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

Executives

Brian Dunn – Investor Relations

Shaw Hong – President, Chief Executive Officer

Ray Cisneros – Vice President Sales

Bruce Wyer – Vice President Marketing

Anson Chan – Chief Financial Officer

Analysts

Quinn Bolton – Needham & Company

Yair Reiner – Oppenheimer

Betsy Van Hees – Wedbush Morgan Securities

Scott for Tristan Gerra – Robert W. Baird

Ian for Douglas Freedman – Broadpoint

Omnivision Technologies (OVTI) Q1 2010 Earnings Call August 27, 2009 5:00 PM ET

Operator

Welcome to the Omnivision Technologies earnings conference call for the first fiscal quarter of 2010. (Operator Instructions) I would now like to turn the presentation over to your host, Mr. Brian Dunn.

Brian Dunn

Good afternoon everyone and welcome to our fiscal 2010 first quarter earnings conference call. Just after the close of market today, Omnivision issued an earnings release reporting our financial results for our first 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 is also being recorded for playback purposes. Both the live webcast and the replay can also be accessed from the investor relations section of our website.

Before we begin, we wish to remind you that certain information discussed in this call, in particular our revenues, earnings targets and our forward-looking product plans is based on information as of today August 27, 2009 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 to today as well as Omnivision's SEC filings including our annual report on Form 10-K for fiscal 2009 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.

With that, I will now turn the call over to Omnivision's President and Chief Executive Officer, Mr. Shaw Hong.

Shaw Hong

I would like to welcome everyone who is participating in our call today. Joining me today are Anson Chan, our CFO, Ray Cisneros, our VP of Sales and Bruce Wyer our VP of Marketing.

I will begin the call with an overview of our results for the quarter and then provide our thoughts on the overall status of the image sensor market, the trends we see in the market and within that trend, our competitive positioning, and lastly our commitment to customers as an integral part of meeting demands and the trends of the market.

I'll ask Ray to present an overview of sales activity and outlook followed by Bruce who will discuss our recent product introductions. Finally, Anson will discuss detailed financial results for the first quarter and provide our outlook for the second quarter of fiscal 2010. We will conclude as usual by answering as many of your questions as time permits.

We are pleased to report fiscal 2010 first quarter revenues of $105.6 million representing sequential growth of 19% as compared to the fourth quarter of 2009. Gross margins also improved sequentially from 17% in the fourth quarter to 22.4% for this quarter. Our net loss was $0.19 per share and our non-GAAP net loss was $0.08 per share.

We experienced revenue growth across all of our markets consistent with general improvements in the demand for consumer electronics. In particular, we saw strength in the mobile phone and notebook markets and introductions in the back-to-school Netbook sales drew consumer spending.

More importantly, and Ray and Bruce will expand on this, we are excited by the wide range of our recent consumer product introductions and we are encouraged by the overall market demand for our products as reflected in booking trends.

Our first quarter performance also included a number of positive metrics which demonstrate that our operating strategy supporting our competitive position is well aligned with the demands and trends of the market.

As we know, mobile communications and the imaging technology continue to transform the lives of millions of people around the world, changing the way we work, how we play and how we interact with those around us. Facebook and U-tube have given us new methods for managing our lives and memories.

These and other consumer applications will continue to drive the need for advanced image capture technology in many formats. According to a report published in June by TSR, the number of image sensor units shipped is expected to almost double from 1.4 billion per year in 2009 to approximately 2.4 billion per year in 2013.

With such an overall demand for image sensors, I'd like to share with you our insights on a number of major trends in the image sensor market and the position we believe we are in. The first trend is the increasing sophistication of consumer expectations. This reflects on the fact that image sensors have rapidly become an exchange of value added technology through a wide range of consumer products.

When image sensors were first introduced into mainstream consumer markets such as mobile phones, they were generally considered a novelty and consumer demands were relatively simple. Now, just a few years later, image sensors have become a stand up feature in many consumer products and consumers expectations have been transformed in the process.

Then, customers have come to expect high quality images combined with ease of use and with many of the improved and complex features such as better sensitivity, and high dynamic range following mainstream digital image processing. Image sensor suppliers are now required to deliver high performance products.

