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Executives

Mary McGowan - IR

Shaw Hong - CEO and President

Ray Cisneros - SVP, Worldwide Sales and Sales Operations

Hasan Gadjali - VP, Marketing and Business Development

Anson Chan - CFO and VP, Finance

Analysts

Harsh Kumar -- Stephens Inc

Raji Gill -- Needham & Company

Paul Coster -- JPMorgan

Andrew Uerkwitz -- Oppenheimer

Hans Mosesmann -- Raymond James

Betsy Van Hees -- Wedbush Securities

OmniVision Technologies, Inc. (OVTI) F2Q 2013 Earnings Conference Call November 29, 2012 5:00 PM ET

Operator

Ladies and gentlemen, thank you, and welcome to the OmniVision Technologies Conference Call for the Second Quarter of Fiscal 2013. At this time, all participants are in listen-only mode. Later, we will open up the call for your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference call over to Mary McGowan. Please proceed.

Mary McGowan

Thank you very much. Good afternoon everyone and welcome to our fiscal 2013 second quarter earnings conference call. On today’s call will be Shaw Hong, President and CEO; Ray Cisneros, Senior VP of Worldwide Sales and Sales Operations; Hasan Gadjali, VP of Worldwide Marketing and Business Development and Anson Chan, Chief Financial Officer.

During this conference call, we may make forward-looking statements regarding our business, including statements relating to revenues, earnings targets and our product plans. This is based on information as of today, November 29, 2012. Actual results may differ materially from those set forth in such statements.

These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially. For a discussion of these risk factors, you should review the forward-looking disclosures in the earnings release we issued today as well as the risk factors and other disclosures in OmniVision's SEC filings and reports, including the most recent annual report on Form 10-K and recent quarterly reports on Form 10-Q.

During today's call, we will also discuss certain GAAP and non-GAAP financial measures, the latter of which excludes, stock-based compensation expenses and the related tax effects. A reconciliation between the two is available in our earnings release posted on our website.

With that, I'll now turn the call over to Mr. Shaw Hong. Shaw?

Shaw Hong

Thank you, Mary and welcome to all of you joining us on the call and webcast. Earlier this afternoon, we issued a press release describing our results for the second quarter of fiscal 2013. For those who have not read the release, I will provide you with a recap of our financial results.

In Q2, we recorded a revenue of $390 million and we shipped 249 million in sensors. On a non-GAAP basis, gross margin was 16.8% and net income was $18.6 million or $0.33 per diluted share. Our cash balance decreased by $97 million to $140 million. This was mostly driven by an increase in accounts receivable. We increased $107 million to $249 million.

As many of you may know, because of the seasonal cycle in our business, our fiscal second and third quarters are historically the strongest quarters in the year. This year is shaping up to be the same. And demand for our image sensors has remained robust as we enter our third quarter. We have continued to push our supply chain to build more sensors in order to achieve our full revenue potential.

Before I turn the call over to our management team to provide details on our Q2 financial results and our outlook, I'd like to make a few comments of my own. Once again, we have recorded revenue at the high end of our guidance. As I have indicated earlier, we are also guiding for another strong quarter.

The mobile phone and entertainment markets are the main driver behind our revenue growth. Revenue contribution from smartphones and tablets are particularly small and demand from these product categories have continued to drive our top line performance year.

Our financial performance this quarter along with our outlook give us confidence that we have regained the revenue momentum that we have previously enjoyed and that our investor expect. During our last earnings call, we talked about our need to preview the inventory and the challenges we have been facing. One of the challenges is the need to increase supply to meet our customer's demand. And the other is the need to reduce cost. These challenges are considerable, but we must address them properly.

OmniVision considers a top priority in leading our customer's demand with supply of the best performance centers. As we continue to work our current supply chain for more capacity, we also put a great deal of emphasis in improving our cost structure. We see all opportunities to better manage our supply chain, streamline logistics, expand capacities and to further improve yields. We have and will continue to implement such measure that will further improve our corporate gross margin.

This quarter, we remind our current and the potential investor that it is our investment in R&D of the years that has afforded OmniVision the ability to complete and win in the very competitive environment. We have been and will continue to focus on developing advanced technologies, not only in image sensors but also in complementary technologies such as Image Signal Processing, algorithm and CameraCubeChip.

As a result of our continuing investment in R&D, we have established a wide range of advanced technologies that can support and strengthen our technology position in the industry. Our goal is very clear. With the advanced technologies as our foundation, we will produce exceptional image sensor solutions that can complete successfully in the marketplace. We can then enhance our financial performance and bring value to our stockholders. This is the goal we are aggressively pursuing and one that we expect to achieve.

Now, I would like to share with you a few key data points that illustrate our leadership position in the industry. First, the CMOS image sensor market is seeing strong and increasing unit growth. From 2005 to 2011, the markets compounded annual growth rate was 44%. For the same period, OmniVision experienced a much stronger 49% growth rate.

