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OmniVision Technologies, Inc. (NASDAQ:OVTI)

Q4 2014 Results Earnings Conference Call

May 29, 2014 5:00 PM ET

Executives

Arnab Chanda - Director, Investor Relations

Shaw Hong - Chief Executive Officer

Ray Cisneros - Senior VP, Worldwide Sales and Sales Operations

Anson Chan - Chief Financial Officer

Analysts

John Vinh - Pacific Crest Securities

Osten Bernardez - Cross Research

Rajvindra Gill - Needham & Company

Paul Coster - JPMorgan

Hans Mosesmann - Raymond James

Tom Sepenzis - Northland

Richard Sewell - Stephens

Operator

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

I would now like to turn the conference call over to Arnab Chanda, Director of Investor Relations at 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, the 29th of May, 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 in 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. A 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 Q4 2014 results. We reported fiscal Q4 revenues of $331 million, a decrease of 6% sequentially and 1.6% year-over-year.

During the quarter, we shipped over 200 million sensors. On a non-GAAP basis, gross margin was 204% and net income was $23.9 million or $0.40 per diluted share. Our balance sheet remains strong as cash and equivalents of $451 million.

Before I turn the call over to our management team to provide details on our Q4 fiscal results and outlook, I'd like to make a few comments on our business and strategy. We are pleased with our fiscal Q4 results. In our core smartphone market, although, there was a decline in North American business we saw growth from Asia-based OEMs, especially in China and Taiwan.

Our emerging automotive and security businesses are continuing to grow. We are again pleased to report sequential improvements in our financial metrics, including higher gross margins, increase cash balance and lower inventories.

OmniVision’s goal has always been to drive profitable revenue growth from diversified applications, products and markets using our core technology. In order to achieve our goal, we must continue to enhance our technology leadership, expand our market opportunity by developing new products and applications based on our technology and optimize our cost structure.

First, technology leadership, our focus remains on innovation and enhancing the development of our core process technology as well as complimentary imaging solutions technologies.

We believe in order for our business to sustain successfully, technology development is a basis on which we can produce better performance products and meet the demand of our key target markets.

One of our key innovations in process technology is our new flagship PureCel technology. PureCel has industry performance, light sensitivity, low power and has been cost optimize for volume smartphone and tablet markets. We expect PureCel sensor volume to ramp up rapidly and can broaden and deepen our ability to address both core and emerging markets.

In addition, I am pleased to say that our technical team have been consistently enhancing and developing complementary imaging solution technologies such high dynamic range, global shutter and competition our image process and we continue our pursuit of innovation and technology leadership, we believe this technologies laid a solid foundation for the enormous product and application opportunities that are available to us.

Next, expansion of market opportunities, as we know, camera technologies continue to proliferate across geographies and into new devices and applications. We see two primary drivers of our potential expansion, one is the globalization of the mobile market and the second is growth in new products and applications.

For the globalization of the smartphone market, we believe OmniVision is well-positioned to benefit from the globalization of the smartphone and tablet market given our wide footprint, long history, as well as deep relationships with baseband partners, module manufacturers and OEMs especially in Asia.

Industry analysts predict that the increase in global proliferation of low cost 3G smartphones, as well as transition to 4G/LTE in China will be the primary drivers for smartphone growth.

During fiscal Q4, we benefited from the global presence as our business continued to shift to Asia. Indeed Asia has become the largest geographic for OmniVision consistent with the emergence of Asia as the largest market for smartphones.

For the growth in new products and applications, we believe that the emerging of new applications, as well as new markets will add to our growth opportunity in the coming years.

In our core smartphone, tablet and PC market, we are working closely with our customers to enable new applications such as capturing 3D depth information, using photography to improve image quality and transition to higher resolutions and developing new human interface applications with machine vision.

Leading OEMs are addition new machine vision sensors to the standard smartphone platform, which will enable new human interface applications such as gesture control recognition and eye tracking. We will continue to see strong growth in our emerging markets especially automotive and security.

In automotive, regulatory requirements and automotive OEMs continue to drive a significant increase in the number of cameras per car. In April, the National Highway and Traffic Safety Administration released a long-awaited federal mandate requiring, starting May 2016 all new cars under 10,000 pounds were facing to have a rearview camera.

Currently many cars already are equipped with cameras for driver assistance applications such as backup, surrounding, night vision, pedestrian and obstacle detection, mirror refreshment, then departure, et cetera.

