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

OmniVision Technologies, Inc. (NASDAQ:OVTI)

F1Q2011 Earnings Call Transcript

August 26, 2010 5:00 pm ET

Executives

Brian Dunn – IR

Shaw Hong – President and CEO

Ray Cisneros – VP, Worldwide Sales

Bruce Weyer – VP, Worldwide Marketing

Anson Chan – VP, Finance and CFO

Analysts

Raj Gill – Needham & Company

Paul Coster – JP Morgan

Betsy Van Hees – Wedbush

Yair Reiner – Oppenheimer & Company

Harsh Kumar – Morgan Keegan

Operator

Good day, ladies and gentlemen, and welcome to the OmniVision Technologies earnings conference call for the first quarter of fiscal 2011. My name is Regina, and I will be your coordinator for today's call. This conference call will include time for questions later in today’s session and all participants are in listen-only mode at this time. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn our presentation over to your host, Mr. Brian Dunn. Please proceed, sir.

Brian Dunn

Thank you very much. Good afternoon, everyone, and welcome to our fiscal 2011 first quarter earnings conference call. Just after the close of market today, OmniVision issued an earnings release reporting our financial results for our first fiscal quarter ended July 31, 2010. 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 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 26, 2010, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements.

During the call today, we will present important factors related to our business, which may potentially affect these forward-looking statements. As a result, we caution you against placing undue reliance on these forward-looking statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings release we issued today as well as OmniVision’s SEC filings, including our annual report on Form 10-K for fiscal 2010 and our quarterly reports on Form 10-Q and other reports filed with the SEC from time to time. And as a reminder, we disclaim any obligation to update information contained in any forward-looking statement.

During this call today, we will discuss certain GAAP and non-GAAP financial measures, the latter of which excludes stock-based compensation expenses and related tax effects, which management does not consider to be directly related to our core operating performance. 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?

Shaw Hong

Thank you, Brian. I would also 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 Weyer, our VP of Marketing. I will begin the call with an overview of our results for the quarter followed by highlighting our corporate and operational focus in technologies development, markets and the customers’ expectation fulfillment, and global performance and delivery.

I will ask Ray to present an overview of our recent accomplishments and current sales results, followed by Bruce with his comments on our broadening strategic posture within the emerging video-centric world. Finally, Anson will discuss in detail our financial results for the first fiscal quarter. Anson will also provide our outlook for the second quarter of fiscal 2011. We will conclude as usual by answering as many of your questions as time permits.

We reported today our fiscal 2011 first quarter revenues of $193 million, up sharply from the $157 million we reported in our prior fiscal quarter. Gross margin also improved sequentially to 26.9% from 24.9% in the fourth quarter of fiscal 2010. This revenue results were fairly consistent with our expectations and with the first quarter revenue guidance that we provided in our last earnings conference call.

We recorded GAAP net income of approximately $16.9 million or $0.30 per diluted share, also up sharply from the $3.5 million or $0.07 per diluted share we reported last quarter. Our non-GAAP net income for the first quarter totaled $22.4 million or $0.39 per diluted share as compared to $10 million or $0.18 per diluted share last quarter. We maintain our strong financial position with $349 million in cash and short-term investments at quarter-end.

We are again pleased with our reported results this quarter, which reflect our persistent focus of the following. First, being the front runner in imaging sensing technologies development; second, fulfilling markets and customers’ expectations and needs; and third, delivering quality performances with global operations. Continuous innovation and commitment to the advancement of imaging technologies is the engine that drives our entire organization in achieving our strategic goals.

When we entered fiscal 2010, we faced difficult economic background. However, our commitment and execution to expand our leading technologies have not slowed down. And in fact, we are being continuously talking and making announcements about our backside illumination, BSI, CameraCube and OmniPixel3-HS technologies.

First, let me share with you our commitment with BSI technologies development. Our commitment to the advancement of BSI technologies is second to none. As the first company to commercialize the use of this technology, our first generation OmniBSI pixel is already in mass production and has begun to ramp significantly in fiscal 2011 and serves as the basic for our entire 5-megapixel product line.

With the advancement of BSI-2, the second generation OmniBSI pixel, we have further expanded our leadership in pixel technology well ahead of our competitors. The second generation BSI architecture represents a major milestone in digital imaging technology in an aggressive form factor. Meanwhile, most significantly, these technologies serve the basic for meeting the trend towards ever higher pixel counts and establish a trend towards high quality pixel.

