OmniVision Technologies' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

OmniVision Technologies, Inc. (NASDAQ:OVTI)

F3Q 2014 Results Earnings Conference Call

February 27, 2014 05:00 PM ET

Executives

Arnab Chanda - Director of Investor Relations

Shaw Hong - Chief Executive Officer

Ray Cisneros - SVP of Worldwide Sales and Sales Operation

Anson Chan - Chief Financial Officer

Analysts

Harsh Kumar - Stephens

Paul Coster - JPMorgan

Brian Peterson - Raymond James

Betsy Van Hees - Wedbush Securities

Operator

Ladies and gentlemen, thank you and welcome to the OmniVision Technologies Conference Call for Third Quarter of Fiscal 2014. At this time, all participants are in a listen-only mode. Later, we will open up the call for questions. Instructions for queuing up will be provided at that time. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Arnab Chanda, Director of Investor Relations, OmniVision Technologies. Please proceed.

Arnab Chanda

Thanks very much. Good afternoon, everyone. And welcome to our fiscal fourth quarter conference call. Joining us today are Shaw Hong, Chief Executive Officer; Ray Cisneros, Senior VP of Worldwide Sales and Sales Operations; and Anson Chan, Chief Financial Officer.

During the call, we may make forward-looking statements regarding our business, including statements relating to revenues, earnings targets and our product plans. This is based on information as of today, February 27, 2014.

Actual results may differ materially from those set forth in these statements. These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially.

For a discussion of these risk factors, you should review the forward-looking disclosures and the earnings release we issued today, as well as the risk factors and other disclosures in OmniVision's SEC filings and reports, including the most recent annual report on Form 10-K and recent quarterly reports on Form 10-Q.

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

With that, I will turn the call over to Mr. Shaw Hong. Shaw?

Shaw Hong

Thank you, Arnab. Welcome to all of you joining the call and webcast. Earlier this afternoon, we issued a press release describing our fiscal Q3 2014 results. We reported fiscal Q3 revenues of $352 million, which was a decrease of 11.4% sequentially and 16.9% year-over-year.

During the quarter, we shipped 214 million sensors. On a non-GAAP basis, gross margin was 19.9% and net income was $40.4 million or $0.69 per diluted share. Our balance sheet remains strong with cash and equivalents of $393 million.

Before I turn the call over to our management team to provide details on our Q3 fiscal results and outlook, I'd like to make a few comments on our business and strategy. We believe that OmniVision performed well in fiscal Q3, but though there was an expected reduction in volumes in North American smartphones and tablet platforms. We saw growth returning in the China market.

As I have commented in prior earnings calls, since our positioning Asia and profitability in China is very strong, we were able to benefit from growth in this market. Together with a determined execution of our corporate strategy, we are pleased to report under the sequential improvement in our financial metrics including high gross margins, increased cash balance and lower inventories.

Over the long-term, our goal at Omni is to drive and optimize profitable growth from diversified markets and applications. In order to do so, we must continue to focus on technology leadership, expand our market opportunity through diversification on marketable fronts and improve our cost structure.

First, technology leadership, as imaging technology continues to proliferate across [smartphone] markets, from consumer to industry and automotive. We believe the foundation of our success is to provide our customers and partners with system level of solutions based on continuous development of both seamless image processing technology and the company management imaging solutions.

We have been working tirelessly on developing and improving our pixel technology beyond 1.1 microns. From our latest most advanced pixel technology, we are extremely pleased to announcing the volume production the first sensor based on our new flagship PureCel family. Our entire organization beginning from pixel design to IC design to manufacturing executed flawlessly to transition from architecture to mass production in less than two years, a record fall of the company.

Leveraging to the latest pixel technology, we are continuing to develop and enhance company management technologies that can result in the expansion of product design and applications for diversified targeted markets. Our wafer level camera technology can address low cost smartphone sector whereabouts market thus expanding our market opportunity. Similarly our new (inaudible) sensor for the automotive market based on our high dynamic range technology address new machinery and drive assistance applications.

In addition, our RGB IR technology can be utilized to create new applications in machine vision, automotive and mobile product. All these technologies are the basic for innovation in product performance and cost structure and seek to reinforce our technology leadership over the coming years.

Next, diversification on marketable fronts, diversification is a key focus for our company, which will allow us to pursue profitable growth for years to come. We are pursuing diversification on marketable fronts including geographic diversifications, hardware diversification and marketed diversification and supply chain diversification.

Geographic diversification, over the last few years, we have seen smartphone and tablet grow strongly in developed markets. According to industry analysis, gross rates are likely to accelerate in the mainstream and entry levels in smartphone segment, primarily in developing economies in Asia, Africa and Latin America. And remain steady in developed economies in North America, Europe, Japan and Korea.

We have seen a significant acceleration in our business in Asia from a combination of trends. First, as the major Chinese carrier, roll out 4G LTE, we expect to see both mainstream and performance market in China adopt high resolution cameras.

Second, as developing economies in Africa, Asia and Latin America transition to 3G smartphones from feature phone, our improved entry level portfolio will benefit us. We expect to see our business become significantly more diversified geographically as smartphone and tablet penetrate worldwide. As our geographic diversification increases we also expect to see a broadening of our customer base, product diversification. Over the past year we have seen multiple new technologies and applications utilizing camera technologies in our core as well as emerging markets. We have seen significant interest in our sensors, our applications such as eye tracking, machine vision, mandate reality, et cetera from leading partners and OEMs in notebooks, smartphones, tablet, smart TVs and automotive electronics.

