OmniVision Beats on Notebook Strength

OmniVision Technologies’ (OTVI) earnings of 7 cents for the fourth quarter of fiscal 2010 (ending April 2010) beat the Zacks Consensus Estimate by a penny. Earnings attributable to OVTI shareholders were 6 cents.

Total Revenue

Revenue of $157.2 million was flat (up 0.1%) sequentially and up 76.5% year over year. Revenue was within management’s guidance range of $145-160 million (down 7.6% to up 2.0% sequentially). Seasonality continued to impact North America and Europe in the last quarter, while Asia was relatively steady.

The year-over-year increase was driven by strength in the notebook and security markets, as well as an uptick in the automotive market. There was also the benefit of more favorable comps, as the fourth quarter of fiscal 2009 was severely impacted by the recession.

Total unit sales were down 3.8% sequentially to 125 million, while the blended ASP jumped 4.1% to $1.26. The 2 megapixel and higher resolution sensors comprised around 27% of total units shipped, up from 25% in the third quarter. Notebooks and cell phones drove the increase in this category.

OmniVision also started seeing traction in the 3 megapixel sensors for the handset market. The 1.3 megapixel category grew from 5% in the last quarter to a more normalized 12% of revenue. Strength in the notebook market was the major reason for the increase. However, VGA and below dropped to a 60% revenue share.

Revenue by End-market

The camera phone, notebook and other emerging products (security, auto, video game consoles, toys, medical, etc) generated 55%, 30% and 15% of total revenue, respectively. The notebook market was the only one that saw a sequential increase (up 20.2%). Camera phones declined 8.2%, while other emerging markets were flat sequentially. The camera phone, notebook and other emerging product markets were up 61.8%, 76.5% and 164.7%, respectively, from the year-ago quarter.

The year-over-year increase in all segments was driven by the company’s newer technologies and the large number of design wins indicates that this strength will continue.

Margins

The pro forma gross margin was 24.8%, down 39 basis points (bps) from the previous quarter’s 25.2%. The gross margin benefited from a better mix and higher ASPs, although this was partially offset by lower volumes. Inventory adjustments also impacted the gross margin in the last quarter.

The operating expenses of $35.2 million were higher than the previous quarter’s $36.0 million. The operating margin was 2.4%, up 14 bps sequentially from 2.3%. The slight increase was related to lower R&D expenses as a percentage of sales, mainly due to the timing of non-recurring engineering expenses related to the release of new designs to Taiwan Semiconductor Manufacturing Company (NYSE:TSM) that increased R&D expenses in the third quarter. SG&A expenses as a percentage of sales were flat sequentially.

Net Profit/Loss

The pro forma net income was $3.2 million, or a 2.1% net income margin, compared to $5.8 million, or 3.7% in the preceding quarter and a loss of $20.2 million or 22.6% of sales in the same quarter last year. There were no special items in the last quarter.

The fully diluted GAAP earnings per share were 7 cents, compared to 9 cents in the Dec quarter and a loss of 40 cents in the year-ago quarter. This was better than the mid-point of management’s guidance range of 5 cents.

Balance Sheet

Inventories increased 22.0% to $134.0 million, yielding annualized inventory turns of 3.5X (compared to 4.3X in the previous quarter). Management stated that turns of 4.0X to 5.0X were more reasonable, given the turns business and short lead times. We think the company built some inventory to serve the very strong demand expected in the next two quarters. Days Sales Outstanding were around 43, up from 39 at the end of the previous quarter.

The company ended with cash and investments balance of $333.6 million, down $9.3 million from the end of the previous quarter. The lower cash balance was due to the higher investment in inventory. OmniVision has $45.4 million in long-term debt and $95.4 million in long-term liabilities.

Guidance

Management’s guidance for the third quarter of fiscal 2010 is as follows—revenue in the range of $190-210 million (up 20.9-33.6% sequentially). The Zacks Consensus revenue estimate is $183 million, below the guided range. The strong revenue guidance is due to the increasing adoption of the company’s BSI technology, which should ship in volume from the fiscal first quarter.

GAAP earnings attributable to OmniVision shareholders are expected to come in at 17-30 cents a share, while non-GAAP earnings excluding share-based compensation are expected to be 27-40 cents a share.

Reiterate Neutral

We are encouraged by the strong growth projected by management and believe the company may be exiting the recession at last. We are also positive about the successful diversification into the notebook segment, which continues to grow as a percentage of total sales.

Our concern pertains to profitability, since the company has turned in operating losses for most of fiscal 2009 and has made marginal profits in fiscal 2010. Consequently, since fiscal 2011 looks good from here, we anticipate some positive movement in the stock. We therefore encourage investors to wait for a more attractive exit point.