Another notable commitment enduring in core sensing technology is our CameraCube technology development. In particular, we remain focused on the development of advanced wafer level optics and packaging solutions for our next generation products and reduce product costs. To this end, we are consistently examining our options and look for solutions to achieve our goal.

Last, but not least, through fiscal 2010, our OmniPixel3-HS technologies continued to gain traction with broad market acceptance due to its leading low light sensitivity. Our latest high performance VGA sensor that is built with our popular 3.0 micron OmniPixel3-HS high sensitivity pixel is well accepted in automotive and the security markets, which also demand high definition color applications.

Fulfilling markets and customers’ expectations and needs continue to be an indispensable part of our organizational goal as customers demand and in turn the markets demand increase for more advanced image sensing technology, enhance better performing products. We are prepared to meet such demand and here is our report card.

Currently, a major trend and expectation in imaging is the increasingly rapid marketplace adoption of high sensitivity, high definition images and video. With our advanced BSI technology, we introduced two new OmniBSI products in the first quarter of fiscal 2011, which Bruce will discuss in greater detail.

The first image sensor is a high definition device design for notebook, netbook, webcam and video conferencing applications, and is based on OmniPixels 1.4 micron OmniBSI backside illumination technology. In addition, we announced a second device, a 5-megapixel system-on-a-chip camera solution aimed and penetrating the high volume, out of focus camera phone market, and is also built on the same OmniBSI technology.

OmniVision now offers optimized BSI products ranging from VGA devices and 720p HD sensors through our remarkable 14-megapixel image sensors for our full range of traditional and emerging markets. In addition, the market now demand for higher accurate imaging details and a smoother motion video have resulted in the movement of the megapixel curve that we have anticipated for some time.

During the first fiscal quarter, our 5-megapixel devices represent a major portion of our product sales volume, combined with a higher unit contribution margin commanded by the essentials. Our 5-megapixel devices contributed substantially to the first quarter gross margin improvements that I noted earlier.

We continue to work daily to translate these advanced technologies into practical product solutions that meet the needs of our customers in all targeted market segments, including the mobile phone, netbook, security, digital still and video camera, medical and automotive segments, as well as the emerging entertainment market segment. Delivering quality performances with our global operations is an achievement and being productive in achieving our strategic goals, coupled with our technological leadership today is our global presence.

In addition to our headquarters in California, we continue to expand on (inaudible) out of our Asian resources that allows us to take advantage of the benefit of conducting operations on the diversified global scale. Our manufacturing, engineering and sales presence worldwide promotes closer working relationships with customers and suppliers alike.

To advance this objective, we have expanded our functional resources across all areas of expertise, including a substantial increase in research and development personnel at our new facilities in Shanghai, China. Our continued investment in research, product design, and testing capacities is designed to support the expanded research and development efforts of tier one customers.

These Asian research facilities combined with those in US provide us with the ability to address customer needs on around the clock basis. Further, our global presence provides greater visibility into local market development and provides for more focused marketing and sales efforts. We have also supported this effort with additional personnel.

Before I turn this discussion over to Ray, I will emphasize that our first quarter results continued to reflect both our wide range of commitment made and the commitments kept in a challenging global economy. We remain confident in the customer demand we have seen for our flagship OmniBSI, CameraCube and OmniPixel products. This confidence is underscored by the introduction of our milestones technology, OmniBSI-2.

We believe that we are uniquely positioned to capitalize on the growth and expansion opportunities presented by the image sensor markets with our technology, fiscal strength and longstanding history of delivering on our goals and commitments. I again emphasize that we will never rest on our past successes as we continue to pursue the opportunities of our own invention.

With that, I will turn the podium to Ray who will provide an update on the quarter’s sales activity. Ray?

Ray Cisneros

Thank you, Shaw. Our reported results for the first quarter of fiscal 2011 were within the first quarter guidance that we provided during our last earnings call although they were somewhat toward the lower end of that anticipated range. Several factors impacted our performance this quarter, including what we view as a temporary softening in the Asian mobile market demand, slight push-outs by our customers in their product ramps, and continuing efforts to fine tune certain manufacturing efficiencies related to our new products based on our advanced proprietary BSI technology.

