Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

OmniVision Technologies, Inc. (NASDAQ:OVTI)

F2Q09 (Qtr End 10/31/08) Earnings Call Transcript

December 2, 2008, 5:00 pm ET

Executives

Brian Dunn – Director of Financial Planning, Analysis and Reporting

Shaw Hong – CEO and President

Ray Cisneros – VP of Sales

Bruce Weyer – VP of Marketing

Anson Chan – CFO

Analysts

Hans Mosesmann – Raymond James

Michael Saraclainin [ph]

Betsy Van Hees – Caris & Company

Ian Ing – American Technology Research

Operator

Good day, ladies and gentlemen, and welcome to the second quarter OmniVision Technologies earnings conference call. My name is Kim and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Brian Dunn. Please proceed, sir.

Brian Dunn

Thank you, Kim. Good afternoon, everyone, and welcome to our fiscal 2009 second quarter earnings conference call. After the market closed today, OmniVision issued an earnings release reporting our financial results for our second quarter. You can access this release from the Investor Relations section of our website at ovt.com. Please be advised that this call is being webcast live and also is being recorded for playback purposes. Both the live webcast and replay can also be accessed from the OmniVision Investor Relations website.

Before we begin, I wish to remind you that certain information discussed in this call, in particular our revenues and earnings targets and our forward-looking product plans, is based on information as of today, December 2, 2008 and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings release we issued today as well as OmniVision’s SEC filings included in our Annual Report on Form 10-K for fiscal year 2008 and our quarterly reports on Form 10-Q and other reports filed from time to time. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release posted on our website.

And with that, I will now turn the call over to OmniVision’s President and Chief Executive Officer, Mr. Shaw Hong. Shaw?

Shaw Hong

Thank you, Brian. And welcome, everybody, to our fiscal 2009 second quarter conference call. Joining me today are Anson Chan, our CFO; Ray Cisneros, our VP of Sales; and Bruce Weyer, our VP of Marketing. I will begin with an overview of our results for the quarter and how I see the company’s overall position. Ray will follow with a review from a sales perspective. Bruce will discuss our markets. Anson will then provide you with the financial details of our second quarter and our outlook for the third quarter. We will conclude as usual by answering as many of your questions as time permits.

Let me begin our regular agenda by highlighting our second quarter financial results. Revenues were $164 million. Our GAAP net loss was $0.10 per share. Our non-GAAP earnings were $0.19 per diluted share. And our cash and short-term investments at quarter-end remained strong, totaling about $283 million.

OmniVision is facing one of the most challenging periods in its history. The image sensors market has been impacted by the extremely difficult global economic environment. End customers demand has decreased significantly throughout the industry, in fact, in all consumer electronic products, security products and the products for the automotive industry.

Consequently, the overall demand for image sensors has also decreased. We are monitoring these developments closely. Clearly, this decrease in demand is having a significant impact on OmniVision and our competitors to the extent that we expect to report a net loss next quarter. This is unacceptable to us. For more than a decade we have prided ourselves from probably bringing new technologies and better products to the marketplace for our customers.

Although the current economic environment is uncertain and stable, I believe that OmniVision is prepared to withstand this turbulent time. We can do so by continuing to execute on the following strategies; investing prudently in technology development, producing new products and developing new markets for our products, managing the supply chain efficiently and effectively, and managing and controlling operating expenses.

Before I discuss several of our key strategies, it is very important to note that our operations have continued to generate cash, which has added to an already strong balance sheet. Our $283 million cash position should allow us to continue to invest strategically in our future. But somehow our competitors may be concerned with their own liability. We will concentrate on continuing to prudently invest in the development and production of market-leading technologies and our expansion into new markets.

First and foremost, as a technology company, our focus has always been and will continue to be on technological innovation. We have developed the best in class image capture and processing abilities. We doubled the low light sensitivity of our market-leading 1.75 micron picture technology with the introduction of our OmniPixel3-HS architecture. We developed and introduced an extended depth of field ISP that is recognized for providing very sharp images across a wide focal range.