In addition, we have developed ASIC that complement our automotive sensors to adding distortion correction and improve light sensitivity. We are already working closely with our automotive partners to drive the next inflection point which will be based on machine vision.

We have also seen strong growth in our security business driven by the proliferation of self-installed low cost IP cameras and geographic diversification into countries such as China. We saw an inflection in our security business two quarters ago as IP camera trend gathering momentum.

Lastly, cost structure optimization, cost structure optimization is an integral part of achieving profitable growth, given the scale of our business. The primary driver behind the implementation of this goal is successfully pursue diversification across all elements of the supply chain.

Image sensor manufacturing is complex and requires a tradition silicon wafer and packaging infrastructure, as well as sensor specific steps such as color filter replacements. Our pursuit of supply chain diversification allows us to reduce customer risk, optimize capacity and cost reduction for products. In addition, supply chain diversification allows us to work with specific partnership to target different market segment that requires unique performance and cost trade ups.

In a mean time, competition in our market remains intense from high end to low end camera, from camera performance to price and so on. However, we will continued to focus on attaining our goal through technology enhancement, product development, cost and supply chain optimization.

I will now turn the call over to Ray who will update you on our sales and marketing activities.

Ray Cisneros

Thank you, Shaw. We are pleased to report our fiscal fourth quarter revenues that exceeded the high end of our guidance. We saw continued robust growth in the smartphone market segment in particular in our China and Taiwan regional markets.

We believe that we are benefiting from the global trend of the value segment driving growth in smartphones. According to DisplaySearch the value smartphone segment is expected to grow nearly 40% in calendar 2014 far outpacing the overall 24% growth in smartphones while the premium segment is expected to grow below 5%.

Our 8-megapixel and 13-megapixel PureCel sensors shift to mass production and will continue a steep ramp to higher volumes. Our Automotive Market segment continued to show solid growth and key OEM brands globally continue to work with OmniVision.

In addition, we are pleased to see our machine vision products move into mass production at our key customer OEM opening up a new market opportunity. Going forward our fiscal Q1 guidance reflects strong growth in the mobile segment given our robust market position in Asia, in particular the China region.

In our fourth fiscal quarter we shift 201 millions units as compared to $214 million units in our prior quarter. The average selling price in our fourth quarter was $1.64 equivalent to the prior quarter. We saw a significant improvement in our resolution mix which was offset by an intense competitive environment which resulted in average selling prices remaining unchanged.

Units sales of sensors 2-megapixel and above represented approximately 52% of total shipments in the fiscal fourth quarter as compared to 44% in the prior quarter. The trend toward higher resolution was primarily driven by increased 13, 8 and 4-megapixel shipments.

Unit sales of 1.3-megapixel sensors represent approximately 37% of total shipments as compared to 44% in the prior quarter. As noted in pervious conference calls, HD sensors form the bulk of this segment with the majority of the volume shipping to North America. Going forward, we expect the decline HD shipments with product transitions. We expect a continued residual level of HD shipments to the notebook, security and mobile segments.

Finally, unit sales of sensors that were VGA and below represent approximate 11% of total shipments as compared to 12% in the prior quarter. Overall, we expect our resolution mix to reflect the continued upgrades of smartphones and tablets to higher resolutions going forward. Our mobile phone sales represented approximately 69% of revenues in the fourth quarter as compared to 52% in the prior quarter.

The significant increase in our mobile phone business reflects robust growth in our Asian regional business in particular smartphone OEMs in China and Taiwan. Our entertainment segment represented 15% of sales as compared to 31% in our prior quarter. The decline in this particular quarter was mainly due to the post holiday seasonality into tablet segment especially in North America.

Our sales of sensors into the notebook and webcam segment were approximately 5% of sales as compared to 7% in our prior quarter, also a result of post holiday seasonality as well as general PC weakness. Several factors have impacted revenues in this segment. The first the industry has moved to lower quality sensors given cost pressures. Secondly, tablet cannabilization has also had an impact.

We are extremely pleased to see our emerging segment increased to 11% of sales in fiscal Q4, primarily driven by the secular growth of automotive and security business. Despite fiscal Q4, typically being a seasonally slow quarter, we saw double-digit growth in the automotive segment and a stable security segment.

Going forward, we anticipate our emerging business to continue to grow strongly which should further diversify our revenues. In the mobile phone space in Asia, we do not see the typical fiscal Q4 seasonality post Chinese New Year.