Second, for our leading OmniBSI-2 sensors, we are seeing more strong market acceptance. We have seen our BSI-2 product ramping significantly in the last few months and we expect this to continue in our third quarter. Between our BSI and BSI-2 products, we are one of the broadest portfolios of image sensors in the marketplace.

Third, we have continued to diversify ourselves beyond mobile phone with success. The mobile phone market, particularly with smartphones is still our leading revenue source. However, we are establishing ourselves in other markets and product segments. For example, OmniVision is the leading supplier in the tablet segment which has seen a 63% compounded annual growth rate since 2010. In the notebook market, despite the softness and the vitality, we are proud to announce that OmniVision has a significant design this year in the notebook and ultrabook segment.

Before I turn the call to Ray, please join me in welcoming Raymond Wu to OmniVision. Raymond, one of the co-founders of OmniVision, has agreed to re-join the company as our President, effective December 1, 2012. During his previous tenure, Raymond's intellect, experience and influence extended to business development, where he focused on from multiple target markets to engineering and to sales. We are enthused by his return. With his knowledge of our company and the industry, I expect Raymond to make significant contributions to OmniVision's continued growth in the years to come.

Now, I will turn the call over to Ray who will provide an update on the quarter's sales activities.

Ray Cisneros

Thank you, Shaw. We are pleased to report on our fiscal second quarter a record quarter in terms of sales and volumes shipped. We continue growth on the smartphone and tablet product categories in conjunction with the steep ramp up of our most recent BSI-2 products were the major contributors to our top line growth.

In our second quarter, we shipped a record 249 million units as compared to 166 million units in our prior quarter. The average selling price in our second quarter was $1.56 as compared to $1.55 in the prior quarter. The step-up in volume in average selling price was due to a shift in resolution sensor product mix, including a significant ramp up in HD sensors and steady increases in 8 and 5 megapixel sensors.

In the second fiscal quarter, unit sales of sensors 2 megapixel and above represented approximately 31% of total shipments, a decrease from 37% in the prior fiscal quarter. On absolute terms, however, 8 and 5 megapixel sensors saw steady growth compared to the prior quarter. Unit sales of 1.3 megapixel sensors represented approximately 48% of total shipments as compared to 31% in the prior quarter.

We remind you that in this category, we incorporate our HD sensors, which is the dominant form factor in this category. The significant step up in this category was driven by the steep growth of the BSI-2 based 720p HD sensor, the OV9760. Due to its superior image quality, this product is broadly used in the secondary camera premier mobile products in the market.

Our legacy BSI-1 based HD 720p sensor, the OV9726 continues to shift to premier notebook brands and other tablet products in our fiscal second quarter, albeit at lower levels due to the market dynamics. A third noteworthy product in this category is the OV9724 or one nine-inch BSI-1 based HD sensor. What's unique about this product is that it is shipping in its traditional sensor package as well as in our proprietary CameraCubeChip form which we call the OVM9724. In its traditional package, the OV9724 is receiving steady acceptance in the ultrabook segment (inaudible) lends itself nicely for the razor-thin vessels of these devices.

In its CameraCubeChip form, it is being accepted as an optimal solution for secondary camera designs in smartphones where its balance and performance cost, manufacturer ability and size are best-in-class.

Lastly, unit sales of sensors that were VGA and below represented approximately 21% of total shipments as compared to 32% in the prior quarter. As mentioned, in previous quarters the steady decline of digital VGA based sensors is natural due to conversion from VGA to native HD 720p resolution in all mobile products. This trend will be pervasive and will continue through the foreseeable future.

In terms of product markets, our mobile phone sales represented approximately 59% of our revenues in the second quarter as compared to 48% in our prior quarter. Our revenues from the entertainment market represented 29% of sales as compared to 27% in our prior quarter. Our sales of sensors into the notebook and webcam market were approximately 6% of sales as compared to 15% in our prior quarter. Other categories balanced out the remainder.

In the mobile market, growth in the smartphone category did not show any signs of slowing down. For OmniVision, this meant a strong step up in shipment volume of 8 megapixel and 5 megapixel sensors. 8 megapixel sensors were the mainstream choice for the main cameras in mid to high end smartphones. We see this trend continuing through the balance of the calendar year and into the following year.

In the Far East Asia market, we saw an explosion of demand for the 5 megapixel quarter-inch sensor for mid-end main cameras and smartphones. We've capitalized on this trend with early customer engagement and alignment of this chipset eco-environment.

A major portion of our mobile revenue growth emanated from a high volume shipment of our new native HD 720p sensor, the OV9760 to the smartphone segment for the secondary camera applications. This trend is pervasive in the smartphone category as secondary camera is transitioned from VGA to HD. The OV9760 is based on our BSI-2 technology and a significant volume we shipped allowed for a continued expansion of capacity into BSI-2 technology generation.

In the notebook and webcam market, we saw a sharp decline. We believe the primary reason for this is the growth of the tablet market. For now the trend points in this direction. What will be the final outcome on how the notebook device will coexist with tablet device will pan out within the next two years. Historically, OmniVision has been the dominant player in the notebook market, and we still intend to closely service this market.

