OmniVision Technologies, Inc.
F2Q2011 Earnings Conference Call
November 30, 2010 5:00 pm ET
Brian Dunn – IR
Shaw Hong – President and CEO
Ray Cisneros – VP, Worldwide Sales
Anson Chan – VP, Finance and CFO
Yair Reiner – Oppenheimer & Company
Paul Coster – JP Morgan
Harsh Kumar – Morgan Keegan
Raj Gill – Needham & Company
Ladies and gentlemen. Thank you for standing by and welcome to the OmniVision Technologies conference call for the second quarter of fiscal 2011. (Operator instructions) Later we will open the call for your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference is being recorded for replay purposes. I will now like to hand the call over to your host for today, Mr. Brian Dunn. Please proceed.
Thank you very much. Good afternoon, everyone, and welcome to our fiscal 2011 second quarter earnings conference call. On today’s call will be Shaw Hong, President and CEO,
Ray Cisneros, Vice President of Sales and Anson Chan, Chief Financial Officer.
During this conference call, we may make forward-looking regarding our business including statements relating to revenues, earnings targets and our product plans. This is based on information as of today, November 30, 2010 and actual results may differ materially from those set forth in such statements. These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risk factors, you should review the forward-looking disclosures in the earnings release we issued today as well as OmniVision’s SEC filings.
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 related tax effects. 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 Mr. Shaw Hong. Shaw?
Thank you Brian and welcome to all of you joining us on the call and webcast. Earlier this afternoon we issued a press release describing our resource for the second fiscal quarter of 2011. For those who have not yet had a chance to read the release let me provide you with a recap of our financial results.
In Q2, we achieved a record revenues of $240 million, a tangible percent and ratio increase in sales. On a non-GAAP basis, gross margin was 28% the second consecutive quarter of sequential improvement in gross margin. Net income was $34 million or $0.58 per diluted share. This is another record for OmniVision.
We maintained our strong balance sheet with a cash position of $397 million and we shipped record volumes of image sensors exceeding 180 million units. This is the highest level of units ever shipped by OmniVision in the first quarter. We are extremely pleased with our record resource for both revenue and earnings.
In my formal comments today I would like to talk about the following areas. First, our focus on investing, maintaining and executing on our leadership in image sensor technologies and solutions. Second, our development of imaging solutions that provide our customers with technologies for the next generation products. Third, discuss some rapid growth trends in the market we serve and out interest to serve them. Fourth, brief overview of our global operations and recent activities.
First, I'd like to speak about OmniVision's leadership role in digital imaging technologies. In particular, our OmniBSI and CameraCube technologies. OmniVision’s OmniBSI, our first generation backside illumination technology is testimony to our technology leadership. As I mentioned before, not only we are the first to commercialize this technology, our volume shipment in OmniBSI based product is a testament to our success in this technology.
Our BSI architecture enabled the most direct path or light to the sensor. This resulted in shorter length and height, thinner camera modules and increased (inaudible). All this while delivering excellent imaging performance. OmniVision is hard at work developing the next generation of BSI. Our OmniBSI-2 technology based on 300-millimeter semi conductor wafer processors. The second-generation BSI architecture is capable of delivering the smallest and highest performance pixel technology in the market. Now pursuing design wins for BSI-2 and we believe we are more than a generation ahead of most competitors. We anticipate shipping BSI-2 based products in the next calendar year.
Next, our CameraCube products are gaining traction and we are shipping those products in steady volumes. Most OmniVision and our customers have learned a great deal about wafer level cameras and we will continue to push the envelope on Omni's product technology. Our plans are to move closely, align our sensor optics and packaging know how into one vertical, integrated and maintain and generate more competitive solutions. As we have had said many times, our strategic direction is based on the principle of disciplined investment in emerging technologies.
We invest in the needs of promising new markets and the increasing satisfaction of the consumer. The common thread in our product or map is to use our market leading imaging technology. So it is appropriate that we talk next of how OmniVision imaging solutions based on our advanced technologies release (inaudible) for our customers next generation solutions.
