InvenSense (INVN) Behrooz L. Abdi on Q3 2016 Results - Earnings Call Transcript

| About: InvenSense (INVN)

InvenSense, Inc. (NYSE:INVN)

Q3 2016 Earnings Call

January 27, 2016 4:30 pm ET

Executives

Leslie K. Green - Principal, Green Communications Consulting LLC

Mark P. Dentinger - Chief Financial Officer & Vice President

Behrooz L. Abdi - President, Chief Executive Officer & Director

Analysts

Suji DeSilva - Topeka Capital Markets

Matthew D. Ramsay - Canaccord Genuity, Inc.

Krishna Shankar - ROTH Capital Partners LLC

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Tristan Gerra - Robert W. Baird & Co., Inc. (Broker)

Theodore Joseph Moreau - Barrington Research Associates, Inc.

Jagadish Iyer - Redstone Technology Research

Operator

Good day, ladies and gentlemen, and welcome to the InvenSense, Inc. Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later there will a question-and-answer session, and instructions will follow at that time. As a reminder to our audience, this conference is being recorded.

Now I would like to turn the conference over to Leslie Green, Investor Relations with InvenSense. Please proceed.

Leslie K. Green - Principal, Green Communications Consulting LLC

Thank you, Brian, and good afternoon everyone, and welcome to all. I'd like to begin our call 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 the 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, inventories, expense or other financial items discussed in this conference call, including the state of our customer design pipeline, our strategy and business focus, and the potential for retention, loss or gains in our share of various product categories and segments.

Investors are cautioned that all forward-looking statements involve risks and uncertainty that can cause actual results to differ from those currently anticipated due to a number of factors. We encourage you to review the cautionary statements and risk factors contained in today's earnings release and in our Annual Report on Form 10-K for the year ended March 30, 2015, subsequent quarterly reports on Form 10-Q, recent current reports on Form 8-K, and other 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 any obligation to update its forward-looking statements to reflect future events or circumstances.

With that, let me introduce Mark Dentinger, InvenSense's Chief Financial Officer. Mark?

Mark P. Dentinger - Chief Financial Officer & Vice President

Thanks, Leslie. I'll start with comments on our Q3 performance, and then I'll turn it over to Behrooz for his thoughts on the quarter and a business update. Finally, I'll conclude our prepared remarks with guidance for Q4.

Most of my commentary on our income statement will refer to our non-GAAP presentation. The balance sheet and cash flow data presented and discussed are in GAAP format only. There was a $0.16 per share after-tax difference between our GAAP and non-GAAP operating results this quarter. The difference consisted of $0.12 for the after-tax effect of our normal recurring reconciling items, including removing stock-based compensation, accreting interest on our convertible notes, and amortization of intangibles from acquisitions from our GAAP results, and an additional $0.04 impact for the estimated difference between our GAAP and non-GAAP tax rate, as a result of updating our full-year GAAP tax rate estimates in Q3. A reconciliation is attached to our release and available on our website.

Total revenue for Q3 was $120 million, which represents a 7% sequential increase from last quarter and a 4% increase over the same quarter a year ago. Our Q3 versus Q2 revenue breakdown by market segment was as follows. Smartphones and tablets were 65% of total revenue in Q3, up from 62% in Q2; Optical Image Stabilization was 14% in Q3, down from 18% in Q2; and all other segments, including IoT, were 21% in Q3, up from 20% in Q2.

There were two customers who individually accounted for more than 10% of our sales in Q3, and those customers represented 47% and 13% of Q3 revenue. There were two 10%-plus customers in Q2, and individually they contributed 34% and 19% of our Q2 revenue.

Geographically, based upon the headquarters of our end customers, Q3 versus Q2 revenue breakdown was as follows. The U.S. was 51% of revenue in Q3, up from 38% in Q2; Korea was 16% in Q3, down from 22% in Q2; China was 22% in Q3, down slightly from 23% in Q2; Japan was 5% in Q3, down from 7% in Q2; Taiwan was 4% this quarter, down from 7% last quarter; and the rest of the world was 2% in Q3 versus 3% in Q2.

In Q3, our non-GAAP cost of revenue was $67.4 million, resulting in non-GAAP gross profit of $52.6 million or a 44% non-GAAP gross margin. This compares to a $49.4 million in gross profit and a 44% gross margin in Q2. Non-GAAP operating expenses for Q3 were $32.3 million, up slightly from what we spent in Q2. Research and development expenses were $22.2 million this quarter, and SG&A expenses were $10.1 million.

Our non-GAAP tax rate for Q3 was 14%, even with Q2. Non-GAAP EPS was $0.18 in Q3, compared with $0.16 in Q2. The average shares outstanding for Q3 were 92.9 million.