In our fiscal second quarter, our major product shipped to this market with the OV9726, the premier HD camera for the high end notebooks. As another option for OEMs, we also shipped our next-generation HD BSI-1 based sensor, the OV9724. This is a smaller form factor sensor design to serve the extreme small (inaudible) and it allowed OmniVision to stay at the forefront of a market that will be highly volatile in the coming quarters.

In the entertainment market, the tablet product category fueled a significant growth step. The tablet market for the seasonal cycle was partly tested by multiple OEM brand names and OmniVision captured design wins for several major products launched this season. The advent of the small tablet form factor only brought in this target market and the opportunity for OmniVision. We serve the tablet market with both our BSI-1 based products as well as our BSI-2 based products of 5 megapixel and HD sensors.

We foresee the tablet product disrupting the communication and competing space as these devices continue to prove the value for the work in consumer environments. As with the mobile space, we believe our best approach to capitalize on this market is to have deep customer engagements in a broad eco-environment support from chipset providers. We believe we have a good position in both.

One final noteworthy point to make and is the automotive market. Our best-in-class megapixel color high dynamic range sensor, the OV10635 scored major design wins with Tier 1 brand name OEMs in various regions. In summary, we believe our fiscal second quarter results demonstrated our strong position in technology, in our ability to adapt to a highly dynamic marketplace.

Mary McGowan

Thank you, Ray. I will now the turn the call over to Hasan who will provide an overview of the company's marketing efforts and opportunities.

Hasan Gadjali

Thank you, Shaw. This quarter I would like to start by highlighting the market acceptance and exceptional growth of our OmniBSI+ and OmniBSI-2 based products. In Q2 we launched four more BSI based products contributing significantly to our strong market position and revenue growth. Using our advanced BSI pixel technologies, OmniVision consistently delivers innovative solutions that drive imaging trends in the highly competitive mobile and smartphone markets.

In our second fiscal quarter, we introduced some significant performance and quality improvement to our OmniBSI+ and OmniBSI-2 pixel architectures. The launch of our new OV8835 8 megapixel camera chip sensor for smartphone and tablet features improved 1.4 micron OmniBSI-2 pixel. The upgrade pixel of a 20% improvement in sensitivity and low live performance and a 25% improvement in (inaudible) capacity.

In additional to best-in-class pixel performance, the OV8835 also delivers full resolution 8 megapixel photography and 1080p HD video at 30 fame per second, making it a highly attractive camera upgrade for next-generation smartphones than tablets.

The recently launched OV5656 is another strong addition to our portfolio. Using an improved 1.75 micron OmniBSI+ pixel design, this cost effective 5 megapixel camera chip sensor deliver a 28% improvement in (inaudible) capacity has significantly improved dynamic range in a smaller [die] size, making it a highly competitive solution for video-centric applications.

Compared to the previous generation OV5650, the OV5656 delivers several performance improvements, including full resolution, high speed photography, 1080p and 1020p HD video. Within our market demand prediction of around 450 million 5 megapixel image sensor for the next three years, the OV5656 high performance and competitive cost structure make it a highly desirable camera solution for OEMs across multiple markets.

Continuing on the 5 megapixel segment, the launch of our OV5645 SOC sensor addresses the exploding cost-sensitive segment of the mobile handset market by retaining only a (inaudible) and eliminating both the DVP interface and an expensive JPEG compressor, the OV5645 saves cost by reducing significantly amount of silicon while maintaining full compatibility with more space than processors.

In embedded auto focus control with voice [quality] motor driven offers further cost saving, providing handset manufacturer with both 40 features yet extremely cost effective solution that delivers the high quality image capture and HD video currently required in the mainstream handset market.

A key new technology development introduced this quarter and featured in the OV5645 is our new picture in picture architecture. This offers an easy to implement low cost, dual camera system solution for mobile handset and smartphones. The feature is based on a master-slave configuration where a secondary camera can be connected to the master camera on the mobile device eliminating the need for an additional MIFI interface into the baseline processor. By utilizing this feature, manufacturers can convert existing single-camera smartphone design to dual camera system without the need of more expensive baseband processors.

In summary, our ability to continue advancing OmniBSI pixel technology has resulted in improved product performance and significant cost benefit because OmniVision offer a broad cost competitive product portfolio. We are well positioned for both mass market and premium applications.

Moving on to CameraCubeChip, this past quarter we introduced the industry's most compact CameraCubeChip to-date with a dimension of 2.4 by 2.4 by 2.3 millimeters, the OVM7695 offers an easy to integrate secondary camera solution for mobile devices. Front-facing cameras have now become a defining feature in mobile devices and set-makers are always looking to providing a better video recording experience within tighter space constraints.

At OmniVision we recognize this trend early on. So we committed our most advanced BSI technology to this VGA product using an optimized OmniBSI+ pixel, the OVM7695 delivered the high quality video that consumer expect in a remarkably chain form factor and because the OVM7695 has minimal tuning requirements, it reduces production cost and time to market for manufacturers.

