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UPDATE: Analyst Becomes Cautious on InvenSense (INVN) Following Tech Issue (AAPL)

September 29, 2014 10:03 AM EDT
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(Updated - September 30, 2014 8:32 AM EDT)

InvenSense (Nasdaq: INVN) is pressured Monday as one analyst is shifting his view on the company.

Rosenblatt's Brian Blair is moving his outlook on InvenSense from Bullish to Cautious. The analyst sees InvenSense losing anywhere from 50 to 100 percent of its accelerometer/gyroscope socket business it recently won with Apple (Nasdaq: AAPL), mainly due to a technical issue with the MPU-6700 part and how it interacts with certain features of the iPhone 6.

Apple might select STMicro (NYSE: STM) as a second-source supplier and might even replace InevnSense entirely.

UPDATE - Below is more commentary from Mr. Blair:

It's difficult to know what could instigate a change, but we believe the reason may be related to technical instability of the InvenSense MPU-6700 part, possibly in how it interacts with certain iPhone features. One of the concerns surrounding the teardown of the iPhone 6/6 Plus has been the inclusion of a Bosch 3-axis BMA280 accelerometer. Its addition was puzzling, as the added capability didn’t seem logical and appeared redundant. Why would there be two? We initially held the view that there may have been some power savings in using the Bosch accelerometer for certain features. Our view is that Apple may have made the decision to include the Bosch part at the last minute, to solve any potential instability in the InvenSense part. We noted a similar situation last year between InvenSense/Apple (where we believed parts for Apple were shipped but never used). The difference in 2013 was that no InvenSense parts actually made it into an Apple product.

Order Cuts and Timing

We understand that Apple generally holds some liability regarding order cuts when making changes to suppliers (typically due to demand changes). Our understanding is that even in the face of a dramatic order cut, Apple will maintain 100% of the following month’s orders, and then 50% of orders in the month after that, in an effort to protect suppliers' quantities should Apple require a change. The concept provides some protection for companies asked to manufacture millions of units for inclusion in Apple products. Using this framework, if Apple were to cut orders for InvenSense, it would not likely see the impact in its orders/ revenues until the month of November, where orders could decrease by 50%. It is possible as well in this framework that December orders into Apple could go to zero, but that is unclear because InvenSense could work with Apple to rectify any technical issues or even offer a lower price, if one part of the MP-6700 functionality wasn’t working as it should. We expect InvenSense to do everything it could to maintain the socket in hopes of maintaining Apple as a customer for next generation iPhones.

December Quarter Guidance

For now, we will maintain a cautious stance until we hear from the company about the December quarter and the details about the relationship with Apple. If there is an issue, as we suspect, we expect that it will be made clear through both December guidance and customer commentary from InvenSense, as well as through quarter commentary from ST Micro (who would assuredly want to brag about an important customer coming back, even if Apple is not mentioned by name).



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