One of the most exciting new applications for consumer devices is wearable devices. We have seen tremendous interest in our sensors in a variety of wearable devices such eye wear, business products and watches that require very small (inaudible). In many cases these products use multiple image sensors per device especially for gesture control or eye tracking applications. One of the new products that we launched recently is our LCOS (inaudible). LCOS our liquid crystal on silicon used in a liquid crystal layer on our silicon (inaudible) to create macro (inaudible) we have seen significant interest in LCOS technology from top tier consumer device OEMs and as well as in new industries and automotive markets.

While it is earlier in market development, we believe new applications such as gesture control and eye tracking new devices such as well wearable and new products such as LCOS have the potential to significantly expand our market opportunities overtime and market diversification.

While the small phone and tablet market remains our largest markets. We have been working diligently to drive our sensors adoption in notable new markets. Automotive has been an important area of focus for the company and we believe that we are among the top suppliers of image sensors for the automotive market. We are seeing a significant interaction in our automotive business. As (inaudible) cameras began to be added for surround view, night vision, (inaudible) and optical detection near replacement then departure etcetera in high end costs.

In order to supply our automotive business and the increased complexity of applications, we recently launched to (inaudible) our new sensor and electronic distortion correction products.

We expect that a less interaction in our automotive business will be driven by machine visit, which could double the number of sensors for our vehicle. Automated drive assistance systems, seek to transform the entire driving experience and all rely heavily, our machine regime utilize to notable impairments.

The automotive business is especially attractive or high barriers entry, non-product cycles and should provide a strong hold and corrective margins for years to come. In addition, security is another proactive market for CMOS image sensors. One of the key trend in securities that goes up IP cameras and legacy CCDs sensor transition to CMOS expanding our market opportunities. We have seen significant growth in the security market with the combination of higher resolution cameras our low lie expertise and our ability to provide image processing capabilities. The IP camera market has recently seen tremendous interest in China. In combination of ease of use, (inaudible) of smartphones and increased internet penetration has cost us search in demand from our China base security cameras OEMs.

Medical is our another long-term opportunity. We are seeing strong interest in our sensors from Tier 1 OEMs servicing the medical market. Automotive, security and medical markets gives us (inaudible) of unity to reduce our consumer volatility with strong growth and profitability over the long-term.

Supply chain diversification, one of the key goals for OmniVision has been to work closely with our supply chain partners to improve efficiency and lower our cost structure. Image sensors are a complex technology and involve multiple elements in the supply chain including wafer packaging and (inaudible).

In addition, our sensors are fabricated within multiple manufacturing technologies. As we have expanded our volume dramatically we are pursuing diversification across all elements of the supply chain. Given our scale and the growing diversity of applications in end markets we also believe that supply chain diversification will mitigate risk of our OEM partners as well as benefit our cost structure overtime.

Lastly, cost structure improvement. We continue to focus on improving our product cost structure and drive efficiency across our supply chain. In addition to our supply chain initiative, we have designed our new PureCel sensor products to optimize performance, power as well as lower our product cost with the smaller (inaudible) size. While we have already seen some benefits from our cost reduction efforts, we continue to work diligently in reducing our product cost over time.

In summary, we believe that our corporate strategy in aggregate and in the long-term will allow us to capitalize on our strength expand our market opportunity, reduce our cost structure and make us an even more attractive partners for global OEMs in all our targeted markets.

With that, Ray.

Ray Cisneros

Thank you, Shaw. We are pleased to report our fiscal third quarter revenues that slightly exceeded the high-end of our guidance. We had a good geographic diversity of sales to North America and Asian customers. Our 5 megapixel product category saw strong shipments across all regions for mobile and entertainment products. We delivered early shipments of our new PureCel 8 megapixel and 13 megapixel products to key customers and we expect to ramp up production in the current fiscal quarter. Our fiscal fourth quarter guidance predominantly reflects slower demand than previous seen in this timeframe from the North American region. On the other hand, we expect strong growth from our Asia based business in the mobile segment and from our automotive and security markets.

In our third quarter fiscal quarter, we shift 214 million units as compared to the 237 million units in our prior quarter. The average selling price in our third quarter was $1.64 as compared to $1.67 in the prior quarter. The slight decrease in the ASP was driven by quarterly price erosion across product lines in all regional markets.

Unit sales of sensors 2 megapixel and above represent approximately 44% of total shipments in the fiscal third quarter as compared to 36% in the prior quarter. The trend toward the higher resolution product mix was primarily driven by increased 5 megapixel shipments. Unit sales of 1.3 megapixels sensors represent approximately 44% of total shipments as compared to 50% in the prior quarter.

HD sensors formed bulk of this segment and the overall resolution mix reflects the trend from our North America based business post holiday season. Finally unit sales of sensors that were VGA and below represented approximately 12% of total shipments as compared to 14% in the prior quarter.

Overall we continue to see improvements in resolution mix as 5 megapixels and above are becoming the standard main camera from mainstream smartphones and tablets across all geographies. In terms of our target markets, our mobile phone sales represent approximately 52% of revenues in the third quarter as compared to 60% in the prior quarter.