On our higher resolution side, we continue to engage with customers to ensure our OVM9724 is qualified into their product. This qualification steps will ensure our OVM9724 meets the performance and the specification requirement for the hasty secondary smartphones. We anticipate we will be in full production in the first half of 2013.

Concluding with an update on our emerging markets, I would like to talk about progress we have made in automotive markets. Last month, we launched the OV480, a companionship the offer electronic image distortion correction to enhance performance in wide field of view automotive vehicle system. The OV480 can correct lens distortion of up to 195 degree allowing a single camera design to be used across multiple vehicles platform. This reduces the designing and integration costs associated with rear views and 360 degree surround view systems.

The OV480 processor supports a wide range of OmniVision's automotive sensor, delivering excellence in reproduction in the most difficult lighting conditions and providing drivers with an unparallel feature rich driving experience. Last month, we announced a high profile design win in the automotive market. Tesla Motors selected our flagship automotive sensor, the OV10630 for its new award winning Model S.

Tesla Model S is the world's first premium electric sedan and we are extremely proud to be part of this beautiful piece of precision engineering. It underscores our strong position as a leading provider of some of the most advanced imaging application in the world. Throughout all our imaging markets, we continue to make meaningful progress often as a first mover. Mid to long term, we continue to view emerging markets as a significant and sustainable growth opportunities.

Shaw Hong

Thank you, Hasan. I will now turn the call over to Anson who will discuss our second quarter financial performance and to provide guidance for our third quarter of fiscal 2013.

Anson Chan

Thank you, Shaw, and good afternoon everyone. For the second quarter of fiscal 2013, we are reporting revenues of $390.1 million, up 61.2% sequentially and up 79% on a year-over-year basis. Direct sales to OEMs and buyers accounted for 85.2% of our revenues in the second quarter of fiscal 2013, an increase from 72.5% in the prior quarter. The remainder of our revenues came from sales throughout distributor channels.

Our fiscal 2013 second quarter GAAP gross margin was 16.6% compared with 19.1% that we reported in our prior quarter. Excluding stock-based compensation expense of $1 million included in cost of revenues, our non-GAAP gross margin was 16.8% compared with 19.5% in the prior quarter. The decrease in our gross margin was the result of a significant increase in shipment mix of our OmniBSI-2 based products.

As we have discussed in our previous call, these products have relatively high cost basis when compared to our older products. And so we increased our OmniBSI-2 mix in our fiscal Q2, our overall gross margin dropped. Regarding the one-off items in the second quarter of fiscal 2013, we've recorded approximately $2.8 million for the sale of previously written down inventory and $6.5 million as an additional allowance for excess and obsolete inventories with a net $3.7 million of unfavorable impact on our gross margin.

In the first quarter of fiscal 2013, we recorded approximately 1.4 million for the sale of previously written down inventory and $4.9 million as an additional allowance for excess and obsolete inventories with a net $3.5 million of unfavorable impact on our gross margin.

For our third fiscal quarter of 2013, we will be depleting our more expensive inventories that we have built earlier during the year and gradually replenish our inventory stock with better price devices from our supply chain financed. Our goal is to achieve further reductions in our OmniBSI-2 production cost on a go-forward basis.

R&D expense in the second quarter of fiscal 2013 totaled $30.4 million, a 5.2% increase from the $28.8 million in our fiscal 2013 first quarter. The increase in R&D expense was driven by increase in take-outs and other non-recurring engineering expenses. We currently expect that our R&D expense in third quarter of fiscal 2013 will be comparable to the second quarter.

R&D expense in the second quarter included approximately $4.1 million of stock-based compensation expense. Excluding stock-based compensation expense, second quarter R&D expense was $26.2 million as compared to $24.1 million in the first quarter of fiscal 2013.

SG&A expenses in the second quarter of fiscal 2013 totaled $18.1 million, a 3.2% decrease from the $18.7 million in our fiscal 2013 first quarter. Even though our top line grew by 51.2%, the absolute dollar amount of sales through our channel partners actually decreased which has in turn lowered our overall commission payment in the second quarter. For our third quarter of fiscal 2013, we expect SG&A expenses to increase slightly.

Our second quarter SG&A expenses included approximately $3.3 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A expenses in the second quarter totaled $14.8 million compared to $15 million in the first fiscal quarter. The second quarter amortization expense for our acquired patent portfolio was $2.3 million, the same as our prior quarter.

Our GAAP operating income in the second quarter totaled approximately $13.9 million as compared to an operating loss of $682,000 in the prior quarter. Our GAAP pre-tax income in the second quarter totaled $14.6 million as compared to a pre-tax loss of $206,000 in the prior quarter.

Our GAAP tax provision for the second quarter was $4.2 million. This compares with an income tax benefit of $2.5 million in the prior quarter. As a reminder, included in the first quarter GAAP tax benefit was a reverse of a certain previously recorded tax reserves when the statute of limitations for the related tax matters expire. This reversal resulted in a one-time non-cash tax benefit of approximately $3.2 million last quarter.

