Why InvenSense Is Worth The Premium

| About: InvenSense (INVN)

Executive summary:

  • Settlement adds an immediate 30% to the bottom line.
  • Cross-licensing of 900+ patents improves IP position, and clears way for acquisition.
  • Intel is the ideal suitor.


As of this evening, I'm kicking myself. Ever since the last earnings call from InvenSense (NYSE:INVN), I've been hinting that there are "some near term catalysts that everyone else is missing." I wasn't talking about the revenue diversification, though Xiaomi accounting for 16% of their revenue and LG for another 10% is excellent, and of course everyone saw the 25-30% YoY growth projection. The thing that nobody commented on was that management said that litigation with STMicroelectronics (NYSE:STM) had finished the discovery phase. This suggested to me that a settlement was now possible, but I have to admit, I never thought it would happen so quickly. The details of the publishing process held me back, and this time InvenSense beat me to the punch. This article will explain why I think this event is so significant and why it happened so quickly.

First of all, while many of the terms of the settlement are confidential, neither company admitted liability. InvenSense had the better of it early on in the courts and from this I speculate that there were no substantial cash payments. If any money was exchanged, I would guess InvenSense was on the receiving end. Regardless of that, management said in the Q&A of its earnings call that its outlook had included provisions of $3-5 million in legal expenses per quarter for the foreseeable future. If we take the median of $4 million per quarter against average net income of $13.58 million for the last 4 quarters, this alone adds almost 30% straight to the company's bottom line. With 87.5 million shares outstanding, that's an extra 18 cents of EPS for the year.

Just about the only other facet of the settlement that was revealed was a cross-licensing agreement. Amongst other patents, STMicro gains access to InvenSense's cutting edge Nasiri manufacturing process, which InvenSense had already opened up to third party developers. InvenSense and its ecosystem are now free to innovate further without fear of further complication from STMicro's 900+ legacy patents. It would be hard to overstate the importance of this development from an Intellectual Property perspective. STMicro, InvenSense and Bosch dominate the patent landscape for MEMs, and InvenSense is by far the best positioned for the coming Always-On revolution.

KitKat, the latest version of the Android mobile operating system from Google (NASDAQ:GOOG) already specifies that most environmental monitoring must be done off the main processor to save battery. InvenSense is first to market with SoC (System-on-Chip) solutions to implement this after acquiring the microphone unit of Analog Devices (NASDAQ:ADI) and thereby further strengthening their patent portfolio. Apple (NASDAQ:AAPL) has further validated the always-on SoC approach with its M7 chip in the latest iPhones. The M7 is, however, far too large and power hungry to go into a wearable device. Despite many premature analyst claims, I've long predicted that only when Apple turns its many recent wearable device patents into actual iWatch, will InvenSense gain the company as a customer. However, the settlement means that it may be time to think even bigger than new design wins. Both Google and Apple have already shown that they are willing to pay handsomely for mobile patent portfolios, but there is another option that's better yet...

Intel (NASDAQ:INTC) has been trying to break into the mobile market for some time now, and the fact that it used competitor chips from competitor ARM Holdings (NASDAQ:ARMH) in their recent CES demo shows just how much catching up the company still has to do. Intel's big wearable push is its best chance of leapfrogging and achieving this goal. Intel has already purchased Acquire Sensory Networks, Omek, and IndiSys in the past year. InvenSense would be a far bigger purchase, but adding its cutting edge design to Intel's best-in-class manufacturing would easily be the most synergistic buyout the chip giant has ever made. Intel already makes chips for Apple , and the latter company finally gets the means for cutting Samsung completely out of its mobile production. Intel, for its part would suddenly have a foot in the door on both major mobile platforms. The clock is ticking and I suspect that these sort of musings are exactly what caused litigation to go almost directly from discovery to settlement. Time will tell.

Disclosure: I am long INVN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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