Going first to our OmniBSI backside illumination technology. We are very pleased that OmniBSI is being adopted abroad and record scale worldwide for a wealth of and consumer products and Tier 1 OEM brand names, including OEMs for high end smartphones, notebooks, portable multimedia devices and even commercial enterprise applications. In the past several months, we released new sensors to now extend our OmniBSI solution from VGA up to 14-megapixel. To highlight a few, our new VGA will enable integration of camera modules into extreme (inaudible)the LCD display panel of 2 millimeter or less.
Our SOC native sensor will enable rapid design and integration into web or multimedia devices. Also, our second A megapixel sensors have added key video features critical for the marketplace today. Our intent is not just to release ordinary sensors but to release solutions that will provide the best technologies at all levels of imaging products.
Going to our front side illumination technology. OmniVision has been working hard in the continuing development of progress based on our OmniPixels 3HS technologies. For example, we released two new products to the market, including a unique color, high dynamic range, full megapixel sensor. The (inaudible) camera integration architectures for the growing 368 (inaudible) in the automotive market. We are offering 720p video capabilities designed with our OmniPixels 3HS technology.
These sensors are designed to meet customer’s demands and need for HD video while offering the values between performance and cost for the features in the market. Now our third discussion is about the rapid growth of the various markets and our achievements in the process to address this. At a global level, we realize the increasingly rapid market of high sensitivity, high definition images and video. It is the goal of OmniVision to be at the full front of technological changes.
I would like to highlight three markets in particular. Mobile, global and webcam and entertainment markets. The mobile phone market is still our most important market today. The English market. We have done well in the small segment with the 8-megapixel sensor based on our BSI technology. The strong exceptions of our BSI pixel is contributing to our product sales volume in this country and our gross margin improved. This market is our notebook and webcam market. This is the market where we have considerable leadership in volume shipment, estimated by some research firms to be in the 15% range.
The advantages and solutions of this segment are also waiting for the HD video and we are meeting this need with our solutions based on those OmniPixel 3HS and OmniBSI technologies. Among our other emerging product markets I would like to highlight our success in entertainment. Entertainment is showing growth that we believe is sustainable and yet can be significant. By entertainment we are including mobile Internet devices, portable media players as well as interactive gaming systems. New video capabilities are emerging daily and enable guests the control of facial recognition is many consumers’ devices. This is an exciting new technology that we believe we are quickly a must have feature for many entertainment applications.
Our market share has been on line with the leaders in this industry offering them our broadest high definition video line and to maintain our focus on developing next generation technology. This is a market segment that we have targeted for some time and we are now beginning to see the results of our efforts.
Now I will comment on our global operations. It has been critical for our delivery of quality products and vital to the achievement of our strategic goals. A number one goal of our operations over the past several months was to launch OmniBSI successfully. In this regard we have overcome many barriers to reach this level of OmniBSI production. Today, over half of our wafer stocks are OmniBSI and the trend will continue upwards.
All the rest of our operations continue to reach this goal including production, quality as well as sales and marketing. Additionally, our ability to reach this level is highly tied to our close cooperation with our longstanding supply chain partners. Mostly with our silicon wafer supplier (inaudible) Our goal now is to mostly transition more and more key partners to OmniBSI by improving efficiencies.
Additionally, achieving OmniBSI (inaudible) for OmniBSI-2. We believe the (inaudible) with OmniBSI to help OmniVision take the leadership in delivering OmniBSI tool based products to the market. We are now preparing the full supply chain to support this launch that will be coming in the months ahead.
We continue to expand our teams to expand our operational prescience on a global scale. Our manufacturing (inaudible) closer working relationship to customers and suppliers alike. OmniVision maintains worldwide service and supports our major customers in market locations. Our global reach enables us to get in real time support as well as collect local intelligence on market trends.
A recent example of this is our expanded research and development in Shanghai, China. The continuing investment in product design and testing capacity is designed to support the expanded R&D effort of our global Tier 1 customers.
l of these facilities combined with those in the U.S. provide us with ability to address customer needs on a 24-7 basis. I would like to make one final comment before turning the call over to Ray. And I hope many of you have noticed, OmniVision operating expenses as a percentage of revenue declined in the second quarter. We carefully managed our expenses by growing our top line an impressive 24%. We are proud of the discipline that our management team gave to the company and we emphasize our confidence in the business model that we believe is highly scalable.