Excluding the effect of stock-based compensation, our non-GAAP provision for income taxes for the second quarter was $4.4 million. This compares to our non-GAAP tax benefit of $2.2 million for fiscal 2013 first quarter. For the third quarter of fiscal 2013, we expect our GAAP tax provision to increase to between $5 million and $6 million but our non-GAAP tax provision will remain comparable to Q2 at $4 million to $5 million.

In the second quarter, our GAAP net income was $10.3 million or $0.19 on a per diluted share basis. This compares to a GAAP net income of $2.3 million or $0.04 on a per diluted share basis in the first quarter of fiscal 2013. Excluding stock-based compensation expenses and the related tax effects, our non-GAAP net income for the second fiscal quarter was $18.6 million or $0.33 per diluted share. This compares to a non-GAAP net income of $11.6 million or $0.21 per diluted share in our first quarter fiscal 2013.

Let me now turn to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments totaling $139.6 million. This compares to $236.6 million at the end of the first quarter of fiscal 2013. The decrease in cash was primarily attributable to our increase in accounts receivable reflecting our significant increase in sales activities in the second quarter.

Accounts receivable at the end of our second quarter, net of allowances, was $249.3 million, an increase of 74.7% from the $142.7 million at the end of our fiscal 2013 first quarter.

Our days sales outstanding increased to 59 days in the second quarter as compared to 51 days for our prior quarter. As of October 31, 2012 inventory totaled $398.7 million, a slight decrease of $4.5 million from the $403.2 million balance at the close of our fiscal 2013 first quarter.

Our quarter and inventory balance represented an annual inventory turn of 3.2 times or 113 day sales. With the increase in revenues in the second quarter, our inventory turn has improved significantly when compared to our first fiscal quarter. As we continue to experience strong demand from our customers, we expect our inventory turn will continue to improve. Our long-term goal for inventory turn is 4 to 5 times.

Overall, despite the cash balance decrease, our cash conversion cycle actually improved. Our cash conversion cycle in the second quarter was 117 days compared to 131 days in the first fiscal quarter and we do expect to see further improvement in Q3.

And with that, I will turn to our outlook for the third quarter of fiscal 2013 which ends on January 31, 2013. We currently expect our fiscal 2013 third quarter revenues will be in the range of $390 million to $425 million. Our GAAP EPS are expected to range from $0.17 to $0.30 per diluted share. Excluding the estimated expenses and related tax effects associated with stock-based compensation, we expect our non-GAAP earnings will be in the range of $0.33 to $0.46 per diluted share.

Shaw Hong

Thank you, Anson. We are excited about the coming holiday season and the strong demand for OmniVision products. We have worked hard to capture design wins for the current crop of consumer devices and we are pleased that our new OmniBSI-2 technology is being deployed in so many new applications. Our company has always been performance-driven whether at the technological or financial level. We will continue to strive to achieve our own expectations in the coming third fiscal quarter and into calendar 2013.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Harsh Kumar with Stephens Inc. Please proceed.

Harsh Kumar -- Stephens Inc

Hey, guys, good numbers top line and bottom line. Congratulations. Anson, I had a couple of questions. Why don't I just start with the cash level? You talked about cash going down because of accounts receivable. I'm wondering -- you mostly deal with Tier 1, a lot of Tier 1 kind of suppliers. And I'm wondering how long it will take you to refill that cash back up. In other words, how long will it take for you to collect all the money back?

Anson Chan

Okay, Harsh, thank you for the comment. First of all, if you look at the revenues that we reported for the quarter, you can almost look – almost half of the revenues is [not even due] at the end of the October. So that's why you have the increase in accounts receivable balance. It doesn't mean in any way or form that we have collections issue in there, but it's just going to take time when you have a significant increase in revenues within the three-month period if a normal say 30, 45 day term, you're going to have to wait until the middle of November to get some of these cash back. So obviously we do expect to get paid by the end of the day. Like you said, we are dealing with Tier 1 customers and so it's just a natural part of working capital increase when the underlying revenues increased.

Harsh Kumar -- Stephens Inc

Thanks, Anson. And my second question was on gross margin. I'm kind of running rough numbers. I'm out of the office, but running some rough numbers. It seems like you'll be in the 18% range, give or take a couple of basis points, which is an improvement. What's the biggest factor that's driving that improvement? I know that you've been trying to negotiate with TSMC and a couple of your suppliers, and also you're probably used to making more BSI-2. But I'm curious, what's the biggest driver? And when can you get 20% or above?

Anson Chan

I'm going to stick with the historical practice and reframe from saying anything specific about gross margin, but just to say we are trying our very best. We know we need to work hard to contain or even try to bring down cost, particular when it comes to BSI-2 products. So we have to execute. That's first and foremost. And one thing to note though as you've seen in the second fiscal quarter results, we've been shipping in unprecedented levels and this is literally a new territory. We are entering a new territory for the company. So with all this stress and requirements and demand from our supply chain, our operations, anything can happen. So that's why I prefer not to say anything too specific. I'll let you work through the math and obviously, ideally we'll let the results speak for themselves when we report again in three months.