The mobile phone segment in the China region did not slow down quarter-on-quarter. And it was a second year in a row to exhibit this trend for OmniVision. Major forces driving growth include the impending introduction of 4G LTE by Chinese carriers that will spur domestic consumption and the production of 3G value smartphones for export markets to emerging regions, such as India, Africa and Latin America.

We shipped a broad range of products to our China-based OEMs including 13852 and HD sensors. These products will ship at higher volumes in the fiscal first quarter and we anticipate an overall strong calendar year.

This region was also the first to launch our PureCel product platforms, specifically a new 13- megapixel OV13850 and the 8- megapixel OV8858. Record volumes of 1/4-inch 5- megapixel sensors were also shipped to value segment smartphones.

We also gained traction with next generation sensors at multiple global OEMs. On the whole, our China mobile business segment will be a major driving force for our revenues in the coming quarters. However, we recognized this market is highly dynamic, competitive and cost driven.

In Taiwan, we are shipping a growing volume of our high-performance sensors in multiple resolution categories ranging from HD up to our 13- megapixel PureCel product. In the North American market, shipment volumes remain flat quarter-on-quarter but we expect a steady decline in this regional business going forward.

In the entertainment market, there was a significant decline in tablets post the holiday season similar to last fiscal year. In addition to seasonality, an overall tablet market growth slowdown also affected the segment. We shipped a range of sensors in this market from VGA up to 5-megapixels or tablets.

Our business in the gaming console segment remains strong while we shipped the study volume of 720p sensor products to a major Japanese OEM. Post holiday seasonality was a significant contributor to the notebook PC segment slowdown in our fiscal fourth quarter.

We also saw the notebook market continues to see cost pressures partly due to tablet cannibalization. This, in turn, has triggered adoption of VGA products for notebooks in order to reduce costs at the expense of image quality. Despite these adverse trends, we continue to successfully transition OEMs to our new OV9728 720p sensor from our legacy 720p sensor. In addition, we shipped a higher volume of VGA sensors to the notebook market to address the VGA demand in notebooks.

In the emerging markets, we saw the automotive market continue to grow strongly in our fiscal fourth quarter. We saw growth in all our key automotive products including our analog VGA with excellent low light sensitivity, our 720p and 1-megapixel product, OV10635 shipping to tier 1 automobiles for surround view and best-in-class back-up cameras.

Additionally, we continue to work with customers and partners to design in our next generation products. We have continued to build on our great success in Europe with major German OEMs. We have continued to increase our market share with tier 1 Japanese OEMs. In addition, our products continue to gain traction in North America.

Lastly major ecosystem partners have validated our technology by continuing to gauge new platforms, especially to enable new applications such as automated driver assistance. We anticipate that these trends will continue going forward, driving our automotive growth.

In the security market, we have seen a strong inflection point and growth due to the adoption of IP digital security cameras. Our 720p products are on its steep growth curve predominantly to the China market, were easy to install and activate, has been enabled by Internet and cloud service providers. We’re quickly introducing lower-cost products in the segment as volumes rise rapidly.

In summary, we are pleased with the fiscal fourth quarter results in a seasonally weak period with significant geographic and market diversification. In particular, we are very pleased with our success in ramping up PureCel in Asia and the strong growth we experienced in our automotive industry and security businesses in fiscal 2014.

We continue to work diligently to capitalize on their highly dynamic global landscape with our balance mix of products and solutions. We continue to launch a number of key products. We are extremely pleased with the success of PureCel products, the OV8858 and the OV13850, which saw the first mass volume shipments in fiscal Q4.

We believe that our products have industry-leading image quality performance on low power characteristics which have been independently validated by our customers. Our 8 and 13-megapixel PureCel products have the latest pixel pitch generation of 1.12 micron and are designed for the high-volume smartphone and tablet segments.

We also announced the third member of the PureCel family, the OV5670, 1/5-inch 5-megapixel sensor, which also uses our 1.12 micron pixel. The 5670 due to its small form factor can either be used for the main camera or as a self-view camera in smartphones and tablets.

The OV5670 uses 35% less power than our previous 1/4-inch 5-megapixel generation with a much smaller footprint. Its small form factor can fit into a camera module of only 3.5 millimeters tall ideal for super slim mobile devices. The product has been well received by the market and we anticipate initial volume shipments in our fiscal Q2.

In our automotive segment, we recently announced the OV10640, the industry’s first BSI-based high dynamic range of 1.3 megapixel sensor. This next-generation sensor provides up to 120 dB dynamic range and over 8 Volts per lux-second light sensitivity.

