OmniVision Technologies (OVTI) reported third-quarter fiscal 2015 (ended Jan 2015) earnings per share of 23 cents, which comfortably beat the Zacks Consensus Estimate of 14 cents. However, the earnings were down 50.6% sequentially and 57.1% year over year, primarily on account of lower revenues.
Following the earnings announcement, the stock rose 3.7% in the after-hours trading session due to encouraging guidance, indicating enhanced growth prospects.
Revenues
OmniVision reported revenues of $292.3 million, down 25.8% sequentially and 17.0% from the year-ago quarter. However, revenues were within the management-guided range of $275.0–$305.0 million. The top line also surpassed the Zacks Consensus Estimate of $290.0 million.
The mobile phone market is very important for OmniVision (contributing 67% in the last quarter). Segment sales weakened significantly (as expected) because of inventory clearance and 4G transition-related slowdown in China. Overall prospects in China, India and Korea are good and there was also an important customer win in Korea.
The company’s notebook PC segment also saw a decline in revenues due to the commoditization of the camera feature in notebooks.
The company’s automotive business continued its strong growth momentum during the quarter and helped to offset some of the decline in the mobile phone market.
Margins
OmniVision reported gross margin of 22.1%, up 14 basis points (bps) from the previous quarter’s 22.0%. The reported figure also improved 245 bps from 19.6% in the year-ago quarter. The expansion in gross margin was due to a favorable product mix shift toward the company’s newer and higher resolution products, as well as productivity improvements, which reduced the cost of production.
Operating expenses of $55.0 million were 3.0% lower than the prior quarter and 7.2% higher than the year-ago quarter. Both research & development and selling, and general & administrative expenses increased from the year-ago quarter but decreased sequentially. The net result was an operating margin of 3.3%, down 427 bps sequentially and 178 bps year over year.
Net Profit/Loss
Total net income for the second quarter of fiscal 2015 was $14.0 million or 23 cents per share compared with $28.0 million or 47 cents in the previous quarter and $30.6 million or 54 cents in the year-ago quarter. The net margin of 4.8% was lower than the 7.1% in the previous quarter and 8.7% in the year-ago quarter.
There were no one-time items.
Balance Sheet
OmniVision ended the quarter with cash and investments balance of $512.8 million, down $12.4 million from $525.2 million during the last quarter. Inventories were up 7.8% to $366.4 million from $340.0 million in the previous quarter. The company has $25.1 million in long-term debt and $98.1 million in total long-term liabilities.
Guidance
For the fourth quarter of fiscal 2015, OmniVision expects revenues in the range of $265.0–$295.0 million. The Zacks Consensus Estimate for revenues is pegged at 262 millions. GAAP earnings per share are expected in the range of 2–18 cents. Non-GAAP earnings, excluding share-based compensation and the associated tax impact, are likely to range between15 cents and 31 cents. The Zacks Consensus Estimate for earnings is pegged at breakeven.
Conclusion
OmniVision has solidified its position in the handset market and has also expanded into other areas leveraging its superior technology. The company reported encouraging second-quarter results with both the top- and bottom-line figures beating the Zacks Consensus Estimate.
We commend the company’s product roadmap, growth prospects, cost structure improvement, market diversification and management execution. Further, we are positive about OmniVision's pixel technology and camera-cube chip technology for low-resolution cameras, which normally form the front-facing camera in smart devices.
The mobile market, especially in emerging markets like China, India and Korea continues to show strong growth trends. The company already has a strong position in China, which is the manufacturing destination for many phone-makers across the world. The local Indian market is looking up and the company has increased investment in the region.
Management also mentioned an important customer win in Korea, so growth prospects look bright. Additionally, management said that the slowdown in China related to technology transition and inventory accumulation had probably run its course, so the business may be expected to look up going forward.
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 – a major positive. Also, the company is seeing improvement at major OEMs in India, expecting the country to become a major growth driver for OmniVision over the next few years.
As OmniVision continues its growth momentum in Asia and other emerging economies, it can result in volatility in the company’s financial results, at least in the near-term. But we expect it to witness long-term growth.
However, increased competition, North American challenges and price pressures remain concerns.
Currently, OmniVision carries a Zacks Rank #3 (Hold). Better-ranked stocks from the same industry include Amkor Technology, Inc. (AMKR), Cirrus Logic Inc. (CRUS) and FormFactor Inc. (FORM). Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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