Ladies and gentlemen tank you for standing by and welcome to the OmniVision’s Conference call for the Q4 of Fiscal year 2011. Good morning. (Operator instructions.) I would now like to turn the conference over to Mr. Brian Dunn. Please go ahead Sir.
Thank you very much. Good afternoon everyone and welcome to our Fiscal 2011 Q4 Earnings Conference Call. On today’s call will be Shaw Hong – President and CEO, Ray Cisneros – VP of Worldwide Sales, Hasan Gadjali – VP of Worldwide Marketing and Anson Chan – Chief Financial Officer.
During this conference call we may make forward looking statements regarding our business including statements relating to revenue, earnings targets and our product plan. This is based on information as of today, May 26th 2011 and actual results may different materially from those set forth in such statements. These and other forward looking statements involve assumptions, risks and uncertainties that can cause actual results to differ materially from those statements. For a discussion of these risk factors you should review the forward-looking disclosure 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 later 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 web cast. Earlier this afternoon we issued a press release describing our results for the FQ4 of 2011. For those who have not read the release, I’m pleased to provide you with a recap of the financial results.
In Q4 we achieved revenue of $258 million and we shipped nearly $169 million in (inaudible). These results show revenues for the year to approach the $1 billion mark for the first time in our company history.
On a non-GAAP basis gross margin was 31%, the 9th consecutive quarter of improvement. Net income was $41 million or $.66 per diluted share. In addition we maintained a very strong balance sheet with a cash equivalence and short term investment position of $467 million.
Before I begin my formal comments I ask you to join me in welcoming Hasan Gadjali to the OmniVision management team. Hasan has rejoined the company as Vice President of World Wide Marketing and Business Development, his previous role with OmniVision. Hasan led our business unit to focus our efforts on many of the emerging markets where we are experiencing success today such as entertainment and automobile. I expect that his knowledge of our company as well as his more than 20 years of product management and engineering experience will be an immediate asset to OmniVision.
Now I will begin my formal comments which will focus on OmniVision’s ability to maintain our leadership role in extensive technologies. A rapidly grown market and we currently sell with our high performance imaging products and our focus in executing our strategies. For OmniVision we have had years of considerable success based on our exciting technical innovations. OmniVision’s heritage has been of an R&D company and our focus has always been on innovations that were placed at the forefront of image technology and solutions. I will now highlight a few of them. Our proprietary backside illumination technology or BSI continues to provide the industry leading imaging solution. We were earlier to commercialize this technology for mobile phones and we continue to improve upon our knowledge to maintain our competitive advantage.
From design to fabrication, our BSI architecture is a complicated technology that can be easily or quickly replicated by new entrants. This creates a significant barrier to (inaudible) particularly with respect to the high resolution sector business. We believe it will be challenging for many user platforms to catch up to BSI technology architecture that we currently design into our most advanced products.
While the market remains competitive among the incumbents, we do believe this proprietary technology (inaudible) to new competitors. With that said, we announced several exciting products within the last three months. In April we announced the OV-12825, a 20 megapixel image sensor for advanced mobile applications. This sensor is based on our Omni BSI pixel architecture.
We also introduced our most advanced 80 megapixel image sensor to date; the OV 8830. And a few weeks ago we announced the OV5690, the best in class eight megapixel sensor. Most of these products use our second generation Omni BSI-2 architecture. As planned, we expect to begin shipping the OV-8830 in volume in the second half of the calendar year 2011. The OV-5690 is scheduled to begin mass production later this calendar year.
In addition to these announcements we have multiple BSI and BSI-2 sensors in the design stage for a broad range of the market saturation as is our (inaudible). We will announce these products when we believe the devices can be produced reliably.
Our camera2 technology is another area where we believe we can extend on market leadership while increasing the dollar content that we sell into teach consumer device.
Historically sensor and (inaudible) have been separate endeavors and these components come together at the nodule of (inaudible). With our camera2 technology we’re able to design our sensors in a complete dense element as an incomplete unit that creates a referral goal image sensor device.
Operationally our camera2 technology delivers many benefits to us. As we see an increase in customer demand for our camera2 products we can streamline the production process by consolidating the supply chain, further expanding capacity and reduce the cost to lead customers in.
Our goal remains to improve sensor performance and increase customer acceptance of our camera2 products. Over the years we closed more than 800 patents and patent application to strengthen our strategy in image sensor development.
In March of this year we were pleased to nearly double the size of our single space image center patent portfolio. That was accomplished with the purchase of approximately 900 patents and applications from Eastman Kodak. This unique opportunity establishes OmniVision with the most comprehensive image center IP position in the market. This supports our ability to innovate.
