Earnings updates

Tough night on the earnings front. Facebook just said on its conference call that “Total revenue in Q4 is expected to grow 40% to 47%.” That’s still huge growth, but the market is knocking 10% off FB after hours on that guidance. Steady as she goes for me and if the stock were to drop below $70, I might even add some more back that I’d trimmed recently. Ebb and flow, tranche trading, etc.

Meanwhile, here’s why INVN is down 25% after hours: “Gross margin determined in accordance with U.S. generally accepted accounting principles (GAAP) for the second quarter of fiscal 2015 was 35 percent, compared with 47 percent for the first quarter of fiscal 2015. GAAP gross margin for second quarter fiscal 2015 included stock-based compensation and related payroll taxes, and amortization of acquisition intangibles.

Excluding these items, non-GAAP gross margin for the second quarter fiscal 2015 was 37 percent, compared with 50 percent for the first quarter of fiscal 2015. The sequential decrease in gross margin was primarily attributable to two factors:  a non-recurring inventory charge largely related to earlier generations of the company`s products that reduced the gross margin by approximately eight percentage points, and a shift in revenue mix towards lower margin, high volume customers that reduced the gross margin by approximately five percentage points.”

Let me interpret all that for you. The company is saying that they ramped up capacity and overbuilt way too many of their first generation components throughout this year and that the components that they are now selling into the iPhone 6 are at much lower gross margins and therefore aren’t as profitable on a per unit basis as their older chips. Both of those are serious red flags and are exactly what I was worried about when I’d written this part: ” Be aware of the risks of investing in a high-growth small high-tech company like this that is trying to manage its growth and meet new demand. That can be very difficult to do.”

I’m putting $INVN fully into the penalty box for now. I am going to make some calls and do some homework with this new information from tonight’s horrible earnings report. I am not going to sell into tomorrow’s panicky decline, but I will probably exit this position fully unless I find some reason that the gross margin decline is about to reverse — which it doesn’t sound like to me from this report so far.