The decrease in our mobile sales reflects the decline in North America post holiday season, partially offset by growth in China. Our entertainment segment represented 31% of sales as compared to 25% in our prior quarter. This uptake in the entertainment category was primarily driven by sales into the tablet market.

Our sales of sensors into the notebook and webcam segment were approximately 7% of sales as compared to 5% in our prior quarter, representing a slight recovery off depressed levels. In our emerging category, we saw an increase up to 10% of sales driven by the continued growth of our automotive and security business.

In the mobile phone market shipped the balance mix of products to key Chinese OEMs while we saw the decline of shipments to North American customers, post the holiday season. We saw an increase of 5-megapixel, 4-megapixel and 2-megapixel shipments to the brand name Chinese OEMs as well as to new product launches from our Taiwan customer base. We also maintained a steady shipment volume of 8-megapixel products to these regions.

We believe there is a large market opportunity with Chinese OEMs as growth rates accelerate for the value in mainstream smartphone segments worldwide. A large portion of our shipments to Chinese OEMs will address the mainstream as well as value smartphone segment. Market trend suggests that the mainstream and value smartphone segment growth rates will outpace the high end smartphone segment as developing economies in India, China and Latin America convert their populations from feature phones to smartphones.

Additionally China is like to spur another wave of growth with the launch of LTE, thus creating an upgrade cycle for the domestic market. We believe we are well positioned to capitalize on these trends and given our strong position in long standing OEM and partner relationships in Asia, especially in China.

We are also extremely well positioned across our product portfolio to serve these markets include our new PureCel 13-megapixel and 8-megapixel products, our recently launched quarter-inch 5-megapixel products and our upcoming 2-megapixel. We are pleased with our progress to secure design wins and for the PureCel OV13850 and the OV8858 with major Asian OEMs in China and Taiwan.

In the entertainment segment, we continue to ship a broad spectrum of products to the tablet market predominantly 5-megapixel and HD resolutions in both OmniBSI and OmniBSI-2 platform technologies with strong growth for the holiday season.

In the gaming console category, our shipments remained strong for some of our products due to our end customer success in the marketplace. In the wearable space, a variety of end user applications are quickly emerging such as smart watches and eyewear. In all cases, image sensors with small form factors are needed due to the compact products designs.

We are well positioned of offer a host the small form factor sensors that cover a variety of resolutions as well as a fully integrated camera solution using our CameraCubeChip product line. Additionally, the wearable space is driving new requirement where the image sensor is used beyond the image capture requirement such as for gesture recognition, eye tracking and other novel applications.

In these cases, OmniVision has developed unique, high speed, low resolution global standard sensors that are ideal for developing fully integrated human interface solutions in wearable products. The notebook and webcam market, we saw an increase in sales driven by a broad mix of tier-1 OEM customers.

Sales were driven by our best in class legacy 720p HD sensor, the OV9726. We are also gaining traction in transitioning our customers to our next HD sensor, the OV9728. This sensor will provide an upgraded performance in cost for next generation notebook products.

Similar to the wearable segment, sensors are now being utilized in notebook and PC products modern image capture requirement. One key OEM shipped initial volumes embedded with our specialty global shutter technology sensor the OV7251 for gesture recognition capabilities.

We believe this is an early indication of the future of gesture recognition as well as for the overall potential for human interface applications. A major purpose for gesture recognition capabilities will be driven by entertainment purposes, but there remains strong interest in this market as well as others to use gesture recognition imaging solutions as a human interface tool to support daily activities or work driven applications.

We have already demonstrated support for gesture recognition solutions for mobile, notebook, automotive and wearable OEMs and expect to benefit when the market develops.

In the emerging markets, we continue to see the automotive and security markets driving growth. We expect that for the fiscal year 2014, automotive and security combined will be larger than the PC, notebook category, which marks a significant milestone for our diversification strategy.

In automotive, despite a seasonal slowdown from our large European OEMs, we still saw sequential increase and we expect continued growth for the rest of calendar year. Additionally, the aftermarket segment is contributing more to our automotive revenue, as they do not require full automotive qualification. Over the long-term, our direct automotive OEM design wins will drive our growth overlaid with the aftermarket products.

In the security space, we saw rapid increase in demand for our digital 720p sensor solutions out of the Asia regions. The solution leverages the IP camera technology and easy to use internet solutions for simplified installation. We are seeing demand from both the enterprise and domestic security segments and we are moving aggressively to meet those unanticipated upside.

We believe we can capitalize on the trend towards IP cameras in Asia, due to our broad portfolio of HP sensor solutions in a variety of technologies and package forms.

In summary, we are pleased with our posted fiscal third quarter results and we believe we are well positioned for the dynamic conditions across regional and vertical markets.

Now, I would like to focus on some product highlights. In fiscal Q3, we launched the first products in our new flagship PureCel sensor family for our core markets. We are very pleased so far with the customer engagement and business for these products in several key regions. Both the OV13850 and the OV8858 are being ramped up now and the response among our customers has validated our goal to deliver a high quality advanced imaging solution at an attractive cost.

As previously mentioned, both products have our latest 1.12 micron pixel generation for optimized low light sensitivity in conjunction with superior low power consumption. This allows for maximum frame rate speeds for no shutter lag and optimal video quality. We anticipate volume shipments to start this fiscal fourth quarter and our design wins are primarily in the mainstream and performance segments of the smartphone markets.