The OV10640 with its superior performance has captured major design wins across tier1 OEMs and major ecosystem partners. Along with the OV10640, we launched the OV490, it’s companionship. The OV490 can process data from the OV10640 for display or machine vision output. This architecture is ideal for best-in-class surround view systems, rear vision systems or forward looking machine vision systems.

Lastly, our newly announced sensor targeted machine vision the OV6211 ramped up in our fourth fiscal quarter. The OV6211 is an extremely low-power sensor running at 120 frames per second in a global shutter mode. These features enable the OV6211 to be designed for applications such as hands-free gesture control, eye tracking, depth and motion detection and biometrics.

Due to its small format size of 1/10-inch, the OV6211 is ideal for mobile products, wearables and gaming devices. The launch of OV6211 to mass production marks the key milestone for Omnivision and expanding our target applications beyond traditional image capture.

We believe that our Omnivision is well-positioned to capitalize on the evolution of human interfaces beyond touch, the products such as the OV6211 driving machine vision application in these diverse markets.

In summary, Omnivision continues to design, develop and launch products to mass production that support current imaging, markets as well as enable a variety of new applications in markets. We are pleased with our execution of new products in fiscal 2014 and we will continue to capitalize an existing and emerging opportunities in fiscal 2015.

Shaw Hong

Thank you, Ray. I will now turn the call over to Anson, who will discuss our fourth quarter financial performance and then provide guidance for our first quarter of fiscal 2015.

Anson Chan

Thank you Shaw and good afternoon everyone. For the fourth quarter of fiscal 2014, we are reporting revenues of $331 million, down 6% sequentially and down 1.6% on a year-over-year basis. Direct sales to OEMs and VARs accounted for 78% of our revenues in the fourth quarter of fiscal 2014, a slight decrease from 88.3% in the prior quarter.

The remainder of our revenues came from sales through our distributor channels. Our fiscal 2014 fourth quarter gross margin was 20.1% compared with 19.6% that we reported in our prior quarter, excluding stock-based compensation expense of $1 million included in cost of revenues.

Our non-GAAP gross margin was 20.4% compared with 19.9% in the prior quarter. Our gross margin improvements are primarily result of volume ramps in some of our newer and more profitable products, as well as our ongoing cost improvement efforts.

On a sequential basis, the net adjustment to gross margins from sales of previously written off inventory and allowance for excess and obsolete inventories had similar effects on our gross margins in both the third and fourth fiscal quarters.

In the fourth quarter of fiscal 2014, we recorded approximately $2.6 million for the sale of previously written down inventory, and $7.2 million as an additional allowance for excess and obsolete inventories, with a net $4.6 million or 1.6 percentage points of unfavorable impact on our gross margins.

In comparison, in the third quarter of fiscal 2014, we recorded approximately $3.5 million for the 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.

We are pleased with the progress we've made in reducing our costs and improving our revenue mix towards newer generation products that have a lower cost structure, which will continue to benefit us in the first quarter of fiscal 2015.

At the same time, the growth in our core smartphone and tablet markets is occurring in the value of our mainstream segments, with intense competitive dynamics. With that said, we remain cautious as we look into fiscal 2015, especially with regard to continued margin expansion.

R&D expense in our fiscal 2014 fourth quarter totaled $31.5 million, a 1.8% increase from the $30.9 million in our fiscal 2014 third quarter. We expect our overall R&D expenses to increase by $1 million to $2 million in our first quarter of fiscal 2015 due to higher mask costs and new tape outs.

R&D expense in the fourth quarter of fiscal 2014 included approximately $4.5 million of stock-based compensation expense. Excluding stock-based composition expense, fiscal 2014 fourth quarter R&D expense was $27 million, as compared to $26.7 million in the third quarter of fiscal 2014.

SG&A expenses increased slightly to $18.6 million in the fourth quarter of fiscal 2014, from $18 million in the third quarter of fiscal ’14. We expect our SG&A expenses to also increase by $1 million to $2 million, for our first fiscal quarter in 2015, mostly due to increased commission payments to our distribution partners.

Our fiscal 2014 fourth quarter SG&A expenses included approximately $3.6 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A expenses in the fourth quarter of fiscal 2014 totaled $15 million compared to $14.4 million in our third quarter of fiscal 2014. The amount of amortization for our acquired patent portfolio remained at $2.3 million for the quarter.