Recognizing the need for more sophisticated imaging solutions, I'm proud to say that Omnivision has been consistently directing its resources and focusing in the development of progressively more complex and remarkable image sensor technology to meet the demands and expectations of our customers. I believe we have well positioned ourselves in the market and are now recognized as the technology leader in our space.

Let me highlight for you our latest imaging technology development in the revolutionary Omni BSI and the camera coup technologies and how these position us going forward. We are very excited about our recently announced 1.75 micron Omni BSI architecture that delivers the industry's prime image capture solution for high performance, streaming video applications.

This represents our second family of Omni BSI sensors and offers the industry's best low light image capture with excellent color reproduction and clarity. Our camera coup technology which was announced in early 2009 delivers a complete camera solution in an extremely small footprint while vastly simplifying the supply chain.

This translates to both costs and time to the market benefits for high volume consumer markets. We believe these exciting new technologies will drive accelerated growth and rates for image sensors in consumer products over the coming years.

The second trend we see is that the number of mainstream applications using image sensors continues to grow creating tremendous opportunities for Omnivision to offer a wide range of high performance products as well as having the capability in meeting customer's delivery demands.

In the mainstream applications, the mobile phones and the PC and Notebook are the two markets that have proven to be solid markets. To date, the vast majority of our revenues have been driven by the mobile phone and the PC and Notebook markets. More excitingly, these markets are being extended by innovative products like Netbooks and the mobile internet devices and we also believe that an entire new class of entertainment products that can further leverage image solutions.

The entertainment products and features including gaming products, that were introduced and 3D imaging solutions capable of immersing players within their gaming environment. Mobile multi-media players will integrate high definition applications with audio and data content.

Consistent with our operating strategy and in collaboration with our manufacturing partners, namely TSMC, Omnivision is prepared to offer the widest variety of products for these applications. For example, in mobile phones we offer products from six to eight megapixels. For Notebooks, we offer products from VGA to five megapixels. The list goes on.

I'm confident with our broad range of products. We are well positioned in our space and we are prepared to take advantage of the growing market opportunities. Our broad offerings and addressable markets do not stop here.

Next, I'd like to discuss with you the third trend of the importance of image sensors in the emerging markets. I'm referring specifically to the areas of security, medical and autos. Omnivision is very proud that image sensors are enabling key breakthroughs in medicine, family safety and as a result in overall quality.

For example, image sensors should significantly enhance the early detection of tumor, and growths during endoscopy procedures. They can be medically extend lives. Research into visual procedures will return sight to the blind.

Automotive applications will deploy numerous sensors for vehicles to enhance our driving experience and wireless monitoring systems will enable you to monitor the safety of your home and family on an every day basis.

Early one, Omnivision has identified the importance of these markets. As a result, we have always been on the forefront of expanding into these markets and developing products by utilizing our advanced technologies to meet customer's needs. Our goal and focus will continue to be in these areas.

Last but not least, we believe a key to our success is not only to recognize the demands and trends and positioning ourselves according, but also to provide the highest service quality to our customers. From the beginning, we have driven this company to become the largest supplier of image sensors to mass markets by meeting and exceeding our customer's expectations, for delivery and total value.

We are confident that with our commitment to our customers, we'll continue to deliver and meet customer's expectations effectively.

Before I turn this over to Ray, I would like to add that we are in a robust and expanding business as we emerge from the economic downturn. We are encouraged that the demand for image sensors remains healthy. The number of applications utilizing image sensors continues to grow.

Together with our advanced technologies, we are positioning ourselves as a leading competitor with the broadest portfolio of sensors designed to meet current market demands and anticipate future requirements.

With that, I will turn the call to Ray who will provide an update on the quarter's sales activity.

Ray Cisneros

As Shaw mentioned, we are pleased with our first quarter results as we believe they are an indication that the consumer markets have stabilized and are gaining momentum in the second half of the calendar year. We are even more pleased with our own momentum which we believe is a reflection of considerable product demand and multi, meaningful design wins over the last several months.

In the first quarter we shipped approximately 75 million units at an average selling price of $1.40. This compares with approximately 65 million units shipped in the fourth quarter at an average selling price of $1.36. Sequential growth was driven by each of our major products and regional markets as demand continues to ramp.

Sequential improvement to the ASP is the result of a revenue mix shift towards higher resolution products. In the first quarter, unit sales of sensors that were two megapixel and higher, exceeded 20% of total shipments as compared to 15% in the fourth quarter. Sales of our three megapixel sensors were particularly strong in the quarter as this resolution is becoming mainstream for the current generational smart phones.

