OmniVision Technologies‘ (OVTI) earnings of 25 cents for the fiscal second quarter (ending October 2011) were in line with the Zacks Consensus Estimate. Shares plunged 11.53% regardless, as earnings were significantly lower than both the previous and year-ago quarters.
OmniVision’s results were impacted by a major cutback in orders from some important customers in the consumer segment. Moreover, guidance was significantly below expectations.
Total Revenue
OmniVision’s reported revenue of $217.9 million was down 21.1% sequentially, down 9.0% over the prior year and just over management’s revised guidance range of $212-217 million (previous guidance was for revenue of $255-275 million).
Total unit sales were down 10.0% sequentially to 153 million, while the blended ASP dropped 12.3% to $1.42. The ASP decline was due to a lower mix of high-resolution sensors, as well as typical quarterly price erosion.
Overall, 2 megapixel and higher resolution sensors comprised around 24% of total units shipped, compared to 37% of shipments in the previous quarter. OmniVision maintained that the 8meg category was stable, while the 5meg Omni BSI category declined significantly. 2meg also declined, impacted by weakness in the notebook and entry-level handset markets. However, the new 3meg category is taking its place and growth rates are expected to continue on the growth path.
The 1.3 megapixel category was 23% of total shipments, compared to 18% in the previous quarter. The lowest-ASP VGA and below category was 53% of total shipments, up from 45% in the fiscal first quarter.
Shipment of the 2meg and up, and VGA and below categories declined 29.1% and 26.9%, respectively from the year-ago quarter, while the 1.3meg category grew 58.5%.
Revenue by End Market
All end markets other than entertainment (20% of total revenue) declined in the last quarter. Revenue from the entertainment market grew 12.8% sequentially, although OmniVision stated that the order cutback impacted results in the last quarter. Management also cautioned that this was an area where significant price erosion may be expected given that it was essentially a low-end market.
The camera phone market remains OmniVision’s largest, with a revenue contribution of 60%. OmniVision continues to make inroads into the feature handset market in Asia, in addition to additional wins in the smartphone market. However, revenues were down 23.6% in the last quarter, due to weakness in entry level handsets.
The notebook and webcam segment shrunk as may be expected to 9% of revenue in the last quarter from 15% in the July quarter. Management stated that the weakness OmniVison saw in notebooks was partly on account of a market slowdown and partly on account of supply chain issues related to the Thailand flooding. However, they were optimistic about the impact of Intel Corp‘s (INTC) Ultrabooks and other similar products.
Other emerging products grew from 9% to 11% of revenue in the last quarter, although the segment declined 3.5% in dollar terms. Revenue from the emerging products group is now being driven primarily by the automotive end market.
OmniVision generated a pro forma gross margin of 30.6%, down 107 basis points (bps) from the previous quarter’s 31.7%. The gross margin was impacted by lower volumes, weaker mix, a much softer ASP and inventory adjustments.
The operating expenses of $44.8 million were higher than the previous quarter’s $44.4 million. OmniVision had an operating margin of 10.0% in the last quarter, which was down 552 bps sequentially from 15.6%. The main reason for the operating margin decline was an increase in R&D (as a percentage of sales), although both cost of sales and SG&A were also up.
Net Profit/Loss
The pro forma net income was $14.8 million, or a 6.8% net income margin, compared to $44.3 million, or 16.0% in the preceding quarter and $28.9 million or 12.1% of sales in the same quarter last year.
Including amortization of intangibles and a gain from the acquisition of VisEra operations, which is a JV with Taiwan Semiconductor Manufacturing Company (TSM), the fully diluted GAAP earnings per share were 35 cents, compared to 68 cents in the July 2011 quarter and 50 cents in the year-ago quarter.
Balance Sheet
Inventories were up 74.3% to $250.6 million, yielding annualized inventory turns of 2.4X (compared to 5.2X 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.
The increase in the last quarter was because of the unexpected cutback in orders, which OmniVision will no doubt have to work down in the next quarter. DSOs were 53, up from 46 at the end of the previous quarter.
The company ended with a cash and investments balance of $464.8 million, down $41.3 million during the quarter. OmniVision has $41.0 million in long-term debt and $107.5 million in long-term liabilities.
Guidance
OmniVision’s guidance for the third quarter of fiscal 2012 is as follows–revenue in the range of $160-180 million (down 17-27% sequentially). The Zacks Consensus revenue estimate was $201 million when the company provided guidance, well over the guided range. Earlier this year, OmniVision lost position at Apple Inc‘s (AAPL) iPhone, when Apple selected Sony Corp (SNE) as the primary supplier, pushing OmniVision to the position of second source. The weak guidance could indicate further share losses.
The GAAP earnings attributable to OmniVision shareholders are expected to come in at loss of 6 cents to earnings of cents a share (a very wide range), while the non GAAP earnings excluding share based compensation and the associated tax impact are expected to be 5-17 cents a share. OmniVision stated that the guidance does not consider any share repurchases during the quarter. The Zacks Consensus Estimate for the quarter was 21 cents when the company reported earnings.
Conclusion
OmniVision had a bad quarter and provided a very weak guidance. While management continues to sound optimistic about the company’s prospects and the breadth of markets that it serves, the fact that it lost the iPhone is a big negative. Given OmniVision’s size, this will have a significantly negative impact on its results. Additionally, the guidance missing our expectations on both the top and bottom lines could be indicative of further share losses.
OmniVision shares carry a Zacks #5 Rank of #5, implying a Strong Sell rating in the next 1-3 months.