Our GAAP operating income in the fourth quarter of fiscal 2014 totaled approximately $14.1 million, as compared to $17.8 million in the third quarter of fiscal 2014. Our GAAP pre-tax income in the fourth quarter of fiscal 2014 totaled $18.3 million as compared to $42.3 million in the prior quarter.

Included in our fourth fiscal quarter pre-tax income was a one-time benefit of approximately $3.1 million. This amount was a post-acquisition gain related to our 2012 acquisition of the CameraCubeChip production operations from VisEra, our joint venture with TSMC.

The gain was a result of our agreement with VisEra to reduce the final installment of our cash consideration for the acquisition from $9 million to $4.5 million. As a reminder, our GAAP operating income in the third fiscal quarter also included a one-time benefit, which totaled approximately $23.8 million. This amount was related to the IPO of WLCSP, one of our equity investees in China.

Our GAAP income tax expense for the fourth quarter of fiscal 2014 was $3.2 million. This compares to the GAAP tax expense of $11.7 million in the prior quarter. Excluding the effect of stock-based compensation, our non-GAAP income tax expense for the fourth quarter of fiscal 2014 was $3.5 million. This compares to our non-GAAP tax expense for the third quarter of fiscal 2014 of $10.8 million.

For the first quarter of fiscal 2015, we expect our GAAP income tax rate to be in the mid-teen percentage range and our non-GAAP income tax rate to be around 10%. In the fourth quarter of fiscal 2014, our GAAP net income was $15.1 million or $0.26 on a per diluted share basis. This compares to $30.6 million or $0.54 per diluted share in the third quarter of our fiscal 2014.

Excluding stock-based composition expense and related tax effects, our non-GAAP net income for the fourth quarter of fiscal 2014 was $23.9 million, or $0.40 per diluted share. This compares to non-GAAP net income of $40.4 million, or $0.69 per diluted share in the third quarter of fiscal 2014.

Let me now turn to balance sheet. We ended the third quarter of fiscal 2014 with cash, cash equivalents and short-term investments totaling $450.9 million. This compares to $393 million at the end of fiscal 2014 third quarter. The improvement in our cash position is primarily the result of cash provided by operating activities.

Our cash conversion cycle actually improved to 90 days in the fourth quarter, as compared to 98 days in the prior quarter. We’ve also received the sales proceeds of $14.9 million from the sale of $5.1 million WLCSP shares last quarter. After the shares’ sale, we still hold 30.3 million shares of WLCSP. At last Friday’s closing price, our WLCSP stake is worth approximately at $180 million, as compared to the recorded book value of $33.8 million at year end.

Accounts receivable at the end of fiscal 204 fourth quarter, net of allowances were $172.5 million, an increase from the $134.7 million at the end of fiscal 2014 third quarter. Our day sales outstanding in the fourth quarter was 46 days as compared to 35 days of our prior quarter.

We experienced strength in both bookings and shipments during the last month of the quarter, which accounts for increasing DSO. As of April 30, 2014, our inventory decreased to $270.9 million from the $342.2 million balance at the close of fiscal 2014 third quarter.

Our fiscal 2014 fourth quarter inventory balance represent an annual inventory turn of four times or 91 day sales, an improvement from 3.3 times or 111 day sales in the prior quarter.

So with that, I will turn to our outlook for the first quarter of fiscal 2015, which ends on July 31, 2014. We currently expect our 2015 first fiscal quarter revenues will be in the range of $360 million to $400 million. Our GAAP EPS are expected to range from $0.29 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 $0.43 to $0.63 per diluted share.

Shaw Hong

Thank you, Anson. We are pleased with our accomplishments in fiscal 2014 in launching our PureCel sensors and achieving supply chain diversification. As we enter fiscal 2015, we believe that our product portfolio has continued to improve over prior years.

In the near-term, we believe that we should continue to capitalize on market trends such as the global expansion of the smartphone markets, especially in Asia, as well as continue growth in automotive and security markets. Over the long-term, new or improved technologies should continue to be the basis, on which we launch our products into target key markets and new applications.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Vinh from Pacific Crest Securities. Please proceed.

John Vinh - Pacific Crest Securities

Hi. Thanks for taking my question. My question is on gross margins. Sounds like you guys have made some pretty meaningful progress in terms of improving your margins. You've talked about ramping, your new PureCel products that have a lower cost structure in the market. Your mix shift is moving towards higher resolution sensors. But it sounds like you are a little bit more cautious about continued gross margin improvements as we go forward. Can you just talk about the puts and takes in that, and why you are cautious going forward about seeing further gross margin improvements?

