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Shares of OmniVision Technologies (OVTI) fell 5% in Friday's trading session. The designer and developer of integrated image sensor devices reported its second quarter results of its fiscal 2013 on Thursday after the market close.

Second Quarter Results

OmniVision reported second quarter revenues of $390.1 million, up 79.0% on the year before. Revenues rose 51.1% compared to first quarter revenues. Second quarter revenues beat analysts consensus of $374.6 million.

Gross margins during the quarter fell once again to merely 16.6%. Margins fell 250 basis points compared to the first quarter of this year, and are down 14 percent compared to the second quarter last year. OmniVision blames an unfavorable product mix, with advanced products resulting in higher manufacturing costs.

GAAP net profits came in at $10.3 million, or $0.19 per diluted share. Last year, the company net earned $2.3 million, or $0.04 per share. During the first quarter of its fiscal 2013, the company net earned $21.1 million, or $0.35 per diluted share.

Non-GAAP earnings came in at $18.6 million, or $0.33 per diluted share. This compares to first quarter earnings of $0.21 per share, and earnings of $0.48 in the second quarter of its fiscal 2012. Earnings beat consensus estimates by two cents.

CEO Shaw Hong commented on the results, "Once again, I am pleased to report that OmniVision has achieved the high end of its revenues guidance, and that the company remains well-positioned to maintain its sales momentum into the third fiscal quarter. We have taken, and will continue to take, actions to improve our corporate gross margins."

Outlook

For the current third quarter of its fiscal 2013, OmniVision expects to generate revenues between $390 and $425 million. The guidance comes in ahead of analysts consensus of $365 million.

GAAP earnings per share are expected to come in between $0.17 and $0.30 per diluted share. Non-GAAP earnings per share are expected to come in between $0.33 and $0.46 per share.

Valuation

OmniVision ended its second quarter with $139.6 million in cash, equivalents and short term investments. The company operates with $41.1 million in short and long term debt, for a net cash position of $98.5 million.

For the first six months of its fiscal 2013, OmniVision generated revenues of $648.2 million. The company net earned $12.7 million, or $0.24 per diluted share. At this rate, full year revenues could approach $1.5 billion. OmniVision could report annual earnings of $0.75 per diluted share, with annual earnings approaching $40 million.

Factoring in Friday's losses, the market values the firm at $807.4 million. This values operating assets of the firm at $708.9 million. Operating assets are as such valued at 0.5 times annual revenues and roughly 18 times annual earnings.

OmniVision currently does not pay a dividend.

Some Historical Perspective

Year to date, shares of OmniVision have risen some 22%. Shares rose from $12 in January to highs of $21 in April of the year. Shares fell back to $12 in July on the back of a weak first quarter outlook. The stock recovered and are currently exchanging hands at $15 per share.

Shares of OmniVision have risen to lows of $5 at the end of 2008 to all time highs of $36 in 2011. Shares have fallen some 60% from that point in time as a result of severe gross margin pressure.

Between its fiscal 2009 and 2013, OmniVision roughly tripled its annual revenues from $507 million in 2009 to an estimated $1.5 billion this year. Net income peaked at $124 million in 2011, for net profit margins of 13.0%. Net earnings are expected to fall to $40 million for its fiscal 2013 with net margins falling to 2.7%.

Investment Thesis

Shares of OmniVision have lost the majority of their value as a result of continued margin compression. Gross margins have roughly halved over the past year on increased manufacturing costs. The company does not have sufficient pricing power to combat these margin pressures.

Part of the margin pressure is the result of Apple's (AAPL) contribution. Revenues rose sharply as a result of the iPhone 5 introduction, but the additional business brings few extra profits. The better availability of the phone in the first quarter of its calendar year of 2013, is promising for OmniVision's third quarter.

The company furthermore announces the addition of Raymond Wu, one of the company's co-founders who re-joined the company. Wu will focus on market development, engineering and sales.

Shares seem fairly attractive at these levels. Revenue growth will continue into the third quarter, while net margins might have stabilized at this moment. Valued at 0.5 times annual revenues and 18 times annual earnings, shares seem attractive if the company manages to boost net margins in the coming year.

Source: OmniVision Technologies - Shares Are Attractive As Margins Might Have Bottomed