OmniVision Technologies’ (OVTI) third quarter earnings of 75 cents a share beat the Zacks Consensus Estimate by 26 cents, or 53.1%. The company’s shares jumped 14.68% in response to the news.
Total Revenue
OmniVision’s reported revenue of $265.7 million was up 10.9% sequentially, 69.3% over the prior year and exceeded the Zacks Consensus Estimate by 9.8%. Revenue was at the high end of management’s guidance range of $230-250 million (down 4.0% to up 4.4% sequentially). OmniVision’s strong revenues were driven by the camera phones.
Total unit sales were up 4.9% sequentially to 194 million, while the blended ASP jumped 5.8% to $1.37. The increase in ASP was mainly on account of the changing mix, as high-resolution BSI sensors outgrew other categories.
Overall, 2 megapixel and higher resolution sensors comprised around 29% of total units shipped, compared to 28% of shipments in the previous quarter. The 5 megapixel and 8 megapixel BSI sensors continued to do very well. The 1.3 megapixel category was 11% of total shipments, compared to 12% in the previous quarter.
The lowest-ASP VGA and below category remained comprised 60% of total shipments, similar to the second quarter. Shipment of the 2 megapixel and up, and VGA categories increased sequentially by 8.6% and 4.9%, respectively, while the 1.3 megapixel category declined 3.9%.
Revenue by End Market
The camera phone, notebook/webcam and other emerging products (security, auto, video game consoles, toys, medical, etc.) generated 72%, 10% and 18% of OmniVision’s total revenue, respectively.
Camera phones were up 33.1% sequentially and 103.1% year over year. OmniVision benefited from its focus on the smartphone segment, which continues to grow much faster than the overall mobile phone market. In the last quarter, the company saw phenomenal growth here, as its customers, such as Apple Inc (AAPL) grew strongly.
Management also stated that OmniVision had entered into strategic relationships with its partners here for next generation products.
Revenue from the notebook market slid 26.0% sequentially and 32.3% year over year. The decline in the notebook market is a concern. Although management explained the situation away by saying that it had taken a strategic decision to go with some customers and not others, we think the company is probably leaving revenue on the table. OmniVision is seeing supply issues, so this could be the reason it is unable to meet demand.
Other emerging products declined 20.1% sequentially, but increased 103.1% from last year. OmniVision started discussing entertainment products (basically mobile devices) under this category and included tablets here.
Given that the tablet market is growing in leaps and bounds and OmniVision sensors are designed into many of them, the category should see some strong growth this year. Management stated that tablets incorporating its sensors would ship later this year.
OmniVision generated a pro forma gross margin of 29.8%, up 165 basis points (bps) from the previous quarter’s 28.2%. A combination of higher volumes and higher ASP raised the gross margin.
The operating expenses of $38.6 million were higher than the previous quarter’s $35.6 million. OmniVision had an operating margin of 15.3% in the last quarter, which was up 202 bps sequentially from 13.3%. Lower cost of sales was the primary reason for the improvement, although a slightly lower SG&A helped.
Net Profit/Loss
The pro forma net income was $44.7 million, or a 16.8% net income margin, compared to $28.9 million, or 12.1% in the preceding quarter and $5.8 million or 3.7% 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 75 cents, compared to 50 cents in the September 2010 quarter and 9 cents in the year-ago quarter. This was better than the mid point of management’s guidance range of 41-54 cents.
Balance Sheet
Inventories were down 22.8% to $93.6 million, yielding annualized inventory turns of 8.0X (compared to 5.7X at the end of the previous quarter). DSOs were 41, down slightly from 43 at the end of the previous quarter.
The company ended with a cash and investments balance of $498.9 million, up $102.2 million during the quarter. OmniVision has $42.6 million in long-term debt and $97.7 million in long-term liabilities.
Guidance
OmniVision’s guidance for the fourth quarter of fiscal 2011 is as follows—revenue in the range of $240-260 million (down 9.7% to 2.1% sequentially). The Zacks Consensus revenue estimate was $217 million when the company provided guidance, way below the guided range. The strong revenue guidance is due to the increasing adoption of OmniVision’s BSI and CameraCube technologies, which have been very popular with customers.
The GAAP earnings attributable to OmniVision shareholders are expected to come in at 48-61 cents a share, while the non GAAP earnings excluding share based compensation and the associated tax impact are expected to be 57-70 cents a share.
Our Recommendation
OmniVision reported a solid quarter and provided encouraging guidance. The company has been trying to diversify its income for some time now and the last quarter’s results and management expectations for 2011 indicate that it is at last making some real progress.
While we are much more positive about its growing opportunities, we think that revenue declines in the notebook market are of concern. Additionally, OmniVision is likely to see increasing competition from Sony Corp (SNE) and Samsung, both of which have developed competing sensors based on BSI technology.
OmniVision shares have a Zacks Rank of #3, signifying a short-term Hold recommendation.
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