Meanwhile, unit sales of 1.3 megapixel sensors increased to just below 15% of total shipments in the first quarter as compared to approximately 10% in the prior quarter. This increase was driven significantly by the Notebook market.

Finally, unit sales of VGA and below sensors dropped to just under 65% in the quarter. The VGA category includes the mainstream products for our customers in the mobile phone space as well as specialized VGA products for the Notebook market.

Our product mix should continue to shift towards higher resolutions in the upcoming quarters and three and five megapixel design wins continue to gain traction. Initial deliveries of our VSI5 megapixel SOC shipped last fiscal quarter and are ramping up this quarter. Similarly, our eight megapixel BSI products are ramping this quarter into the DVDSC Japan market.

In terms of markets, our mobile phone sales were up approximately 20% quarter over quarter and represented slightly less than 60% of our revenues in the first quarter. Notebook and PC sales were also approximately 20% quarter over quarter and totaled approximately 30% of our revenues in the quarter. Sales of our other imaging market products accounted for the remaining 10% of sales in the quarter.

Within the mobile phone market, we experienced strong growth in the smart phone category. The introduction of several new devices in recent quarters has sparked an uptick in consumer demand. We are well positioned in the smart phone market and believe we continue to take share from our competitors.

Our three megapixel and above sensors are gaining traction among multiple tier one OEM's. These design wins not only drive higher volume shipments for our three megapixel products in the near term, but will also drive Omni BSI five and eight megapixel sensors in the coming quarters. The value and image quality benefits of Omni BSI architecture are quickly being recognized globally by our tier one OEM customer base.

The other market that continues to see strong demand is Notebooks which experienced another strong quarter and is driving demand and design for all sensor resolutions from VGA up to five megapixel. Currently, we have new design wins in place with the majority of tier one Notebook manufacturers around the world.

These wins are driving significant shipments today in our mainstream VGA, specialized VGA, 1.3 megapixel, high definition and mainstream two megapixel sensors. In the future, our three megapixel business will increase in this space as will the migration of new BSI sensors specifically targeted to the Notebook market. Key to our success in the Notebook PC market is the fact that we can support so many different design opportunities.

Finally, our camera cube VGA product ramped last quarter and we continue to increase in volume. Multiple tier one customers have accepted this product, recognizing the benefits of this technology. These customers are planning mass production schedules and we are preparing our manufacturing flows to meet their demands. Volumes are anticipated to increase in the coming quarters as these new customers come online.

The markets we serve remain competitive. However, by pushing ahead with technology improvements and maintaining our relentless focus on providing cost effective solutions to our customers, we believe that we can and will continue to capture market share and drive revenue growth.

Shaw Hong

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

Bruce Wyer

I would like to begin my discussion on a subject that Shaw touched on earlier in this call. That is, we are uniquely positioned to capitalize on the multitude of markets requiring the value of high performance CMOS image sensors.

During the first quarter we extended our technology leadership position by announcing our 1.75 micron Omni BSI product family which offers a 50% improvement in low light sensitivity and double signal to noise ratio's resulting in improved color reproduction and image clarity. We are now shipping five Omni BSI products across our 1.4 micron and 1.75 micron families ranging from two megapixel to eight megapixel resolutions.

Additionally, during the quarter, we introduced a number of new products specifically for the mobile phone, digital still camera, digital video, Notebooks, Netbooks, gaming and automotive markets. We are confident that these exciting new products will continue to build on our current market leadership position.

For example, according to TSR we have approximately 60% market share in Notebook PC, over 50% share in security and automotive markets and over 30% share in the games and toys market. We also continue to lead the mobile phone market with over 20% of CMOS image sensor shipments.

Beginning with the mobile phone market, in the quarter we entered two new products utilizing our Omni BSI technology; the OV5650 a five megapixel raw sensor, the OV 2665 a two megapixel system on chip solution.

These sensors are designed specifically to address increased consumer demand for digital still camera quality images and features on a mobile phone as well as the emerging desire for streaming video applications. These sensors also have the industry's lowest stack height which is ideal for today's ultra-slim phones.