Over the past two quarters, we have spoken frequently of our backside illumination and our OmniBSI architecture. This technology allows our image sensors to capture significantly more light by collecting the light from the back side of the silicon. The OmniBSI architecture, which currently implemented in 1.4 micron picture size, these are prime examples of our success in pushing forward our continuing improvement in technology for our products.

This new architecture has already yielded two new and very important products, which Bruce will discuss in more detail. Those products are the world’s first 1/3-inch, 8-megapixel image sensor based on BSI technology and the world’s first 1/4-inch, 5-megapixel system-on-chip sensor for the mainstream mobile phone market, which incorporates our top of the line TrueFocus image signal processor with OmniBSI architecture.

As illustrated above, we have a very well rounded technology portfolio and (inaudible) just try in time. And with our continued focus on technological innovation, OmniVision is prepared and ready for the challenges. Next, we are committed to identifying opportunities for the development of new products based on our leading technologies. This new high resolution products built on the success of our robust VGA sensors, as Ray will discuss today to you in more detail. 2-megamixel and high resolution accounted for larger percentage of our revenue and unit sales this quarter than ever before. Our 3-megapixel sensor shipments had been growing and smart phone continued to increase their share of the mobile phone market.

In the past, we have successfully identified and developed before our competitors a family of products well suited for the notebook market. As a result, our image sensor sales to notebook computer manufacturers have increased significantly during the past year, as increasing number of these notebooks does not include cameras. The second element of our new product development is our continued focus on the penetration of emerging markets such as medical and automotive. As Bruce will expand upon, our goal is to continue to obtain design wins and to increase revenues from these markets. Our third strategy is to continue to efficiently and effectively work with our supply chain partners to deliver a more cost-effective and value-added product to our customers.

Over the next few quarters, we will move to smaller line width to increase the number of die per wafer. We will work to migrate to 300-millimeter wafer production, both with TSMC and VisEra. As always, we will work to improve our units throughout the process and we will work to improve the efficiencies of our automated final testing equipment. I believe that with our continuing cost reduction and unit improvement efforts, we will continue to deliver cost-efficient and quality products to our customers.

Finally, we have reviewed and have already taken steps to reduce our operating expenses. We will continue to monitor our market conditions and take additional actions as necessary. Our goal is to operate efficiently and effectively by continuing to invest strategically in our technological innovation, product development and new product penetration. As a service company, we have the flexibility to manage our expenses across the entire organization, which I believe provides us with opportunities to better sustain our cash position.

Before I conclude, I would like to add that we have a strong management team. And with everyone working together, I believe that we are positioned to weather the economic downturn and to be ready when market growth resumes.

With that, let me turn the podium over to Ray who will tell you how we see things on the sales front. Ray?

Ray Cisneros

Thank you, Shaw. During our fiscal second quarter, we sold about 99 million units into the marketplace. At the tail end of the second quarter, we saw some continued weakness in demand from our customers due to the recent global economic downturn. However, despite the near-term market conditions, our customers have not slowed down on new designs. In fact, we continue to provide extensive support worldwide for new customer projects in all our markets. Additionally, some areas provide particular encouragement as we look at the long-term picture. One is the smart phone market where we have done very well. We are shipping in volume to this market segment and have secured new design wins with leading customers.

Our 2-megapixel sensor shipments into smart phones have been particularly strong over the past two quarters. And now, this quarter, we have ramped up our 3-megapixel sensor shipments. Smart phones are becoming a larger and larger piece of the mobile phone market as end customers look to consolidate multiple functionalities onto one device. These phones typically incorporate higher resolution sensors, and when the demand returns to growth, should provide – help drive higher volume shipments to 2-megapixel, 3-megapixel, and very soon 5-megapixel.

The other area that continues to be a larger and larger contributor to revenue is notebooks, which today drives demand for all sensor resolutions from VGA up to 2-megapixel. In fact, sensors on notebooks represented our strongest growth area during the quarter and represented approximately 30% of the company’s revenue. We shipped 2-megapixel, 1.5-megapixel, and specialized VGA products to Tier 1 notebook customers. Near-term duress decreased demand due to the economy, but we are well positioned in this market when it returns to growth.

In the second quarter, just over 60% of our revenues came from the mobile phones and just under 40% from emerging products. As for the unit mix in the quarter, the VGA and below was 65%, 1.3-megapixel was just over 15%, and 2-megapixel and above was just below 20%.