On the balance sheet, we ended the quarter with $297 million in cash and investments. During Q3, we generated about $27 million in cash flow from operations, versus the $34 million we generated in Q2. The Q3 cash flow included an $11.5 million payment for the cross-license arrangement we announced in Q1. We also spent about $2 million on capital investments in Q3. DSOs were 32 days in Q3 versus 41 days in Q2. Net inventories at $62 million in Q3 were flat with the end of Q2, and inventory turnover based upon GAAP cost of revenue was 4.6 turns this quarter versus 4.2 turns in Q2.

Total head count increased by 4 in Q3, and we ended the quarter was 671 employees. We expect our head count to remain about flat during Q4. In early Q4 we acquired certain assets of a company for about $8 million in cash and consideration. The acquired assets complement our sensor-assisted navigation technology.

Now let me turn the call over to Behrooz for his thoughts on the quarter. Behrooz?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Thank you, Mark. Amidst the backdrop of a tumultuous business and financial macro-economic environment, InvenSense posted a solid quarter with record-setting revenue. We maintained careful adherence to our business model, while continuing a rapid pace of innovation across our product portfolio. We also executed well to our plan of diversification, growing our revenues and product offerings in a wide range of Internet of Things or IOT applications and services, while continuing to drive our strategic value and competitive differentiation within our mobile customer base.

In the past several quarters we have intensified our focus on sensor-based use cases, such as images stabilization and navigation, that are visible to end users and drive higher-value hardware and software integration. These investments not only have the potential to add content in mobile, they also allow us to scale across many IoT devices. While we will remain selective in competing for lower value commodity sockets, we believe that our strategy, coupled with continued product cost reductions will lead to improved gross margins and long-term growth.

Starting with image stabilization, we're excited by the interest from OEMs worldwide in offering a high-quality imaging experience to the end user, both for the mobile and the IoT markets. Our solution for discrete modules provides the highest performance in the industry today. Building upon our leadership, we were pleased to announce a new imaging optimized gyro at the Consumer Electronics Show this year that sets the standard for performance and also offers an industry-leading 0.5 mm height, enabling thinner camera modules for a new generation of smartphones and IoT devices.

We're also excited by the continued trend in the adoption of multiple and higher performance cameras in smartphones, which validates our strategy in driving integrated image stabilization, both OIS and EIS, as a key use case for current and future mainboard motion tracking SoCs. We believe that our integrated EIS capability will expand our TAM in the mobile segment, as our unique combination of gyros and software enable cost- and power-efficient video stabilization across a larger percentage of smartphones. We believe that enabling both EIS and OIS will open up additional TAM across a variety of imaging-focused applications such as drones, security systems, automotive and industrial applications.

Similarly, we believe that navigation will also be a major driver for sensor adoption in the coming years, and we have established InvenSense as a leader in the field. Our sensor-assisted navigation solution offers significant advantages in power efficiency, continuous availability, accuracy, and the provision of actionable data when paired with traditional location technologies. We are now seeing the early evidence of its compelling value proposition with leading customers.

For example, InvenSense Positioning Library, or IPL, software has been licensed by Huawei for incorporation into the high-silicon Kirin 950 mobile application processor platforms for its recently launched Mate 8 smartphone. We are excited that one focus on Huawei's considerable Mate 8 advertising campaign has been on providing enhanced accuracy and better location-based power consumption.

We look forward to driving the proliferation of this key feature across other platforms at this top-tier OEM, as well as other OEMs. Similar to the rise in OIS adoption, we believe that sensor-assisted navigation will ultimately be driven by end user expectations, both indoors and outdoors, for better navigation experience and power profile than what is currently enabled by GNSS technology alone.

In addition, where IPL enabled navigation capabilities through OEMs at the device level, our Coursa sensor platform provides navigation capabilities through applications that work with the existing motion sensor in an end user's device. During the third quarter we announced Coursa Sports, our first sensor-based cloud-based Software-as-a-Service business tracking platform for mobile and wearable application developers, comprised of an SDK for integration into a mobile application and a cloud server. The platform is designed to provide more accurate and always available speed, distance and route tracking, with up to 50% reduction in power consumption compared with GNSS alone.

In addition, earlier this month we announced Coursa Retail, a shopper location analytic and retargeting service for brick-and-mortar retailers that enables actionable shopper behavior insights that, for the most part, only online retail channels can track today. Coursa Retail integrates into a retailer's mobile application – customer application and uses existing motion-tracking sensors in shoppers' smartphones. It delivers unique insights into individual and aggregated shopper behavior in stores by accurately recording and tracking the shopper's path and dwell time at all points in a retail store.