Similarly, last quarter we discussed our 2-megapixel product line the OV2680 and OV2685, both are based on our cost effective OmniPixel3-HS technology targeted toward (inaudible) camera and the mainstream smartphone market as well as for the main camera and the entry level smartphone market.

We have gained excellent customer traction in our 2-megapixel sensors and we expect to ramp up significant volumes this quarter. In our fiscal third quarter we also introduced two key automotive products. The OV10626 is our most advanced wide VGA high dynamic range SoC sensor for the automotive industry. The product is intended to serve the machine vision space in the automotive segment with applications for autonomous driving.

Additionally, we offer the most advanced automotive qualified packaging technology ACSP; it’s targeted 120 DD dynamic range and 20 volts per second sensitivity will offer our customers the best in class machine vision sensor. We have secured early customer commitments for this product in key name brand automotive OEMs. The second automotive product release was the OV480; this is a novel ASIC companion chip for some of our high dynamic range products or our VGA analog chips. The OV480 offers a powerful total solution for distortion and prospective correction for display application. It correct lens distortion of to 195 degrees which allows maximum design flexibility for automotive applications in backup cameras, surround view cameras, or specific feature enhancements such as cross traffic or trailer ball-hitch display features. The OV480 has already gained multiple design wins in tier I automotive OEMs.

Another interesting application is 3D mapping, an area that is going through an intense flurry of the development activity. There are variety of ways to develop an imaging solution that will render the 3D mapping information one of the methods which we recently announced where the key partner uses our recently developed OV4682, a highly specialized 4-megapixel sensor where portion of the sensor rate captures IR light that is then used to [capitalize] depth information.

With a help of this sensor and in conjunction with the system architecture, the mobile device can be used to generate 3D maps of the surrounding environment. The concept product illustrates the breath of applications for CMOS image sensors beyond traditional image capture. We anticipate that the evolution of 3D mapping and other new applications will develop new market opportunities for OmniVision.

In summary, we are pleased with our latest product execution during fiscal Q3. We expect to launch multiple new PureCel sensors as well as products for new applications and new markets throughout the calendar year.

Shaw Hong

Thank you, Ray. I will now turn the call over to Anson, who will discuss our third quarter financial performance and provide guidance for our fourth quarter of fiscal 2014.

Anson Chan

Thank you, Shaw and good afternoon everyone. For the third quarter of fiscal 2014, we’re reporting revenues of $352 million, down 11.4% sequentially and down 16.9% on a year-over-year basis. Direct sales OEMs and VARs accounted for 80.3% of the revenues in the third quarter of fiscal 2014, a decrease from 84.1% in the prior quarter. The remainder of revenues came from sales through our distributor channels.

Our fiscal 2014 third quarter gross margin was 19.6% compared with 18.8% that we reported in the prior quarter. Excluding stock-based compensation expense of $1 million included in cost of revenues, our non-GAAP gross margin was 19.9% compared with the 19.1% in the prior quarter.

Our gross margin improvements are primarily the result of the ongoing cost improvement efforts and a slightly less than favorable net adjustment to gross margins from sale of previously written off inventory and allowance for excess and obsolete inventories.

In the third quarter of fiscal 2014, we recorded approximately $3.5 million from a sale of previously written down inventory and $8.2 million as an additional allowance for excess and obsolete inventories, with the net $4.8 million or 1.6 percentage points of unfavorable impact on our gross margin.

In comparison, in the second quarter of fiscal 2014, we recorded approximately $1.2 million for the sale of previously written down inventory and $8.4 million as an additional allowance for excess and obsolete inventories with the net $7.2 million or 1.9 percentage points of unfavorable impacts on our gross margin.

In the third quarter, there are two other one-off and outstanding transactions that together had a small unfavorable impact on gross margin. The first transaction resulted in a reduction of the revenues where we received a one-time cash compensation of about $2.4 million from an end user customer for order cancellations, offsetting this benefit was a one-time charge of approximately $2.7 million to cost of revenues.

Related to licensing of certain CMOS image sensor-related patents from the California Institute of Technology for the [licensing] arrangement that total fee was approximately $25.3 million and the payment schedule has a net present value of $24.6 million. For accounting purposes, after recording the $2.7 million charge in cost of revenues, we will capitalize the remaining balance on the balance sheet and amortize of the nine years. This will translate into an additional cost of revenues of approximately $600,000 per quarter.

We are continuing our efforts to reduce our production cost and we expect to see further improvements in our gross margin in fourth quarter. Longer term, we believe the ramp up PureCel will give us additional opportunities for further cost reductions. In our fiscal fourth quarter, PureCel will not have any material impact on gross margin given the initial shipping volumes.

R&D expense in our fiscal 2014 third quarter totaled $30.9 million, a 6.2% increase from the $29.9 million in our fiscal 2014 second quarter. The slight increase is attributable to an increase and expenditures of take-outs and engineering wafers. The timing of take-outs is driven entirely by our engineering schedules and the total announced (inaudible) from quarter-to-quarter. We expect to spend a comparable amount on take-outs and engineering wafers in our fiscal fourth quarter and we expect our overall R&D expenses to also remain comparable quarter-to-quarter.