Anson Chan

Sure. First of all, we all know margin is two-side inflation. We had the cost which something we’ve been working on for quite a while. The other side of the equation would be the selling price. And as Ray was trying to describe earlier on the call as well, we have been expanding our presence in terms of revenue mix in the China market and that market historically has been very competitive. And that translates into pricing pressure for us. So anything can happen looking out as we continue to expand our presence in this market and lot of that to do with the selling price. If we can -- if the cost curve that we can keep up with the price aggravating curve for that rate, their margin would be okay. But to extend it, the pricing pressure becomes a little more extreme that can put pressure on the gross margin expansion.

John Vinh - Pacific Crest Securities

Got it. And then just my follow-up, can you talk about what your mix of PureCel is? And as that mix starts to improve going forward, does that also help? And then obviously you talked about dynamics in terms of geographic mix. I would imagine that as your mix moves more heavily towards China versus North America, does that also should help going forward as well?

Shaw Hong

I can try first. So PureCel is something that we will continue to push. It’s our latest lineup. Obviously over time it will pick up a more significant share of our revenues. Right now they are limited to the high-resolution devices. And as we have mentioned earlier in the call, the first two PureCel devices were 13-megapixel and 8 megapixels. Because the resolutions are higher, they carry high ASPs. But as we try to promulgate this technology across our product lineups, you’ll start to see PureCel products coming out with low resolutions. As ray mentioned earlier, the next PureCel product is a 5 megapixels. As this continues, it will have -- from a mix perspective it will also have some effects on the selling prices and gross margins? And Ray, I don’t know if you have anything add to that?

Ray Cisneros

I just want to make a comment about the question in regards to the geographical business mix. Right now as we have been consistently commenting that the Asia business mix is quite a big component of our revenue today. Just to put it, I would say broadly it’s -- the combined overall Far East Asia business is probably a multiple now with the North America business. So it is a good component of our business. On the other hand, it represents a lot of opportunities because as mentioned earlier, the market shift of who’s enabling products to be sold to the marketplace to the consumer place is being driven by the Far East Asia OEMs at the moment. So it’s going to be a balanced situation of gaining as much market, surviving the dynamics and the competitive environment of each markets, and they are pacing quite at a big pretty brisk pace, so we just need to keep up.

John Vinh - Pacific Crest Securities

Great. Thank you.

Operator

Your next question comes from the line of Osten Bernardez from Cross Research. Please proceed.

Osten Bernardez - Cross Research

Good afternoon, and thanks for taking my questions. I guess real quick could you provide some color as to when you started to see the trends you saw in the fourth quarter sort of the above what you were originally planning?

Shaw Hong

Let me try that. As I tried to mention earlier when I described the accounts receivable balance, all of that shipment and demand got fairly strong towards the last month. So that’s really a lack of linearity in terms of shipments for the quarter. It continued to increase. That party explains why our guidance for the first fiscal quarter ’15 was so strong because demand is continuing.

Osten Bernardez - Cross Research

Got it. And so could you comment with respect to share in China or rather from the Far East Asia region in terms of how you intend to sort of balance your goal of gaining/maintaining share and also driving profitable growth?

Shaw Hong

I will talk a little bit about the business aspect of your question in regards to the gaining and maintaining market share, I think we particularly stand back and take a broad, I would say an overall look at the current situation. It took several quarters in preparation to develop this. I would say our position right now with very good business in the far East Asia market. It’s we’ve learned lot through this growth curve. We are not -- we are very familiar with this market, but I think it’s just the way the market dynamics shifted from various regions to the Far East Asia regions in regards to this smartphone segment, that’s where the opportunity broke up in for us as well. Going forward how we intend to maintain this sort of leadership position is a back to our core values of innovation and technology, our latest product announcement with PureCel. The latest product to be added to the PureCel family, the OV670 is an example. There is more of new products and new innovation. In addition, we have very strong sales and marketing channels in Asia that allow us to be very close and intimate to our customers and partners in the ecosystem. So there are lot of advantages to our side to try to maintain this position, but again we will be little bit cautious as well. Going forward we are not planning in any victory at all. We understand it’s very competitive and dynamic.

Osten Bernardez - Cross Research

Thank you.

Operator

Your next question comes from the line of Rajvindra Gill from Needham & Company. Please proceed.

Rajvindra Gill - Needham & Company

Thanks for taking my question. Just a question on the growth in China, if you could just dig a little bit deeper in terms of where the growth is coming from, specifically by the customers? And are you seeing a lot of growth from the Tier 1 as well as the Tier 2? And along those lines, can you talk a little bit about the pricing competitive dynamics in the Tier 2 customer base?

