OmniVision Technologies (OVTI) reported first-quarter fiscal 2015 (ended Jul 2014) earnings of 78 cents a share, which comfortably beat the Zacks Consensus Estimate of 39 cents. In response to the results, stock improved 2.24% in after-hours trading.
Revenues
OmniVision reported revenues of $406.5 million, up 22.8% sequentially and 8.8% from the year-ago quarter. Also, revenues surpassed management’s guidance range of $360.0–$400.0 million as well as the Zacks Consensus Estimate of $384.0 million, driven by strength in mobile phone and automotive businesses.
Total unit sales were up 23.9% sequentially to $249.0 million, driven by increases in 5-megapixel (MP) and HD sensors. However, the blended average selling price (ASP) was $1.63 versus $1.64 in the last quarter.
Overall, the 8-MP and above category, which represents mainstream cameras in flagship smartphone segment, comprised around 10% of total units versus 9% in the prior quarter. The sequential increase in this category was driven by increased shipment of 8 and 13-MP sensors. The 3 to 5-MP category, which represents main cameras in the mainstream smartphone segment, constituted 40% of total shipments versus 34% in the prior quarter. Lastly, the 2-MP and below category constituted 50% of total shipments versus 57% in the prior quarter.
Revenues by End Market
*Note: The automotive segment will be reported as a separate category beginning the first quarter of fiscal 2015.
The mobile phone market remains OmniVision’s largest, contributing 69% of revenues, flat sequentially. The increase in mobile sales was due to significant growth in the Asia region business, particularly smartphone original equipment manufacturers (OEMs) in China.
Currently, China is the largest mobile market worldwide and the company witnessed strong demand for all major resolution categories, led in order by 5-MP, HD, 8-MP, 2-MP, and 13-MP resolutions. Additionally, the company expects strong demand for its image sensor resolutions, ranging from VGA to 13-MP in other Asian markets, including India.
We believe the full-HD format sensors will witness a rise in demand as all major handset OEMs are using VGA with HD sensors for the front camera in smart devices.
The entertainment end market contributed 16% to revenues, up from 15% in the prior quarter, due to seasonal growth in shipments in the tablet segment. Also, the company witnessed steady shipments in the gaming segment for console and handheld products. However, cannibalization from phablet phones and convertible notebooks will lead to lower sales, going forward.
Wearable computers or smart 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 trend.
Notebook and webcam segment contributed 6% to revenues in the first quarter, up from 5% in the fourth quarter. The next generation 720p OV9728 sensor witnessed strong demand and accounted for most of the revenues in this market.
OmniVision is trying to develop cost-friendly products 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.
The automotive end market, including camera systems which OEMs embed in the automobile as well as those sold in the aftermarket to consumers, contributed 4% to revenues and grew over 50% year on year. On a sequential basis, automotive grew in double-digit percentages.
In the automotive market, the company’s sensors are mostly being used for surround-view systems (SVS) and rear-view cameras (RVC), lane departure warning (LDW) and lane keep assist systems (LKAS). Management expects cars to have more cameras for exterior and interior functions and a fully autonomously-driven car in the future. The transition to autonomous driving will create a demand for more advanced imaging solutions and algorithms, increasing the demand for OmniVision’s sensors.
Other emerging products, which will now include security and medical, DSC, and other miscellaneous subcategories, contributed 4% of revenues in the reported quarter. Revenues from the emerging products group are now being driven primarily by the security market. During the quarter, the company witnessed strong growth in its security business due to the consistent growth in IP digital camera products. The company secured design wins in 4-MP BSI-2-based OV4688, legacy 5-MP BSI-1-based OV5650 derivatives as well as automobile-based OV10635-based derivatives.
Margins
OmniVision reported gross margin of 21.7%, up 160 basis points (bps) from the previous quarter’s 20.1% and 430 bps from 17.4% in the year-ago quarter. The increase in gross margin was due to a favorable product mix shift toward the company’s newer and higher resolution products.
Operating expenses of $56.3 million were higher than $48.2 million incurred in the year-ago quarter. As a percentage of sales, research & development expenses increased from the year-ago quarter, while selling, general & administrative expenses decreased. The net result was an operating margin of 7.9% in the quarter, up 360 bps sequentially and 340 bps from the year-ago quarter.
Net Profit/Loss
Total net income for the first quarter of fiscal 2015 was $45.3 million or 78 cents per share compared with $15.1 million or 26 cents in the previous quarter and $23.1 million or 42 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 $45.3 million (11.1% of sales) compared with $15.1 million or 4.6% net income margin in the preceding quarter and $23.1 million or 6.2% of sales in the same quarter last year.
Balance Sheet
Inventories were up 6.3% to $288.1 million from $270.9 million in the previous quarter. DSOs were 40 days, down from 46 days at the end of the previous quarter.
OmniVision ended the quarter with cash and investments balance of $524.2 million, up from $450.9 million during the previous quarter. The company has $31.9 million in long-term debt and $116.8 million in total long-term liabilities.
Guidance
For the second quarter of fiscal 2015, OmniVision expects revenues in the range of $360.0–$390.0 million. GAAP earnings per share are expected in the range of 29–45 cents and non-GAAP earnings, excluding share-based compensation and the associated tax impact, in the range of 43–59 cents per share. The Zacks Consensus Estimate for earnings is pegged at 34 cents.
Conclusion
OmniVision has solidified its position in the handset market and expanded into other areas leveraging its superior technology. The company reported strong first-quarter results with both the top and bottom-line figures beating the Zacks Consensus Estimate.
We commend 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.
Further, we are positive about OmniVision's pixel technology and 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 in the Chinese market, which is a big positive. Also, the company is seeing growth at major OEMs in India, expecting India to become an important geography for OmniVision over the next few years.
OmniVision has a Zacks Rank #2 (Buy). Other better-ranked stocks that are performing well at the current levels include World Energy Solutions, Inc. (XWES), sporting a Zacks Rank #1 (Strong Buy), and Garmin Ltd. (GRMN) and Mercadolibre, Inc. (MELI), with a Zacks Rank #2.
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