R&D expense in the third quarter of fiscal 2014 includes approximately $4.3 million plus our stock-based compensation expense. Excluding stock-based compensation expense, fiscal 2014 third quarter R&D expenses was $26.7 million as compared to $25.2 million in the second quarter of fiscal 2014.

SG&A expenses decreased slightly from $18.4 million in the second quarter of fiscal 2014 to $18 million in the third quarter of fiscal 2014. We expect our SG&A expenses to remain approximately the same for our fiscal fourth quarter.

Our fiscal 2014 third quarter SG&A expenses include approximately $3.7 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A expenses in the third quarter of fiscal 2014 totaled $14.4 million compared to $14.9 million in our second quarter of fiscal 2014.

The amount of amortization for our acquired patent portfolio remained at $2.3 million per quarter. Our GAAP operating income in the third quarter of fiscal 2014 totaled approximately $17.8 million as compared to $25 million in the second quarter of fiscal 2014.

Our GAAP pre-tax income in the third quarter of fiscal 2014 totaled $42.3 million as compared to $28.1 million in the prior quarter. Included in our third fiscal quarter pre-tax income is a significant one-time benefit of approximately $23.8 million related to the IPO of WLCSP, one of our equity investees in China. Of that $23.8 million gain, $14.1 million was attributable to a step up in book value of our investment in WLCSP.

We also participated in the IPO as 7th shareholder; the remaining $9.7 million of the one-time benefit represented the gain that we realized when we sold 5.1 million shares for approximately $15.9 million. Since this IPO occurred at the very end of the third fiscal quarter, our reported January 31st cash balance did not include the sales proceeds.

Our GAAP income tax expense for the third quarter of fiscal 2014 was $11.7 million. This compares with a GAAP tax expense of $1.8 million in the prior quarter. Our third quarter GAAP income tax expense reflected a tax effect from $23.8 million gain from the WLCSP IPO of approximately $7.9 million. As such on a tax effective basis, the WLCSP, IPO resulted in a per share gain of approximately $0.28 for our third fiscal quarter.

We’ve also reported approximately $1.8 million of additional tax expense when we made a tax election in California to provide future tax benefits to the business. This translated into a $0.03 offsets against the $0.28 tax effective gains associated with the WLCSP IPO transaction.

Excluding the effect of stock-based compensation expense, our non-GAAP income tax expense for the third quarter of fiscal 2014 was $10.8 million. This compares to non-GAAP tax expense for the second quarter of 2014 of $1.6 million. For the fourth quarter of fiscal 2014, we expect our GAAP and non-GAAP income tax expense to be around $2 million.

In third quarter of fiscal 2014, our GAAP net income was $30.6 million or a $0.54 on a per diluted share basis. This compares to $26.3 million or $0.47 per diluted share in the second quarter of fiscal 2014. Excluding stock-based compensation expense and related tax effects, our non-GAAP net income for the third quarter of fiscal 2014 was $40.4 million or $0.69 per diluted share. This compares to non-GAAP net income of $34.9 million or $0.60 per diluted share in the second quarter of fiscal 2014.

Let me now turn to the balance sheet. We ended the third quarter of fiscal 2014 with cash, cash equivalents and short-term investments totaling $393 million. This compares to $265.6 million at the end of fiscal 2014 second quarter. The significant improvement in our cash position is the result of improved working capital management particularly in the areas of accounts receivables and inventories. This has been a key focus for the company. As we mentioned before, our fiscal Q3 cash balance does not include $15.1 million proceeds from the sale of WLCSP shares.

Now on the topic of WLCSP, we currently own 13.3% of WLCSP or approximately 30.3 million shares. At yesterday’s closing price, our stake in WLCSP is worth approximately $195 million. This compares to our book value for WLCSP of approximately $34.1 million as of January 31, 2014.

Account receivable at the end of fiscal 2014 third quarter net of allowances were $134.7 million, a decrease from $178.9 million at the end of fiscal 2014 second quarter. Our day sales outstanding in the third quarter was 35 days as compared to 40 days for our prior third quarter.

As of January 31, 2014, we reduced our inventory to $342.2 million from the $390.3 million at the close of our fiscal 2014 second quarter. Our fiscal 2014 third quarter inventory balance represented an annual inventory turns of 3.3 times or 111 day sales comparable to our inventory turns last quarter.

With that I’ll turn to outlook for the fourth quarter fiscal 2014, which ends on April 30, 2014. We currently expect our 2014 fourth quarter revenues will be in a range of $275 million to $305 million. Our GAAP and EPS are expected to range from $0.05 to $0.21 per diluted share. Excluding the estimate expense and the legal taxes associated with stock-based comp, we expect our non-GAAP earnings will be in the range of $0.19 to $0.35 per diluted share.

Shaw Hong

Thank you, Anson. We are very excited about our new product portfolio. And we execute our diversification education strategies on multiple fronts are never being more confident of our long-term success.

With that, operator we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Harsh Kumar, Stephens. Please go ahead.

Harsh Kumar - Stephens

Yes, hey Mr. Shaw Hong and Mr. Ray congratulations, great numbers, great guidance. I just had couple of questions. Your guidance is seasonally much better than historical trends as well as other people in the space I know you talked about inventory you talked about spends in China. I am curious if you could talk about what drove the better numbers and maybe even address the inventory situation in China, is this temporary or do you think that the Chinese strength can go on for a little bit?