Turning to the markets we serve, I’d like to highlight our key focus on our working relationship with our customers and then discuss gross projections as well as our achievement during the quarter to address this opportunity. For the specific markets my comments will cover our three key markets, mobile phones, notebooks and the rapidly evolving entertainment market. I will also comment on emerging markets where I believe we have significant opportunity over the next several years.
Our objective is to serve our customers needs to meet today’s consumers’ expectations for more and more novelty functions and technological advanced devices. So ideally our focus is a collaborated relationship with our customers. This relationship allows us to work hand in hand sharing ideas with one another from product concept inception to product design and production and finally delivering of products to customers. We work closely with our customers at every stage of this product cycle.
Now let me discuss the specific markets. First, the mobile phone market remains one of our key markets. The smart phone is the fastest growing segment within this market and the content opportunities continues to increase. Phone market research forecasts smart phone shipments to increase in 2011 by 49% when compared with 2010. The smart phone is our number one priority given the size of the market. Our platforms raw competing power and its premium device status lends itself well to the incorporation of the high resolution, high performance image sensors. We believe we have a major share of the smart phone market because of our ability to deliver to this product category.
Meanwhile our content opportunity continues to increase. Today consumers increasingly expect smart phones to have two cameras. The main camera for digital still image capture and the secondary capture facing the user for video conferences. The revolution of the main camera is also increasing. In 2010 the predominating resolution was 5 megapixel. In 2011 we believe the 80 megapixel will become the standard.
Next is a noble market which includes webcams. We continue to see stable demands for our targeted global and PC markets which are expanding beyond the traditional desktop option. Now there are touch screen monitors and the fully integrated all in one PC to name a few of the changes in this market.
The level of innovation is exciting and entails a range of sensors with varying resolution including some of our latest 720p HD options. We believe there is increasing opportunity in this market with the event of video conferencing needs. Some of the leading providers are publishing more video conferencing standards. And our high performance products are poised to take advantage of these things.
Now let me touch on the entertainment market. This is a rapidly evolving category. It is driven by new product introductions and the customers’ demand for the exceptional performance in our component business.
In Q4 entertainment was 11% of revenue. With this category we include the portable multimedia players, TV applications as well as tablets and the interactive gaming systems. The Tablet, which we also include in entertainment, saw numerous product introductions earlier this year. A variety of our products are shipping into this segment including our high definition video sensor, the OV9726.
Finally I want to briefly comment on our automotive business. We expect automotive to become a meaningful contributor to revenue over the next several years. We have participated in this market for some time and we have a number of design wins in luxury brand cars. In Q4 we won additional designs for image sensors in the Korean and Japanese automotive market with initial shipments expecting in 2013.
As many of you may know, the US Department of Transportation is proposing safety measures for rear view visibility in cars. When this proposal becomes law, we believe we will see sales opportunities in the broader mainstream car market.
I will now turn to a comment on our strategies as a key to our success. Our financial results for FQ4 and in the full fiscal year are testimony to our ability to follow through with our strategies and plans.
First I would like to make a few comments on the earthquake in Japan and its impact on OmniVision. Let me say that the disaster of Santiga island of Japan were tragic on so many levels. The loss of lives and homes of the Japanese people is a sadness still around the world. OmniVision does have a sales occupancy in Japan and we are pleased to say that our employees there are all safe.
Looking strictly at the potential economic impact on OmniVision operations, I can say that we have experienced no near term effects on our supply chain. OmniVision is fortunate to have its manufacturing operations in Taiwan and China, however, like so many other companies we continue to monitor the situation for disruptions that may affect the (inaudible) in the market place over time. I’m a firm believer that in order to have a successful year like we had in fiscal 2011 we must focus on executing and implementing our stated strategies and plans accordingly. A successful execution requires seamless team work from our employees and between our employees and our supply chain vendors and other partners. On that note, I would like to take this moment to recognize our employees around the world. Now expertise and above all the focus in collaborating with one another globally has enabled OmniVision to maintain its position in the forefront of advanced digital imaging innovation and a well managed operation world wide.
With the recent addition of Hasan to our senior staff, I’m also pleased with the focus on our executive management team. For OmniVision it has to be a year of dynamic market changes. While this created uncertainties we remain focused in executing our plans and schedules with our supply chain vendors and other partners. To illustrate, with the announcement of our initial BSI process in 2008 we are viewed as a highly effective supply chain. Since then we’ve collaborated with core functional team to prepare for the ramp of BSI-2 sensor introduction later this year. This launch will deliver a higher performance center to compete in the marketplace. This also represents our first product migration to the (inaudible) manufacturing process which adds to our overall sense of production capacity.