With that, I will turn the call over to Ray who will provide an update on the quarter's sales activity. Ray?
Thank you, Shaw. We are pleased with our reported results for the second quarter of fiscal 2011 falling on the high end of our guidance and most importantly setting a record high for OmniVision. Our upward trend in revenues was fueled by the execution of our decision to release to the market superior technology in products. In addition to continuing to ship our industry leading BSI 5-megapixel and 8-megapixel sensors in Q2 we saw an increase in shipments of our BSI 720p HD sensor OV9726. And an acceleration of shipments of a specialized VGA sensor that has created a paradigm shift in a secondary camera application for a high-end smartphones.
All of these products are setting the industry standard for superior imaging technology. In our second fiscal quarter we shipped a record high of nearly of 185 million units as compared to 134 million units in our prior quarter. The average selling price in our fiscal second quarter was $1.29 as compared to $1.44 in the prior quarter.
The sequential drop in the average selling price was driven by the shift in our products mix mainly due to a surge in shipments of our new BSI HD sensor OV9726 and our new specialized VGA product of the OV3738. These chips are sold in high profile products and are highly sought after in the marketplace but both are smaller in size and therefore carry a lower ASP.
In the second quarter, unit sales of sensors 2-megapixel and above higher were approximately 28% of total shipments as compared to 33% in the prior fiscal quarter. In absolute terms this category actually increased over our prior quarter by 17%.
We have previously mentioned how successful our industry leading BSI 5-megapixel and 8-megapixel sensors have changed the strategic scope of our product sales as well as our end customer products in vertical markets. Quarter-over-quarter, volume of both of these sensors showed continual growth in our fiscal second quarter and will remain consistently strong. In fact our 5-megapixel sensor generated more revenue on it's own than any other individual sensor. This has been a trend for two consecutive quarters.
Unit sales of 1.3-megapixel sensors increased to approximately 12% of total shipments in the second quarter as compared to 10% in the prior quarter. On absolute terms this category actually increased by more than 60% as this category contains the new HD sensor OV9726.
Demand is driven hard by notebook and portable multimedia devices. The OV9726 has set the benchmark for HD video applications in small (inaudible) devices.
Finally, unit sales of sensors that were VGA and below represented approximately 60% of total shipments in the second quarter, an increase over the 57% of units shipped in our prior quarter. In absolute terms there was an increase in units shipped in this category of more than 40%. The specialized VGA sensor, the OV7738 utilizes a large 3-micron pixel for a high quality of video capture in secondary camera applications. This product shipped in much larger volumes during the second quarter and accounts for most of this increasing unit sales of low-resolution sensors.
The OV7738 reverses the concept that low-resolution sensors are only cost driven solutions. The OV7738 carries a much larger pixel than a typical VGA sensor because there are customers who have opted for image performance over cost and secondary camera applications. Once again, OmniVision has set a trend in sync with customer expectations and needs.
In terms of product markets, our mobile phone sales represented approximately 60% of our revenue in the second quarter equal to our prior quarter. On absolute terms however, the increase was about 24% quarter-over-quarter. Our sales of sensors into the notebook and webcams segment were approximately 15% of sales compared to 19% reported for our prior quarter. On an absolute basis the revenues were the revenues were fairly comparable quarter-over-quarter indicating steady demand into the seasonal cycle. Breaking higher ground as anticipated was our entertainment category with 11% of sales as compared to 6% last quarter.
The bounds of our sales that have backed into other market categories with digital still cameras or DSC in security applications comprising the larger portion. The upward revenue trend in mobile phone sales continues to be driven by our strong position in the Smartphone segment. Our industry leading one-third inch format BSI 5-megapixel and megapixel sensors continue to set the benchmark for image quality in this market. A steady stream of consumer reviews has consistently reported winning ratings of handset cameras that utilize our BSI resolution sensors against our competitors. With these endorsements we believe the Smartphone category will continue to fuel our growth as the one-third inch BSI 5-megapixel remains strong and the one-third inch BSI 8-megapixel maintains a steady growth rate.