This final issue was not expected given the remarkable sequential increase in our BSI product shipments during the first quarter. BSI shipments were led by our 1/3-inch, 5-megapixel in our 1/3-inch 8-megapixel image sensors. We are comfortable with our assessment that no other competitor is likely to approach our current level BSI production capabilities within the short-term.

Our BSI products are proven to be a key differentiator that has enabled OmniVision to secure a range of high value customers and projects. We expect that our proprietary BSI technology will continue to be a decisive factor in securing further design wins during the next several quarters resulting in an increasingly prominent position within our vertical target markets.

During this period, our BSI products will begin to appear in a wide variety of high value product applications, including mobile handsets, portable multimedia players, notebooks, digital still and digital video cameras, and even telepresence technology. We are pleased to note that our customers have begun to report that our BSI technology has translated into a higher level of end consumer satisfaction for capturing images or video.

In our first fiscal quarter, we shipped approximately 134 million units at an average selling price of $1.44. This compares favorably with our last quarter’s results in terms of both unit volume and average selling price, increasing from approximately 125 million units shipped in the prior fourth quarter at an average selling price of $1.26. The sequential increase in ASPs reflects the continued shift towards a high resolution mix that we have discussed in prior calls.

In the first quarter, unit sales of sensors 2-megapixel and higher increased to approximately 33% of total shipments as compared to 27% in the prior fiscal quarter. This increase was driven by a nearly five-fold increase of our 1/3-inch BSI 5-megapixel sensor, which also represented our highest selling product by volume in this category.

The substantial increase in 5-megapixel volume more than offset a decline in 3-megapixel demand while our 2-megapixel demand remains strong, followed by a notable increase in our BSI 8-megapixel sensor volume. We are extremely pleased with this result and we see a continual upward trend into the second quarter.

Both our BSI 5-megapixel and 8-megapixel sensors were featured in high profile smartphone products worldwide. The main drivers for our 2 and 3-megapixel sensors were mainstream feature handsets as well as notebook applications. Unit sales of 1.3-megapixel sensors increased to approximately 10% of total shipments in the first quarter as compared to 12% in the prior quarter.

Going forward, we expect that this category will increase as a percentage of total shipments due to anticipated increases in our high profile BSI HD OV9726 device. This device is being ramped in significant volumes for a variety of applications, including portable multimedia players and notebooks. Finally, unit sales of sensors that were VGA below represented approximately 57% of total shipments in the first quarter.

In terms of product markets, our mobile phone sales represented approximately 66% of our revenues in the first quarter, a significant increase from 55% in the prior quarter. This increase resulted primarily from our strong position in the smartphone segment, which benefits from sharp advances in our BSI 5-megapixel and 8-megapixel unit volume. As a consequence of our stronger mobile sales, the notebook and PC sales were approximately 19% of revenues in the quarter while our emerging market products accounted for approximately 15% of revenues.

In the mobile phone market, our BSI 5-megapixel and BSI 8-megapixel led the way in strengthening our position in the mobile market. Each products offer the optimal combination of the best attributes provided by higher quality pixels and higher pixel counts. These sensors are carried in several leading smartphone products worldwide, and we expect volume will remain consistent for several quarters.

We are again pleased to announce that our customers have told us that with our advanced BSI technology operating at these higher megapixel resolutions, consumers have begun to view the integrated handset camera as a mere equivalent replacement to a point-and-shoot camera. Bolstering our position in the higher end resolutions were continued strong sales in 3-megapixel sensors, also for smartphone products. Our 2-megapixel, 1.3-megapixel and VGA sensors continued to serve steady demands from mainstream feature handsets worldwide.

In the PC, notebook and webcam segment, initial BSI 720p HD sensor shipments began in Q4. We expect this trend will take hold of continuing upward trend. The demand for superior video quality has spurred the interest in BSI for this application. The higher image quality and low light settings common for video applications on notebook products drives a strong interest in BSI products. Major brand names have adopted our BSI HD sensor and will set the standard. The summer cycle remain consistent with our expectations and continued to drive demand for our 2-megapixel, 1.3-megapixel in various VGA products.

In our emerging products categories, our BSI 5-megapixel shipped in ramp-up quantities to the DV camera market. Our new BSI 14-megapixel sensor is on track to do likewise in the second quarter. As we have mentioned in prior calls, devices employing our BSI technology have been designed into a number telepresence applications which are on track to ramp up in the coming months.