Before I turn the call over to Ray, I would like to remind investors of the manufactures contributing to OmniVision’s success over the last few years. Specifically we have a leadership position in the advanced image sensor technology that helps drive all our target markets. We have a diverse customer base comprised of the right customers. Our addressable market is rapidly expanding. We also have a long term strategic supply chain relationship ready as we expand in 2011 with our move to BSI-2. All of these factors along with the seamless execution enable us to deliver the financial performance that we seek and that our stockholders expect.
With that I will turn the call over to Ray who will provide and update on the quarter’s sales activity, Ray-
Thank you Shaw. We are extremely pleased to report revenues on the high end of our guidance that was backed by a strong business mix. We shipped solid numbers into the smart phone and Notebook markets as well as to the growing entertainment market that was driven by tablet devices. Our 5 megapixel product line continued its growth path and our HD sensors are ramping up to another level of volume fueled by its global (inaudible) in Notebook computers and entertainment devices. Customers in all regions continue to release new products based on our Omni BSI technology. Continuing to demonstrate the benefits and values our BSI products bring to the markets.
Our new Omni BSI-2 technology for our new 8 megapixel sensor is being driven by demand from key customers primarily in the smart phone market at the onset of the product launch.
In our FQ4 we shipped 169 million units as compared to 194 million in our prior quarter. The average selling price in our FQ4 was $1.53 as compared to $1.37 in the prior quarter. As in the previous quarter, the upward ASP trend is due to a shift in product mix to higher resolution sensors fueled by our industry leading BSI sensors.
In Q4 unit sales of sensors two megapixel and above represented approximately 37% of total shipments as compared to 33% in the prior fiscal quarter. In this category our BSI based five megapixel sensor product lines remained strong and branched out to higher volume in the quarter inch five megapixel category. Likewise our two megapixel category remains strong and our eight megapixel products are transitioning from a first generation OmniBSI to our second DOV8820 as well as to our new eight megapixel OB8830 based on OmniBSI-2. OV8820 will ship in volume this first fiscal quarter and 8830 will begin initial volumes.
Unit sales of 1.3 megapixel sensors increases significantly to approximately 18% of total shipments in Q4 as compared to 11% in the prior quarter. In this category we include our industry leading BSI based 720p HD sensor, OV9726 as well as other HD sensors based on traditional SSI technology.
The OV9726 shipped in significantly higher volumes into various notebook and entertainment devices reflecting the requirement of consumer products to employ HD video format. The upward trend will continue and will migrate to a wealth of more markets and applications.
Finally unit sales of sensors that were VGA and below represented approximately 45% of total shipments in FQ4 as compared to 56% of unit shipments in our prior quarter. This decline was attributed to strategic targeting of markets and applications. Our high performance VGA sensors with a specialized large 3 by 3 micron pixel continued to ship in significant volumes as the leading choice for video conference camera in a premier smart phone product. The same type of VGA sensor ships to best in class notebook models. Mainstream VGA sensor products also continue to ship into the entry level feature handset category all though at lower volumes then previously shipped on a quarterly basis.
In terms of product markets our mobile phone sales represented approximately 65% of revenues in FQ4 as compared to 72% in our prior quarter. This decline was attributed to the customer seasonality softness after the holiday period. Our sales of sensors into the notebook and webcam segment were approximately 15% of sales compared to 10% reported for our prior quarter. This was a strong upward swing on an absolute dollar basis as well as on a proportional business mix in light of the mobile phone seasonality effect.
Our entertainment category represented 11% of sales as compared to 10% last quarter. We anticipate this category to continue to climb upwards as it represents the extremely high growth of table market segment.
The balance of our sales backed into our other market categories mainly in security, DSEDVC and automotive. Although on a relative scale the automotive segment is still small on a quarter-on-quarter dollar basis we were pleased to see a strong increase this quarter.
Our mobile phone revenue continues to be driven by the smart phone market. This trend will not change anytime soon as competing operating systems continue to fuel the overall growth of smart phone products. Our industry leading 1/3 inch 5 megapixel BSI product continues to ship as the highest run rate to various smart phone OEM. In addition we saw growth in our ¼ inch 5 megapixel BSI product lines also shipping through smart phone products. This trend was predominantly seen in the Asian market and represents a movement to a mid-level cost (inaudible) for smart phone products, bringing in alternative solutions for better consumer value.