It is expected that a major portion of the Smartphone segment will migrate to the 8-megapixel resolution throughout 2011 and 2012. OmniVision already has a strong position with our first and second-generation BSI 8-megapixel sensors. You can rest assured that OmniVision will heavily leverage our next generation BSI-2 technology to deliver key products on target to our customer needs.
In the featured handset market, OmniVision shipped a steady stream of 2-megapixel, 1.3-megapixel and mainstream VGA products. We're also actively positioning our strong line of 1/4 inch 5-megapixel sensors in this market. In addition, OmniVision enjoys two SOC 1/4 inch 5-megapixel sensors with and without true focus as well as the raw 1/4 5-megapixel product. Over the past several months we have built an eco system of third party designs. This positions us well for shipments of 1/4 inch 5-megapixel sensors over the next 12 months.
In the notebook and webcam segment steady sales were realized with the whole spectrum of sensors delivered to the segment ranging from VGA to 3-megapixels in resolution. Specialized VGA sensors with the larger pixel size has shipped for secondary camera and high-end smartphones for video capture were also shipped in the notebook segment. In the emerging market segment, the entertainment, DSC and securities catalogs lead the way. The entertainment segment in particular saw significant increase in our sales mix again driven by our OV9726 and used in various multimedia devices.
In the future we expect the HD format shifts will be quickly adopted by other entertainment products such as TV and home gaming devices. In terms of product developments, OmniVision continues to innovate and bring superior value added solutions to our customers. During the second quarter OmniVision continued to launch strategic products based on OmniBSI. Heading the list is our second BSI 8-megapixel 1/3 format sensor OV8820 designed with feature rich functionality such as 1080p and 720p HD format output along with electronic image stabilization. These and other functionalities nicely position the 8820 for the advanced high-end segment or similar multi function or used devices.
For smaller form factor products OmniVision has launched a BSI 1 over 6.5-inch 720p native SOC sensor the OV9740. The OV9740 utilizes our already proven 1.75 BSI pixel that is currently deployed in our industry leading BSI 5-megapixel products. Designed for fast implementation by taking advantage of the full feature onboard ISP, the OV9740 is well suited for numerous portable media devices.
Again utilizing the same 1.75 BSI pixel OmniVision also launched a very small 113-inch form factor VGA, the OV7727. This is the first VGA in the industry manufactured to be a (inaudible) technology and it is ideal for products that require integrated and camera solutions with sub 2-milimeter display panels.
The final highlight to point out in product development is the release of the fully featured high dynamic range automotives qualified megapixel sensor, the OV10630. Already in high demand by Tier 1 automotive brand name OEMS the OV10630 delivers a dynamic range up to 100 db's in color and 110 db's in black and white. Coupled with it's dynamic range capabilities the OV10630 delivers up to 3.5 volts per sensitivity via it's 4.2 micron and OmniPixel 3HS pixel.
A final note to make is the continued development of BSI-2, our second-generation BSI technology. Suffice it to say we are poised to deliver next generation products based on this technology and we are actively engaged in early products with key customers.
Thank you, Ray. I would now like to turn the call over to Anson, who will discuss our second quarter financial performance and provide guidance for our third quarter of fiscal 2011.
Thank you, Shaw. And good afternoon, everyone. For the second quarter of fiscal 2011 we have reported revenues of $239.5 million, up 24% sequentially and 30.6% on a year-over-year basis. Direct sales to OEMs and VARs accounted for 73.9% of our revenues in the second quarter of fiscal 2011, up from 68.4% in the first quarter. The remainder of our revenues came from sales through our distributor channels.
Our fiscal 2011 second quarter gross margin was 28.2%, up from 26.9% in the prior fiscal quarter. Excluding stock-based compensation expense of $522,000 included in cost of revenues, our non-GAAP gross margin was 28.4%, up from 27.2% in the first quarter.
In the second quarter, we recorded approximately $3.4 million for the sales of previously written down inventory and $5.3 million as an additional allowance for excess and obsolete inventories with a net $1.9 million of unfavorable impact on our gross margin. In the first quarter, we recorded approximately $1.2 million for the sale of previously written-down inventory and $5.1 million as an additional allowance for excess and obsolete inventories, with a net $3.9 million of unfavorable impact on our gross margin.