As Shaw mentioned, 2-megapixel and high resolution sensors represented the highest percentage of our revenue in history as well as the high point mark for unit shipments. While we have begun to ship our new 1/13-inch VGA product and are seeing a good deal of interest in this product, we do believe that the trend towards higher resolutions should continue in both the short and long-term. During the quarter, the blended ASP of our products was $1.65. The increase from the prior quarter was a direct result of higher resolutions.

All of these factors that I have mentioned illustrate that we must continue to look at the bigger picture of the image sensor market. When we reach the other end of the global economic downturn, the image sensor companies that will succeed will be the ones who were able to introduce new products, bringing industry-leading functionality to their solutions and do so cost-effectively.

Shaw Hong

Thank you, Ray. I would now like to turn the call over to Bruce to discuss our technology and marketing efforts in more detail. Bruce?

Bruce Weyer

Thank you, Shaw. Let me elaborate further on activities we are seeing in our key markets. I will begin with mobile phones, our largest market. As both Shaw and Ray have mentioned, it is extremely important that we continue to introduce innovative, new products in a timely fashion in order to continuously expand our footprint and imaging market.

During the quarter, we introduced the industry’s first 5-megapixel and 8-megapixel image sensors based on BSI technology. OmniBSI architecture allows our customers introduce cameras that deliver sharper images across broader lighting conditions with more vibrant true-to-life colors. OmniBSI also makes it possible to reduce the height of the camera module, allowing mobile phone makers to design even thinner phones.

Our 5-megapixel sensor is the world’s first 1/4-inch system-on-chip solution of its kind. Within this sensor we have incorporated two of our key proprietary technologies, BSI and TrueFocus. Based on our 1.4-micron OmniBSI architecture, this sensor will provide our customers with best-in-class low light performance in a small footprint, which positions the product well for next generation phones requiring ultra-thin camera modules.

We’ve also included our most powerful signal processing engine with our TrueFocus ISP. This ISP improves image quality through enhanced sharpening algorithms and improves camera performance by delivering extended depth of field while using standard lens technologies. Our 8-megapixel sensor is also based on the 1.4-micron OmniBSI architecture. Being the world’s first 1/3-inch 8-megapixel product to leverage the BSI technology, we have many of the same pixel advantages of our 5-megapixel solution, obviously with higher resolution. Both products will be qualified for mass production in the first half of 2009.

The second biggest contributor to our revenues today is our notebook business. Our notebook business was the one area that grew meaningful during the quarter, although we do anticipate a pullback in this market over the next couple of quarters due to the current economic conditions. We have continued to execute well with respect to utilizing architectural innovation, bringing forth the complete product portfolio to win designs.

In the security market, we secured a very important design win in the IP camera market. Our customer introduced an all-in-one, outdoor, day and night security camera that utilizes one of our high dynamic range sensors. In order to produce high quality pictures when the viewing field contains both extremely bright and dark images, our product incorporates its split pixel design, in which one part of the pixel captures dark tones within an image while the other part captures the bright tones. This design win represented the first time that a commercial security product is being built using a single-chip CMOS HDR solution.

We also continue to make progress in the automotive market, including introduction of a new megapixel product. This product is based on our OmniPixel3-HS technology, which optimizes performance in our lighting conditions. As image sensors are becoming more frequently used for wide-angle applications such as 360-degree view systems, the higher resolution becomes more important where distortion correction and image stitching are required.

Also during the quarter, we announced multiple strategic design wins with Valeo, the leading provider of advanced vision systems to many of the largest European car manufacturers and their suppliers. Some of the applications that we are working with Valeo on are rearview cameras, parking assistant systems, side view and 360-degree view systems.

In the medical market, we are seeing the transition from CCD image sensors to CMOS image sensors is now projected that 2008 will be the first year, which there are more CMOS image sensors shipped into medical applications and CCD sensors. This is happening because CMOS has lower power requirements, lower system costs, higher frame rates, and easier integration.

In summary, we are continuing to focus on bringing market-leading technologies and products to our customers. With our continued advancement in image quality and functional capabilities being delivered to the market, we feel that we are well positioned for success in the long run.