Though the overall mobile device market is likely to face headwinds in the near term, we believe that our position in the market remains solid. We are pleased with our ongoing relationship with our largest customer, and continue to diversify our presence within its product portfolio. We view this as a multi-year, multi-generational relationship of mutual value. In addition, contribution from our second largest customer came in in line with our expectations given current market dynamics, as well as our previously stated share expectations within current and upcoming platforms. Engagement continues to be positive, and though we expect to see a decline in this customer's year-over-year revenue contribution in FY 2017, we are optimistic about future opportunities.

Turning to China, we continue to drive strong competitive positioning across all of the key Chinese OEMs. These OEMs are raising the level of sophistication and performance in their flagship devices in order to compete more broadly in the global market, and value the software-enabled features and quick time to market that our solutions can enable.

Our design win portfolio at mobile is growing steadily, including exciting new wins in images stabilization and location. We are also very pleased to announce that we have been awarded our first win for a high-end microphone with a Chinese handset manufacturer. This is significant because we believe that it is the beginning of a trend towards the adoption of high-end audio capability in the mobile market, where historically OEMs have not perceived a marketable value for a differentiated audio experience. While this first win is with a smaller high-end brand, we believe that we will see increasing opportunity globally for both our analog and digital microphones in the coming year.

In addition, we continue to amass design wins across the IOT landscape in China, including a number of wins for our FireFly product in wearables, drone and other categories. While the current macroeconomic challenges may persist in China in the coming quarters, we believe that we are well positioned in this strategic region. In fact, last quarter we announced two strategic distribution agreements which we believe will help accelerate and expand our footprint in China through value-added IOT system design and distribution partners.

Turning to our IOT business, once again we grew our revenue in this category both in absolute dollars and as a percentage of our record total revenue. The individual applications within IOT remain fragmented as many of these applications are just emerging. Among the most promising applications for InvenSense are wearables, drones, smart home, gaming/virtual reality, automotive and industrial.

While I won't go into any detail about any of them today, I do want to call out two categories in which we recently announced significant innovations. In the wearable category, our sweet spot remains health and fitness applications, where we have developed considerable expertise and intellectual property in monitoring and activity recognition. Our recent announcement at CES of a FireFly-class SoC platform delivering a total solution for wellness and fitness-centric wearables underscores our continued commitment to this important and growing market segment.

The complete wearable platform delivers low-power activity recognition such as walk, run, and bike, as well as higher-level features such as motion artifact correction for heart rate variation, floors climbed, sleep quality analysis, calorie counter, and speed and distance. We are already in the design-in phase with this platform at a number of OEMs.

Earlier this month we also launched our third-generation 9-axis device that performs 9-axis sensor fusion on chip. InvenSense continues to raise the bar in power, performance and integration with a device specially suited to wearables and other IoT applications, such as panoramic viewing for virtual reality and head-mounted displays and head tracking for smart glasses.

Drones also continue to be a key IoT revenue component, driven by worldwide demand and emerging use cases. We believe that approximately 25 million drones are sold annually, and that approximately 90% of those are for recreational use, which is our target market. The sophistication of consumer drones continue to increase, and in turn the additional sensor content required for new use cases presents an attractive opportunity. For example, in addition to the primary gyroscope used in flight stabilization, use cases such as image stabilization, both optical and electronic, as well as navigation, open up additional content opportunities.

At CEF this year we announced a new FireFly device that is tailored to the requirements of drones and head-mounted displays – devices. Our new temperature-stabilized module improves performance by eliminating temperature variation effects on the 6-axis motion sensor. It also includes our integrated OIS and EIS software capability to enable an optimal still and video imaging experience. Customer interest in this device has been very encouraging, and we expect to see revenue from it before the end of the calendar year.

And finally, turning to new sensors, with customer and investor interest in our disruptive fingerprint sensor continuing to grow, I wanted to give an update on our product development. Unlike the majority of fingerprint sensors on the market today that leverage capacitive technology, the InvenSense solution uses ultrasound technology to enable greater accuracy through deeper dermis layer scanning, even in the presence of moisture, oils and other contaminants. We are currently in trials to demonstrate its efficacy on their typical cell phone display glass thicknesses, and expect to be able to offer our technology as a product in the next fiscal year. For those of you attending Mobile World Congress in Barcelona next month, we'll have a demonstration available in our booth and we encourage you to come by and see it.

In closing, while both the business and financial markets have provided a harrowing backdrop of late, we continue to scale and make great progress on our strategy of market, sensor, and revenue diversification. Over the last several years we have invested in building a robust sensor platform that enables few high-value use cases for applications spanning a number of vertical markets, without significant incremental investment.