Ray Cisneros

Hi this is Ray Cisneros, thank you for your comments there. In regards to our guidance and how it reflects and as it backs into some of our markets, we believe that the Asian market and the growth drivers behind that sort of market are extremely large and fairly sustainable, that’s speaking from just a marketing perspective of literature out there that you could pickup yourself. We certainly back into this market immediately, we have been progressing towards this position for quite a while now. Our fiscal Q3 results reflected our fiscal Q4 guidance is also embedded with a stronger Asia regional revenue mix. And beyond that obviously the marketing indicators are this will continue through the calendar year as with the same marketplace. So we are extremely happy with the products and our channels that back into this market.

Harsh Kumar - Stephens

Hey, fair enough, guys. And it has one follow up, I was wondering, I know you have talked about some initiatives in supply chain. I am curious if you could talk about that relative to what you put up in your gross margin into the way nice bump, and maybe you are looping some commentary about pure sale whether it’s above corporate average or below corporate average?

Anson Chan

Hey Harsh. I will try to guess that, excuse me. The reported gross margin for that fiscal quarter, most of that cost like we talked about came from ongoing product cost reduction at first and cost improvements. In terms of the pricing certification, obviously, we have been talking about using PSM and even PSE for that matters and going forward we will look at each boundaries capabilities, capacity and will tape out the right products with the right product cost structure so that we can protect our (inaudible) markets more effectively.

So it’s not a longer process that we have to go through. In terms of immediate results for this remaining fiscal quarter like I tried to address last quarter, we feel pretty much shifting skills that we introduced earlier in the fiscal year. So any margin improvement that you are seeing in our results primary comes from new improvements and some addition negotiations that took place with our vendors.

And regarding PureCel we are happy that product starts to going to nice production that the initial shipping volumes for Q4 in particular is not going to be significant enough to have immediate impact on gross margins. Longer term it will help and but immediately it’s, the two main factors (inaudible) if that is not going to have any immediate significant impact. One [it's moving slow], second if you think about any semiconductor products ramp, when you first start to go into mass production your yield is going to sub-optimal. So these are basically factors that will prevent any meaningful uplift to our immediate gross margin.

Harsh Kumar - Stephens

Thank you and congratulations again.

Operator

Thank you. And your next question is from Paul Coster with JPMorgan. Please go ahead.

Paul Coster - JPMorgan

Your newest competitor, Sony, is reportedly one more share of a Tier 1 OEM. But your guidance, it seems better than we had anticipated, notwithstanding our assumption that you were losing some share in North America. Can you just comment upon share gain or loss in the North American Tier 1 handset space and just sort of clarify for us what if that has happened, what might have been mitigating factors for the numbers looking pretty good, nonetheless?

Ray Cisneros

Hi, this is Ray. I can't speak for the I would say the tally sheet if you will, whatever be stands with market share is in particular region and I think that takes a little while for numbers to get rolled up. But we've been indicating for a couple of quarters now on how the markets are transitioning regionally around the world. It's our opinion and as well as shared with plenty of other marketing reports. The high end of the smartphone market is seeing some kind of saturation or some kind of tempering in terms of the growth rate relative to the mid and low end segments of the smartphone categories. And keep in mind the mobile segments drive the majority of the volumes of imaging.

And so when you take that into perspective we are looking at a situation where we believe the Asian market will be driving quite a bit of growth globally and reback into that. Now in North America as we stand today and as we’ve indicated in our prepared commentary we are seeing a shift in our business mix from North America to Asia business mix shift, is that good that we believe it’s not either I think we look at it as a well balanced position in the marketplace given everything that’s going on returns.

Paul Coster - JPMorgan

Okay. And my follow-up question is some of these facts that are standing here came away from your product lineup that was on show CES, so really impressed by the fact that you were becoming a imaging solutions company and no longer image sensor company. And well the transition just evident in the mix shift is happening faster than I would have anticipated. Can you talk to us about the strategy here? How long has it been in the making, what the sort of in state might be and how you see your competitors evolving are they evolving in a similar way or are you, do you believe you’re unique in this diversification strategy?

Ray Cisneros

Yes. I mean I think when it comes to diversification of products I think OmniVision stands for that philosophy from the very beginning. But of course the markets that drive the volumes typically reflect I would say what people or what the outside community sees OmniVision delivering, nevertheless behind the scenes we’ve been investing in diversification from day one, a good example is automotive for over 10 years now it’s been continue R&D investment in automotive and now you begin to see the results of that, similarly the security market is another example of diversification, then if you are referring to some of the examples you saw at CES, it goes beyond that.

There are some incredibly innovative solutions and imaging that go beyond the image capture requirement or gesture motion control is one example. In my prepared commentary the particular OEM product was displayed showing gesture motion control utilizing one of our unique sensor products of fast global shatter speed sensor just simply to collect data and allow gesture must be pro and then of course the reference to one of our key customer partners in the time project of the Google device that was recently, I would say displayed and over press. That’s another example of diversification and of course we need to be investing in R&D and we do so, but of course we do so along our partners and customers.

Paul Coster - JPMorgan

All right thank you.