Shaw Hong

Right. Growth is occurring in variety of areas, predominantly though led by the smartphone players from the China market as well as some very good results out of the Taiwan region. The smartphone market, you could break that down into multiple segments and we see the mid to the low end smartphone type category products showing the fastest growth rates. Now that’s today, but we also see trends going forward. These particular OEM companies are also, I would say, aggressively now moving into the high end segments as well. So there is very, very rich opportunities right now in the Far East Asia market, and particularly the China market. In regards to actual specific names, we typically refrain from going into that level of detail, but we could tell you our participation in the China market and the Far East Asia market, we are engaged with the full lineup of names that are typically associated and the full lineup of names associated with Tier 1 segment as well as the Tier 2. And there is always a broad channel going into the low end segments in the Far East Asia market.

Rajvindra Gill - Needham & Company

So my follow-up, Anson you talked about the wafer level stake that you have, you still on 30 million shares in that company versus 180 million if I am correct. Could you remind us again what the lockup period is again and as well as what the taxable implications would be when you sell that stake?

Anson Chan

A lot of that is -- significant portion of that has got a one-year lockup. The IPO took place last February, so that is 12 months from then. But it has nothing to do whether or not we will sell. WLCSP is a part of a supply chain. It’s a strategic partner at this point. So in terms of the liquidity, and I guess as we are getting it of these equity investments, it’s something that we would decide later on when the lockup period is expired.

And then in terms of the tax implications, obviously you have this supply gap issue in the US. These are passive earnings to the extend we realize it. So that it’s possible that we will be taxing the U.S., it’s going to realize again.

Rajvindra Gill - Needham & Company

Thank you.

Operator

Your next question comes from the line of Paul Coster from JPMorgan. Please proceed.

Paul Coster - JPMorgan

Thanks for taking my question. It’s really to do with diversifying the wafer supply, have been able to achieve that in any way and can you quantify it? And then the customer side, is there anything you can share regarding customer concentration?

Shaw Hong

Hi, Paul. In terms of wafers diversifications, I think we are still primarily using TSMC, where we do have some wafers coming out from PSE in Taiwan as well. We have not probably talked about any other wafer sources. Obviously, if they become material, we will follow all the required SEC disclosure rules, so we will describe these other sources in further detail. But at this point it’s nothing significant.

However, we are making some progress in terms of specifications and actually, if you look at the last quarter’s public filings, the 10-Q in particular, you can see some done transactions with WLCSP already. We have not any transactions with them for a while and I think last quarter, we just first started to report transactions with them again. So, it’s just an example of how we are continuing to diversify the supply chain.

Paul Coster - JPMorgan

Okay. Got it. And then my follow-up question. Your inventory seems to have declined ahead of a sequential increase in revenues. It's a little unusual. Are you now systemically running with a higher turns ratio? And is there anything about the content of that inventory mix that might give us some clues as to how that is being achieved?

Shaw Hong

It took us many quarters to rectify inventory situation, so we are pleased with that. But as you know, frankly based on our guidance, there’s enough inventory at year end to support that kind of revenue guidance. So we will be building inventory again. And understanding that we have a fairly long lead time and any fluctuations in the customer demand side may result in addition inventory that we may not want to have.

So it’s kind of hard for me to comment at this juncture. What kind of turn we will have on our next quarter? Obviously, the goal is try to keep up the turn at around four times. And we’ve stated in the prior quarters that this has been our goal for a longest time. So, we’ll do whatever we can to keep this efficiency in our capital management.

Paul Coster - JPMorgan

Thank you.

Operator

Your next question comes from the line of Hans Mosesmann from Raymond James. Please proceed.

Hans Mosesmann - Raymond James

Thanks. Hey, Anson, can you give us a sense of a gross -- I'm assuming that the gross margins are going to be flattish here over the next quarter or so. But over time, as PureCel becomes a greater portion of the mix, how should we expect gross margins to trend, say into next fiscal year?

Anson Chan

As we’ve tried to comment on the prepared remarks at this point, as management we are fairly cautious in terms of margin projection, particularly because of the increase in revenue mix from the Far East market. The competition is significant. Across the board, we have Tier 1 manufacturers in that market, all the way to lower tier domestic suppliers. And there is some hesitation that we need to pay proper attention as a management, so I guess I would advise you to be cautious as well.