Next, we introduced our OMNI BSI OV5653, another five megapixel solution for the digital still and video camera applications. 5653 delivers 720P at 60 frames per second and full HD 1080P at 30 frames per second, delivering superior image quality and low power consumption in a small form factor. According to TSR research, demand for CMOS image sensors in the digital still camera, video market is expected to triple to nearly 35 million units by 2013.

In July we introduced the OV9715 for the automotive market. Designed for forward looking and extremely wide angle field of vision applications, the OV9715 is ideal for 360 degree bird's eye view and parking assistance applications in addition to sensing systems such as rear view and warning systems.

It is also designed to withstand the automotive electronics council's stringent specifications such as the operating temperature range of a negative 40 degrees to 85 degrees Celsius. According to TSR the percentage of new vehicles with integrated cameras is projected to increase from approximately 20% in 2008 to over 70% in 2012.

Also in July we introduced the OV7739 which is an ultra-thin video sensor for Netbooks, Notebooks and gaming applications. This device provides a versatile platform with support to multiple interfaces for use in single and multi camera applications. According to TSR, 90% of Notebooks PC's and Netbooks will include an integrated camera by 2013. Unit demand for integrated cameras is projected to nearly double from 2009 to 2013.

Finally, just this week, we launched the OV2710, our first 16X9 format two megapixel sensor offering 1080P HD video. This device is optimized to deliver high end video conferencing and recording for camcorders, Notebooks, Netbooks and other mobile applications.

With the rapid adoption of both consumer and business applications incorporating video capability, the OV2710 is designed to offer cost effect, high quality video solutions across conditions that are less than ideal.

In summary, ubiquity of such platforms such as Spacebook and U-tube create endless opportunities for people to communicate with one another and share their lives. In turn, desire to easily upload high quality images and streaming videos onto these types of mediums creates a significant opportunity for Omnivision to broaden our addressable market reach and widen the distance from our competitors.

Shaw Hong

Thank you Bruce. I would now like to turn the call over to Anson to discuss our first quarter financial performance and give guidance for the second quarter.

Anson Chan

Good afternoon everyone. As Shaw mentioned at the beginning of the call, revenues for the first quarter of fiscal 2010 were $105.6 million up 18.5% sequentially. Direct sales to original equipment manufacturers and edit resellers accounted for half of our revenues in the first quarter of fiscal 2010, while the other half came from sales through our distributor channels.

Our first quarter gross margin was 22.4% recovered from the 17% we reported in our fourth quarter of fiscal 2009. Excluding stock based compensation expense of $808,000 included in cost of revenues, gross margin was 23.2% up from the 17.8% for our fourth quarter.

The principal contributors to the improvement in gross margin in the first quarter were the shipments of fresh inventory that were built to order, a net increase in custom demand for our higher resolution products.

As part of our inventory reduction effort in the fourth quarter, we shipped inventory that we produced one to two quarters earlier. That inventory carried a relatively higher cost and depressed our gross margin. That is largely behind us.

Meanwhile, the improvement in product mix that Ray discussed earlier provided an additional uplift to our gross margin. As this trend continues, we expect to see a modest improvement in gross margin in our second quarter.

Recovering our allowance for excess and obsolete inventories we recorded approximately $3.7 million which is approximately 3.5% of our revenues for the first quarter.

R&D expense in the first quarter was $18.4 million approximately 10% from the $20.6 million we reported for our fourth quarter. The main contributor to the decrease in R&D was lower NRE expense. If you recall, our NRE expense can fluctuate from quarter to quarter depending on what projects we worked on.

We do expect to release additional mass designs to TSMC in the second quarter and our total R&D and NRE expense should become more comparable to our fourth quarter spend. R&D expense in the first quarter included approximately $2.5 million of stock based compensation expense. Excluding stock based compensation expense, R&D expense was $16 million as compared to $17.7 million in the fourth quarter.

SG&A expenses in the first quarter totaled $14.2 million which is slightly lower than our fourth quarter SG&A expenses of $14.4 million. Our SG&A expenses included approximately $8.2 million of stock based compensation expense. Excluding stock based compensation expense, SG&A in the first quarter was $11.3 million as compared to $11.8 million in the fourth quarter.

Our GAAP operating loss in the fourth quarter was $8.9 million. Excluding stock based compensation, our operating loss was $2.8 million. Our GAAP pre-tax loss in the first quarter was $8.6 million. Excluding stock based compensation, our pre-tax loss was $2.5 million.