Shaw Hong

Thank you, Bruce. I would now like to turn the call over to Anson to discuss our financial performance. Anson?

Anson Chan

Thank you, Shaw. And good afternoon, everyone. For the second quarter of fiscal 2009, which ended on October 31, 2008, OmniVision has reported revenues of $163.9 million, down 6% sequentially and down about 30% on a year-over-year basis. Direct sales to original equipment manufacturers and value-added resellers accounted for approximately 60% of revenues in the second quarter of fiscal 2009, while about 40% came from sales through distributors.

Gross margin for the second quarter was 25% compared to 25.2% last quarter. Excluding stock-based compensation expense of $716,000 included in cost of revenues, gross margin was 25.4% compared to 25.7% we reported in the first quarter. This gross margin number was negatively impacted by an additional allowance of inventory of $9.2 million versus the $2.5 million of inventory allowance taken in the last quarter.

During the quarter, we performed a goodwill impairment analysis in accordance with FAS 142. Normally this would take place at year-end. However, the significant decline in our market cap and the current economic downturn prompted us to perform an interim impairment analysis. Based on the work performed to date, we have concluded that a goodwill impairment loss is probable and estimable, and have thus recorded an impairment charge of $7.5 million of our goodwill. Intangible assets and other long-lived assets, however, remain unaffected.

R&D expense in the second quarter was $23.2 million, up from $20.3 million last quarter. R&D expense this quarter includes approximately $3.2 million of stock-based compensation expense. Excluding stock-based compensation expense, R&D in the quarter was $20 million compared to $17.4 million in the prior quarter. The increase this quarter principally reflects NRE charges and a limited headcount increase.

SG&A expenses in the quarter totaled $16.9 million, down from $17.4 million in the prior quarter. Our SG&A expense includes approximately $3 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A in the quarter was $13.9 million, down from $14.2 million quarter-over-quarter.

Including the goodwill impairment charge, we had a GAAP operating loss in the quarter of $6.7 million. Excluding stock-based compensation and this goodwill impairment charge, operating income was $7.7 million. Our GAAP pretax loss in the second quarter was $7.1 million. Excluding stock-based compensation and the goodwill impairment charge, pretax earnings were $7.4 million.

Our GAAP net loss in the second quarter was $5.3 million or $0.10 per share compared to net income of $6.2 million or $0.12 per diluted share in the previous quarter. Net income in the second quarter of last year was $20.5 million or $0.36 per diluted share. . Excluding stock-based compensation and this goodwill impairment charge, non-GAAP net income for the second quarter was $10 million or $0.19 per diluted share. This compares to non-GAAP net income of $12.8 million or $0.25 per diluted share in the previous quarter. In the second quarter of fiscal 2008, excluding $8.6 million of stock-based compensation expense and related tax effects, net income was $29.2 million or $0.51 per diluted share.

Let me now turn to the balance sheet, which remains in excellent shape. After the company repurchased $12.9 million of its common stock at an average price of $8.19 per share or 1.6 million shares in total, we ended the second quarter with cash, cash equivalents and short-term investments totaling $282.7 million. All of these funds are invested in highly marketable, highly liquid and low risk securities. Consequently, we have not experienced any losses from our investments in the quarter.

Accounts receivable at quarter-end net allowances were $100.4 million, down $21.5 million from last quarter. Our days sales outstanding were 56 days as compared to 64 days last quarter. Under the circumstances, we are extremely pleased with these results and we will continue to monitor our receivables closely.

On October 31, 2008, inventory was $127 million compared to $110.1 million on July 31, 2008. Quarter-end inventory represented 95 day sales, which is equivalent to annual inventory turns of 3.9 times. Our goal remains for inventory to be in the range of 75 to 90 days equivalent to annual turns of four to five times.

I’d like to turn to the outlook for the third quarter of fiscal 2009, which will end on January 31, 2008. We currently expect our third quarter revenues to be in the range of $80 million to $100 million. This should translate to a GAAP loss of between $0.37 and $0.24 per share. Excluding the estimated expense and related tax effects associated with stock-based compensation, we expect that our non-GAAP loss to be in the range of $0.22 to $0.09 per share.