Harsh Kumar -- Stephens Inc

So what's the biggest driver of improvement here, at least in the short-term, Anson?

Anson Chan

If you see improvement, if any, they obviously will be coming from cost and some components and mostly (inaudible) we can have a better control. We've been making a lot of these parts to-date, so we view this improving. We're basically making sure that we continue to execute in that regards.

Harsh Kumar -- Stephens Inc

And do you feel that you have got room to improve from here, from the January quarter onwards?

Anson Chan

There's always going to be room for improvement, particularly if you give us time. Again, we are doing our very best and everyday we're looking at the cost and find ways to create and generate improvements. But you do need to give us more time though.

Harsh Kumar -- Stephens Inc

Fair enough. And my last question, and I'll get back in line, I think Ray mentioned that 8 megapixel was very strong. Now it has been very widely publicized that you did not get the 8 megapixel at a very top tier, US-based handset manufacturer. So I'm curious if you can tell me how much 8 megapixel was up sequentially for you. And where is it going? Who is the buyer that's driving up 8 megapixel for you guys?

Anson Chan

Well, first of all the global market for the smartphone business is enormous, I would say, and very dynamic as you well know. So in regards to who's it going to, it's going to a variety of customers. We do have a good slew of OEM based Tier 1 customers that are buying 8 megapixel from OmniVision. We see that trend continuing to grow. And it's going to be across the board. It is across the board in terms of BSI-2 as well as BSI-1. So all I can tell you is in general, the market is large and I think the ballgame is still early and we got a ways to go.

Harsh Kumar -- Stephens Inc

Fair enough. I'll get back in line. Congratulations, guys. Thanks.

Operator

Your next question comes from the line of Raji Gill with Needham & Company. Please proceed.

Raji Gill -- Needham & Company

Yes, thanks, and congrats as well. Just to follow up on the camera phone business, if I do the numbers it appears that the camera phone revenue grew 86% sequentially and represents, if I go back, probably the highest quarterly revenue number for camera phones, despite not having the main 8-megapixel socket at the top tier US customer. So just another follow-up to that, where are you seeing kind of the big shift that's happening in the camera phone business that's making the numbers so good for that business?

Ray Cisneros

Hi, this is Ray Cisneros. Maybe I can be the best one to answer your question. It's a good breakdown for the cell phone industry for us in terms of the smartphone market that is exploding. As you're well aware, the smartphone requires two cameras, the main camera and the self-view camera. And we've got a good business mix for both. Obviously, our BSI-2 new product, the new HD BSI-2 based product, that has been widely accepted in Tier 1 brand name, customers of ours and that's generating quite a bit of revenue for us. On the other hand, the smartphone market is populated by a host slew of OEM brand names that are fighting vigorously for market share and we do have a good portion of that business and we backed into that portion with 8 megapixel and 5 megapixel. So I would say just – now a broad brushstroke for your question is the revenue generator of the mobile – the revenue business for us was generated from HD 8 megapixel and 5 megapixel sensors predominately.

Raji Gill -- Needham & Company

But just going on that question -- on that answer, there's only a certain number in terms of the smartphone market who is really dominating the smartphone market. The rest are slowly declining. And one of the major ones is Samsung, which I believe is using an internal sensor. So are you seeing growth in 8-megapixel out of the Chinese handset vendors that are migrating? Are you seeing dual-source opportunities at some of the top tier US makers for 8 megapixel? Maybe some additional color there would be great.

Ray Cisneros

Right. Here's a good perspective for you. If you took a snapshot of the top 10 handset makers a year ago versus the top 10 handset makers today, it's completely different. And some of those new players are extremely strong and dominant coming out of the Far East, some of them have remained in a strong position over the course of the year and that's a good mix for OmniVision to back into and we do back into a good mix of those top 10 brand name customers. So that's the way I would look at it. I would not say that any given name remains 100% strong quarter-over-quarter, year-over-year and it's shuffling quite a bit, it's very dynamic and it falls nicely into OmniVision's overall strategies with a wide variety of products and ecosystem chips as partners.

Raji Gill -- Needham & Company

All right, thanks for that. And last question, Anson, on the margins, could you update us in terms of the relationship that's happening at TSMC? Where are they in terms of depreciating their costs over the useful life of the assets? When is that going to result in lower wafer costs that they're going to pass on to you? Any update on that arrangement would be helpful?

Anson Chan

For me to give you any updates like that, because a lot of this information is internal to them. Obviously we're working with them everyday like we said in the prepared remarks, we are working on our current supply chain, working very hard trying to bring down the cost. And it's first and foremost on top of our priority list, so we're significantly working on it.

Raji Gill -- Needham & Company

And what's the mix of BSI-2, would you say, of your sensors, right now, percentage wise?