For example, the same image stabilization and navigation platforms that have allowed us to move up the value chain in mobile are highly relevant to other verticals such as wearables, drones and automotive. Furthermore, we have applied our fundamental MEMS technology and manufacturing platform towards building other MEMS sensors, such as microphone, environmental and fingerprint detection. Today our high-performance microphone products are allowing us to expand our TAM into new markets and customers previously unavailable to us. Many of these customers are excited and inspired by the possibility of fusing motion, audio, and other sensory inputs to create new and compelling product features in their segments.

Our FireFly product, empowered by the SensorStudio design suite, enables these customers to bring their differentiated products to market at an ever-increasing pace. Today more than 80% of our new design win pipeline is outside of mobile, giving us confidence that the mobile market will be one of many in which InvenSense can take a leadership position as the proliferation of sensors continue in the IoT era.

With that, I'll turn the call back to Mark for guidance for the fourth fiscal quarter of 2016. Mark?

Mark P. Dentinger - Chief Financial Officer & Vice President

Thank you, Behrooz. For Q4 fiscal 2016, we are estimating that total revenue will be within a range of $77 million to $83 million. Our expectations for non-GAAP gross margins in Q4 is 44% to 45%. Non-GAAP operating expenses are expected to increase by about $2 million, in part because our Q4 will be a 14-week quarter versus a 13-week quarter in Q3. As a result of the extra week we estimate that we'll have an additional $1.3 million in payroll expenses, which weren't part of Q3. Our non-GAAP net other expense and our tax rate should be about flat with Q3. Non-GAAP EPS should be within a range of breakeven to $0.02 per share this quarter, assuming an average share count of 93.5 million. If you are modeling us on a GAAP basis, our EPS should be between $0.09 and $0.11 loss in Q4.

This concludes our prepared remarks, and now I'll turn the call back over to our operator Brian for your questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Suji DeSilva with Topeka. Your line is now open. Please go ahead.

Suji DeSilva - Topeka Capital Markets

Hi guys. On the guidance here for the revenue, can you give us a sense of the breakdown here, maybe by smartphone, tablet versus OIS, which segments are getting impacted in the quarter, and whether it's seasonality or whether you are seeing specific content shifts? Thanks.

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, let me take them in reverse orders, Suji. There is certainly some seasonality associated with the guidance. There is also some of what you recently saw with some softness in the smartphone market. That's incorporated. And in terms of the distribution by markets, I would say the bad news is that that softness on the mobile market, we do see – offsetting at least partially is some continued strength in the IoT and other bucket that we talked about before. So I think when you look at it through that, you got softness on the mobile side, but some continuing strength on IoT and other, but net-net we are going to be down a little bit.

Suji DeSilva - Topeka Capital Markets

Okay, that helps, that helps. And then Mark, on the Korea segment with some of the share loss you had there, is that going to stabilize in the low to mid teens as a percent of revenue, or is there a way to think about where that levels off?

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah Suji, I think it goes a little bit lower than that in the near term. I think for – incorporated into our thought process for the Q4 guidances is that we think that that's a single digit – well, the G.O. (24:11) may be a little bit higher but our second largest customer, our traditional second largest customer is going to slip to single digits, and we think that that circumstance is probably with us for the next couple of quarters at least.

Suji DeSilva - Topeka Capital Markets

Great. And last question, gross margin, you're guiding it to improve slightly, but what are the puts and takes on gross margin as the next couple of quarters progress? Thanks.

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah. The puts and takes go as follows. Actually we are stabilizing on the mobile front, so a lot of the work that we put in in terms of improving product yields and what-not have contributed to stabilizing on the mobile front. And then this rotation into the IoT and other bucket is obviously going to give us a little bit of a tailwind now. We do expect that to continue into the next fiscal year. I don't know whether or not it's a quantum leap anytime soon, but I do think that we're going to see some slow and steady improvement in the margin profile in fiscal 2017.

Suji DeSilva - Topeka Capital Markets

Great. Thanks Mark, thanks Behrooz.

Operator

Thank you. Our next question comes from Matt Ramsay with Canaccord Genuity. Your line is now open, please go ahead.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Thank you very much, good afternoon, guys. I guess just to continue on with Suji's question in Korea with the large customer there, I guess do you have any, Behrooz, any forward visibility on how the competitive position may or may not be changing for generation-next products there? Obviously there's been some things you guys have disclosed about the products that are coming to launch here in the next few months at that customer, but beyond that, do you see the competitive position or maybe some of the investments that you've made in software platforms changing the dynamic at all there?

Behrooz L. Abdi - President, Chief Executive Officer & Director

That's a really good question. As we've been signaling in the past, and apparent – more recently as we've got more visibility with them, the 6-axis, the mainboard 6-axis has been challenged for quite a bit because of the lack of really a compelling use case. And that's someplace that we made a decision in the last few months that we weren't going to participate in that. OIS also has come under pressure, and we're going to be sharing that with a competitor.