In the automotive segment, our shipment remains steady this summer, reflecting a potential level of sustainability in this market. Further out, our next series of new products, both with BSI technology and without, are being engaged in high value customers today. We are confident that our technology will continue to provide the product differentiation, which our customers and consumers have come to expect in value.

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?

Bruce Weyer

Thank you, Shaw. For many years, OmniVision has been recognized as the volume leader in the CMOS image sensor market. This leadership has once again been confirmed by recent analyst reports by Techno Systems Research and (inaudible) development, which show OmniVision’s calendar year 2009 market share ranging between 24% and 28% with absolute leadership percentages of 5% to 8%.

In fiscal 2010, OmniVision broadened our leadership position by introducing our performance and image quality leading OmniBSI solutions ranging from 720p high definition to 14-megapixel resolutions. This leadership has been validated with significant gains in the high performance smartphone, digital video camcorder, and entertainment markets.

OmniVision has also delivered the industry’s broadest CMOS sensor portfolio, optimized for emerging markets, resulting in continued market share gains in the notebook, security, automotive and medical markets. We are bullish on our market position, product portfolio, and product roadmap, as we close our first quarter of fiscal 2011. In the first quarter of fiscal 2011, OmniVision introduced the OV2720, the world’s first 1/6-inch, native 1080p high-definition CMOS image sensor designed for notebooks, netbook, webcam and video conferencing applications.

Based on OmniVision’s 1.4-micron OmniBSI technology, the new 1080p sensor captures video, conference-quality HD video and a form factor that meets the module size and height requirements of progressive and notebook designs. In June, OmniVision announced the OV5640, a quarter-inch, 5-megapixel system-on-chip sensor built on our 1.4-micron OmniBSI technology. The device offers a cost optimized, complete camera solution with excellent pixel performance for 5-megapixel photography and 720p or 1080p high-definition video for camera phones.

The sensors embedded auto-focus control with voice coil motor driver offers further cost savings to end customer, making the OV5640 a highly attractive alternative to other 5-megapixel sensors currently on the market. In June, OmniVision also announced a high-speed OV7735 VGA sensor, providing one of the thinnest VGA camera solutions available today at less than three millimeters in height. The OV7735 is ideal for portable applications, including digital video cameras, portable media players, as well as gaming devices and webcams.

OmniVision has been very diligent in the development of leading edge technologies to deliver the highest quality CMOS image sensors and video experience for the consumer and professional markets. OmniVision believes we can significantly enhance and enrich people’s lives for bringing affordable high-quality video systems to their social, professional, and health and safety environments.

Shaw Hong

Thank you, Bruce. I will now turn the call over Anson, who will discuss our first quarter financial performance and provide guidance for our second quarter of 2011.

Anson Chan

Thank you, Shaw. And good afternoon, everyone. Revenues for the first quarter of fiscal 2011 increased by 22.9% to $193.1 million from $157.2 million in the fourth quarter of fiscal 2010. Direct sales to OEMs and VARs accounted for 68.4% of our revenues in the first quarter of fiscal 2011, up from 46.9% in the fourth quarter. The remainder of our revenues came from sales through our distributor channels.

And fiscal 2011 first quarter gross margin was 26.9%, up from 24.9% in the prior fiscal quarter. Excluding stock-based compensation expense of $533,000 included in cost of revenues, our non-GAAP gross margin was 27.2%, up from 25.3% in the fourth quarter of fiscal 2010.

In the first quarter, we recorded approximately $1.2 million for the sales of previously written down inventory and $5.1 million as an additional allowance for excess and obsolete inventories for a net $3.9 million of unfavorable impact on our gross margin. In the fourth quarter of fiscal 2010, we recorded approximately $5.9 million for the sale of previously written-down inventory and $5.7 million as an additional allowance for excess and obsolete inventories, with a net $200,000 of favorable impact on our gross margin.

As we turn to our BSI volume, we continue to fine tune our supply chain. And thanks to the dedication of our supply chain partners, the overall yield of our 5 to 8-megapixel BSI product was much better than we originally expected. The yield improvement accelerated the unit contribution in margin improvement from these higher megapixel products. This was the primary factor behind a 200 basis point sequential improvement in our gross margin in the first quarter.

R&D expenses in the first quarter of fiscal 2011 totaled $20.2 million, a 3.2% increase from the $19.6 million in our fourth fiscal quarter, the increase was primarily due to an annual company-wide salary increase effective to our post. We currently expect our R&D expense in the second quarter of fiscal 2011 will increase from first quarter levels as the pay rates will have been in effect for the full quarter.