Hans Mosesmann - Raymond James

Okay. And then fair enough. And then, can you give us any commentary regarding how sell-in versus sell-out dynamics are occurring with your customers, maybe some clarity or granularity there? Thanks.

Anson Chan

Are you referring to the sell-out through distribution channels versus direct sales?

Hans Mosesmann - Raymond James

Any commentary that you see in the channel, you are selling these into the low and mid-tier smartphones that your customers, indeed, seeing some success at selling through their products.

Ray Cisneros

All right. This is Ray. Our sell-through products or sell-through sales, in regards to the Far East Asia markets are across all the segments. But keep in mind, there is a fairly large chunk that sells, I would say that is somewhere between the mid to value segment in smartphones. But we do have some product selling into their flagship premier products in the marketplace from some of our customers. So we span across the scope or the spectrum of smartphones.

Hans Mosesmann - Raymond James

Okay. Thank you very much.

Operator

Your next question comes from the line of Tom Sepenzis from Northland. Please proceed.

Tom Sepenzis - Northland

Yeah. Hi. Congratulations on the quarter and the guidance. I just wanted to ask a couple quick questions. One, in terms of the strength you're seeing in China, I just wanted to clarify that that's not one or two customers. You're seeing that strength across the board, or with multiple customers.

Anson Chan

Yes. When it comes to the Far East Asia market, there are many, many, many customers. As you maybe aware there is a very large battle out there in the Far East Asia market for a market share grab. The famous global -- it was even famous and global branding OEMs from the China market that are now achieving market share outside of the China market. And so it’s a long list. It’s certainly not a handful. It’s more than a handful and it’s quite extensive.

Tom Sepenzis - Northland

Great, thank you. And then as my follow-up, I know you haven't really guided to it, but traditionally October sees a pretty serious ramp. I'm wondering if the strength that you are seeing in July maybe flattens out that growth that we typically see in that second quarter of the year for you or how you see the second half of the calendar year progressing?

Anson Chan

Well, just as typically is our position, we’re not commenting on anything other than what we’re reporting today. But it is a two side of story here. One is the huge opportunities in the Far East Asia markets that are developed, that we’re currently in right now full swing. On the other hand, the market is large enough to attract a lot of competition. It’s very dynamic and very cost driven, so we’re taking on both sides of these conditions very seriously. But that’s as far as we could comment in regards to and forward-looking comments beyond what we’re reporting today.

Tom Sepenzis - Northland

Great, thank you. And what was the percentage for the handset revenue in April? I missed that, I'm sorry.

Anson Chan

Yes, the mobile business, I believe we've reported as 69% of revenues.

Tom Sepenzis - Northland

Thanks so much.

Operator

Your final question comes from the line of Harsh Kumar from Stephens. Please proceed.

Richard Sewell - Stephens

Hey guys, thank you. This is Richard in for Harsh. Congratulations on the quarter and the guidance. Just wanted to start off with the question on the North America business, I think you mentioned that you expect that to be down steadily over the course of the year. Could you give any color on how you see that trending in terms of smartphones and tablets? Do you expect one to come down a little bit faster than the other?

Anson Chan

Yeah. In general, our North America business has -- we're basically in the middle of down trending steps. But in regards to breaking it down beyond that, it will be difficult to do just overall as the business mix it is. Just a general decline for us quarter-on-quarter and we anticipate that to remain the case.

Richard Sewell - Stephens

Fair enough there, and then looking at the competitive landscape, you talked about fairly healthy competitive dynamics there. Are you seeing this more intense than in previous quarters or how would you classify that?

Anson Chan

I think there is -- I think the way you want to look at this is the overall market of imaging. It continues to expand, it continues to grow. Most official marketing reports are typically very conservative type outlooks of the overall sensor market growth. That is the reason why there is continual traction of new competitors coming into this space. If we had to look back in one, two, three, four, five years ago and compare it to today, I would say there is probably more competitors today than it was a few years ago.

And there in all segments high mid and low segment. So it’s difficult for me to tell you exactly how many competitors out there, there is quite a few. We track them. We know how to fight against them. We have our own strategic plans to try to make the best out of the situation. I hope our results and our performance speaks to that.

Richard Sewell - Stephens

Great. Congrats again you guys.

Operator

This concludes our question-and-answer Session. I will now turn the call back to Mr. Arnab Chanda.

Arnab Chanda

Thank you all for joining us on this call and webcast. We anticipate holding our fiscal first quarter conference call on the 28th of August, 2014. Thank you and good day.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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