And again, it's because of – this particular customer is going through their own competitive dynamics in the market right now. And quite frankly, their focus strategically has been on just a severe cost reduction at the expense of performance. So, on the OIS we are going to be sharing that, we'll have some share in that, but right now for our modeling purposes we have decided to not be very aggressive in terms of the share assumption there.

We do see that longer term, just like everything else that I've seen in this market in the last two decades, is that eventually as you start with new products and innovation, eventually it gives way to integration. So our strategy for the last two years in terms of IP has been to drive an integrated platform, for a couple of reasons. There's at least two cameras in the phone today, there might be more later, but we've figured that imaging experience continues to expand and improve, and we've made a strategic decision that we're going to continue to serve the discrete market, and a lot of areas we continue to have a leadership position there, but we also want to drive a fully integrated solution between EIS, OIS and mainboard 6-axis, and that's where we believe that the real opportunity in the future we're discussing with everybody else. So stay tuned for that, but we are optimistic about that in the future.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Thank you for the additional detail there. That's helpful. I wanted to switch gears a second and ask you, Behrooz, about the software or Platform-as-a-Service offering that you guys are talking about in the navigation space. Any details you can give about potential monetization metrics, whether that's something that's applicable to only some of the IoT markets or if that's a smartphone play as well, and then how you figure that will I guess pair in the market or compete potentially in the market with some of the hardware vendors that have their own databases for navigation and fitness data, et cetera? So any color there would be helpful. Thank you.

Behrooz L. Abdi - President, Chief Executive Officer & Director

Sure, sure. In terms of the – there's two brands that we – let me step back a little bit. We've taken the use case, which is navigation, and we've decided that there is a lot of IP that we have here that we have been applying to the device level, at – the software that we've been applying to the device level to decycle the GPS, to save battery and things like that. We made a decision at some point that there's really no reason that cannot be just a software play at a much higher level for devices that have existing sensor solutions. And inertial – as long as there's an inertial sensor and there's a gyro, we can apply that same technology at a much higher level at the application layer.

So that's where we made the decision to go into two areas, one is around fitness and wearables and smartphones, and that is around fitness, where we go to the app layers, and even though there might be hardware in the chip – in the phone that some of the OEMs might have put some features in there, you see there's a lot of apps that have additional value, especially around calorie count and route and distance, that they want to bring in. And that's a feature that we can bring in at a much higher level, and at a software application layer. And we don't do the app, but we'll be the engine and a feature that they can plug in and really get value for distance and route.

The other one is around retail. And again, indoor location we can do with our IP, we can do indoor location and traffic, people moving around, consumer traffic around the aisles and things like that, without the use of infrastructure. And again, that's an IP that we're bringing into the mobile phone at a much higher level, at the application layer, at the retailer application. These are all sensor-based so we're not really going too far away from our roots and from our knowledge, but we understand sensors better than anybody else at that layer and the use case, and we are applying that.

In terms of monetization, monetization will be at the application layer or at the – with retailers will be with their applications, so it will be various levels of monetization that we've have been talking to the customers, either licensing, royalty-based, click-based, so there's many different ways that we can monetize that, and we've started those dialogues now, and so stay tuned for that; in the future we'll be able to share a little bit more.

Matthew D. Ramsay - Canaccord Genuity, Inc.

All right, thank you. And then just one for Mark really quickly. The guidance for the March quarter is slightly above breakeven on a non-GAAP basis. How are you thinking about managing investment levels, I guess, during this current I guess tumultuous period in the smartphone market, regardless of customers there? Thanks.

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, a fair question Matt. I can speak not only for next quarter but I think we can speak a little bit with the mindset as we going into fiscal 2017. We're – right now we have been signaling pretty consistently both on these calls and in investor conference work that we think we're fairly fully invested right now, from a head count and a resource deployment position. There is some possibility that we will have to move resources around a little bit as we move through the year, depending on – as Behrooz described, we've got a number of initiatives going here, and I am sure as some pronounce – create opportunities to invest further and get quicker returns, we might move resources around.

But our mind set right now is that our operating expense levels as they currently exist are pretty well set for next year, and I would anticipate that may be fiscal 2017 is a slight up on the OpEx side of the equation. So we're fully invested. We are obviously – in contemplating that, you can see we've been fairly disciplined on the earnings for the last year, that we think that we're in a relatively short period of time here in which we are dealing with a market correction in mobile and maybe a little bit of channel inventory clear at one or two customers. But with that in mind, over the next two quarters if that circumstance clears and we continue to show strength and growth in the IoT and other, I think that the leverage in the model will return quickly.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Thank you very much guys, good luck.