In addition, we anticipate increased NRE charges extending from an anticipated increase in mass design releases to TSMC. R&D expenses in the first quarter included approximately $2.6 million of stock-based compensation expense. Excluding stock-based compensation expense, first quarter R&D expense was $17.7 million as compared to $17.1 million in the fourth quarter of fiscal 2010.

SG&A expenses in the first quarter of fiscal 2011 totaled $14.3 million as compared to $15.6 million that we reported in the previous quarter. The decrease in SG&A expenses is attributable to lower legal expenses for patent defense and lower commission payments, which more than offset the company-wide salary increase that I mentioned earlier.

The first quarter SG&A expenses include approximately $2 million of stock-based compensation expense. We expect the SG&A to increase in the second quarter of fiscal 2011 due to the increase in compensation and commission payments to our channel partners. Excluding stock-based compensation expense, SG&A expenses in the first quarter totaled $12.3 million as compared to the $13.4 million that we reported in our prior fiscal quarter.

Our GAAP operating income in the first quarter totaled approximately $17.4 million as compared to the $4 million in the prior quarter. Our GAAP pretax income in the first quarter totaled $18.7 million as compared to the $4.7 million in the prior quarter.

Through the first quarter, Silicon Optronics, Inc., one of our equity investees based in Taiwan, elected a new Board, in which we time we no longer have majority representation on the Board. Consequently, we will require under US GAAP to deconsolidate Silicon Optronics from our financial statements. The deconsolidation resulted in a one-time non-cash gain of approximately $1.6 million, which we record as part of our other income for the first quarter. Offsetting this one-time gain was a $1.1 million loss, resulting from our interest rate swaps that we use to hedge our interest rate risk on our mortgage loans that we entered into in 2007.

Our GAAP tax rate for the first quarter was 9.5% and resulted in a GAAP income tax provision of $1.8 million as compared to $1.3 million in the prior quarter. Excluding the effect of stock-based compensation, our non-GAAP tax provision for the first quarter was $1.5 million, and our non-GAAP tax provision for the fourth quarter was zero. For the second quarter of fiscal 2011, we expect our GAAP tax rate will be in the mid-teens and our non-GAAP tax rate will be in the low-teens.

In the first quarter, our GAAP net income attributable to OmniVision was $16.9 million or $0.30 per diluted share as compared to GAAP net income attributable to OmniVision of $3.5 million or $0.07 per diluted share in the fourth quarter. Excluding non-cash stock-based compensation expense, our non-GAAP net income attributable to OmniVision for the first fiscal quarter was $22.4 million or $0.39 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $10 million or $0.18 per diluted share in our fourth fiscal quarter.

Let me now turn to the balance sheet, which remained in excellent shape. We ended the first quarter with cash, cash equivalents and short-term investments totaling $349 million. This compares to $333.6 million at the end of the fourth quarter. As of July 31, 2010, inventory totaled $141 million, an increase of $7 million or 5.2% from the $134 million balance at the close of our fourth quarter. Our July inventory balance represented 92-day sales or annual inventory turns of 4 times. We increase our inventory in anticipation of increased sales in the second quarter of fiscal 2011.

Turning to our accounts receivable, the balance at the end of our first quarter net of allowances was $93.7 million, an increase of 26.1% from $74.3 million at the end of our fourth quarter. Our days sales outstanding increased to 45 days in the first quarter from 42 days for our fourth quarter. The increase in days sales outstanding was related to the timing of our product shipments to our customers during the quarter.

Now I will turn to our outlook for the second quarter of fiscal 2011, which ends on October 31, 2010. We expect significant strength in demand for our image sensors, which leads us to provide a very robust guidance for the second quarter. We now expect our 2011 second quarter revenues to be in a range of $220 million to $240 million, representing a 14% to 24% increase over our first fiscal quarter. Our GAAP earnings are expected to range from $0.36 to $0.49 per diluted share. Excluding the estimated expense and related tax effects associated with stock-based compensation, we expect our non-GAAP earnings will be in the range of $0.46 to $0.59 per diluted share.

Shaw Hong

Thank you, Anson. In summary, we believe our fiscal 2011 first quarter results reflect underwriting strength in our revenue trends that parallel with the comparables that we are seeing within the global economy under a moderate growth scenario. I assure you that we will continue to execute with the same focus and the precision throughout this new fiscal year, as we did during the challenging past fiscal year.