Our GAAP tax rate for the first quarter was negative 13.9% which translated into a GAAP income tax provision of $1.2 million. Without stock based compensation, our non-GAAP tax position was very comparable at $1.4 million.

With our pre-tax loss, our tax provision was driven primarily by tax paying entities in foreign jurisdictions. For the second quarter we expect these entities to be the dominant factor in our income tax expense computation. Consequently, an indicative tax rate for the second quarter is not meaningful especially when the business is getting close to break even.

However, from an absolute dollar perspective, we do expect our tax provision for the second quarter to be comparable to our July quarter.

In the first quarter, our GAAP net loss attributable to Omnivision was $9.9 million or $0.19 per share as compared to a net loss of $20.1 million or $0.40 in the fourth quarter. Excluding non-cash stock based compensation expense; our non-GAAP net loss attributable to Omnivision for the first quarter was $3.9 million or $0.08 per share. This compares to non-GAAP net loss of $15 million or $0.30 per share in the fourth quarter.

Turning to the balance sheet, we are again pleased with the results. It remains in excellent shape. We ended the first quarter with cash, cash equivalents and short term investments totaling $309 million. This compares to $274.8 million at the end of the fourth quarter. Improvement in our cash balance was driven primarily by our ability to generate positive cash flow from operations despite a difficult operating environment.

Accounts receivable at the end of our first quarter net of allowances were $48.4 million up from $40.4 million at the end of our fourth quarter. This increase in accounts receivable is a reflection of increased product shipments in the first quarter. Meanwhile, our day's sales outstanding were 42 days as compared to 44 days in the fourth quarter.

As mentioned in the past, we did not relax our credit standards to chase up the revenues and our discipline is giving good results.

As of July 31, 2009 inventory was $99.2 million, a decline of 5.6% from the $105 million balance at the close of our fourth quarter. Our July inventory represented 111 days sales or annual inventory turns of 3.3 times. Our stated goal of 75 to 90 day sales or annual turn of four to five times is well within our reach.

Before I turn to our outlook for the second quarter, I do want to update everyone on a minor change to our supply chain. One of our equity investors, Intech Technology Company Limited will be acquired by a listed company in Taiwan [Tomishing] Electronic Industries Ltd. [Tomishing] is also a current investor of Intech.

This will be a stock for stock transaction and we expect to record a small gain when we complete the sale of our Intech shares sometime during our third fiscal quarter. As of July 31, 2009 we owned 25.7% of Intech with a carrying value of $1.3 million. We currently use Intech for some of our assembly work and this transaction will have no effect on our product deliveries.

With that said, I'll now turn to our outlook for the second quarter of fiscal 2010 which ends on October 31, 2009. We saw early signs of improvement in our business during the first quarter allowing us to outperform our guidance. Our operating results are continuing to improve. We now expect our second quarter revenues to be in the range of $155 million to $170 million representing a 47% to 61% increase quarter over quarter.

Our GAAP earnings are expected to range from break even to a net income of $0.10 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 $0.10 to $0.20 per diluted share.

With such robust guidance for the second fiscal quarter, we believe the historical seasonal cycle to our business has returned and that we will have a healthy recovery as we progress through the second half of calendar 2009.

Shaw Hong

Thank you Anson. In summary, we are very pleased with our first quarter results and our guidance for the second quarter as we believe that they are indicative of the encouraging signs we are seeing in the consumer products markets and the overall global economy.

We are view our results and guidance as a testament to the competitive differentiation and the customer demands we are seeing for our flat chip, OMNI BSI and the camera cube products which are both shipping to multiple tier one customers globally. We believe we are uniquely positioned to capitalize on the growth and expansion of the image sensor markets with our technology, the financial strength and the history of delivering on our goals. We look forward to continuing to share our story with you in the quarters to come.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Quinn Bolton – Needham & Company.

Quinn Bolton – Needham & Company

Congratulations on the very strong October guidance. I wanted to clarify, Anson you talked about seeing a return to more seasonality in the second half of the fiscal year. Historically you've seen a better January than October. Are we to infer from your comments that you do think January will show seasonal strength relative to the October guidance that you just gave?