Operator

Thank you. Our next question comes from Krishna Shankar with Roth Capital. Your line is now open. Please go ahead.

Krishna Shankar - ROTH Capital Partners LLC

Yes, Behrooz, the March quarter, this seasonal weakness here and obviously some weakness in China and some of your large customers – do you have new programs or design wins or anything that would suggest a robust recovery in the June quarter, or do you see this sort of period of softness in smartphones extending for a couple of quarters?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Well in the total number, you got to keep in mind Suji, that when you have a large customer that fluctuates in their number quite a bit, it's anything else at least in the short term is not going to be as significant in terms of making up for that. But we are – to answer your question, it is a definite yes, we do have design wins.

And the design wins that we have that gives me encouraging sign for the future is in some of these, towards some of the initiatives that we announced, obviously with navigation we talked about a little bit at the OEM, as well as with some of the image stabilization, and including EIS and OIS that are coming in. And then the microphone, we're starting to see design win in mobile, as I alluded to, and we have bunch of other design wins that are in the works.

And in the outside of the mobile market, we have a pretty healthy pipeline actually, with FireFly, a lot of design wins with microphone outside of mobile. I didn't really go into it too much because, again, short term with mobile with a large customer fluctuation it's hard to make up for that short-term, but definitely if there's any inventory correction that clears up this quarter, I think June quarter we're hopeful.

Krishna Shankar - ROTH Capital Partners LLC

And then with respect to your large customer, is there the potential to continue getting market share there, or new applications and new sockets within that large customer?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Well within the past year we've continued to proliferate into multiple form factors, and our 6-axis has become to some level the de facto and the only one in multiple platforms. So that's been a continuing trend. I sure hope that we can continue to see that happen as they come up with new products. We do have other opportunities, not just at that customer but with other customers also, around audio, that we're always hopeful but we're not prepared to talk to at this time.

Krishna Shankar - ROTH Capital Partners LLC

Great. Thank you.

Behrooz L. Abdi - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open. Please go ahead.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Behrooz and Mark, thanks for taking my questions. I guess just two from me. First one on microphones. As I recall you bought that, the basis of that business a bit over two years ago, and it seems like this is maybe the first time where you've really called out some new design wins here, I think one was with China specifically. Can you help us understand why it's taken so long thus far, and what's changed things, and what kind of progress you see either in mobile and/or the IoT segment, which one is relatively more exciting for you going forward?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Well, actually they're both pretty exciting. In the mobile side, one of the biggest challenges in the mobile side has been that the mobile guys have not seen a compelling value for high-performance microphones. If you recall, we bought it – when we bought this technology and we bought the product line, we were really focused on the high performance. We didn't want to go into the commodity microphone. And that high-performance microphone has taken a little bit of time to come in.

And now we're starting to see that, especially as the market matures, as the smartphone market matures, people are looking for more differentiation, and audio is one. So we definitely see more of that trend. We are going to see some more digital microphones coming into the phones. So that's – it's a combination of us taking the technology that we acquired from AVI and creating products around it we announced in the last year, and then just going through that cycle with the mobile guys.

On the IoT side, actually we have had, ever since – since day one, actually, when we acquired that technology, we've had design wins, but IoT, some of these markets take about a two-year, three-year cycle, whether it's the automotive or industrial or enterprise. So for example, we have one customer that uses six or seven microphones in one device, and they've been at it for the last two years. It's not because they are not good at designing microphones, it's just it's a very high-end product. Volumes will be, it's not going to be comparable to mobile, but the content dollar and the margins are much more exciting there. And we have a bunch of customers like that, and it just takes time. As you know, IoT, just for example automotive and industrial, it just takes time, and that's we haven't really called those out in the past as much. Now we are seeing more and more of those coming towards closer to production and we are getting more excited about it.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. Great to see you, just a quick follow-up on the topic of microphones. Is this something where you have visibility of that becoming, contributing 10% of sales within your visible timeframe?

Behrooz L. Abdi - President, Chief Executive Officer & Director

I think we could see that become, potentially in the next four quarters...

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, back half...

Behrooz L. Abdi - President, Chief Executive Officer & Director

Yeah back half...

Mark P. Dentinger - Chief Financial Officer & Vice President

Essentially the back half of fiscal 2017.

Behrooz L. Abdi - President, Chief Executive Officer & Director

And the reason for a little bit of a pause here is again mobile. You get one design win in mobile, and it will be just massive, and then so it's a, you know, it's a very binary, and we have a number of those activities going on. It's the same thing that we went through with OIS last year, and you guys used to ask the same question about OIS, and it was just that as adoption increases you get to that point of stability at a higher level of contribution at some point, but right now there's a number of opportunities that we're chasing.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay, great to hear. My last question here, you've talked about new types of technologies, and specifically called your fingerprint sensor product. If I heard you correctly, Behrooz, did you say that that's something you expect to come to market here in the next fiscal year, in fiscal 2017?

