OmniVision's Net Up, Shares Soar - Analyst Blog

OmniVision Technologies' (OVTI) earnings of 50 cents for the fiscal second quarter (ending October 2010) beat the Zacks Consensus Estimate by 7 cents. The company's shares jumped 4.31% in response to the news.

Total Revenue

OmniVision's reported revenue of $239.5 million was up 24.0% sequentially, 30.6% over the prior year and exceeded the Zacks Consensus Estimate by 3.2%. Revenue was at the high end of management's guidance range of $220-240 million (up 13.9% to up 24.3% sequentially). OmniVision's strong revenues were driven by the emerging products category. Its new products — the BSI HD sensor OV9726 and the VGA sensor OV3738 — did particularly well.

Total unit sales were up 38.1% sequentially to 185 million, while the blended ASP dropped 10.2% to $1.29. The ASP decline was due to the changing mix, as OmniVision's strong-selling new products carry lower ASPs.

Overall, 2 megapixel and higher resolution sensors comprised around 28% of total units shipped, compared to 33% of shipments in the previous quarter. The strongest products here were the 5 megapixel and 8 megapixel BSI sensors, with the 5 meg category remaining the fastest growing sensor for OmniVision for the second straight quarter. The 1.3 megapixel category was 12% of total shipments, compared to 10% in the previous quarter. The lowest-ASP VGA and below category was 60% of total shipments, up from 57% in the fiscal first quarter. Shipment of the 2 megapixel and up, 1.3 megapixel and VGA categories increased sequentially by 17.1%, 65.7% and 45.3%, respectively.

Revenue by End Market

The camera phone, notebook and other emerging products (security, auto, video game consoles, toys, medical, etc) generated 60%, 15% and 25% of OmniVision's total revenue, respectively. The notebook market was the only one that saw a sequential decline (down 2.1%). Camera phones were up 12.8%, while other emerging markets were up 106.7% sequentially. Revenues from the camera phone and other emerging product markets were up 30.6% and 63.3%, respectively, from the year-ago quarter. Notebooks were very weak, even declining in the sequential comparison by 2.0%.

The camera phone market is OmniVision's core market, where the company continues to benefit from the rapid growth in smartphones. The decline in notebooks was not unexpected, as this market has seen an inventory correction and has also been impacted by the growing tablet market. We are, however, encouraged by OmniVision's position at Apple Inc. (AAPL) and the fact that its sensors are going into Apple iPads.

Margins

OmniVision generated a pro forma gross margin of 28.2%, up 126 basis points (bps) from the previous quarter's 26.9%. The gross margin benefited from higher volumes that were partially offset by a lower ASP.

The operating expenses of $35.6 million were higher than the previous quarter's $34.6 million. OmniVision had an operating margin of 13.3% in the last quarter, which was up 428 bps sequentially from 9.0%. Cost of sales, R&D and SG&A were almost equally responsible for the improvement, since all expenses declined as a percentage of sales, displaying the leverage in the model.

Net Profit/Loss

The pro forma net income was $28.9 million, or a 12.1% net income margin, compared to $16.9 million, or 8.8% in the preceding quarter and $7.9 million or 4.3% of sales in the same quarter last year. There were no special items in the last quarter.

Accordingly, OmniVision's fully diluted GAAP earnings per share were 50 cents, compared to 30 cents in the July 2010 quarter and 15 cents in the year-ago quarter. This was better than the mid point of management's guidance range of 36-49 cents.

Balance Sheet 

Inventories were down 14.0% to $121.3 million, yielding annualized inventory turns of 4.0x (compared to 5.7x at the end of the previous quarter). OmniVision has previously stated that turns of 4.0x to 5.0x were reasonable, given the short lead times. DSOs were 43, down slightly from 44 at the end of the previous quarter.

The company ended with a cash and investments balance of $396.7 million, up $47.7 million during the quarter. OmniVision has $44.0 million in long-term debt and $100.4 million in long-term liabilities. 

Guidance

OmniVision's guidance for the third quarter of fiscal 2011 is as follows — revenue in the range of $230-250 million (down 4.0% to up 4.4% sequentially). The Zacks Consensus revenue estimate was $209 million when the company provided guidance, way below the guided range. The strong revenue guidance is due to the increasing adoption of OmniVision's BSI and CameraCube technologies, which have been very popular with customers.  

The GAAP earnings attributable to OmniVision shareholders are expected to come in at 41-54 cents a share, while the non GAAP earnings excluding share based compensation and the associated tax impact are expected to be 50-63 cents a share.

Zacks Rank

OmniVision has seen momentum in the business over the past two quarters and analysts are growing increasing positive about its prospects. The company has not only maintained its leadership position in the camera phone market, but has also successfully expanded into other areas. We think this diversification will enable it to generate stable revenues and grow earnings. While the exposure to notebooks may be a negative in the current environment, we are not really concerned since the company is also well-exposed to other portable computing devices. However, OmniVision shares have a short term Buy rating (Zacks #2 Rank), since we think investors are likely to discount this exposure. Other players in the market, such as Silicon Image (SIMG) and Amtec Systems (ASYS) have Strong Buy ratings (Zacks #1 Rank). 

 
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