Is OmniVision Technologies Getting Cut From The iPhone?

Shares of OmniVision Technologies OVTI are plunging more than 30% today after the company guided sharply lower than expected, and many are wondering whether the company is being squeezed out of the iPhone, or perhaps Apple AAPL is squeezing the margins of yet another supplier. The chip-maker, which designs chips for image sensors, reported first quarter earnings of 76 cents per share on $276.1 million in revenues. Wall Street had been expecting earnings of 72 cents per share on $276.59 million in revenues. While the mixed quarter may have hit shares, the reason for the 30% haircut today is the much weaker than expected guidance. The company expects 2012 second quarter guidance to be 52 to 64 cents per share in earnings, on $255 to $275 million in revenues. Wall Street had been expecting earnings 82 cents per share on $306.4 million in revenues. "We are extremely pleased with our achievement this quarter, with record revenues along with year-over-year revenues growth of 43 percent," stated Shaw Hong, chief executive officer of OmniVision Technologies, Inc. "We will maintain our focus on execution and our dedication to bringing leading-edge imaging sensors to the market." Apple is notorious for squeezing the margins of its suppliers, and some are even speculating that OmniVision could be shut out of the iPhone 5 entirely, or at least share the camera chips with another competitor. Rajvindra Gill of Needham & Co. said that he expects Apple to use another supplier for its image sensors. “It's clear now that Apple is dual-sourcing its image sensors with Sony,” Gill wrote in a note today captured by Marketwatch. “The question is it a straight 50-50 split, or something more?” Betsy Van Hess of Wedbush Morgan disagreed, and Marketwatch interviewed her for her thoughts. “The conclusion that the bears are drawing is a loss of the pole position at Apple, with that going to Sony,” Van Hess said during the interview today. "We obviously don't believe that is the case, as the guidance would be considerably worse." Others agreed with Van Hess, like Daniel Amir of Lazard Capital. “Our checks show that Sony lacks the capacity to supply Apple this year and OmniVision remains the supplier,” wrote Amir in quotes captured by Marketwatch. With OmniVision Technologies lowering guidance so sharply, it does appear that Apple is doing something with its image-sensor chips that the company does not like. The company blamed a longer development cycle on one of its product lines, and a weaker economy, but Apple seems to have been immune to a weak economy. Nobody is buying what OmniVision is selling, and it looks as if Apple is not either. ACTION ITEMS:

Bullish:
Traders who believe that Omnvision will see a ramp up in earnings might want to consider the following trades:

• Shares are trading at less than 6 times 2012 earnings, and are incredibly cheap. If the situation is not as bad as feared, shares offer an incredible value at these levels.

Bearish:
Traders who believe that Apple is moving away from Omnvision may consider alternate positions:

• It does look like Apple is moving away, at least partially, from Omnvision. Sony SNE could benefit, as it also makes image-sensor chips. Traders could go long Sony, short Omnvision on a pairs trade.
  
  

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.