OmniVision Technologies(OVTI) fourth quarter earnings of 57 cents a share beat the Zacks Consensus Estimate by a penny, or 1.8%. This was significantly lower than the average positive surprise of 27.2% in the three preceding quarters. So it was not surprising that share prices plunged 8.9% the following day.

It is not unnatural for the April quarter to see a slowdown, since most of OmniVision’s technology goes into consumer-type products, which tend to be very heavy in the holiday season and decline thereafter.

Total Revenue

OmniVision’s reported revenue of $258.3 million was down 2.8% sequentially and up 64.3% over the prior year. Revenue was at the high end of management’s guidance range of $240-260 million (down 9.7% to 2.1% sequentially).

Total unit sales were down 12.9% sequentially to 169 million, while the blended ASP jumped 11.6% to $1.53. OmniVision stated that the average price erosion ranged between 10% and 15%, although the growing mix of higher-resolution sensors were currently offsetting the impact.

Overall, 2 megapixel and higher resolution sensors comprised around 37% of total units shipped, a decline of 2.3% from the previous quarter. The 5 megapixel and 8 megapixel BSI sensors continued to do very well.

The 1.3 megapixel category was 18% of total shipments, an increase of 42.5% from the previous quarter. The lowest-ASP VGA and below category brought in the remaining 45%, down 30.0% sequentially.

Revenue by End Market

The camera phone, notebook/webcam and other emerging or entertainment products (tablets, security, auto, video game consoles, toys, medical, etc) generated 65%, 15% and 20% of OmniVision’s total revenue, respectively.

Camera phones were down 12.2% sequentially but up 94.2% year over year. OmniVision benefited from its focus on the smartphone segment, which continues to grow much faster than the overall mobile phone market. OmniVision quoted an independent market research report, which stated that the smartphone market would be up 49% in 2011.

This, along with the opportunity to grow within the market, will continue driving results. The popularity of two-way cameras (for video conferencing) is increasing demand for its sensors, which is increasing the content OmniVision sells into smartphones.

Revenue from the notebook market jumped 45.8% sequentially to 15% of quarterly revenue. However, this represented a 17.8% decline from the year-ago quarter.

The notebook market overall is seeing some challenges, on account of cannibalization by Apple Inc’s (AAPL) iPad and other tablets, so OmniVision is naturally affected by that. However, the company’s penetration opportunities within the market continue to increase, as video conferencing becomes more in demand.

Other emerging products increased 8.0% sequentially and 119.1% from last year, primarily on account of tablets, where OmniVision’s products are benefiting from the many new products coming to market.

While the company’s products are currently designed into high-end cars, regulatory mandate regarding rear-view vision is expected to drive demand for OmniVision sensors even among lower-range models. However, given the nature of the market, design wins secured this year are not likely to contribute to revenue until 2013.

Margins

OmniVision generated a pro forma gross margin of 30.7%, up 93 basis points (bps) from the previous quarter’s 29.8%. A more positive mix of business helped drive the ASP during the quarter, which offset the decline in volumes.

The operating expenses of $42.6 million were higher than the previous quarter’s $38.6 million. OmniVision had an operating margin of 14.3% in the last quarter, which was down 105 bps sequentially but up 3,645 bps from last year.

The sequential comparison was hurt by significantly higher SG&A expenses as a percentage of sales (cost of sales and R&D more or less offset each other). All expenses were down year over year as a percentage of sales

Net Profit/Loss

The pro forma net income was $34.7 million, or a 13.4% net income margin, compared to $44.7 million, or 16.8% in the preceding quarter and $3.2 million or 2.1% 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 57 cents, compared to 75 cents in the January 2011 quarter and 6 cents in the April quarter of 2010. This was better than the mid-point of management’s guidance range of 48-61 cents.

Balance Sheet 

Inventories were up 14.2% to $106.9 million, yielding annualized inventory turns of 6.7X (compared to 8.0X at the end of the previous quarter). DSOs were 50, up from 41 at the end of the previous quarter.

OmniVision ended with a cash and investments balance of $466.9 million, down $32.0 million during the quarter. During the quarter, OmniVision bought 850 patents related to CMOS image sensor technology that could facilitate next generation performance improvements, miniaturization and cost reductionfrom Eastman Kodak Co (EK) for $65 million in cash. The company has $41.9 million in long-term debt and $92.0 million in long-term liabilities. 

Guidance

OmniVision’s guidance for the first quarter of fiscal 2011 is for revenue in the range of $265-285 million (up 2.6% to 10.4% sequentially).  

The GAAP earnings attributable to OmniVision shareholders are expected to come in at 55-68 cents a share, similar to the Zacks Consensus, which was 63 cents when the company announced results. The non-GAAP earnings excluding share based compensation and the associated tax impact are expected to be 64-77 cents a share.

Our Recommendation

OmniVision’s results and guidance were more or less in line with our expectations. The company has been trying to diversify its income and it now appears that the company is making some progress on that front. While we are much more positive about its growing opportunities, we think that the notebook market will remain sluggish, as the effect of deeper penetration is offset by tablet cannibalization.

OmniVision shares have a Zacks #3 Rank, signifying a short-term Hold recommendation.

 
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