We're always working with our manufacturing and packaging supply partners to further improve efficiencies at every stage of our supply chain. And the overall improvements in our BSI products has more than offset some of the ASP declines that we experienced during the quarter. We may see further improvements in gross margin in the third quarter, however it's unlikely that increase will be as large as it was in the second quarter.
R&D expenses in the second quarter of fiscal 2011 totaled $20.9 million, a 3.3% increase from the $20.2 million in our first fiscal quarter. The increase in R&D expenses was caused by the company-wide salary increase that we discussed during our last earnings conference cost was offset by slight delays in some of our mass design releases which in turn (inaudible) our NRE charges.
We currently expect our R&D expense in the third quarter of fiscal 2011 will increase from second quarter levels as some of these mass designs will be released in the third quarter. R&D expenses in the second quarter included approximately $2.5 million of stock-based compensation expense. Excluding stock-based compensation expense, second quarter R&D expense was $18.4 million as compared to $17.7 million in the first quarter.
SG&A expenses in the second quarter of fiscal 2011 totaled $14.7 million as compared to $14.3 million that we reported in the previous quarter. The slight increase in SG&A expenses is attributable to our company-wide salary increase that came into effect on July 1, 2010. We expect SG&A to increase in the third quarter of fiscal 2011 as our commission payments may increase.
Our second quarter SG&A expenses include approximately $2.1 million of stock-based compensation expense. Excluding stock-based compensation expense SG&A expenses in the second quarter totaled $12.6 million as compared to the $12.3 million that we reported in the prior fiscal quarter.
Our GAAP operating income in the second quarter totaled approximately $31.8 million as compared to the $17.4 million in the prior quarter. Our GAAP pretax income in the second quarter totaled $31 million as compared to $18.7 million in the prior quarter. As a reminder during our first quarter we benefited from the one time non-cash gain of $1.6 million when we deconsolidated Silicon Optronics, Inc., one of our equity investees based in Taiwan. We reported that gain as part of our other income expense net for the first quarter.
Our GAAP tax rate for the second quarter was 6.8% and resulted in a GAAP income tax provision of $2.1 million as compared to $1.8 million in the prior quarter. Excluding the effect of stock-based compensation, our non-GAAP tax rate for the second quarter was 5.1% and our non-GAAP tax provision was $1.8 million. This compares to our non-GAAP tax provision for the first quarter of $1.5 million. For the third quarter of fiscal 2011, we expect our GAAP and non-GAAP tax rates will be comparable to our second quarter tax rates.
In the second quarter, our GAAP net income attributable to OmniVision was $28.9 million or $0.50 per diluted share as compared to GAAP net income attributable to OmniVision of $16.9 million or $0.30 per diluted share in the first quarter. Excluding non-cash stock-based compensation expense, our non-GAAP net income attributable to OmniVision for the second fiscal quarter was $34.2 million or $0.58 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $22.4 million or $0.39 per diluted share in our first fiscal quarter. Again let me mention that these results are an all time high for OmniVision and we are extremely pleased with the progress we have made.
Let me now turn to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments totaling $396.7 million. This compares to $349 million at the end of the first quarter. As of October 31, 2010, inventory totaled $121.3 million, a decrease of $19.7 million or 14% from the $141 million balance at the close of our first quarter. Our total inventory balance represented 65-day sales or annual inventory turns of 5.6 times. This is lower than our standard goal of 75 to 90-day sales or annual terms of 45 turns but we are comfortable with our inventory level and we're working with our supplier partners to meet the ongoing demand of our products.
Accounts receivable, at the end of our second quarter net of allowances was $113.1 million, an increase of 20.6% from the $93.7 million at the end of our first quarter. The increase in accounts receivable is inline with our increase in product shipments in the second quarter. Our banks sales outstanding they remain comparable at 43-days in the second quarter as compared to the 45-days for the first quarter.
Now I will turn to our outlook for the third quarter of fiscal 2011, which ends on January 31, 2011. We continually see strength in the demand for our image sensors, which leads us to expect our third quarter revenues to continue at a level similar to our second quarter revenues that we reported today. We now expect our 2011 third fiscal quarter revenues to be in a range of $230 million to $250 million. Our GAAP earnings are expected to range from $0.41 to $0.54 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 $0.50 to $0.63 per diluted share.