Anson Chan

Our historical seasonal range if you recall is a lower Q1 and Q4 and a stronger Q2 and Q3. With what just happened in Q1 and with our guidance in Q2, it's certainly looking like we're getting back to that kind of pattern. But I would say that visibility is still limited to this calendar year.

Right now we're probably looking at a reasonable Christmas season and Q2 is looking very strong and it's highly possible that Q3 may remain this way.

Quinn Bolton – Needham & Company

A second question on the gross margin, you mentioned that the gross margin would be up slightly in the October quarter. With the significant increase in revenues especially with the mix to higher resolution and fresh inventory, I would have thought that you might have seen a bigger jump in the gross margin in October. Can you talk about some of the things which may be limiting gross margin? Is there pricing pressure or are there other issues at hand that may be holding back gross margin expansion?

Anson Chan

We need to put everything back into perspective. When we have a strong guidance, it's not just a particular resolution that's growing. The rest of the market is also recovering.

Another thing to think about also is we're just coming out of a very slow period and this is a transitional period for us in terms of customers moving into our new generation products. So there will be a period of time where we have to ramp up the yield as we produce more and more of the new generation products. These are the limiting factors to a sudden recovery in gross margin I would say.

Quinn Bolton – Needham & Company

Can you talk about the anticipated mix of products in the third quarter? Is VGA expected to stay at roughly 65% of units in the quarter?

Ray Cisneros

We're really happy with the design wins history we've logged in for higher resolutions. We expect that to start taking effect in the coming quarters. So right now it's difficult to tell, but I've got a feeling that VGA will still be strong but on the other hand, the higher resolution products will start gaining more of a percentage mix for us.

Operator

Your next question comes from Yair Reiner – Oppenheimer.

Yair Reiner – Oppenheimer

I was wondering if you could talk a little bit about ASP's both the type of pricing environment you're seeing now and also as you move forward and have a higher mix of high resolution products, how the prices begin to change as you go from three to five to eight megapixel.

Ray Cisneros

Obviously the ASP's will be weighted by the volume of resolution mix we have with our anticipation of a higher mix of high resolution products. Obviously it's logical to think that ASP would start moving up, but it remains to be seen. The counter balance to that is the pricing pressure we always have in the competitive landscape, so it's difficult to really guarantee some kind of trend and so you have those two counterpoints weighing on each other.

Yair Reiner – Oppenheimer

Specifically in terms of the China white label market that used to be a very significant part of your business, it sounds like you're transitioning away from that. Could you give us a rough idea of how much that market is contributing now to the overall revenue for you?

Ray Cisneros

We're not transitioning away from China at all. In fact typically, our historical view of it is it only gets stronger. What's happening in China is quite interesting. There's a strong VGA presence but there's been a dramatic change in this quarter and the going forward quarters with a shift to higher resolutions in China. We're actually shipping two megapixel, three megapixel and five megapixel into China. So it just starts backing into our overall scope of business.

Operator

Your next question comes from Betsy Van Hees – Wedbush Morgan Securities.

Betsy Van Hees – Wedbush Morgan Securities

Congratulations on a great quarter and a phenomenal guidance. That was fantastic. I did want to touch a little bit on the inventory mix that you have right now. Could you refresh us as to how much inventory is sitting there from the older products, on the new products and can you give us an idea of when you think you can be into that 75 to 90 day range?

Anson Chan

We're pretty much back to a go to order mode at this point so in terms of older stale inventory I would say the impact is pretty small now. With the guidance of $155 million to $170 million, I fully expect to be within the 45 turns when we report again for second quarter.

Betsy Van Hees – Wedbush Morgan Securities

Could we go back to the comment on the Netbook market? I believe in Shaw's comments he said that he saw strength in Netbooks driven by back to school Can you give us a better sense, a little bit more color on that as to where that strength is coming from? Is it here in the United States, outside?

Ray Cisneros

As you are well aware there's various name brand companies that are driving the Notebook business, the Netbook business and MID's now and some are Asian based. Some are American based. I can tell you right now that in both side, they're driving very strong numbers.

What's nice about the numbers as well is they're driving across the whole resolution of image sensors, VGA all the way up to two megapixel in our current quarter and in the future even higher than that.

Betsy Van Hees – Wedbush Morgan Securities

In regards to your gross margin, clearly we understand that you are in a rebuilding mode and yields are going to be improving. Can you give us an idea as we look out in the further quarters will we continue to see the similar gross margin improvement that we saw from the quarter you just reported for the previous quarter or what kind of gross margin improvement should we be modeling as we move forward?