Behrooz L. Abdi - President, Chief Executive Officer & Director

That is correct, yet. We have a technology, what we did was we've done a prototype, which the basic element is done and we've been able to demonstrate the core technology going through glass and all that. And the electronics, some of the electronics, a lot of the electronics have been FPGA or discrete components, and really what we're going through is the execution to integrating the electronics, which is something that we know really well to do.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. And is that something you expect to come to market with as a premium for the pricing for the current generation type of fingerprint sensors, or how should we view that?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Perhaps a little bit to a premium. We are very cognizant of the cost structure, and obviously as the market goes up – grows, we see that the capacity of cost structure comes down and the market stabilizes to a different price point. So we are very cognizant of that. At the same time, we believe that with the ultrasonic there's system-level cost savings like you don't have to poke a hole in the glass, you don't have to have a guarding material sitting on top of the glass. So there are some of those that we're going through right now. So we haven't nail downed the total cost structure yet, but we are very, very cognizant of that. And, but we're excited that the technology has that capability, and we'll be able to get some premium for the performance and the additional authentication security that we can bring to the market.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay, great to hear. Look forward to watching more about that. Thanks a lot, guys. That's all the questions from me.

Mark P. Dentinger - Chief Financial Officer & Vice President

Thank you very much.

Operator

Thank you. Our next question comes from Tristan Gerra with Robert W. Baird. Your line is now open. Please go ahead.

Tristan Gerra - Robert W. Baird & Co., Inc. (Broker)

Hi, good afternoon. How should we look at the impact of the June quarter from the one week less, as you move back to a 13-week quarter in the June quarter, is that maybe 5% of revenue?

Mark P. Dentinger - Chief Financial Officer & Vice President

I think it's actually a little dangerous to try to correlate the revenue with the extra week. A lot of the selling gets done before even the quarter enters, that's – you're just really lining up the revenue and the shipment activity based upon the order activity that is built up previously. So it may sound a tad defensive, but I think that the revenue picture actually is unchanged because of an extra week, or even if we lost a week in the quarter. But the operating expenses, because you make payroll very, very linearly through the quarter, if you add a week you get that. So in the June quarter that will come out, obviously.

Tristan Gerra - Robert W. Baird & Co., Inc. (Broker)

Okay, and then at your Korean customer, would you characterize the share shift that you've described over the past couple of quarters pretty much completed, or is there another step down that you expect for the user interface gyro when the next model is coming over the new few months? Or is that already out with the existing models?

Behrooz L. Abdi - President, Chief Executive Officer & Director

I would say it's pretty much out with the exiting models. I think that if you look at – there's two flagship products that they have, and for the most part, one has come out now. There's another product out – probably be coming out in the mid to end of summer, and that's the release, that's the next one that we're going to be fighting for. But I would just characterize it as stabilized. In terms of revenue contribution from that customer, obviously there's a residual from the older platforms that will continue to ramp down. So my comment isn't necessarily correlated to the revenue, but certainly in terms of share contribution and all that, I would say we are stabilized.

Tristan Gerra - Robert W. Baird & Co., Inc. (Broker)

Okay. And then, you know, as you have been very successful at the large Tier 1 OEM, typically as years progress, there's basically for cost reduction, otherwise you could experience some margin contraction at the same customer. And I know that in the past you had regular cost-down architectures that you will talk about. Anything that you could share with us for this year, specifically on the 6-axis gyro?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Yeah, we have done the same thing actually this year in terms of cost down, both from a material cost down, dealing with our suppliers, as well as some architectural, so I think that trend will continue. We have, as I articulated in the past, I think we have at least another one or two nodes to go in that cycle, in the next couple years, so we're definitely on that path this year.

Tristan Gerra - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you.

Operator

Thank you. Our next question comes from Ted Moreau with Barrington Research. Your line is now open. Please go ahead.

Theodore Joseph Moreau - Barrington Research Associates, Inc.

Yes, thank you very much. Just curious, Behrooz, are you hearing any indication that smartphone manufacturers perhaps are thinking about designing in VCSEL technology into their smartphones, in order to handle gesture recognition capabilities? And if so, how would that impact your sensors business?

Behrooz L. Abdi - President, Chief Executive Officer & Director

Okay. What type of technology?

Theodore Joseph Moreau - Barrington Research Associates, Inc.

VCSEL laser technology, for gesture recognition.