Thank you, Anson. In summary, we believe our fiscal 2011 second quarter results and our outlook for Q3. They are witness to the technological leadership of our products and the best (inaudible) we have worked so hard to achieve. I assure you that we will continue to execute with the same focus and the precision throughout the coming quarters and years.
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. We continue to work daily to achieve this advance in technologies into critical product solutions and meet the needs of our customers and our own target market segments.
Operator, we are now ready to take questions.
Thank you. (Operator instructions) And your first question comes from the line of Yair Reiner of Oppenheimer & Company. Please proceed.
Yair Reinder - Oppenheimer & Company
Great. Thank you first of all for the great results. I know you don't like to give guidance on the full year basis but maybe you can talk a little bit about the design wind that you're seeing for Calendar 2011 and maybe how you see seasonality shaping up this year as compared to prior years? April traditionally, much like January has been a difficult quarter for the street to model? Thank you.
Hi, this is Ray Cisneros. I'll make a few comments about just our activity in terms of design, design efforts we have with customers on going around the world. Obviously we can't get into exact details of what's transpiring but our best answer to this is we're extremely, extremely happy with our product mix in terms of what we offer to the marketplace. As we mentioned in our comments we're extremely happy how OmniBSI has been adopted in the marketplace by all Tier 1 customers in all segments. That positions OmniVision I would say very, very strongly and very, very favorably in the marketplace into spaces we play in. I'd like to just leave it in that general broad type of comment. In regards to revenues obviously we're not going beyond anything that we've guided and maybe Anson you want to make some comments on that?
That's okay. So obviously what we guided is what we believe is reasonable. There are obviously many macroeconomic factors that are going on right now and the guidance is based on our understanding of those factors. But one thing I do want to point out though, keep in mind though is seasonality in our business. So typically Q2, fiscal Q2 and Q3 are our higher quarters and so what we've guided for the third fiscal quarter is entirely reasonable under that perspective and in Q1 and Q4, fiscal that is, tend to be a little slower for us so just keep that in mind.
Yair Reinder - Oppenheimer & Company
And your next question comes from the line of Paul Coster of JP Morgan. Please proceed.
Paul Coster - JP Morgan
Yes. Thank you for taking my question. I wonder if you'd be kind enough to elaborate on the BSI-2 ramp? When does it start? How long will it take to sort of pretty decent yields and what does it ultimately do you think to the cost curve for OmniVision and relative to other companies in the space?
You know we're going to refrain from breaking out too much detail in regards to our specific plans around BSI-2. As you can imagine it's highly, it's a highly competitive market or landscape we participate in. Suffice it to say as we have in our prepared commentary we are extremely, extremely pleased with the engineering progress that has transpired with this platform. We are extremely pleased with the product developments that are directly taking place today and we're very, very pleased with our engagements with Tier 1 leading customers to adopt Omni BSI-2. All that being said we're lining up for some time within the next calendar year to start ramping up production and ramping up initial projects with customers. I would say sometime in the early, the latter half of the Q2, Q3 timeframe calendar year next year would be the ramp of some of these activities.
Put another way Paul, if all goes well, we continue to execute the pattern will be similar to this fiscal year.
Paul Coster - JP Morgan
What does it do to your cost curve?
In terms of cost curve it depends on the time frame really. Let me first address the current fiscal year first. In our prepared remarks we've indicated that we are executing on BSI-1 and we got additional year approvement for second fiscal quarter. Obviously we’re reaching the optimal point when it comes to yield for this kind of projects to that's why for fiscal Q3 if we were to experience much improvement the improvement would not be as great as the second quarter. However, as Shaw has mentioned in his prepared remarks we're also trying to convert more of our products and customers over to BSI so that hopefully will give us additional margin improvement while we execute on ramping up these BSI-2 products. So moving on to BSI-2 that obviously before next fiscal year, Ray has mentioned the ramp up period is likely going to be latter part of fiscal Q1, Q2. Initially when we introduced new part of this, we covered that before, we're going to have some yield issues that hopefully over time we will overcome these yield problems and will continue to have better performance for the business and show improvements for stock holders.