Anson Chan

It's hard to say precisely how much growth we can get out of the business. Needless to say, we are constantly working every day trying to improve our costs and sell more products to our customers. But to understand though, Q4 of fiscal of '09 was more of an anomaly. It came from a sudden downturn in the global market for image sensors and us procuring a little bit more inventory than we would like at end of Q2 and Q3. That was really what happened and depressed our margin. So going forward, I highly doubt we can have an 8% improvement every quarter.

A little bit more on what you asked earlier on the inventory, if not for the fact that we had to prepare inventory for the second quarter, we could probably achieve four to five turns right away but we had to keep enough in the supply chain so that we can satisfy demand in the second quarter. That's the primary reason why we ended up with the 3.3 turn.

Operator

Your next question comes from Scott for Tristan Gerra – Robert W. Baird.

Scott for Tristan Gerra – Robert W. Baird

When I start to look at the cash balance, it's starting to get pretty large here. Have you thought about re-initiating the buy back and can you talk about how much of that cash is actually based in the U.S. versus overseas subsidiaries?

Anson Chan

We don't provide a breakdown of cash, but if we have need for it we can definitely use it. Regarding how we want to deploy the cash, it's really early in the planning stage. After all, we're just coming out from a very, very slow time and management's focus has been trying to the turn the business around and come to a quarter like this Q2 where we can actually provide an income for guidance.

So with that said, we're going to need more time to really work on how we want to deploy the cash, how to further grow the business down the road.

Scott for Tristan Gerra – Robert W. Baird

You were talking about the stack, the megapixel stack within Netbooks and Notebooks and how it seems to be moving up. Do you think that it will be similar to the mobile phone market where VGA will have a strong presence maybe in the Netbook market and the Notebook market kind of moves up the stack or do you think that 1.3 to two megapixel will be the sweet spot for a decent amount of time or maybe HD. Any thoughts on that market?

Ray Cisneros

I say just a few items here that come to mind. It's difficult to compare the two markets because the technologies that they approach or have an interest in and the solutions that they're looking for for their customer experience, there's some difference in the two market spaces. And so it's difficult to really start saying will it mirror one or the other.

I could say that it's actually an exciting market space in the Notebook and the Netbook market because there's a lot of technology features that are used in that space that are not necessarily used in the mobile handset space and right now it's looking like almost a broad even split as it starts trending forward.

Bruce Wyer

On the Notebook and Netbook space, it's been traditionally geared more towards streaming video. People are online, having conversations with people online. And they usually do streaming video with that.

So the mobile phone market has traditionally been about still photos, so that drives higher resolutions more quickly into the market. We do see high definition video of importance moving forward and that is part of the move up in resolution in the Notebook markets and then as you have emerging products like mobile internet devices which are much more portable, it could also start being used more for still shots instead of streaming video.

But you're going to see an upward shift in both markets, but I do believe that the Notebook/Netbook market will continue to be a little lower on average than the mobile phone market.

Scott for Tristan Gerra – Robert W. Baird

Not necessarily lower on an ASP basis?

Bruce Wyer

Because the streaming video, even though we said they use VGA historically, they use much larger pixels so your die sizes are larger in VGA there. So the ASP's can become more comparable, but I think that there's different segments of mobile phones. There's different segments of Notebooks and Netbooks. I would not try to compare them from an ASP standpoint head to head.

Scott for Tristan Gerra – Robert W. Baird

You were talking about camera cube and the OMNI BSI. Where would you expect that to be as a percent of revenue exiting this year and should we think about that as being like a lot of other new products where it comes in at kind of a lower gross margin or given the R&D that had to go into these products, did that actually come in at a more corporate average type gross margin and we should actually see that helping to benefit the gross margin over the next coming quarters?

Ray Cisneros

From a product mix it's definitely a growth segment of our business. The BSI driving some key products is definitely going to be driving our product mix going forward and weighted towards higher resolutions. In regards to gross margin, that remains to be seen. As you well know, semiconductors drive volume. Volume drives yields and yields drive costs and that's the way you need to play that and look at that kind of aspect and so we need to drive volume in order to really start predicting gross margins.

