed and developed the industry’s first integrated motion processing solution that enables a motion-based user interface for consumer electronics. INVN targets robust and growing markets including games, smart phones, smart TVs and tablets.

For the quarter ended June 2011 compared to the year earlier quarter, revenue was up 62% to $36 million, profits increased top $9 million from a loss of -$1.1 million, and gross margin was 58%, up from 46% for fiscal 2009 ended March 2009.

The net profit margin was an admirable but probably unsustainable 25%. Also, 64% of revenue for the June 2011 quarter came from four customers.

Nintendo Co. Limited (OTCPK:NTDOY) was INVN's largest customer in fiscal years 2009, 2010 and 2011, comprising 80%, 85% and 73% of net revenue, respectively. Nintendo accounted for only 14% of revenue for the June 2011 quarter.

INVN has made great strides in diversifying its customer base away from Nintendo. For the three months ended June 2011, three other customers accounted for 10% or more of INVN's net revenue: HTC (24%), LG Electronics (13%) and Quanta (13%).

OBSERVATIONS - INVN believes it is the pioneer and a global market leader in intelligent motion processing solutions. By attaching motion sensors, such as a three-axis gyroscope and a three-axis accelerometer, INVN enables the consumer electronic device's movement to be accurately tracked.

The gyroscope tracks the rotation of the device as it tilts forward or backward (pitch), turns from portrait to landscape (yaw) and twists from side to side (roll), while the accelerometer measures the linear movement of the device as it moves up or down (y-axis), left or right (x-axis) and toward or away from the user (z-axis).

INVN has 15 issued U.S. patents and two issued foreign patents, which will expire between October 2023 and December 2031, and 40 patent applications pending for examination in the United States Patent and Trademark Office

VALUATION - Annualizing the June 2011 quarter results, INVN expects to IPO at a 21 times P/E ratio. However, it’s hard to believe INVN can sustain a 25% after-tax profit margin.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing March 3 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

InvenSense

$751

5.2

21

4.7

4.7

13%

INVN Valuation Metrics

OVERVIEW - INVN’s single-chip MotionProcessor combines micro-electro-mechanical system, or MEMS, based motion sensors, such as accelerometers and gyroscopes, with mixed-signal integrated circuits (ICs) to deliver the world’s first integrated MotionProcessing solution.

BUSINESS - INVN believes it is the pioneer and a global market leader in intelligent motion processing solutions.

INVN defines motion processing as the ability to detect, measure, synthesize, analyze and digitize an object’s motion in three-dimensional space.

INVN has designed and developed the industry’s first integrated motion processing solution that enables a motion-based user interface for consumer electronics.

MOTION PROCESSING - By attaching motion sensors, such as a three-axis gyroscope and a three-axis accelerometer, the consumer electronic device's movement can be accurately tracked.

The gyroscope tracks the rotation of the device as it tilts forward or backward (pitch), turns from portrait to landscape (yaw) and twists from side to side (roll), while the accelerometer measures the linear movement of the device as it moves up or down (y-axis), left or right (x-axis) and toward or away from the user (z-axis).

MARKETS - INVN targets robust and growing markets, including games, smart phones, smart TVs and tablets. INVN’s solutions have broad applicability across consumer, industrial, military and other industry verticals.

Specifically, INVN currently targets consumer electronics within a variety of end markets that the company believes demand a more intuitive and immersive user experience, such as console and portable video gaming devices, smart phones, tablet devices, digital still and video cameras, smart TVs (including digital set-top boxes, televisions and multi-media hard disk drives), 3D mice, navigation devices, toys, and health and fitness accessories.

FINANCIALS - As of July 3, 2011, (the end of INVN’s first quarter of fiscal year 2012), the company had shipped over 131 million units. Net revenue was $29.0 million, $79.6 million, $96.5 million and $35.6 million for fiscal years 2009, 2010 and 2011 and the three months ended July 3, 2011, respectively. Net income was $0.2 million, $15.1 million, $9.3 million and $9.0 million for these periods.

CUSTOMERS - INVN's customers consist of the world’s largest consumer electronics makers, including Acer Computer, HTC, LG Electronics, Nintendo, Research in Motion (RIMM), Samsung and Sharp. As of July 3, 2011, INVN had shipped products to more than 130 customers since its inception.

These customers are in multiple consumer segments, including console and portable video gaming devices, digital television and set-top box remote controls, smart phone and tablet devices, remote controlled toys and other household consumer and industrial devices.

CUSTOMER CONCENTRATION - Nintendo Co. Limited (OTCPK:NTDOY) was INVN's largest customer in fiscal years 2009, 2010 and 2011, comprising 80%, 85% and 73% of net revenue, respectively. Nintendo accounted for only 14% of revenue for the June 2011 quarter. INVN has made great strides in diversifying its customer base away from Nintendo.

Reported sales of the Wii declined from 20.5 million units for the 12 months ended March 31, 2010, to 15 million units for the 12 months ended March 31, 2011. Forecast sales of the Wii are reported to be approximately 13 million units for the 12 months ending March 31, 2012.

The Wii is in the fifth year of its console cycle, which refers to the life cycle of video game consoles, which INVN believes is typically about five years. Nintendo has announced its intention to introduce a successor to the Wii. If sales of the Wii console decline, our sales based on Wii MotionPlus accessories and Wii Remote Plus controllers included with new console sales will also decline.

For the three months ended July 3, 2011, four customers each accounted for 24%, 14%, 13% and 13% of total net revenue, or 64% total.

As of July 3, 2011, four customers accounted for 22%, 18%, 12% and 11% (the sum is 63%) of total accounts receivable.

As of June 27, 2010, one customer accounted for 83% of total accounts receivable.

As of April 3, 2011, three customers accounted for 43%, 16% and 16% of total accounts receivable. At March 28, 2010, three customers accounted for 59%, 17% and 14% of total accounts receivable.

INTELLECTUAL PROPERTY - INVN has 15 issued U.S. patents and two issued foreign patents, which will expire between October 2023 and December 2031, and 40 patent applications pending for examination in the United States Patent and Trademark Office and 25 international patent applications pending for examination in Europe, the Republic of Korea, Taiwan, China and Japan which will expire between October 2024 and July 2031.

All of the foreign issued patents and patent applications are related to U.S. issued patents and patent applications.

COMPETITION - INVN currently competes with the following: Analog Devices (NASDAQ:ADI), Epson Toyocom, Freescale Semiconductor (NYSE:FSL), Kionix, Inc. (a wholly owned subsidiary of Rohm Co., Ltd.), MEMSIC (NASDAQ:MEMS), Murata Manufacturing, Panasonic (PC), Robert Bosch GmbH, Sensor Dynamics (division of MXIM), Sony (NYSE:SNE), STMicroelectronics (NYSE:STM) and VTI Technologies, Inc.

Currently, STMicro is the primary competitor in the consumer motion sensing market. Over time, INVN expects continued competition from motion sensor competitors as well as competition from new entrants into the motion processing market.

USE OF PROCEEDS - INVN expects to net $90 million from its IPO, with proceeds allocated for working capital, capital expenditures and other general corporate purposes.

Source: IPO Pick of the Week: InvenSense