Paul Coster - JP Morgan
Thank you very much.
(Operator Instructions) And Your next question comes from the line of Harsh Kumar of Morgan Keegan. Please proceed.
Harsh Kumar - Morgan Keegan
Hey guys, First of all, great quarter. Obviously, very good guidance. Had a quick question Anson or Mr. Shaw? You just put up a 24% sequential growth number. I think that's a better number than most of the PC, cell phone end markets and what they're growing at? Can you provide us with for our understanding with some color on maybe where you're winning or any kind of dynamics on how you're able to grow so much faster than the end markets and your designs or just market share, any of that please?
Thank you, Harsh first of all. Let me try to answer that and I'll probably get Ray to help me. It's a very simple story from my perspective. The target markets are expanding and we happen to have the leading edge technology to give us a very advantageous position to continue to win designs and high profile designs even. Ray, do you have any additional color?
Yes, those are great introductory comments for what I need to say. It definitely is a leadership in technology. A leadership in the right product strategies as you fully understand. We rested quite a bit of our strategies on 8-megapixel, 5-megapixel BSI products and then layered over that is our HD sensors, that's also based on BSI. What that means in the marketplace across all segments, handsets, notebooks, entertainment devices and even commercial applications like we mentioned, the need for low light sensitivity to capture images not just still images but video and to capture moving video whether it's stored clip or not is so important and when you get the technology that provides you that extra performance it's starts brining in the right customers, the right market segments and even growing new market segments for that matter. So when you combine all that I think you start breaking some of the (inaudible) that you need to track and we just end up rolling up every together that adds for growth rate to OmniVision.
Harsh Kumar - Morgan Keegan
That is very helpful. It sounds like market share gains based on technological improvement, is that pretty fair?
I mean we hope so, we'll have to wait for the reports to come out typically at the end of the calendar year or first when you get them in the spring as they roll up the calendar year numbers. We're hoping for that and that would be our expectation but we'll see.
Harsh Kumar - Morgan Keegan
Got it and I'll come back with a follow on. Thank you.
And your next question comes from the line of Raj Gill of Needham & Company. Please proceed.
Raj Gill - Needham & Company
Yes, thank you and congrats on excellent results. Just a quick question on the ASP and the VGA mix. Your ASPs were down; the VGA shipments as a percentage were up sequentially. How should we be looking at kind of ASPs moving forward and the VGA mix going forward? Should that be offset by your expectations for a bigger ramp in 5 and 8-megapixel or should we be looking at that type of mix going forward? Any color there would be helpful?
Right. They're going to be competing tracks definitely as it turns out the VGA that we released to the marketplace as if you're following our technology it's got such a fantastic image performance that the use of that VGA into a variety of applications for small form factor cameras and typically that is targeted to secondary camera applications or even primary camera applications. The marketplace has reacted positively so from that standpoint it's been a pleasant surprise. So that means growth in those tracks, the VGA as well as the HD sensor, which is categorized as a megapixel if you will. And then competing against that is a continual strong growth upward trend for 5-megapixel, 8-megapixel, both for our BSI, OmniBSI and future technologies so it's hard to say what exactly the mix will fall out to be in the upcoming quarters but we're putting the best pixels on our resolution so it's starts driving all our product clients.
And Raj, this is where I'll jump in to. It's about trying to hide it for a long time. ASP is not necessarily tied to our gross margin and this quarter is a good example of that. Indeed we can actually ship more advanced pixels and solicit premium for that. ASP is more like a derivative number only, not necessarily gaged to how profitable business will be.
Raj Gill - Needham & Company
And you next question comes from the line of Yair Reiner of Oppenheimer & Company. Please proceed.
Yair Reiner - Oppenheimer & Company
Yes, thank you. So first Anson, tax rate continues to be quite low in the mid single-digits. Is that something that at this point we take for granted as the long-term level?
Well it's technically always difficult and I think now we're always focused with what the senate would do and so forth. So this is just based on our understanding of the current situation. Obviously we report the actual results in a couple more months and we'll just have to wait and see.