Scott for Tristan Gerra – Robert W. Baird

So it wasn't at a pricing level where you would immediately have above corporate average gross margins on those. Is that how we should think about that?

Anson Chan

You should not yet. This is actually a prime example of how we are in a product transition stage and we do need the time to ramp the volume to get production rate going before we can improve the units.

Scott for Tristan Gerra – Robert W. Baird

Any kind of bogey on what those might be as a percent of revenue both BSI and camera cube by year end? Is it going to be about 5% of revenue for each or is it going to be significantly higher?

Anson Chan

It's going to be difficult to pinpoint it as a bogey. Internally we have a target, but it would be difficult to something on a call in a forum like this.

Operator

Your next question comes from Ian for Douglas Freedman – Broadpoint.

Ian for Douglas Freedman – Broadpoint

Given all the new design wins coming online, can you describe the expected profile of a successful design win ramp? Does it peak in the first quarter, second quarter, and how does it trail off in future quarters?

Ray Cisneros

I'm not sure exactly how you want to get answered here. The design wins, typically what happens in the notebook and the mobile space with tier one companies, there's a nine to 12 month incubation period of getting the design done, getting all the engineering work done, and then there's typically a nine to 18 month lifespan for any particular one design.

So you could start looking at it that way. There's no predication as to when new designs come in and dovetail out and then another wave of new designs come in. What we have, I think what you want to take away is we believe we're taking market share and that's what I think you could look at.

Ian for Douglas Freedman – Broadpoint

Can you give us a sense for how many ramps are coming online now in the September guidance? How many designs are ramping?

Ray Cisneros

I'm going to refrain from answering that. It's going to be too much granularity and pretty much the scope of this particular discussion I would say.

Ian for Douglas Freedman – Broadpoint

This transition from VGA for camera cube, I understand the manufacturing cost advantages. What inning of the shift do you think we are in and what's the end point when it fully converts over to fully camera cube?

Ray Cisneros

In particular with the VGA camera cube and you look at world wide the use of VGA resolution, we're talking about the infancy stage here obviously and on top of that there's two segments to the VGA or you could even go beyond that. In just the mobile space there's primary cameras and secondary cameras. The volume is enormous.

And then you go into other market spaces that need VGA. Obviously that adds on to that layer. And then camera cube as we are indicating, higher resolution demand for camera cube and higher resolution sensors is there as well. So we're looking at that technically.

Ian for Douglas Freedman – Broadpoint

I believe in previous calls you talked about some reductions in discretionary spending. Have those materialized yet or are those still coming up?

Anson Chan

Yes we have. We're continuing. We have not stopped at all. You may look at our SG&A. It's actually a little lower and then for R&D is mostly due to NRE issues, but there are actually some benefits from that, discretionary expense control as well.

Operator

Your next question comes from Quinn Bolton – Needham & Company.

Quinn Bolton – Needham & Company

You mentioned that you are effectively building to order now and sort of raised the question are you, do you think you're leaving any demand on the table? Are you effectively saying that you're supply constrained to the extent somebody comes in for a near term upside to forecast?

Anson Chan

Not at all. Don't misunderstand me. In fact if there were to be supply constraints we would not be looking at a 47% to 61% increase in revenues. It's just a matter of scheduling those productions and making sure that we can run through the supply chain, that's all.

Operator

Your next question comes from Betsy Van Hees – Wedbush Morgan Securities.

Betsy Van Hees – Wedbush Morgan Securities

I understand that you can't comment specifically about customers, but I was wondering if you could give us the same color in the smart phone market that you did in the Notebook market in terms of how many tier one smart phone manufacturers do you have designs with and you're working with today?

Ray Cisneros

We can't get into the specific number per se, but what you did hear in our prepared commentary is our confidence of winning the smart phone market. It continues at high resolution and it continues with brand name tier one customers.

Betsy Van Hees – Wedbush Morgan Securities

As we're moving into profitability from a tax standpoint, how should we be looking at taxes in the second of your fiscal year?

Anson Chan

As mentioned in the prepared remarks, the tax amount, the dollar amount going forward is likely going to be dominated by tax paying entities in these overseas jurisdictions, so expect dollar value to be comparable quarter over quarter. The rate obviously, it's an artificial construct then and will fluctuate from quarter to quarter if you do that.

Operator

Thank you for your participation in today's conference. This concludes the presentation.

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 Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts