InvenSense IPO: Recommend On Strong First Half FY12

Nov.16.11 | About: InvenSense (INVN)

This analysis of InvenSense was provided to TradingIPOs subscribers in advance of its IPO. On November 15 the company announced that its initial public offering of 10 million shares was priced at $7.50 per share.

InvenSense (NYSE:INVN) plans on offering 11.5 million shares at a range of $7-8.50 Insiders will be selling all of the over-allotments 1.5 million shares. Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) are leading the deal, Oppenheimer, Piper, Baird and ThinkEquity are co-managing. Post-IPO, INVN will have 79.7 million shares outstanding for a market cap of $618 on a pricing of $7.75. IPO proceeds will be used for general corporate purposes.

Three venture firms will separately own 45% of INVN post-IPO. Qualcomm (NASDAQ:QCOM) will own just over 5%.

From the prospectus: "We are the pioneer and a global market leader in intelligent motion processing solutions."

Motion processing - The ability to detect, measure, synthesize, analyze and digitize an object’s motion in three-dimensional space. INVN pioneered the world's first integrated MotionProcessing solution. The company uses a fabless model. INVN does not manufacture their own processors.

The company's primary end market is consumer electronics. End products include console and portable video gaming devices, smartphones, tablet devices, digital still and video cameras, smart TVs, 3D mice, navigation devices, toys, and health and fitness accessories.

Primary uses to date have been motion-based video games and user interfaces for smartphones. The bulk of revenues have been derived from placement in Wii MotionPlus and Wii Remote Plus controller. Recently INVN has begun seeing substantial revenues from handset makers as well. INVN has shipped 157 million units as of 10/2/11.

INVN's advantages: Patented integrated platform that simplify access to complex functionality demanded by end customers. Enhanced performance and reliability with a smaller form factor and lower cost saves customers time and expense.

Lots of techhead stuff in the prospectus. For our purposes, INVN pioneered digital motion processors and relies heavily on Nintendo's (OTCPK:NTDOY) WII for revenues. Nintendo's Wii controllers/motion pad accounted for 85% of 2010 revenues and 80% of 2009 revenues. There is an awful lot of risk in a tech IPO relying so heavily on one product for the bulk of revenues. To work longer term, INVN must expand their revenue, especially at a market cap that is approaching $1 billion by the time all the options eventually exercise. We've seen a few that have been able to do that, we've seen a number that crash and burn though when they've been unable to expand those revenues to other sources.

Risk - As noted above, the loss of Nintendo or not being able to add handset makers to help drive revenues. In the S-1, INVN notes: "Nintendo reduced its orders for our products below levels we had anticipated during fiscal years 2011 and 2010, which negatively impacted our net revenue."

Sales of Nintendo's WII were 20.5 million units for the 12 months ending 3/31/10, 15 million in the 3/31/11 year and are expected to be 13 million in the 3/31/12 year.

Note that INVN's processors are not incorporated into the Xbox or Playstation.

The company's primary competitor is STMicroelectronics (NYSE:STM). STM is a larger more diverse operation, so it's not a pure comparable.

Financials

$1.75 per share in cash post-IPO. The fiscal year ends 3/31 annually. FY '11 ended 3/31/11.

FY '11 (ending 3/31/11): After rapid growth in 2010, growth slowed in 2011. $96.5 million in revenues, just a 20% increase from FY '10. FY '10 did not see INVN increase their revenue base much past Nintendo. When you've got a $757 billion market cap of $96.5 revenue base, you better plan on growing those revenues swiftly. This is a potential big issue for INVN as the next generation Wii platform is not scheduled for launch for at least another year. Gross margins of 55% not overly impressive for a fabless processor operation. Operating margins of 22%. Plugging in taxes, net margins of 14%. EPS of $0.17.

FY '12 (ending 3/31/12) : Very strong first half for INVN. Most importantly, while the company grew revenues 73%+ year over year in the first half of the fiscal year, only 30% of those revenue were derived from Nintendo (down from 70%+). This is a promising sign.

$170 million in revenues, a strong 75% increase over a lackluster FY '11. Gross margins look to improve to 56%. Operating margin improvement to 33%. I can't stress enough how strong the first half of INVN's fiscal year has been. Due to tax loss carryforwards, the tax rate should be 25%. 25% net margins. EPS of $0.53. On a pricing of $7.75, INVN would trade 15 X's FY 2012 EPS.

Conclusion - Mid-term success of this IPO will be dependent on INVN's ability to attain new customer wins that result in significant revenues. Specifically INVN is targeting the handheld/tablet market. Some promising signs of this with the first half of FY '12.

Note that it appears INVN is making strong inroads into the handheld and tablet market. Samsung, LG and HTC combined have acounted for 35% of revenues. Through the first half of FY '12 at least, INVN has done a very sweet job of broadening their end market from 'just the Wii' and into handhelds.

This is a promising tech IPO with technology that could make it a nice long term winner. Emphasis on 'could'. Lot of risk here as noted, however INVN is showing nice signs of broadening customer base. First hald of FY '12 has been as strong as we've seen from a tech IPO in awhile. INVN followed a very strong first quarter with an even better 2nd fiscal Q. Coming just 15 X's FY '12 estimates with a 75% revenue growth rate, INVN is too cheap in range here. Strong recommend off blistering first half of FY '12.