With that, I will turn the proceedings back to Shaw to some strategic commentary.

Shaw Hong

Thank you, Anson. Our financial performance and forecast has been negatively impacted by difficult economic environment. While it is currently unclear as to how long the world will be affected by the downturn, we will continue to use our strong cash balance to make the right business decisions at the right time. This will allow us to continue to focus on cost-effectively introducing new technologies and new products to ensure that we are well positioned for the long run.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Hans Mosesmann. Please proceed.

Hans Mosesmann – Raymond James

Thanks. Few questions. In terms of the guide, which is down around 45% sequentially at the midpoint, how much of that includes ASP erosion and what would that be if that is part of the guide?

Ray Cisneros

This is Ray Cisneros. And I think the – connecting it to ASPs, I think we don’t have that visibility to that granularity, but suffice it to say that the way to probably look at that question and the answer to that question is to look at the overall mix of products. And right now we are seeing consistent trends with the mix with strong growth in higher resolutions and the normal mix of the other products.

Hans Mosesmann – Raymond James

So what you are saying is, the mix is improving and that if that continues, it would be consistent with what you saw in the second quarter, right?

Ray Cisneros

I can say just the product mix is consistent at the moment.

Hans Mosesmann – Raymond James

Okay. And then a follow-up, in terms of inventory, can you comment on what the inventories may be in the channel or at customers or by geographical location, whatever you think is helpful you could comment on?

Ray Cisneros

Sure. Yes, we definitely – as we are all commenting here in our discussion, we are taking a very close look at our customers, at our markets, at our geographies. I could say the flavor of the market is people are being conservative, people are watching their own channels and inventories. And it’s sort of a slow progress of commitment. However, this is nothing new in this particular period we are in right now, I think, for all products. And in consumer electronics, in particular, this is sort of the stance customers are particularly trying to keep.

Hans Mosesmann – Raymond James

Okay. And then one last question and I’ll let others ask. You didn’t comment on wafer level camera type manufacturing. Can you give us an update of where the company may be in that area and when can we expect product introduction on that type of manufacturing? Thanks.

Bruce Weyer

Yes. Hans, this is Bruce Weyer. We certainly work very hard at keeping at the forefront of technology development. I think OmniBSI expresses that directly. We have not discussed any wafer level module developments publicly. We do continue to monitor the markets and would proceed at an appropriate time to discuss that.

Hans Mosesmann – Raymond James

Would you require licensing technology from other companies to do that? Can you comment on that at this point?

Bruce Weyer

We don’t discuss any licensing agreements publicly either. And obviously we do tremendous amount of development in-house. We also have capabilities for optical level technologies in-house. We do not discuss if we are licensing technologies or not.

Hans Mosesmann – Raymond James

Okay. Thank you.

Operator

Your next question comes from the line of Yair Reiner. Please proceed.

Michael Saraclainin

Hi, this is Michael Saraclainin [ph] for Yair Reiner. Just you mentioned you expected couple of quarters of notebook weakness. Do you think you could possibly see negative year-over-year – like significant negative year-over-year unit growth there for ’09?

Ray Cisneros

I don’t – this is Ray Cisneros. I don’t particularly think we mentioned specifically that there were specific numbers in notebook. What mentioned was that our markets globally and regionally are consistently down due to the economic situation we’re in. But we don’t – I think the notebook market is not going to be immune to the global economic crisis, but on the other hand, it’s a general state of affairs everybody is in. There is nothing in particular to notebook that we see in and of itself.

Michael Saraclainin

So you are saying that the weakness you see – you’re starting to see right now, it’s going to continue for quite some time?

Ray Cisneros

It’s really – what we said is really hard to tell. What we do is we definitely do deep dive into our channels, into our customers, and we try to understand their point of view. And the comment I can make is they are conservative. I think everybody is conservative in this environment. And commitment for any long-term visibility is right now not laid out clearly. On the other hand, there is a step-by-step – quarter-over-quarter type approach customers have and so do we.

Michael Saraclainin

Okay. Got you. Also – okay. So about – has your market share changed at all, say, your VGA resolution?