Operator

Thank you. And your next question comes from Hans Mosesmann, Raymond James. Please go ahead.

Brian Peterson - Raymond James

Yes. Hi this is Brian Peterson in for Hans, just a question on the pricing environment in China. I know that you alluded to competitive environment last quarter. It sounds like regional demand perspective that's getting better next quarter any update on the pricing environment in the competition there?

Ray Cisneros

Brian, so here’s the, I would say some broad comments about the Asian market in regards of pricing. It is still luckily a segmented market, we did talk quite a bit about the mainstream and the entry level, mobile handset markets in Asia those do drive a very, very competitive environment. On the other hand, we feel based on some of our cost improvement measures that we’ve done so far, despite the competitive environment in the pricing, based on all the hard work our operations teams have done to reduce cost, we can remain competitive and hopefully no promise here, definite financing but we hopefully can maintain some good profitability results. But what the final comment I will make about the Asian market is there is a high end segment as well that is a segment that we fully intend to participate based on either current products or products we have planned, in the future.

Brian Peterson - Raymond James

Okay that’s helpful. And just one more on PureCel and I appreciate that it’s ramping next quarter. Do you have any sense for how big as a percentage that could be in terms of your product mix for the full fiscal year next year? Thank you.

Ray Cisneros

I will speak from just the sales and I would say the marketing perspective of PureCel, some of my prepared commentary did have comments about our I would say our satisfaction in regards to how well we’ve been in the marketplace gaining traction with customers, customer commitments, customer engagements with our leading PureCel products, the 13-meg and the 8-meg. Suffice it to say, we do have a stamp -- a steep ramp up profile. And we’re I guess a company, we are focused on ramping that up, bringing in the best yields possible. And then given our strong sales channels around the world, we feel very pleased so far with our progress. But I think we’ll refrain from making any comment in regards how it breaks up into our progress.

Operator

Thank you. And your next question comes from (inaudible). Please go ahead.

Unidentified Analyst

Hi, yes. Good afternoon, thanks for taking my questions. As it relates to some of the emerging uses of image sensors, machine imaging, 3Ds, gestures if you will, could you some highlight for us whether there is a reason that you would be a preferred player in these emerging spaces, is there a technological mode that you have there or is it more of a function of your scale, both from production and a servicing standpoint that allows you to be the preferred vendor in space even though it’s still early?

Ray Cisneros

Yes, I think it’s all the above. I think especially, this is, take a first big example of the automotive segment where machine vision is a significant major kind developing immediately and right in front of us. Today you have as we speak, a lot of automotive OEMs with machine vision imaging technology and OmniVision is a strong player with in my opinion a very strong technical mode, as you put it, because of our unique abilities with developing the sensor array, what’s in the pixel and what’s in the logic controlling that sensor to provide the best machine vision capabilities in the marketplace. We have that validated through multiple OEM design wins with our current products, our future products and the lineup of automotive OEM, brand names are quite impressive.

Can’t pull out some discreet or clear market share gain numbers for you but we are extremely happy with the trend and we foresee it continuing.

In other segments with imaging used for other than image capture, the trends are extremely, extremely rapid and dynamic. But I do know the sensors that for example, that were quoted in the press, for example with the OV4682 that’s a unique example, again with a technical move around our solutions as compared to our competitors with a readymade sensor array with IR pixels that can capture the IR light. And that’s deliverable to the marketplace as we speak today. I can’t say too many other of our competitors are ready to that so easily.

Similarly, the gesture motion control sensors are ready to go for or impact our shipping for mass production ramp up for examples you’ve seen today as well as examples you’ll see coming out in the near future with our end customer products we’ll be showing to the marketplace.

Unidentified Analyst

Appreciate that color. And then secondly for me, would you be able to comment on whether there is sort of, whether we should be -- I don't know if you’ve already mentioned this earlier, updating our view of what is normal seasonality for the company, given the mix shift in your customers both geographically and from a technological standpoint?

Ray Cisneros

I think the seasonality question is going to be a very hard question to answer, quite frankly. Simply because of sort of the global dynamics that are occurring, I’ll just give you one example according to my data, the Asian market has been now growing year-over-year continuously but not much of a dip in their traditional seasonality that we’ve been used to seeing. And we’re being carried by that enormous business wave. And so that kind of breaks the more overturns of our, what we consider seasonality. The post Chinese New Year low is a harder to define now these days and that’s just what we’ve seen in the past couple of years. Then you overlay that with sort of our business, our internal regional revenue mix. So it’s going to be a hard answer to give you right now; I apologize for that but it’s not something that we could easily dissect for you and make it simple to you.

Unidentified Analyst

All right. And then lastly, I guess the question for me is the share question. Given what -- as we consider the puts and takes of North America and China, do you anticipate maintaining a growing share in calendar ‘14?

Ray Cisneros

That’s another, you’re throwing out maybe the toughest questions for me to answer is sort of a crystal ball going forward for the next 12 months to 18 months. It’s difficult for me to really pin down clear and simple answer for you. But again, I’ll point to your attention sort of these global market dynamics that we’re involved in. And the fact that the Asia market a little bit of research you’ll find out its significant growth. We’re seeing double-digit growth in that region. We’re seeing double-digit growth in the automotive segment. We’re seeing double-digit growth in the security segment. So when you roll everything up, it’s going to be hard to sort of give you a simple answer but I am trying to help you out as much as possible.