We are confident in our ability to capitalize on the growth opportunities presented by the image sensor market with our technology, financial strength, and our outstanding history of delivering on our goals and commitments. I again emphasize that we will never rest on our past successes as we continue to pursue the opportunities of our own invention.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Certainly. (Operator instructions) Gentlemen, your first question today comes from the line of Raj Gill with Needham & Company.

Raj Gill – Needham & Company

Yes, thank you. And congrats on very good gross margin results and guidance. Just wanted to talk a little bit about the revenue in the quarter for July, if I can. Could you talk a little bit about the softening demand in Asia mobile handsets? Maybe you can provide a little color on what was happening there. And the customers pushing out orders, if you could maybe describe that? And how much of that is being now factored into your revenue guidance for next quarter?

Ray Cisneros

Sure. This is Ray Cisneros. As you know, the Asian mobile market is very dynamic. And so what we saw in our fiscal Q1 was just a temporary market blip. And so we consider that behind us. And going forward, in fact, we are stepping into the high season of the Asian mobile market that’s leading up the Chinese New Year. So whatever market trends we saw in Q1, we regard that as behind us.

Raj Gill – Needham & Company

But what was the blip? I mean, what specifically happened there?

Ray Cisneros

It was entry-level handsets. As you may or may not know, it’s a large market in Asia. Yearly basis, it’s over 200 million unit handsets made in Asia. So there was a temporary blip in the market in terms of some softening.

Raj Gill – Needham & Company

Okay, got it. And then maybe could you describe a little bit about your market share position in the camera phone market? Did you feel that you are gaining share against your competitors? Where do you see upside? And maybe describe a little bit about your technology – “technology leadership” in BSI-1 and BSI-2 relative to your competitors. How do you characterize that?

Ray Cisneros

I’ll make a couple statements. I think Bruce will make a couple statements as well. Definitely, as we marched through our Q1, as you’re aware, our BSI position backing into some high value projects, high value customers, represents a significant market share gain. Now, obviously that’s just an opinion. We will have to wait till the market analysts quenched our numbers when the calendar year closes out. But that’s our opinion going forward. In regards to technology of BSI, obviously to ship the quantities that we are shipping today, it’s a long learning curve. We regard that as extremely a big advantage to OmniVision, and our competitors will probably face that step when they get to it. And it’s not easy to ship the volumes we have.

Raj Gill – Needham & Company

Just last question, switching gears to the margin, incredible performance there. How sustainable is that margin going forward? What do you think the drivers for continued gross margin improvement existing this year? And could you talk a little bit about the overall blended ASPs? Where do you think that will be going over the next several quarters? Any thoughts there would be helpful. Thank you.

Anson Chan

Okay. It’s a lot of questions in that one question. First of all, regarding the margin, we experienced some favorable yield this quarter and the yield improvement is a lot faster than we originally planned. So that’s why you see the margin expanded this quarter to much more than what everyone out in the street was expecting. Now going forward, I think the yield for these newer BSI products will be a lot closer to the optimal point. And so the further expansion in margin, I think, would take a slower – smaller step, to put it that way. Regarding the ASP, that has a lot to do with the mix going forward.

We, obviously in Q1, shipped a lot of 5-megapixel and 8-megapixel devices. In Q2 and Q3, that trend may continue. A lot of that depends on the macroeconomics and whether they are not – the smartphone, in particular, will continue to be a significant seller in the mobile phone market. With that said, I think the last question has to do with sustainability of the margin. Currently, that has to do with the technology upgrade. We have a technology roadmap in place. And like all semiconductor industry businesses, if we can continue to migrate our products to the next geometry node or more advanced technology, which had been able to lower our cost of goods sold in a unit basis. And that will give us the opportunity to continue to expand gross margins.

Raj Gill – Needham & Company

Thank you very much.

Operator

(Operator instructions) And gentlemen, your next question comes from the line of Paul Coster with JP Morgan.

Paul Coster – JP Morgan

Thank you. Ray, you talked about softening in the quarter. You also talked about customer push-out. Can you elaborate upon that? And does that have some varying upon on the guidance for the second quarter? That’s my first question.