Our 8-megapixel BSI sensor also continues to ship to smart phone customers while some key customers began to transition to our latest OmniBSI 8-megapixel sensor, the OV8820. The OV8820 offers advanced features and enhanced performance over its predecessor. This product will continue to ramp up to higher volumes as more customers adapt it.
In addition we continue to set the stage and prepare for mass production of our 8-megapixel based on our latest BSI technology, OmniBSI-2. This product, the OV8830 is also targeted to premier brand name smart phone OEM and is scheduled to ramp in the second half of calendar 2011.
In the notebook and web cam segment we saw a strong resurgence in growth on absolute dollar terms in this market. This growth was driven by a surge in sales of our OmniBSI based HD 720p product, the OV9726. It ramped to various brand name Notebook OEMs in all geographic regions putting OmniVision in the leadership position. The drive to use a 16 by 9 video HD format is prevalent and will fuel growth from our brand line up of HD sensors.
Also shipping to our Notebook customers are a variety of specialized VGA products. As previously mentioned, our best in class 3 by 3 micron pixel VGA products were shipped to customers seeking to use the best combination of image performance and costs. Similarly even an OmniBSI based VGA product shipped into the Notebook market were the smallest form factor camera without a compromise on image quality with desire.
In our entertainment market we covered a tablet segment. In this category we continued to pick up design wins in all geographic regions and our customers have adopted anywhere from an HD sensor up to a 5 or 8-megapixel resolution sensor. We believe the tablet market will segment into various levels of performance and feature set offerings which in turn will drive a broad range of image capture solutions from us. Our going forward outlook in the tablet space is strong from all regions at various resolutions and will continue to add material growth to our overall business.
In the gaming segment of the entertainment category we have a solid position in the marketplace today and within the next several months we will begin shipping in mass production for a significant design win previously secured.
The DSC market ship study 5-megapixel products in our security business was very stable. In other segments we continued to see stead increase in the automotive market with a highly specialized VGA digital product seeing strong growth. These products are used in novel 360 degree imaging solutions for brand name OEM and are driving volume growth. As this particular application requires multiple cameras per individual car. Additionally our latest HD wide dynamic range digital chip in our newly released analog VGA product continues to pick up design wins with premiered global brand names. These are significant results coming back to the long investment cycle required in this market.
In summary we remain confident in our ability to continue gaining market share, key customers and expand our regional coverage. We anticipate continued growth due to our product innovation and technology leadership.
Thank you Ray. I will now turn the call over to Hasan who will provide an overview of the company’s marketing efforts and opportunity.
Thank you Shaw. I’m excited to be back with OmniVision working on the next generation image sensor technologies and products. Today I would live to provide an overview of our marketing strategies. My job is to drive these strategies and take the company to the next level of growth. In the coming quarters I’m looking forward to updating you on our progress.
First let me cover our near term strategies which we rely upon to tackle our largest market. This includes the mobile phone, Notebook, web cam as well as the entertainment market. One of our key objectives is to maximize the revenue growth and profitability by focusing on high end premium markets such as the rapidly expanding smart phone market. But our marketing efforts extend well beyond that one product category to our BSI technology and our abrupt range of products we have well positioned ourselves to meet these needs of diverse customer base. The majority of our HD 5, 8 and higher megapixel sensors are already based on our BSI architecture and we have more BSI products in the pipeline.
BSI enables us to maintain a leadership role in a rapidly expanding market for new premium products. We have tier one customers who look to us for their smart phone needs. Our marketing organizers are well positioned with people world wide and across our field to understand, plan and address our customers’ needs. The leading market research from roughly 1.6 billion units in calendar year 2010. However, we believe that our market was even larger; fueled by growth in mobile phones, notebooks, web cams and entertainment devices.
So what difference (inaudible) OmniVision? On the technology side we continue to optimize our two year value BSI technology. The empty space that our OmniBSI-2 architecture will take the company to the next level as we believe it has the best in class pixel and image quality. Also, 30 prints per second has become an important requirement for camera sensor today. Our image sensor supports such requirements and more.
Further ensuring our leadership in this high growth vertical it’s our success in aligning our product definition with specifications and requirements from suppliers and platforms provided.
We were closing with our tier one (inaudible) so that when a reference is actually published it will include an OmniVision sensor. At the same time we work very closely with the software platform company that detects performance specifications for image capturing devices.
Now I would like to comment on some of our longer term opportunities that we expect to be significant. This includes the medical and automotive market which we find very exciting. About five years ago we started addressing the automotive market. We had one product and it is gratifying to see how this market and how well it has gone.