Yair Reiner - Oppenheimer & Company
Okay and then just one more follow-up. In terms of capacity, I've heard in the market that there are some issues out there with capacity for you. And would be able to fulfill all customer demands? Can you talk a little bit about the challenges you're going through in terms of getting more capacity at your partners and whether you expect that to be a limiting factor over the next year?
That's a good question. I think when it comes to capacity we have to stand back and look at what's transpired in the calendar year of 2010. It's just not an OmniVision issue. From a global standpoint the whole semiconductor market experienced a constraint in silicon supply and OmniVision was not immune to that. In fact the number of wafers that we purchased on a yearly basis puts us right smack into the, you know one of the hungriest companies out there in the world. So we definitely have to understand this point.
On the other hand counterbalancing this point is what we've demonstrated in this quarter despite some of these top level constraints worldwide. We still managed to achieve revenue growth and then what does that mean, that means it's been a selection of strategic planning that's put us, despite any constraints, still provide revenue growth and unit growth as well as market share growth so that basically was driven by the right strategy of products and our selection to deliver to the market the right technologies. And so even within these conditions and the environment we still have that story to tell.
Yair Reiner - Oppenheimer & Company
And your next question comes from the line of Harsh Kumar of Morgan Keegan. Please proceed.
Harsh Kumar - Morgan Keegan
Hi, just quickly on the January quarter guidance that you just gave, should we assume that the mix of cell phones and PCs should be similar to the one in the last quarter or is there any movement within those two?
It could be, I think all of it will fall within the range. If you follow our trending, especially the past four quarters, we're plus or minus 5% on any given category but there's strength as we mentioned in our prepared commentary, there's a lot of strength in the handset market and there's an incredible growth factor in the entertainment market. So those factors need to be considered as well.
Harsh Kumar - Morgan Keegan
Fair enough and then I had a question about one of your product lines. I might not have heard completely that piece whether it was 1.3 megapixel that was up 605 or just the 9726 that was up 60%? But I was curious if you could tell us mostly where those sensors are going to be up that much in this quarter?
Right. The 1.3 pixel category incorporates your traditional 1.3 megapixel and what we've also done is placed our new high definition 720p BSI sensor, the OV9726 in that category and that's been ramping up in the past two quarter and the past quarter we just closed out was an incredibly high, high growth rate in terms of units delivered. So that drove up that category significantly and that backs into a variety of markets.
There is no one market that has not taken a hard look at that if not designing it in and that includes notebooks, that includes portable multimedia devices, that includes even desktop gaming devices. The list goes on and one. It could even be, there's some customers even considering if we're secondary camera applications so we're extremely, extremely happy about that. And so we're looking forward to that segment to continue to be strong for quite a while.
Harsh Kumar - Morgan Keegan
And then as a follow-up I wanted to ask you are you seeing anything different now than you were a quarter ago?
Well that's a very broad question. I would say from the competitive front there's a lot of the same names, a lot of the same players. I don't see any new players. There's ins and outs in terms of strategies from our competition word of targeting their resources in energy but you'd have to give me a more specific question that that.
Harsh Kumar - Morgan Keegan
Okay fair enough. What I meant was does the (inaudible) started to see them; they're sort of a big competitor of yours a few years ago. Sort of disappeared. Have they resurfaced at all, do you run into price competition with them? Those kind of questions?
Right. I can't say from my, if I look at my activity on a worldwide basis I can't really say they're in or out. And I can't really judge what's change has transpired in terms of their activity inside our space. It's not from my standpoint extremely, extremely noticeable.
Harsh Kumar - Morgan Keegan
Got it and my last question. Any 10% or meaningful customers in the quarter?
No Harsh. I'd have to wait until the 10Q.
Harsh Kumar - Morgan Keegan
Thank you for your questions ladies and gentlemen. I would now like to hand the call back over to management for closing remarks.
Thank you all for joining us on this call and webcast. In the upcoming quarter, OmniVision will be attending the following Investor events. The Wedbush Bus Tour in Silicon Valley on December 2 and the Needham Growth Stock Conference in New York in January 2011. We hope to see many of you at those events. Thank you and have a good day.
Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.
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