OmniVision Technologies - Investors Might Be Overreacting To Volatile Earnings

Shares of OmniVision Technologies (NASDAQ:OVTI) were selling off on the final trading day of the week. Investors are not too pleased with softer-than-anticipated first quarter results, which were accompanied by a disappointing outlook for the current quarter.

Yet I remain slightly optimistic as OmniVision has a solid balance sheet, has initiated a range of efforts to boost future earnings, and trades at a somewhat modest valuation.

First Quarter Results

OmniVision Technologies generated first quarter revenues of $373.7 million, up 44.8% on the year before. Revenues were up by 11.1% on the fourth quarter of last year. Despite the solid growth, analysts were looking for slightly higher revenues at $376.8 million.

GAAP net earnings came in at $23.1 million, compared to earnings of just $2.3 million last year. Diluted earnings per share came in at $0.42, compared to just four cents last year.

Non-GAAP earnings rose to $0.55 per share. While this beat consensus estimates of $0.43 per share, the earnings included a non-cash tax benefit of $8.9 million, or roughly $0.16 per share. Excluding this item, earnings fell short of consensus estimates by some four cents.

CEO Shaw Hong commented on the developments during the quarter, "For the first quarter of fiscal 2014, we are excited to report strong sequential revenue growth in spite of a slowdown in the smartphone market during the second half of the quarter. Nonetheless, as competition intensified in response to the market slowdown, the forecasts for some of our products were negatively affected and we did not see a sequential improvement in gross margins."

Looking Into The Results

Revenue growth fell short of consensus estimates, but was still impressive. The problem is that margins continue to be under pressure.

Gross margins fell by 10 basis points compared to the fourth quarter, but were down 170 basis points from last year, coming in at 17.4% of total revenues. The company took net $8.4 million in inventory charges which hurt operating margins by 230 basis points.

Operating expenses actually fell in dollar amounts compared to last year, despite strong year-on-year revenue growth. As such, relative operating costs fell by an impressive 640 basis points to 12.9% of total revenues.

OmniVision did see a slowdown in the smartphone in the second half of the quarter. Competition intensified during the slowdown and hurt gross margins, which OmniVision hopes to offset by pursuing supply chain cost reductions.

And Looking Ahead

OmniVision sees second quarter revenues between $375 and $410 million. This implies that at the midpoint of the range, revenues are seen up by 5.0% compared to the first quarter. Still, they are seen only up 0.6% compared to last year.

Diluted GAAP earnings per share are seen between $0.21 and $0.38 per share, down from earnings of $0.42 per share in the first quarter, but up from last year's earnings of $0.19 per share.

Adjusted earnings for the quarter are seen between $0.36 and $0.53 per share, down from first quarter earnings of $0.55 per share.

The guidance for the second quarter fell short of consensus estimates. Analysts were looking for non-GAAP earnings of $0.50 per share on revenues of $407.7 million.


OmniVision ended the first quarter with $240.5 million in cash, equivalents and short-term investments. The company operates with $121.9 million in short and long-term debt, for a solid net cash position of almost $120 million.

For the fiscal year of 2013, OmniVision generated annual revenues of $1.41 billion, up 57% on the year before. Net earnings fell by little over a third to $43 million.

Trading around $15.50 per share, the market values OmniVision at around $860 million. This values operating assets of the firm at $740 million. As such, operations are valued at 0.5 times last year's annual revenues and roughly 17 times earnings.

OmniVision does not pay a dividend at the moment.

Some Historical Perspective

Long-term holders in OmniVision have seen their fair share of volatility. After setting lows of $5 in 2008, shares have advanced towards their mid-thirties by 2011. From that moment in time, shares have given up roughly half their value, currently exchanging hands around $15 per share.

Between the fiscal year of 2010 and 2013, OmniVision has increased its annual revenues by a cumulative 133% to $1.41 billion. Net earnings rose from merely $7 million to $43 million after peaking at $124 million in 2011.

Investment Thesis

The market was not happy with OmniVision's soft results which were accompanied with an even softer earnings outlook. The weakening market circumstances immediately resulted in increased competition, putting stress on the bottom line.

The producer of image sensors for mobile phones, webcams and surveillance systems aims to reduce costs to offset weakening demand. Diversification is key as well, as the company has become too reliant on smartphones which generate 65% of total revenues. Growth in other sectors including the automotive and security sectors, among others is key.

The company which uses imaging sensors which use both sides of a chip has seen rapid growth in recent years. The technology allows for smaller but better technology cameras, a much needed solution in today's technology world. Key smartphone customers include LG and Foxconn Technology which is a key supplier to Apple (NASDAQ:AAPL).

OmniVision is still battling with some struggles. Gross margins remain under pressure on the lack of an increase in average selling prices, which came in at $1.79 over the last quarter. Intensified competition and inventory write-downs are not helping either.

Back in December of last year, I last took a look at OmniVision's prospects. Trading around $15 at the time, I concluded that shares were attractive as margins might have bottomed. While margins have stabilized, shares have not seen much upside factoring in Friday's losses.

The tough times will continue for a while, but OmniVision's financial position is very solid. The company believes that it is one of the few image sensor suppliers able to handle volumes required by large smartphone and tablet manufacturers in today's global technology world.

The improvements in the cost structure, general market growth and diversification efforts should boost the long-term prospects.

Therefore I remain cautiously optimistic about the company's long-term prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.