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InvenSense, Inc. (NYSE:INVN)

F2Q12 Earnings Call

October 23, 2012 04:30 p.m. ET

Executives

Steve Nasiri – Chairman & CEO

Alan Krock – CFO

Analysts

Mark Delaney – Goldman Sachs

Krishna Shankar – Roth Capital

Jason Link – Fidelity Investments

Nick Clare – Robert W. Baird

Mark Mckechnie – Evercore Partners

Richard Shannon – Craig-Hallum Capital

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2013 InvenSense Earnings Conference Call. My name is Keith and I will be your operator for today. [Operator Instructions] With that I would now like to turn the conference over to your host for today Mr. Alan Krock, CFO, InvenSense. Please go ahead sir.

Alan Krock

Thank you operator. Good afternoon and welcome to all. I need to begin our call with a forward-looking statements, statements by management in this conference call that are not historical are forward-looking statements as determined to find in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can constitute projection of revenue, gross margins, expense or other financial items discussed during this conference call and the potential for continued technology leadership of InvenSense devices, design wins and potential design wins for consumer electronic and other customer products.

Investors are cautioned that all forward-looking statements during this call involve risks and uncertainties that can cause actual results to differ from those currently anticipated due to a number of factors including about limitation, current global economic conditions, customer business environment, customer inventory, customer inventory levels, vertical market integration, market acceptance to customer products, product introduction, schedules, the rate of growth of the company’s products, changes in the mix of our business between products as well as changes in economic conditions and other risk factors discussed in the documents filed by the company with the Securities and Exchange Commission, SEC from time to time.

Copies of InvenSense SEC filings are posted on the company’s website and are available from the company without charge. Forward-looking statements are made as of this date of this conference call and the company does not undertake any obligations to update its forward-looking statements to reflect future events or circumstances. With that introduction I will turn the call over now to Steve Nasiri, our Founder, Chairman and Chief Executive Officer.

Steve Nasiri

Thank you Alan, and good afternoon to everyone. Welcome to our fiscal 2013 second quarter call. We had another record quarter where we were able to deliver at mid-point of our stated guidance of $53 million to $57 million with revenue at $65.3 million. Our earnings per share of $0.16 exceeded our guidance of $0.15 per share. Our revenue grew 41% sequentially in September quarter with smartphones and tablets leading the growth, representing 63% of the total revenue.

Looking at our market, based on all of our ongoing customer engagements, we are very pleased by the rapid rate of adoption of motion interfaced functionality into many high-end smartphones and tablets, where we now are starting to see adoption into mid-range smartphones by a number of leading smartphone makers. We are also equally pleased with the rapid market adoption of our integrated 6-axis devices in most new design just coming to the market, such as Samsung Galaxy S3 LTE smartphone and Amazon Kindle Fire HD tablet.

We also see continuing trend in our gaming and smartTV market with customers expected to meet their initial forecast for current fiscal year. We are seeing the strong adoption of our motion tracking solution over our competitors and virtually all customers, due primarily to our higher performance, smaller size and power, and higher quality and reliability of our solution. We believe these are our key competitive advantages that will continue to fuel our growth into second half of our fiscal year ’13 and beyond.

In our previous calls we had discussed market opportunities for optical image stabilization in the issue of still cameras and camera modules for the smartphones. We are happy to report that we have already secured a number of measured design wins with PSP customers that have already made it into production. Also with respect to optimal image stabilization, in camera modules for smartphones, we are seeing strong customer interest and expect to see phones in the market in the first half of 2015. We continue to be bullish about the revenue opportunities and growth in this segment.

Alan will provide a more detailed breakdown on the business outlook later in this call. I would like to provide a quick revenue outlook for our December quarter. We expect our revenue in our third fiscal quarter ending in December, a seasonally strong quarter to be in the range of $57 million to $59 million or 3% to 7% sequential quarterly growth and 38% to 43% year-over-year growth as compared to the same quarter in our fiscal 2012.

Demonstrating the leverage in our business model, in September quarter we delivered net income of $13.7 million, an increase of 79% sequentially from $7.7 million in immediate prior quarter. September quarter operating margin came in at 31.2%.

Finally, we see a strong interest in our product by new markets such as industrial and wearable sensors where we are leading the market with our integrated multi-axis products, software solutions and reference designs. We see this market segment as potential for future growth and diversification of revenue.

I will now turn the call over to Alan for more detail on the fiscal Q2 ’13 financial results. We will then provide an update on our products and other developments in the third quarter fiscal 2013 financial outlook.

Alan Krock

Thank you Steve. Please note that all financial results will be discussed on a generally accepted accounting principle or GAAP basis, which includes stock based compensation expense. For the second quarter of 2013 net revenue was $55.3 million, up 41% from the first fiscal quarter of fiscal 2013 and up 28% from the second quarter of fiscal 2012.

Our market splits for the second quarter of fiscal ’13 were smartphones and tablets 53%, gaming 29%, all other segments 8%. For Q2 our 10% customers are Samsung, Nintendo, Quanta, which is a contract manufacturer for a number of consumer electronics companies. The first half of fiscal year 2013 market splits were smartphones and tablets 68%, gaming 22%, all other segments 10%.

Seasonally, the March quarter has historically been the lowest revenue opportunity for us driven by calendar year and holiday related sales. Fiscal Q1 ending in June can also be somewhat seasonally slower for the same reason as our market transitions at peak quarters of September and December. Consistent with seasonal patterns and significant and important new design wins sales for all market segments experienced strong sequential growth in fiscal Q2. Gross margin for the second fiscal quarter of 2013 was 54.9%, consistent with our target operating model range. Gross margin for the first half of fiscal 2013 was consistent at 55.0%.

Turning to operating expenses, our total operating expenses were $13.1 million for the quarter versus $11.9 million for the immediately prior quarter. R&D expenses were $5.9 million or 10.7% of revenue for fiscal Q2 as compared to 5.7 million or 14.4% of revenue in the prior quarter. For the first half of fiscal 2013, R&D expenses were $11.6 million or 12.2% of revenue consistent with our targeted operating range of 12% to 14% of revenue.

SG&A expenses were $7.2 million or 13% of revenue in fiscal Q2 as compared to $6.3 million or 16% of revenue in the prior quarter due primarily to modest increases in headcount driven primarily by our sales and marketing activities.

For the first half of fiscal 2013 SG&A was $13.5 million or 14.2% of revenue, higher than target percentage primarily attributable to our revenue level during the seasonally slower portion of the fiscal year.

Period over period increases in absolute dollar OpEx spent to comparable current and prior year periods are, for R&D primarily engineering headcount driven and is the result of the company addressing ancillary leverage available within the Nasiri Fabrication Platform to drive further integration and innovation in motion tracking in the consumer electronics mobile market.

In addition to SG&A or primarily sales and headcount driven to address the company’s substantial global customer opportunity including sales channels in geographies like China or adoption of motion tracking solutions by major consumer electronic customers represent a significant opportunity for the company, and the expansion of our marketing efforts targeting new market opportunity. We also have slightly higher public company cost and increased legal expense due to patent related litigation activity.

Stock based compensation included in the September quarter for fiscal Q2 was $2 million in total versus $1.7 million in the prior quarter and $800,000 for Q2 of fiscal 2012. For the first half of fiscal 2013 stock based compensation was $3.7 million and $1.6 million for the same period in fiscal 2012. Operating margins were 31% this quarter versus 25% in the prior quarter. Long term operating margin target is 30% to 34% primarily based on sales seasonality. Considering Q2 seasonality we are in line with our target operating model for Q2.

Our income tax provision was 21% of income before tax for fiscal Q2 of 2013. Net income for the second quarter of fiscal 2013 was $13.7 million compared with net income of $7.7 million in the first quarter of 2013, an increase of 79%. For the first half of fiscal year 2013 net income was $21.3 million.

Fully diluted GAAP EPS was $0.16 for Q2 fiscal 2013 based on fully diluted shares of $87.3 million. On the balance sheet cash generated from operations for the second quarter of fiscal 2013 was $5.9 million increasing our cash and investments totaled to a $167 million with essentially zero debt. Working capital increased primarily resulting from increased accounts receivable plus normal increase in inventories reflecting the impact of Q2 shipment volume and timing due to such factors as increasing demand for our new products and timing of customer purchase of other newer products in the quarter.

Increased inventory levels are anticipation of accelerating demand through the remainder of fiscal 2013. As a result of increased accounts receivable our net base sales outstanding were 65 days up to 53 days at the end of the prior quarter on the higher sequential revenue. All customer accounts were substantially current to payment terms. As of the end of Q2 2013, our total inventory stood at $21 million versus $20 million at the end of the prior quarter.

With these remarks I will turn the call back to Steve Nasiri.

Steve Nasiri

Thanks Alan. Now, I would like to comment on some of the business highlights for the last quarter. First, a quick overview of some of our important announcement. We set a new industry benchmark with the introduction of world’s smallest 6-axis integrated motion tracking device. This is the company’s latest generation integrated 6-axis device that has both 3-axis gyroscope and 3-axis accelerometers integrated on the same die in a very small 3x3x0.9 mm QFN packages. We are presenting a reduction of 45% in package size and nearly 60% in power as compared to our nearest competitor.

This has also resulted in having over 25% reduction in die size. We are seeing very favorable response by all of our key customers and new customers where they are actively designing this product into their next generation of products.

With respect to legal matters this past quarter InvenSense announced that the patent infringement lawsuit filed against the company by Wacoh on July 20, 2010, has been jointly dismissed by both parties. With respect to our still remaining legal action with STMicroelectronics the case remain in its early stages and InvenSense continues to defend itself vigorously. InvenSense remain fully committed to its entire product portfolio and all investment products continue to be available through [inaudible].

In addition, InvenSense has brought its own counter claim against ST for alleged infringement of two investment patents. InvenSense alleges that these patents are infringed by ST 3-axis gyroscope product. I will now turn to Alan to provide additional details for our September quarter financial outlook.

Alan Krock

Thank you Steve. Now to conclude, I will provide our financial outlook for the third quarter of our fiscal 2013 and an update on our growth opportunities for fiscal 2013 in total. As you have heard from us before, our end markets have been seasonal in the past, in particular the gaming market. As such, our fiscal Q2 ending September and fiscal Q3 ending December are generally our strongest revenue quarters. We expect Q3 revenue in a range of $57 million to $59 million, as was the case in fiscal Q1 and fiscal Q2, component shortages related to the 28 nanometer technology node limited our customer’s volume outlook for their own new product. However, we believe that our revenue outlook for $57 million to $59 million takes into account our customer’s understanding of current levels of component availability. We understand and expect that such current component constraints have eased as we progress through calendar 2012. We support the Q3 FY13 revenue outlook, we currently have backlog in place which exceeds the majority of this total current quarter revenue target.

In Q3 we expect our gross margin to continue to stay within our long-term model, in the mid 50 percentage point range. In Q3, we expect operating expense of approximately $13.7 million made up of $6.4 million for R&D and $7.3 million for SG&A. We therefore expect a current quarter operating margin in the low 30 percentage point range. We expect fully diluted share count of approximately 88 million shares and therefore GAAP basis earnings per share of approximately $0.17.

For fiscal year 2013 in total, based on our existing customers and expected design wins we believe that we can achieve our current target of 35% year-over-year revenue growth, an excellent result given all the current macro-economic uncertainties our customers and peers are currently experiencing. Further, we continue to see strength in adoptions in our products due to their higher performance and attractive size at a number of new major customers in our mobile handset and tablet markets that we believe could offer a significant opportunity to exceed our current fiscal quarter revenue target of 35% and positively impact our revenue growth in fiscal period beyond the current year.

With respect to our business model, for the balance of fiscal ’13 we expect our margins and operating expenses to stay within our long term model with gross margins in the mid 50 percentage point range with R&D expenses of 11% to 13% of sales and SG&A expense of 10% to 12% of sales. We expect operating margins of 30% to low 30% of sales. We expect a tax rate of 21% of 23%. As a result we expect net income after tax percentage of approximately 25%.

That completes our remarks with respect to the earnings and business aspect of this call. Separately, with respect to a second press release today, InvenSense provides information on executive transitions at the company. I will highlight that.

Today the company announced that Mr. Steven Nasiri, company founder, CEO and Chairman will be stepping down. Steve will continue to provide his expertise and insights as a member of the board of directors and will continue to serve as an executive of the company through the end of the calendar year to provide for an orderly transition.

Steve founded the company in 2003 and has served as its CEO and Chairman the entire time. Effective October 24, 2012 Mr. Behrooz Abdi has been appointed as Chief Executive Officer and will work closely with Steve during the transition. Behrooz has served on InvenSense’s board of directors since June of 2011 and has worked extensively with the board and the company for the past 15 months.

Prior to accepting the CEO role here, Behrooz was an Executive Vice President and General Manager for Netlogic Microsystems and prior to that Behrooz served as the President and Chief Executive Officer of RMI Corporation, also known as Raze Microelectronics, Inc., a fabless semiconductor company. Behrooz has also served as the Senior Vice President and General Manager of CDMA Technologies at Qualcomm, Inc., and as Vice President and General Manager for Motorola’s radio products division, in charge of RF and mixed signal ICs for the wireless mobile market. Additional details are included in our press release of today.

I will add that I have personally known and worked with Behrooz since he joined Netlogic Microsystems in 2009 where I served on the board of directors beginning in 2005 through the sale of the company in early 2012.

With that, I would like to turn our call to the question and answer session. Thank you, operator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line James Schneider with Goldman Sachs. Please go ahead.

Mark Delaney – Goldman Sachs

Yeah hi it’s Mark Delaney calling on behalf Jim Schneider. Thanks very much for taking the questions. I guess first Steve congratulations on a great career with InvenSense. I was hoping you could may be provide us with some more thoughts on why the CEO transition at this point?

Steve Nasiri

Well, the press release has already summarized what we would like to say publicly. Fundamentally, after 10 years of driving the company to where I have been expecting in vision and basically exceeded all of my own expectations, board has felt that for the next stage of the company it’s perhaps time to transition to a new CEO. They have chosen Behrooz that I have worked with at the board and I feel he is qualified to do the job. That’s all I can basically add.

Mark Delaney – Goldman Sachs

That’s helpful thank you. In terms of the outlook for next quarter, can you help us understand in terms of things being a little bit weaker, still strong but rather weaker than what you have been contemplated previously, can you help us understand how that would breakdown in terms of the incremental weakness, in terms of either inventory destocking as opposed to general end market weakness.

Alan Krock

It’s Alan speaking. We took the opportunity to do a couple of things here. We provided our current target for the year of year-over-year revenue growth of 35% which is based on prior year fiscal 2012 revenue of a $152 million, and would provide for 35% revenue around $206 million, $207 million. That is based on known existing design wins and business within primarily the Android eco system plus our historic business at Nintendo plus the myriad of other applications that traditionally made up about 10% of our business in total. So, the outlook that we give for the current quarter and the rest of the year is based on what we know of the businesses that’s been defined which is again Android plus Nintendo plus 10% of other types of application.

We also said that there is a significant potential for additional new revenue from new customers beginning it’s potentially as soon as the March quarter of 2013 and continuing into the new fiscal year for us. Therefore what we are doing is providing information on the business that exists within the existing base of customers where there is good momentum, 35% year-over-year revenue growth in this environment given the uncertainties. The customers are actually facing in their own business, it’s quite desirable and there is no one element to point to of 35% to 40% which was the 10-K we did around the size of kind of the secondary versus the 35% today. It’s just the rate of business available from a solid growth market in motion tracking.

Therefore to get there, the current backlog that we have we feel would support, hopefully conservatively. The 57% to 59% that we’ve given and the balance then by deduction for the rest of the quarter would take to an expected target of 35% for the entire year. So, to get to enjoy this level of growth obviously we have deployed a number of platforms, very important platforms in the Android ecosystem. As mentioned Samsung was one of our largest customers, they are in the range of 19% to 22% of sales throughout this fiscal year so it’s a significant incremental gains in share Samsung driving that opportunity.

Nintendo has total of four platforms in the market right now, hopefully they will meet or exceed the expectations set for them, we are in the VU, the V-console [ph] the 3DS and the 3DS-XL so they have a total of three platforms which are also doing reasonably well we believe, and form the basis of that. The new applications are the remotes, the helicopters deployed the various other things you’re familiar with and they remain at about 10% of total sales.

Based on that color we just learned more about our markets, the rate of our growth in our markets, and we leave as an opportunity some incremental platforms which we believe we have very good exposure to, very reasonable prospects of winning designs that we can talk to later this fiscal year, and that’s the basis of the existing 35% revenue target and the potential for possibly exceeding that in the future.

Mark Delaney – Goldman Sachs

That’s very helpful color. I appreciate that Alan. One last one from my side. Can you quantify either in terms of revenue or dollars, how much the fixed axis product currently comprises and then what your outlook for the 7 and 9-axis products?

Alan Krock

Okay, so the 7-axis product is something that’s under design currently and will be available to customers out in the market in 2013 has not been announced or released that I have any color to add or provide information about. The 6-axis product, I’m just going to look really quickly here to try to get through the percentages. The 6-axis product is approaching 50% of our total revenue for the company for the year-to-date and is expected to be a majority of the revenue for the company for the entire fiscal year. Does that help with the product related splits you are interested in.

Mark Delaney – Goldman Sachs

Yes, thank you very much.

Alan Krock

Sure, no problem.

Operator

Your next question is from the line of Krishna Shankar with Roth Capital. Please go ahead.

Krishna Shankar – Roth Capital

Yes, Steve congratulations on – great company and your track record in building InvenSense to this stage and good luck going forward. Just a question on – Alan, you mentioned new customers in addition to the existing wins on the Android customer base. Can you give us some flavor for whether – I know you folks can’t talk much even if you are engaged with the customers such as Apple you really can’t say much, but can you give us a flavor for additional new customers, end markets, or designs that required upside to a fiscal year ’14 and also the last quarter of fiscal year ’13.

Alan Krock

Yeah, you are very perceptive Krishna and you are right we can’t. We really are not in a position to provide any further specifics at this time. Once we have a specific design win awarded clearly it would be a big deal to this company and material and we would be able to talk to it. We cannot provide anything further other than the stated goal which we have said many times. We seek and believe that we will serve all customers in the smartphone and tablet market.

Krishna Shankar – Roth Capital

And is the Q4 guidance constrained by the continuing capacity shortages of 28 nanometers for some of your key partners or has that sort of gone away now for Q4 for the December quarter?

Alan Krock

Our expectation has always been that it would run its course during calendar 2012 and we are not aware of any customers which are experiencing ongoing shortages at least as we understand it and the basis of their forecast. The Qualcomm 8960 chips that is in many different customer’s phones and products, so in addition to the exposure it’s – almost all of the other customers that we serve as well on the LTE side. So, we are not aware of any ongoing considerations associated with availability.

Krishna Shankar – Roth Capital

Great, thank you.

Operator

Your next question is from the line of Jason Link [ph] with Fidelity Investments. Please go ahead.

Jason Link – Fidelity Investments

Yes, hi Steve. Just a quick question for you. Do you see yourself starting any new businesses or going anywhere else?

Steve Nasiri

I haven’t thought that far yet. At this time I’m not expecting to start another company that I know of.

Jason Link – Fidelity Investments

Okay, thank you.

Operator

Your next question is from the line of Nick Clare with Robert W. Baird. Go ahead.

Nick Clare – Robert W. Baird

Hey guys, this is Nick Clare calling for Tristan Gerra. First, Steve congratulations and best of luck. First question, just to kind of touch again, Alan, on your comments. You mentioned quickly about the 6-axis and how it’s kind of – I think you said nearly 50% of total revenue for the company year-to-date. I remember maybe on the last call or the call before, you had given a target for what the 6-axis would account for by the end of the year. A, what was it and B, is that in line with what that original target was?

Alan Krock

Yes, that was in the 60 percentage range of total unit sales for the year, excellent dollar sales for the year, and I believe the progress of being – approaching 50% for our year-to-date is consistent with that target.

Nick Clare – Robert W. Baird

Okay. Looking at I guess for the product feature on that, would you expect – I know the products sometimes you sell versus when they hit the market are different timing wise. But would you expect kind of a larger majority of them to come out now at the very end of this year or is it going to carry over or has the majority already [inaudible].

Alan Krock

Yeah, we have two versions of that product. The original is the 6050 which is what’s in production and being designed in with customer applications today, and Steve referenced in his remarks are 6500 product which is currently available for customers to design with for the next generation of products. With the 6500 we believe that it’s a very impressive product, it’s being highlighted in performance, features, size, all aspects of it and therefore we expect significant traction with that part. And for smartphones and tablet going forward from general availability and release of that product. That will be a very substantial majority of the product that we sell into the smartphone and tablet market.

The existing products today are a blend of the old 3-axis parts plus the current production ready 6050 part which has been in production for the last couple of quarters. So, we expect to see designs accelerate with the 6500 significantly which is what customers are designing with today.

By the way, I believe I overlooked commenting on our 9-axis product which is a product which is our 6-axis Accel Gyro integrated together with a third party compass back on top of our existing 6-axis chipset, and that is actually exceeding our expectations as far as design related wins and we expect to sell more than a million dollars at least or more than a million units at least of that product within this fiscal year. Our customers are very keen to have a 9-axis solution.

So, while the majority of customers may be starting to think about designing with 9-axis parts, there are a handful that are actually going to go into volume production with the existing two chip solution that we offer into the market as a supplement with single chip solutions of the 6-axis which we have been speaking of. So, very pleased with the evolution in the product roadmap of the 6, 7 and 9-axis products that we had out in the marketplace. A lot of asset design with all of them.

Nick Clare – Robert W. Baird

Did you say one million units, Alan?

Alan Krock

Approximately, that’s our current target for this fiscal year.

Nick Clare – Robert W. Baird

Okay. So next I guess looking at the surface tablet, I know that you guys have had some action in the RM base, one is at least Windows RT based versions. Do you also have designs with the Intel based version or are you primarily RM only?

Alan Krock

We have a balance. We have reference designs and designs with RM based solutions. Competitor ST has the dominant position with the current Intel related reference design. We are working diligently to turn some of that around and also accelerate our design presence with Intel based solution.

Nick Clare – Robert W. Baird

Okay. Looking – Apple just announced the iPad Mini, I don’t know how you forecast that originally into your outlook for the year with tablets. Did that have any impact on kind of – in the sense of it being like cannibalistic towards other – or share loss for other tablet vendors? Did that affect the way you look at your fiscal third quarter calendar, fourth quarter in any way?

Alan Krock

No, it really doesn’t. We are involved with both the Google Nexus 7 mini tablet and Amazon HD Fire mini tablet, and those customers seem fairly optimistic and satisfied with their position in the market and price significantly below where other competitive solutions is in the marketplace. So, to the best of our knowledge we are not aware of any impact where our components are supplied to – to that market in total.

Nick Clare – Robert W. Baird

Okay, beautiful. One last quick one. You said for the OpEx guidance for fiscal 3Q, $13.7 million in OpEx and you said $6.4 million in – was it SG&A or R&D did you say?

Alan Krock

This splits that I gave was – I believe that’s correct. But let me just double check for you to make sure. Q3 operating expenses is 13.7, 6.4 of R&D and 7.3 of SG&A.

Nick Clare – Robert W. Baird

Okay great. That was it from me. Thanks a lot guys.

Alan Krock

Thank you.

Operator

Your next question is from the line of Mark Mckechnie with Evercore. Please go ahead.

Mark Mckechnie – Evercore Partners

Great, thanks. A couple of things. One, can you give me, Alan, maybe the specific customer mix in the quarter? You laid out 10% customers but are you going to share the actual mix of these customers, and I guess HTC fell off the 10% level?

Alan Krock

Yeah. Well, we generally in the call provide those which are 10% of that’s basically what's expected and required of us. All the others tend to be – all the other substantial players that you mentioned, HTC, LG, Sony, they tend to be in the mid to high single digit and just below the 10% threshold, and sometimes they peak up of it and sometimes not. And then there is a myriad of China based customers that are 2% or 3% of total sales. The most important one to us right now are clearly Samsung with the best number of growing design wins that we have with that customer. Nintendo with its four platforms in this space, in the gaming space and Quanta, which still – for both the mini tablets that we have. And generally, for our fiscal year in total I think we expect fairly similar type relationships although any one quarter all of those other customers are substantial enough to peak up above 10% level. But what we do have as far as our outlook for them kind of reflects them being in the mid to high single digits each.

Mark Mckechnie – Evercore Partners

Got you. And then the guide for next quarter and then across the fiscal year, I guess not as strong but seasonal Q4, calendar Q4. I’m trying to get a sense, because I think that’s below what you had expected, certainly what I had expected. And just to be clear, are you saying that it was – some of it was because your customers couldn’t get enough 28 nanometers in the December quarter or it – help me out with actually the mix that you project.

Alan Krock

I think generally in the current business environment this is the rate that our customers are expecting to produce products at. I mean, you have heard in this earnings season a number of our peers and the customers themselves talk about this macro-economic uncertainty and general economic slowing of growth in the United States and China, and Europe of course is not anything to hope for in the near term. So, I think this is just – I think our position is just generally reflective of the industry wide condition and the 35% year-over-year growth with opportunity to do much better than that if we come up with several different design wins, with different possible target customers to talk to.

So, I think we are just trying to be reasonably prudent in a somewhat uncertain environment and let people know what in this environment – our base business and Android gaming and other applications is likely to generate for the remainder of the year, again leaving as an opportunity several different OEMs who are not at this time large customers for us. So that’s the way to look at it.

There is no one element to look at or talk to. It’s just generally reflective of the broader macro-economic environment and we strongly believe that some of these other opportunities will eventuate and will eventuate in a lower than horizon of time but we don’t have design wins that our customers are cleared of speaking to and we can't speak further about them.

Mark Mckechnie – Evercore Partners

Okay I get it. That makes sense and it’s not unreasonable by any means. So it’s interesting though the guidance for the full fiscal year implies maybe down mid-single digit sequential, kind of 7% to 8% sequential march versus a lot bigger decline typically. And it sounded like – do you feel like you have got some new customers coming online or new projects going online in that March quarter to offset the normal seasonality or is it just the case of hey, people aren’t going to overbuild as much in December. So you won't have the normal seasonal downtick there in March?

Alan Krock

No, it’s a much improved mixed way from the very seasonal gaming. I mean in total gaming is going to be low 20 percentage points of our sale this year versus low 30% prior year. So, there is just not that seasonality with the lower dependency on the gaming related markets. So therefore the sequential decline is much more modest, and out there is the opportunity of sequential growth because that would be a very relevant horizon for something new to come along within. But we don’t have any particularly wins that we can speak of. But those are the different dynamics that play for that particular quarter.

Mark Mckechnie – Evercore Partners

Okay, that makes sense. The last one, on the capacity side, I guess you talked about your capacity and this is probably more optimistic looking. But any updates on your capacity and your ability to quickly ramp your capacity if need be?

Alan Krock

Yes, well we’ve got – our current investor presentation to just 300 million units of capacity available to us through Global Foundries, TSMC, Linkson Steel [ph], and our own internal sort and test facility, our partners are adding additional capacity as we speak and into the new calendar year. And we expect that our capacity will be 50% to 100% greater in the relevant horizon by 600 million units of total available capacity as we get into the early part of 2013. That essentially would be sufficient for the majority of the market that exists today. So therefore we are and our partners who are actually the ones who are investing a lot of capital in their own facilities to support this are clearly optimistic about the future of motion tracking and in particular our products which were the ones that are made in the third party foundry environment.

Mark Mckechnie – Evercore Partners

Okay, thanks Alan.

Alan Krock

Thank you.

Operator

The next question is from the line of Richard Shannon with Craig-Hallum. Please go ahead.

Richard Shannon – Craig-Hallum Capital

Hi Alan and Steve, maybe just a couple of questions on my part. I would love to hear your assessment of the current competitive environment. Any new suppliers coming into the market or being more competitive specifically in 6-axis that you have seen?

Steve Nasiri

This is Steve speaking. As far as the competition, from our perspective the environment hasn’t changed much from our last call or since the beginning of the year. We are still primarily still ahead of our main competitors in most accounts. But we also see that our technology and our product offering is more technologically advanced both in size, performance, power and overall solution, and highly competitively priced. So, overall competitive market hasn’t drastically changed but we are seeing our ability to win the accounts and win the designs, keep improving with our offerings. There are other companies that have made announcements like Bosch and perhaps even Kionix. But to our knowledge we have not seen their product at any, you know, a mysterious way tend to be one generation behind with their product announcements to what is already being offered by us. So that I hope answers the question.