Behrooz L. Abdi - President, Chief Executive Officer & Director

Oh, I see, I see. Yeah, we have, but that definitely will not – really it's immaterial to the type of things that we do, because the level of accuracy that we have, especially when it relates to some of the other areas such as navigation, image stabilization, I think that you're going to see continuing adoption and continuing attach rate of the gyro. Gyro is really a core component.

What we actually see is that, depending on the customer of course, we'll be talking about some of the costumer dynamics, but what we see is the gyro performance and accelerometer performance is getting pushed to a higher level for those OEMs who are really keen on getting better indoor navigation and also bringing image stabilization – a better image stabilization experience to the mainboard. Especially as you go to higher density cameras like 4-K or HD, high definition, I think the level of performance on the gyro has actually grown higher.

Theodore Joseph Moreau - Barrington Research Associates, Inc.

That's helpful. So thanks for that. And then on your top customer, do you anticipate similar content in any upcoming potentially smaller smartphone versions that we might see in the coming months?

Behrooz L. Abdi - President, Chief Executive Officer & Director

From our side, we see that the content obviously doesn't change for us depending on the size of the form factor. So we see the same content and the same contribution from our side. We haven't seen indication to anything else yet.

Theodore Joseph Moreau - Barrington Research Associates, Inc.

Okay, good to hear. Thank you so much.

Operator

Thank you. Our next question comes from Jagadish Iyer with Redstone Technology. Your line is now open. Please go ahead.

Jagadish Iyer - Redstone Technology Research

Yeah, thanks for taking my question. Mark, I want to drill down a little bit on the OIS. If I remember correctly, when we spoke last time on the call you were a little bit more optimistic on the OIS. Now that you say about the share, kind of sharing the market share with another competitor, I was wondering what kind of threats do you see with OIS, particularly amongst Chinese handset markers as we look at next, say, couple of quarters? And then I have follow-up.

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, a fair question. We think right now most of the OIS pressure is coming from the Tier 1 customer that we discussed. And that is a big piece of the profile of OIS, but we think for the time being that that is somewhat isolated on the module-based solution. In addition, Jagadish, as you know, we're also with the introduction of our integrated solution, with the 6-axis product, we do believe that we've got an offering coming out that's going to be compelling, particularly to the Chinese handset manufactures. And that would allow us to get expand our footprint with both OIS and EIS, as well as the 6-axis motion, and our thought process is as that product comes out and is sticking, is well adopted, that that is where we will likely see some growth in the OIS profile.

Jagadish Iyer - Redstone Technology Research

And how much does that increase the dollar content, or any percentage that you can think of, please?

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, it's a little to say because what would happen with an integrated solution that comes out is that you'd have to allocate the dollar content, obviously, between let's call it the classic 6-axis motion and that piece of the content that is dedicated to EIS and OIS, and let's call it the advance functionality. And we haven't completely thought all of that through yet, because we are looking at this in sort of an aggregate at this point, but clearly there would be some contribution coming from that.

Jagadish Iyer - Redstone Technology Research

Okay. And a follow-up question, if I just look at your guidance and you look at it, it's down like say 33% quarter-over-quarter. Is business outside your North American customer down significantly, or is it just your North American customer being the main culprit here for your guidance here?

Mark P. Dentinger - Chief Financial Officer & Vice President

Yeah, actually the North American customer – I'm using my words here and I'll let Behrooz chime in – the circumstance at the North American customer seemed quite conventional with respect to, there's typically a step down quarter-on-quarter, and maybe there's a little bit of channel clearing that's got to go on in terms of the correction with the announcements of the last week or so. I think basically that that circumstance is well understood.

The other piece of the step down, however, is that we are lighter in Korea than we have been historically, and that's where the backfill has to come in. The good news is, is that we do have some backfill coming in from the IOT and other bucket. And I think that the circumstances in the rest of the world, particularly with respect to China, that looks very, very conventional in terms of what we would see in this circumstance, and I wouldn't exchange much – I wouldn't expect much of a change in the profile there.

Jagadish Iyer - Redstone Technology Research

Okay. Thank you.

Operator

Thank you. This concludes our question-answer session. I would now like to turn the call back to Behrooz Abdi, President and CEO, for closing remarks.

Behrooz L. Abdi - President, Chief Executive Officer & Director

Well, thank you for participating in our conference call. This quarter, we'll be presenting at the Morgan Stanley TMT Conference in San Francisco, and also the 28th Annual Roth Capital Conference in Dana Point and the Northland Capital Growth Conference in New York. I encourage you to check the Investor Relations section of our website for details. As always, feel free to contact us if you would to schedule a call or a meeting. We look forward to speaking with you in the future, and I thank you again.

Operator

Ladies and gentleman, this does conclude today's program and you may all disconnect. Everybody have a wonderful day.

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