Unidentified Analyst

Thank you very much.

Operator

Thank you. And your next question comes from (inaudible). Please go ahead.

Unidentified Analyst

Thank you, a good quarter, just a couple of housekeeping questions. One you mentioned the Caltech licensing deal that's a flat fee per quarter for nine years?

Anson Chan

You can call it that essentially it’s an amortization of balance sheet item that will go on an ongoing basis. The lack about nine years, like I said on the prepared remarks, it’s about $600,000 per quarter hit to a cost of goods sold.

Unidentified Analyst

So you just look at it as, I’m sorry about $600,000 or is it tied to units or value or volume or...?

Anson Chan

Not at all, it’s flat fee. To be precise, it’s $608,000 a quarter.

Unidentified Analyst

Okay, Anson. Thank you. Another just housekeeping, you mentioned guidance on tax rate was $2 million again a flat dollar amount of percentage this quarter?

Anson Chan

That is correct because that’s at the end of the fiscal year already. So from the tax accounting perspective, we’re basically just wrapping up the whole fiscal year based on our anticipation.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. And your next question comes from (inaudible) Capital Markets. Please go ahead.

Unidentified Analyst

Hi congratulations and thanks for taking my questions. There has been a lot of talk out there about smartphone I mean this year with the potentially will have dual cameras either for 3D or for one wide angle one with an actual mechanical zoom rather than optical zoom and I was just wondering if you have any particularly in the top tiers, but that are looking at implementing dual camera on the rear this year?

Anson Chan

It’s one of those questions where we really honor our customers’ confidentiality, expectations out of us when it comes to any products being designed with them, along with them. I will just have to reference you to whatever is written out there in the public press to answer that kind of question. But in general, dual cams or array cams or multiple cams is overall general trend we see not just in the mobile space, but in other consumer device spaces actually for that matter even industry type applications even in the automotive segment. So it is a growing trend to have multiple cameras to capture what we call computational imaging type information whether its depth mapping or position tracking. So it is a growing trend overall and of course we don’t have to go see that, it’s now double the sales right.

Unidentified Analyst

Yes absolutely. And then I was wondering if you could give us just a little bit more color on your LCOS product in terms of its timing and if you have customers lined up or when you expect to see revenue from that product?

Ray Cisneros

LCOS is I would say it’s in its early stages of business development for OmniVision. We do have a very, very, very small stream of revenue from legacy products from our regional acquisition of the LCOS business. On the other hand again something that’s very I would say relative to much of the discussion here is sort of new applications of imaging are also synergistic with how to display the image and that’s the reason why the LCOS fits nicely into our portfolio of products when we visit any one particular customer. There is a lot of interest in LCOS technology for either display or heads up or a projection.

All of these kind of technical applications back into incredibly novel and innovative end customer consumer products. So but near-term, I can’t say it’s going to be significant it’s going to take a while to develop, but we are extremely engaged with multiple customers on LCOS.

Unidentified Analyst

Great, thank you very much.

Operator

Thank you. And the last question is from Betsy Van Hees, Wedbush Securities. Please go ahead.

Betsy Van Hees - Wedbush Securities

Thanks for taking my question. With the fiscal Q3 guidance you guys guided revenue in the range is down 22% to 14% and revenue was only down 11% and it sounds like the strength in China that offset weakness in North America and then for fiscal Q4 you have guided revenue down in the range of 22% to 13%. I was wondering if you can help us understand what the tooling factors are to get you to the high-end and to the low-end of the guidance ranges.

Ray Cisneros

Yes. As it pertains to our fiscal Q3 we closed out, I mean there were some assumptions typically when we go through our methodologies internally here to try to estimate a range; we try to factor in risks, as well as very solid base business. Most of what transpired was, I would say a little bit stronger and then anticipated business or sales into the tablet segment, a little bit of downside in terms of the mobile segment in North America, but then some of that was offset by extremely, extremely steady and strong business growth in the Asian markets.

So that’s sort of something we do with every quarter. We typically are spot on with our guidance. This one was slightly above it. As it goes forward to our fiscal Q4, again we see some weakness in the North America base business that -- in comparison to previous years that's reflecting sort of the down step, but on the other hand, we continue to see growth in our Asian markets and we continue to see growth in automotive in this fiscal quarter and growth in security this fiscal quarter. So hopefully, we have captured these moving components and that's our methodology.

Betsy Van Hees - Wedbush Securities

Thanks, Ray. That's very helpful. And so speaking of the Asian market from a competitive landscape standpoint, do you see the same competitors that you do in North America or is it a different set of competitors that you are seeing?

Ray Cisneros

I would say, you could say the Asian market has a longer list of competitors that's currently what we see and then there is a subset of that list of components in Asia that do cover our global market that we compete in. So, there is a longer list in Asia as compared to I would say in North America or Europe are pretty much those two major regions or even Japan I would say. But yes, so hopefully that answers your questions. It's a bigger mix.

Betsy Van Hees - Wedbush Securities

Okay, great. Thanks so much.

Operator

Thank you. I would now like to turn the call over to Arnab Chanda for closing remarks.

Arnab Chanda

Thank you all for joining us on this call and webcast. We anticipate holding our fourth quarter conference call on 29 of May, 2014. Thank you and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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