Ray Cisneros

As much as we can do what our end customers do is out of our control. What we report was what’s in hindsight. What happened in the quarter, as I mentioned, is a little bit softening in the Asian market. And as we track our customers and our projects with them, at some instances, you may have some delays in their launches had nothing to do with anything that we had control over. It is market and customer conditions we have no control over. But as we provide guidance, as we try to capture some of that and as it turns out, we did capture that.

Paul Coster – JP Morgan

Okay, got it. I think, Anson, in the guidance for the fiscal first quarter last year around – for the January quarter, some quarters ago now, it was a little bit of a surprise to investors about the seasonality in the business. Can you confirm that we should see a repeat of what happened last year and that the January quarter will be sequentially down? And can you remind us why?

Ray Cisneros

I’ll say a few words about seasonality. As you recall, we mentioned a customer mix within OmniVision’s customer portfolio shifting slightly towards the Western Hemisphere and that therefore driving some seasonality shift. On the other hand, I will balance this out now saying that our BSI product position has given OmniVision a very advantageous position. And going forward, we won’t make any clear predictions here. But all I can say is we are happy with our products, we are happy with our position with customers. And how the seasonality turns out? I think there is a mix of both, of traditional seasonality, but on the other hand, we have a very, very strong market positions with our technologies and products.

Paul Coster – JP Morgan

Okay. Sorry. I have got another quick question. Portable media players, what were you referring to there?

Ray Cisneros

Well, you can look around in the space – in the consumer space. You go to any good electronic store, you can pick up a variety of different, very small form factor, portable devices that provide all kinds of entertainment for the consumer. I will leave it at that without getting too specific. As you march through the fiscal year with us, you will obviously come across the end products on the store shelves. But it’s any kind of media that a consumer would like to have at his fingertips, be it video, music, images of digital still camera, that sort of thing. It’s a very broad category that we’d like to look at the portable media players as.

Paul Coster – JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Betsy Van Hees with Wedbush.

Betsy Van Hees – Wedbush

Thank you very much. Good afternoon, everybody, and congrats on that great bottom line beat and really great gross margin and the guidance. I think you guys have done a good job addressing what’s happened in the past. And so I wanted to focus a little bit more as we look forward to the business. The mix has changed. You had 66% of revenue coming from camera phones and then 19% from notebooks and webcam. Should we expect that same kind of mix going forward or are we going to see an even greater percent to the camera phones given the success that you guys are having in the smartphone arena?

Ray Cisneros

Yes. Let’s just say that the strength of the mobile phone market, as we are marching into the Christmas holiday season, this is carrying a lot of volume with it, a lot of great customers, a lot of great products. On the other hand, I could say that the entertainment is going to pick up for us coming into the holiday period as well. There are some fantastic new products that customers will be launching. And so that’s going to offset a little bit the mobile space. DSC will pick up. So we are looking at the quarter that has a very good mix. So I can’t say one is up or down, but all of them start pulling forward very aggressively, all vertical markets we address.

Betsy Van Hees – Wedbush

Thanks. That was very helpful. You guys talked about the competition in BSI, and I think the commentary was that you guys remain ahead of the competition. Could you please give us a little bit more color behind that and what's differentiating you and why are you so far ahead of the competition? And lastly on that question, who are you most worried about in terms of whose closest to you?

Bruce Weyer

This is Bruce Weyer, Vice President of Marketing. We have been developing the backside illumination technology with our strategic partner TSMC for many years. This has been a five-year effort for us. And there has been a tremendous amount of intellectual property developed between the two companies in that process. And that’s very hard to reproduce and is very hard to reproduce in a short time period. So if you look at our success and the growth we’ve seen, it’s really been fueled by BSI. So that should give you an indication that a great portion of that learning has already taken place for us. So we think that as a big barrier for the competition.

The only other company that has announced products in the market with backside illumination has been selling. And their initial products were focused on their more central market of digital still camera. So we think that in the broader market space, the breadth of our portfolio, it will take a long period of time anyone that’s following to reproduce our product portfolio that we’ve introduced. We have a continued focus on expanding that portfolio. Likewise, we’ve announced our BSI-2 technology, which has been the next generation to build on, and that will become the target of the benchmark that our competitors are going to have to compete against.

Betsy Van Hees – Wedbush

Thank you. That was very, very helpful. And, Anson, can I ask one more question, please?

Anson Chan

Sure. Go ahead.

Betsy Van Hees – Wedbush

Thank you. You talked about OpEx going up, and understandable given that revenue is going up and compensation. Can you give us a little bit of an idea of how much we should be modeling OpEx up?