Anson Chan

We have not put that down, and we don't really have that intention of breakdown. Traditionally, we don't breakdown by technology. We only break down by resolution, so I'll keep it this way. But at a high levels to give you some color, the increase in mix – increase of BSI-2 is very significant in the second fiscal quarter and that's why I said in the prepared remarks as well that it's the single biggest factor that has caused the margin to drop.

Raji Gill -- Needham & Company

Thank you.

Operator

And your next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Paul Coster -- JPMorgan

Thanks very much for taking my question. I think this one is probably for Ray, and it really sort of goes to the guidance, which is much stronger than we had anticipated. To what extent do you think the revenues are driven by units versus mix and price, for that matter? Are you seeing opportunities to raise prices in any of these sort of particular segments that you addressed?

Ray Cisneros

Yes, it's a very good question and you could also -- not just mix of prices but also markets. So it's across the board how our revenue guidance is being driven. We're driven predominantly by the smartphone market and the tablet market. Both of those markets are completely 100% exploding in the second half of 2012 and we foresee that in 2013. The other drivers are a pretty good mix. We continue to see steady growth of 5 megapixel and 8 megapixel and then we still have a very strong, strong quarter-on-quarter level of our HD sensors back into both of these markets. In terms of price, that's always a competitive landscape. We're going to see all these quarter-on-quarter price pressures, but we're trying to maintain and do our best to keep our prices up.

Paul Coster -- JPMorgan

Okay, got it. And then the other question I've got is, you obviously have some view on what's going to happen in the year ahead, owing to design activity that's taking place now. As it relates to smartphones and tablets, are we at risk of seeing the peak activity now in that we start to see a sort of lower product cadence from the companies going into 2013? Or, do you believe that it can continue at this very elevated level, the rate of product innovation at the Tier 1's remains very high?

Ray Cisneros

Product innovation is extremely, extremely high. The types of solutions and designs in products that are – our customers are working on today for the near term and long term are extremely exciting. The other aspect about growth is – and you could bunk these kind of questions probably better to other market analysts, but you consider the amount of feature phones that were out there in the market historically for many years now. All those products have to convert over to smartphones. And that's something we all know if you are in our business is happening today and will continue to do so throughout 2013.

So that is an incredibly huge market replacement cycle. And then there's some obvious trends that contribute to, I think, in imaging how imaging will continue to grow and that's the evolution of tablet type products. It's not the end of it. What you see today is certainly not what you're going to have a year from now or two years from now. Those technologies are growing and evolving incredibly fast to exciting type of products, different form factors, different type of approaches to offering tablet type devices to the marketplace. And then we have the PC notebook industry.

They are in the midst of understanding or trying to lay out strategies and plans on how to participate while you have a strong tablet type of trend coming into this marketplace. And that represents an opportunity for OmniVision. So growth-wise, these large markets are extremely innovate and dynamic and represent great opportunities. And then you have emerging markets as we continue to point to the automotive market is extremely exciting as you heard today. A good example is just the electronic vehicle like Tesla that that is something that markets like those are also part of the plan and sort of the outlook for OmniVision that we know we're going to back into.

Paul Coster -- JPMorgan

Okay. Thank you.

Operator

Your next question comes from the line of Andrew Uerkwitz with Oppenheimer. Please proceed.

Andrew Uerkwitz -- Oppenheimer

Yeah, hi. I just had two quick questions here. The first is, how should we think about the Chinese market? Obviously, 8 megapixels and whatnot are at the high end, but how should we think about the middle and low end, which is probably far more robust than the high end there? Is this an area you're definitely targeting? Do you have the products there? What will be the gross margin expectations we should be thinking about there?

Ray Cisneros

I'll make a few comments about the market and maybe Anson can talk about gross margins, but in terms of the Far East Asia market, yes, it's obviously something that is emerging extremely fast. The type of words I was using in my prepared commentary was an explosion Far East and that's certainly not far from the truth at all. And what you can say about the Far East market is not relegate them to sort of – bend them into certain category of quality. By no means do some of these main players in the Far East Asia market are in that kind of category. They are Tier 1 OEM brand name companies and it's not about only domestic sales, it's very much part of their business plan is the exports. And they will encroach and they will start picking up market share around the world. So in terms of OmniVision strategy, we're one of those strongest – we, if not, arguably the strongest sales channels into the Far East Asia market to take advantage of this opportunity and we have that sales channels and we have the eco system also built in, into the Far East Asia market.

Anson Chan

So with that said, I'm beginning to get the color that the China market, Asia market is not that different than rest of the world anymore. It is returning into a global market, so with certainly a margin perspective going back to say on part of your question, it's probably going to follow our corporate average.

Andrew Uerkwitz -- Oppenheimer

Okay, and then one follow-up there -- I definitely agree with you on the quality side of it. But as far as pricing side, there definitely seems to be a bifurcation, that there is a very large market, and if phones could be, say, under $250 or $100 versus the Samsung/Apple that sell at a much higher price. How do you consider the positioning with some of the domestic brands there that can really get down to that $100 to $250 price range?

