OmniVision Technologies (OVTI) reported second-quarter fiscal 2014 (ended Oct 2013) earnings of 47 cents a share, which comfortably beat the Zacks Consensus Estimate of 29 cents.
Revenues
OmniVision reported revenues of $397.2 million, up 6.3% sequentially and 1.8% over the year-ago quarter. Revenues were at the higher end of management’s guidance range of $375.0 million–$410.0 million.
Total unit sales were up 13.9% sequentially to $237.0 million while the blended average selling price (ASP) decreased 6.7% sequentially and came in at $1.67. The decrease in ASP was due to unfavorable product mix, reflecting the ramp up of new 720p HD sensor shipments to Tier 1 smartphone platforms as well as increasing competition in China.
Overall, 2-megapixel and higher resolution sensors comprised around 36.0% of total units versus 47.0% in the prior quarter. The 1.3-megapixel category constituted 50.0% of total shipments versus 39.0% in the prior quarter. The sequential increase in this category was due to the ramp up of new 720p BSI-2-based sensor for Tier 1 platform. The VGA category constituted 14% of total shipments, flat sequentially.
Revenues by End Market
The mobile phone market remains OmniVision’s largest, with a revenue contribution of 60.0% compared with 63.0% in the prior quarter. Currently, China has become the largest mobile market worldwide and the company witnessed steady demand for 5-megapixel and 8-megapixel sensors for smartphones in the Chinese market. Additionally, the company expects strong demand for its 4-megapixel sensor in the Asian markets.
We believe that the full HD format sensors will witness a rise in demand as all major handset original equipment manufacturers (OEMs) are using VGA with HD sensors for the front-facing camera in smart devices. This is a positive for OmniVision.
The entertainment end market contributed 25.0% of revenues, up from 22.0% in the prior quarter, due to strength in the tablet segment. The ramp up of OmniVision’s 5-megapixel BSI-2 sensors and 720p HD sensors helped drive the demand in this segment.
We believe that tablet sales will pick up as all the major OEMs are planning to launch the latest models, which may boost demand. Further, the rise in demand of smart TVs, which come with built-in cameras, is likely to boost demand for OmniVision’s 5-megapixel BSI-2 sensors.
Wearable computers or smartphone devices are the next step in mobile electronics. The tech companies are blending the fashion quotient to market their new unique devices better and we believe OmniVision is well-positioned to capitalize on this opportunity.
Contribution of the notebook and webcam segment decreased to 5.0% of revenues in the second quarter from 7% in the first quarter. Though the tablets have cannibalized the notebook market, OmniVision is trying to develop products that offer a cost benefit with improved performance. Many of the OEMs are using sensors to develop human interface solutions like gesture and eye tracking control for PC users. Also, the company is working on various imaging-based technologies with OEMs in order to drive growth in this segment.
Other emerging productscontributed 10.0% of revenues in the second quarter. Revenues from the emerging products group are now being driven primarily by the automotive end market and the security market. High-performance 720-P HD, 1080p and VGA sensors are the primary products in this market. During the quarter, the company witnessed strong growth in its security business due to the continuing increase of IP digital camera products.
Margins
OmniVision reported gross margin of 18.8%, up 140 basis points (bps) from the previous quarter’s 17.4% and 220 bps from 16.6% in the year-ago quarter. The increase in gross margin was due to improved production yields for 1-megapixel and 5-megapixel products as well as favorable net adjustment to gross margin from the sale of previously written-off inventory and allowance for excess and obsolete inventories.
Operating expenses of $49.9 million were lower than $50.8 million incurred in the year-ago quarter. OmniVision reported operating margin of 6.3% in the quarter, up 180 bps sequentially and 270 bps from the year-ago quarter. As a percentage of sales, research and development expense was down, while selling, general and administrative expense was flat from the year-ago quarter.
Net Profit/Loss
Total net income for the second quarter of fiscal 2014 was $26.3 million or 47 cents per share compared with $23.1 million or 42 cents in the previous quarter and $10.3 million or 19 cents in the year-ago quarter.
There were no one-time items in the quarter. Consequently, pro-forma net income was the same as GAAP net income of $26.3 million (6.6% of sales) compared to $23.1 million or a 6.2% net income margin in the preceding quarter and $10.3 million or 2.7% of sales in the same quarter last year.
Balance Sheet
Inventories were down 8.5% to $390.3 million from $426.6 million in the previous quarter. DSOs were 40 days, down from 43 days at the end of the previous quarter.
The company ended the quarter with cash and investments balance of $265.6 million, up from $240.5 million during the previous quarter. OmniVision has $35.6 million in long-term debt and $123.0 million in total long-term liabilities.
Guidance
For the third quarter of 2014, OmniVision expects revenues in the range of $310.0 million–$340.0 million, down 18.2% sequentially at the mid-point. Management stated that the guidance reflects lower HD sensor shipments, seasonal slowdown in the automotive market and weak end-customer business trends.
GAAP earnings per share are expected in the range of 14 cents–30 cents and non-GAAP earnings, excluding share-based compensation and the associated tax impact, in the range of 28 cents–44 cents per share.
Conclusion
OmniVision has leveraged its superior technology to solidify its position in the handset market and also expanded into other areas. The company reported strong second-quarter results with both the top and bottom lines exceeding the prior-year figures.
We like its product roadmap, growth prospects, cost structure improvement, market diversification and management execution and believe that it will be able to deal with the short product life cycles and temporary slowdown in the computing and smartphone markets.
Further, we are positive about OmniVision's camera-cube chip technology for low resolution cameras, which normally forms the front-facing camera in smart devices.
Automobile OEMs are rapidly deploying camera sensors in vehicles such as rearview and surround view. OmniVision has gained significant market share at major OEMs in Europe and North America, which may boost its revenues in the future.
OmniVision’s shares carry a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Cabot Microelectronics Corp. (CCMP), Advanced Photonix Inc. (API) and Amkor Technology, Inc. (AMKR). All these stocks carry a Zacks Rank #2 (Buy).
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