Anson Chan

I can’t give you specific numbers per se. But if you look at the – one way to help you understand this, from Q4 to Q1, take R&D for instance, you have about $600,000 of increase. And I also mentioned in the prepared commentary that in that increase, that’s about one month of company-wide salary increase. So you can do your rough estimate and make some discount and multiply by three. That’s basically where I was trying to get to in terms of how the OpEx will increase next quarter because there would be a full quarter worth of pay raise for the company. Earlier in the prepared commentary, Shaw also mentioned that we are increasing some headcounts in China in particular for R&D. So there is some additional increase in OpEx in there as well. And on top of that, you have some lumpiness when it comes to NREs with takeouts at TSMC.

Betsy Van Hees – Wedbush

Thank you very much, and I'll step out of the queue and let someone else ask some questions. And once again, congratulations.

Anson Chan

Thanks.

Operator

Gentlemen, your next question comes from the line of Yair Reiner with Oppenheimer & Company.

Yair Reiner – Oppenheimer & Company

Great. Thank you. First question, on notebooks, it looks like notebook revenue declined by about $11 million Q-on-Q for you, which is not the normal seasonal pattern. Based on the orders you are seeing now, how do you expect notebooks to track in October? Should we go back to kind of that $50 million level that we saw in April or do you expect it to be longer for the inventory issues there to work themselves out?

Ray Cisneros

Hi, this is Ray Cisneros. There was some step-down, a little bit incremental step-down from Q4 to Q1 in the notebook business. However, we do still see a strong summer season and going back to school season in the notebook space. On absolute terms, I wouldn’t regard it as a significant step-down. It’s tracking within, I think, our range that we typically see. So it’s just been overshadowed by a strong mobile revenue that we reported this past quarter.

Yair Reiner – Oppenheimer & Company

Okay. And my next question is just on like-for-like ASP trends. I think traditionally, in the CMOS unserved market, like-for-like prices tend to drop on the order of 20%, 25% a year. Correct me if I'm wrong. Should we expect BSI chips to kind of follow those same patterns over the next year or two, or do you think given your leadership it may be a little bit less drastic than that?

Ray Cisneros

I think that’s a very good question. I think it opens up the comment that when it comes to BSI, we are going to try our best to find the best customers and the best projects for BSI to get as much out of BSI as possible because we are getting strong feedback from our customer base that it is a differentiator. So that being said, going forward, everything we could possibly do, we try to prevent similar type of price erosion that we’ve seen in our standard FSI-type technology products. So I’d like to say we’ll definitely try to drive the BSI to a better proportion to the marketplace and to our shareholders.

Yair Reiner – Oppenheimer & Company

Great. I have other questions, but I'll cede the floor. Thank you.

Operator

Your next question comes from the line of Harsh Kumar with Morgan Keegan.

Harsh Kumar – Morgan Keegan

Good quarter, first of all, and good guidance. Just a couple of quick questions. You touched upon this a little bit with respect to the ramp that you're seeing. Could you maybe talk about the linearity of the build, particularly in the context of the Christmas build? Are you seeing a normal Christmas build and is it linear?

Ray Cisneros

We’re seeing some – I would say, some aggressive Christmas builds as it pertains to our customers and our projects. I think when you sit down and consider on my side with all the information in front of me, we have some very aggressive builds with customers. And that I think backs into our strong positions of the great technologies and products that we are offering to our customer base.

Harsh Kumar – Morgan Keegan

Okay. Fair enough. And if I can ask my follow-up, your accounts receivables were up quite a bit. Could you maybe explain what's going on there? Is it just a function of the build?

Anson Chan

Yes. It’s really just a function of when the shipment took place during the quarter. If you think about the build for the summertime and where our fiscal quarter started, you have some shipments proportionally and towards the end of the quarter. So that drives up the AR balance. (inaudible) DSO increased only three days. The general profile is still in very good shape. Our customers are definitely paying their bills. So, no concerns there.

Harsh Kumar – Morgan Keegan

Fair enough. Thank you.

Operator

And ladies and gentlemen, this concludes the question-and-answer portion of the call. This also concludes the conference. We thank you for joining us today. You may now disconnect. Have a wonderful day.

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

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

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

Source: OmniVision CEO Discusses F1Q2011 Results - Earnings Call Transcript
This Transcript
All Transcripts