Bruce Weyer

It’s very hard for us to fully measure our market share at all the different resolutions because there is only two companies that actually report out on the sensor market. And then you have to get into the absolute mix. As a whole, we do have a richer mix than some of the other large manufacturers in the VGA space though.

Michael Saraclainin

Okay. I guess I’m just trying to get a sense of how competition has been in, for example, China?

Ray Cisneros

Sure. I could talk a little bit about China. As most of you are aware, China is a very competitive market. It is the, I would say, the largest market for entry-level handsets. But that alone makes it a very competitive market. On the other hand, OmniVision, as we mentioned, we do have the right technology and the right product introductions to continue to fight in this market. We are nowhere in a frame of mind to either let go market share or not fight for it. We continually come back.

Michael Saraclainin

Okay. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Betsy Van Hees. Please proceed.

Betsy Van Hees – Caris & Company

Thanks for taking my question. I was wondering if we could go back to the income statement and we could talk a little about the results for the quarter you just completed. When we look at the SG&A line, you had a nice improvement on a pro forma basis with SG&A decreasing to $13.9 million. Could you give us a little more color onto what has brought the SG&A down?

Anson Chan

Sure. It’s just basically general spending in (inaudible) commissions. If you look at the volume of the business, it varies from quarter to quarter as we sell through different channels and we tend to different pay different levels of commissions. And that’s the biggest item that brought down SG&A for Q2.

Betsy Van Hees – Caris & Company

Okay. So there weren’t any cost-cutting measures that were done in the quarter that positively impacted SG&A then?

Anson Chan

Not to any significant level, but we will concentrate on this working through in Q3 to help reduce some of the operating expenses.

Betsy Van Hees – Caris & Company

Okay. And if we look at the fiscal Q3 and we talk about OpEx, how should we be modeling R&D and SG&A?

Anson Chan

Well, that’s a little hard to talk about right now because there is too many moving pieces. And that’s why in our guidance we give you a range. But what we are working on, it’s not that different from any other companies – fabless company, I would say, you see out there. We’re talking about shutdown during the holidays, trying to limit some of the travel expenses and whatnot, nothing too unique compared to other companies out there.

Betsy Van Hees – Caris & Company

Okay. And then how about taxes for the quarter? How should we be looking at your taxes for fiscal Q3?

Anson Chan

Fiscal Q3, well, let’s say that we’re guiding to an operating loss, the tax rate can be a little difficult to model. In our business, we would still be paying some tax in the foreign jurisdictions. So what you would be looking at is almost like a negative tax rate, so to speak. There will be some tax provisions despite the operating loss.

Betsy Van Hees – Caris & Company

Okay. Thanks. When we look at the balance sheet, when we look at the inventory levels, they increased 15% quarter-on-quarter. What are you guys doing to reduce those inventory levels as we move forward?

Anson Chan

Well, again, as we discussed in our prepared commentary, we are focusing on bringing down inventory to four to five times level. What happened during Q2 is, again, we have a fairly long lead time for ordering inventory. And so when the economic downturn hits all of a sudden, it takes a little bit of time for us to break and hold back on some of the inventory ordering. So that’s some of the impact you see. But even despite all of that, our turn is still in a reasonable range. I’m talking about 3.9 times compared to a goal of 4 to 5.

Betsy Van Hees – Caris & Company

Okay. And then when we are looking at – and the question was asked earlier about units and ASPs. If we look at the midpoint of the guidance range, you guided revenue to about $90 million. And if we look at ASPs basically declining maybe on a 10% basis, then we are looking at units declining anywhere from 35% to 40% – 45%. Would that be accurate assessment in terms of how we model the business?

Anson Chan

My apology. I’m not sure that’s something that we feel comfortable to guide through at this point. Again, like Ray has mentioned earlier, there are a lot of moving pieces and we have tried to provide you the best we can to give you a guidance. The diluted visibility under the current economic situation, it’s really difficult. And that’s another reason why we’re still giving you a $20 million revenue range despite the scaling back of the top line guidance.

Betsy Van Hees – Caris & Company

Okay. And I just have one more question as it relates to the inventory level. Can we expect write-downs – and what kind of write-down should we expect in inventories for fiscal Q3?