Richard Shannon – Craig-Hallum Capital

Yeah, that does. Maybe just a quick follow-on the general theme there, so you haven’t seen any more difficult pricing trends in your products, I guess I’m more interested in leading edge 6-axis but if any comments on the older generation 3-axis would be also interesting?

Steve Nasiri

Well, we have the original 3-axis. We have a second generation 3-axis also available in the market that’s priced extremely competitive, and still the product is significantly shrunk over the previous 3-axis. Original 3-axis was in a 4x4 in a more extensive process, high voltage process, and usually Axis Gyro is in a 3x3 QFN in a much lower cost process note and much – about 40% shrink in size of the die.

So, it’s highly competitive. We don’t tend to boost our 3-axis capability because we see the entire market transition to 6-axis, but we have a pretty strong offering in the 3-axis as well as in the dual axis and single axis which we don’t tend to talk much.

Richard Shannon – Craig-Hallum Capital

Okay, great. I appreciate it. Maybe the last question, in your conversations with customers over the last quarter or so, do you get a sense when they look out few quarters and kind of think about a penetration rate of motion sensing in their platforms, and I guess I’m more interested in the mobile phone and the tablet market. Are you hearing any comments, you know, increasing resonance on that or lower, and have you heard any specific kind of targets in terms of penetration rates in looking a year out or so?

Steve Nasiri

Yeah, actually in fact we are very encouraged. We are very encouraged in multiple fronts. If you just go back a year ago or maybe two years ago, Apple introduced a gyro into the iPhone4 and everybody followed. Many of our customer just reacted to what was happening in the market and trying to play catch-up. So they bought the Android ecosystem as well as multiple upper customers are now putting motion interface and they really understand why they are putting it in.

If you just look at Android Ice Cream Sandwich and the next generation they keep leveraging the motion whether the 3D view or whether it is doing panoramic capture or picture capture or doing a gesture recognition, shaking or taping, every customer is now at various functionalities that now they see they need motion interface integrated. So we see motion interface now as a standard function. We’ve been saying it for the last two years and now we’ve actually seen it happening and we are also seeing the penetration in the lower mid range, smartphones. We are seeing some of our leading customers integrating motion interface in the mid range and we expect sometimes next year that would follow suit into many Chinese smartphones as well.

So whether it’s a gaming or whether it is panorama capture, street viewing or gesture recognition, and eventually of course indoor navigation and pedestrian location based services, location based services ultimately will be the main driver. But today there are sufficient number of applications that is more than justified. Of course the cost has drastically came down, solutions have fully matured and integrating this into the smartphone has made it much easier than a year and a half, two years ago.

Richard Shannon – Craig-Hallum Capital

Okay, that’s great. That’s all from me Steve, and once again congratulations and good luck.

Steve Nasiri

Thank you.

Operator

Your next question is from the line of [inaudible] Medical systems, please go ahead.

Unidentified Analyst

Hi Steve congratulations again. You spoke on the last call your inkling some discussions with Microsoft, can you elaborate on that?

Steve Nasiri

Yes, go ahead.

Unidentified Analyst

I was saying can you elaborate on the discussions you were having with Microsoft, you mentioned that on the last call?

Steve Nasiri

Yes, I don’t recall mentioning such a discussion and I’m not necessarily sure the thought process behind your question. Can you state your question?

Unidentified Analyst

Well, you inkled that you had meetings with Microsoft in the last call, maybe the call before that. Now I was just wondering if there has been any progress with that or what direction that is going?

Steve Nasiri

Yeah, we tend to not to want to comment on specific customer questions, which is very specific. So in general we are in discussions with every major customers in multiple different applications, and I really don’t know what else I can add to that beyond just saying that we are assessing every opportunity to every major customer and certainly Microsoft is one of those major customers that we continue to be engaged with, but we can’t comment beyond that.

Operator

Ladies and gentlemen that is all the time we have for questions today. I will turn the call back over to management for closing remarks.

Alan Krock

Okay. Well we appreciate the attendance on the call and all the good questions, and look forward to speaking with you at the end of our next quarter. Thank you very much and have a good afternoon.

Steve Nasiri

Thank you guys.

Operator

Ladies and gentlemen that will concludes today’s conference, thank you very much for joining us and you may now disconnect. Have a great day.

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