Ray Cisneros

Yeah, I think it is a smooth scale. I think it's – everybody's going to – I like Anson's terminology. It's a global market. Everybody will complete for high end sales type devices and the Far East Asia providers of handsets today can provide a high end product into the marketplace as well along with the other common Tier 1 brand name companies most people are used to. On the other hand, their curve could go much further down and much deeper into different price categories. And when you look at that, we have options to select and pick which categories we would like to participate in and compete in. So we have that option of which categories we'd like to compete in. So I would say it's a much more global scale than I think some people might appreciate.

Andrew Uerkwitz -- Oppenheimer

All right, and then just last one -- on the auto sale, how should we think about that? Because autos obviously won't have the volume the phones have. But take Tesla, for example, since it has been announced. How many sensors would go into a single car there, and how should we think about that?

Ray Cisneros

Right. Today, predominately there's most cars due to the rear view display requirement in America, required in 2014, 2015, the bulk of the cars will have one camera. However, if you're familiar with automotives, especially on the high end, they have up to five or six cameras now. And there's surround view type of technologies. There's forward facing type of technologies. There's side view type technologies and then there's rear view type of technologies for starters. An so from the top end, you have multiple cameras per car. For the mainstream high volume cars, it's going to be one camera per car, mainly for the rear camera application.

On the other hand, you have to start adding up numbers in terms of volume and of course it doesn't compare to the billions of units that we talk about for handsets. But on the other hand, if you break down some of our products, it does have higher profitability and that's where we're aiming. We are aiming to produce more profit out of these parts, so on a per unit basis, it starts helps our bottom line. Now it's going to take time. It's the curve but I've been into the business for now of 10 years and I've seen the curve take a long, slow start. It is here to hockey stick and of the curve here. And it's I would say two to three years could develop some high volume to have meaningful material impact.

Operator

And your next question comes from the line of Hans Mosesmann with Raymond James. Please proceed.

Hans Mosesmann -- Raymond James

Thanks. A couple of questions. First of all, in terms of your notebook business being down, it was down significantly. Was that part of the original expectation or guidance? And how did that -- the linearity occur for that part of your business throughout the quarter?

Ray Cisneros

Honestly, I think it was little bit of surprise on how much down it was for us I think stepping into the fiscal Q2 four months ago. We probably would have expected slightly stronger numbers from the PC, notebook business. However, that was more than offset by the continual incredible pace of the tablet and the smartphone business. So being in multiple markets is an extreme advantage for us to be able to bounce these kind of trends and shifts that may happen very rapidly.

Hans Mosesmann -- Raymond James

Okay, thanks. And then the follow-up. On BSI, it looks like it is becoming mainstream, this type of sensor in the market. How does the competitive dynamic look as you enter 2013 in terms of that technology, your second-generation technology? Thanks.

Ray Cisneros

Right. BSI in and of itself is becoming main stream. On the other hand, BSI has multiple generations of roadmap technologies that we can plan on and that's where the gain lies now. Going forward we need to plan for our next generation BSI and the generation after that, and that's exactly what we do with our key customers and we do have that. On a standard operating business in our area, we do sit down with our Tier 1 customers and we do lay out one to two year type technology plans and product plans and project plans with them and that drives our roadmaps.

Operator

And your next question comes from the line of Betsy Van Hees with Wedbush Securities. Please proceed.

Betsy Van Hees -- Wedbush Securities

Thanks and good afternoon. Congratulations on the quarter. That was fantastic. I was wondering if you could help us a little bit to understand the ASPs. They only went up just a smidge, yet when I look at the mix, your 1.2 megapixel, which I'm assuming has a lot of HD in there, went up 132%, and then your 2 megapixel and above went up 26% quarter-over-quarter. So did you see some unusual pricing pressure during the quarter? Or what's happening with the pricing standpoint with ASPs only being up a smidge?

Ray Cisneros

Yeah, I think the best way to describe it is the HD is centered although it's extremely high volume for us does represent a major portion of our total unit shipments, so that ends us moving the needle closer to that side of the ASP range as opposed to the 5 megapixel, 8 megapixel although we had double-digit type percentage growth for both of those categories, but in comparison to the total HD shipped, that was the big screen factor and that contributed to the ASP having only a very incremental step up.

Betsy Van Hees -- Wedbush Securities

Okay, thanks, that was very helpful. And then, Anson, if I do the math on the midpoint of the quarter for the January guidance, I get to more of about a 17%, 17.2% gross margin. So just once again, just kind of a smidge step up. So is that how we should be looking at gross margin into the next couple of quarters, just kind of these marginal improvements as you work with your supply chain?

Anson Chan

Yeah, I'll just repeat what we said before. We will need some time before we can produce anything meaningful. So wherever you're going to model, don't expect any sudden spike in margin.

Operator

I would now like to turn the call over to Mary McGowan for closing remarks.

Mary McGowan

Thank you all for joining us on this call and webcast. We anticipate holding our third quarter fiscal 2013 conference call on Thursday, February 28, 2013. Thank you and good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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