Anson Chan

It’s not something that’s easy to guide to, and I will caution you try not to look at our business that way because setting up inventory reserves, it’s just an integral part of the business, one reason why we do not pro forma out such events. Setting up allowance of inventory, it’s very, very sensitive to the inventory balance at quarter-end and our outlook for generally next 12 months. Because as indicated in our public filings, our general policy is to set allowance for anything that we do not believe we can sell within a reasonable period, and generally that’s 12 months. And so depending on the fluctuation and forecast at the end of the particular quarter and how much inventory we have in hand, we have different levels of inventory reserves. So the items are very, very difficult to give you some direct insight at this moment.

Betsy Van Hees – Caris & Company

Okay, great. Now, one last question and that’s in regards to backlog visibility. Can you give us some idea of what your visibility into backlog is for this quarter compared to last year at this time?

Ray Cisneros

This is Ray. We don’t break out into that detail. Obviously we’re provided guidance. And as usual, I think historically OmniVision has done fairly done in its guidance range. So again, we’ll suffice that – we’ll leave it at that as the answer to your question.

Betsy Van Hees – Caris & Company

Thanks for taking my questions.

Operator

Your next question comes from the line of Doug Freedman. Please proceed.

Ian Ing – American Technology Research

Hi, it’s Ian Ing for Doug Freedman. Thanks for taking my call. Wondering if you can provide more color on managing the operating expenses going forward. Any changes to the take-out [ph] rates that we saw in October? And what are the tools you have besides the holiday shutdowns?

Anson Chan

The fundamental premise of all the OpEx containment we’re talking about is not to hurt our future. So we’re not going to do anything drastic that will affect our ability to continue to develop technologies and new products in the next year or so. So at this moment, we are limiting our efforts to looking at some of the expenditures that we do not need to spend, like travel, for instance, looking at our commission payment schedules and see if we can do anything about that, doing holiday shutdowns, again just Christmas and whatnot, and I think it would be something that our employees will enjoy. There's nothing too unusual in the whole program at this moment.

Ian Ing – American Technology Research

Okay. So that NREs elevation we saw in October, we should consider that fairly flat going forward then?

Anson Chan

Well, our effort is to try to bring it down.

Ian Ing – American Technology Research

Okay. Okay, great. Do you have any commentary on the order patterns from the end of last quarter going into the current quarter? Where things – were order rates really stable or are they declining would you say?

Ray Cisneros

I think the order patterns of last quarter, I think we made in our prepared commentary at the tail-end of the quarter that there was weakness already in the marketplace. And of course, that carried into our current quarter we’re in today. Obviously, the pattern from this quarter versus any previous quarters is they are night and day. Right? What we’re in today is very unique. It’s the global situation. So it’s hard to compare the two quarters in terms of ordering patterns.

Ian Ing – American Technology Research

Okay, great. And then moving over to VGA sensors, can I assume that sales are mostly with the new 1/13-inch sensors or is there still 1/10 out there? And would you say – are cost declines staying ahead of the ASP declines at this point for those sensors?

Ray Cisneros

We have several VGA products and pretty entry-level handset market. We deal with three different products; the 1/13-inch, the 1/10-inch and the 1/7-inch. And all three are doing fairly strong, robust sales. And it’s our strategy to maintain that kind of presence in the marketplace.

Ian Ing – American Technology Research

Okay, great. And then two more questions. I saw that your stock comp guidance seems a little higher by $0.02 per share. Could you provide more color on what’s driving that?

Anson Chan

Stock comp, some of that is just to do with the tax effects. Netting it together quarter-over-quarter, the only change I can think at this point would be some new employee grants that may increase the expense slightly, as we do with amortization schedules.

Ian Ing – American Technology Research

Okay, great. And then last question for housekeeping, can you provide depreciation and CapEx?

Anson Chan

We generally do not provide that kind of guidance. But we are at the end of day a fabless company and so you can expect those amounts to be fairly consistent.

Ian Ing – American Technology Research

Okay, thank you.

Operator

There are no further questions in the queue. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OmniVision Technologies, Inc. F2Q09 (Qtr End 10/31/08) Earnings Call Transcript
This Transcript
All Transcripts