A leading research initiative in the automotive market will consume roughly 35 million units in 2014. That represents a combined annual growth rate of about 45%. However, OmniVision believes the market of opportunity may be much later as we begin to see the potential for up to ten camera sensors per car. OmniVision currently has three products to address this growth and we are in the forefront of this market. Working with tier one automotive makers and suppliers all over the world.
The medical market is another longer term opportunity with considerable potential. Just as mobile phone has evolved to include an increasing number of image sensor with a two to one or more attach rate, we believe the medical market is positioned to repeat this phenomena. OmniVision is already a leader in the field of camera sensors into the medical market. Due to the stringent designs and performance requirements, this is a market that could deliver strong financial returns. To give you an idea of the market potential, at least in units, several market research from currently forecasted statements of 4 million units by 2014. However, in the potential market size could easily double. One reason for this is that many of our engagements are for the development of one time use medical devices such as endoscopy cameras.
As you can see, there is considerable excitement at OmniVision over the opportunities that we are currently capitalizing on and the potential that we have yet to realize.
With that I would like to turn the call back to Shaw.
Thank you Hasan. I will now turn the call over to Anson Chan who will discuss our FQ4 financial performance and provide guidance for our Q1 of fiscal 2012.
Thank you Shaw and good afternoon everyone. For FQ4 2011 we reported revenues of $258.3 million, down 2.8 sequentially but up 63% on a year-over-year basis.
Gross sales of (inaudible) accounted for 76.9% of our revenues in FQ4 2011, down from 80.2% in Q3. The remainder of our revenues came from sales through our distributor channels.
Our FQ4 2011 gross margins were 30.7%, 90 basis points higher then the 29.8% that we reported in our prior fiscal quarter excluding sub base competition expense of $438,000 included in profit revenues, our non-GAAP gross margin was 30.9%, up from 30% in Q3. The improvement is attributable to a continued strong demand for our premium products which carry higher profit margins. In Q4 we recorded approximately $4.2 million for previously written down inventory and $4.9 million as an additional allowance for inventories, with a net of $0.7 million of unfavorable impact on our gross margin.
In Q3 we recorded approximately $5.6 million for the sales previously recorded on our inventory and $2.9 million as an additional allowance for (inaudible) and obsolete inventories with a net $2.7 million unfavorable impact on our gross margin. Given our current visibility we do not expect any significant movement in gross margins during FQ1 2012.
R&D expense if FQ4 totaled $24.3 million, a 5.1% increase from the $23.1 million in our FQ3. The increase in R&D expense was caused by our release of additional (inaudible) which increased our NRE charges. We currently expect our R&D expense in FQ1 2012 will increase further mostly attributable to further increase in activities.
R&D expense in FQ4 included approximately $2.1 million of stock-based compensation expense. Excluding stock-based compensation expense FQ4 R&D expense was $22.1 million as compared to $20.8 million in FQ3.
SG&A expenses in FQ4 of 2011 totaled $18.3 million as compared to $15.4 million that we reported in the previous quarter. The increase in SG&A expenses were attributable to transaction costs incurred in association with the Kodak patent purchase which Shaw has mentioned earlier during the call. Since these were one time payments we expect SG&A expenses to decrease in FQ1 of 2012.
Our FQ4 SG&A expenses included approximately $2.2 million of stock based compensation expense. Excluding stock based compensation expense, SG&A expenses in FQ4 totaled $16.1 million as compared to the $13.4 million that we reported in the prior fiscal quarter.
We introduced a new line on the company’s income statement in Q4. We called it the amortization of the acquired patent portfolio and is in the operating expenses section of our income statement. The reported amount of $.8 million represented a one month amortization of the Kodak patent portfolio. The total consideration for the portfolio is $65 million and will amortize EBITDA for the next seven years.
This translates into an incremental quarterly expense of approximately $2.3 million which we’ll report under this new line item. Please note that this amortization expense is included in both our GAAP and non-GAAP metrics. Consistent of our prior quarters, we (inaudible) stock-based compensation expenses and associated tax effects in our non-GAAP metrics.
Our GAAP operating income in Q4 totaled approximately $36 million as compared to $40.7 million in the prior quarter. Our GAAP pre-tax income in Q4 totaled $36.9 million as compared to $42.1 million in the prior quarter.
Our GAAP tax rate for Q4 was 8% and the GAAP income tax provision was $3 million which compares with a benefit of 6.2% that resulted in the GAAP benefit and income taxes of $2.6 million in prior quarter. As reminder, our Q3 tax provision was affected by a one time non cash tax benefit of approximately $10.3 million. Excluding the effect of stock-based compensation, our non-GAAP tax provision for Q4 was $.9 million which compared to our non-GAAP tax benefits from income taxes from Q3 of $4 million.
For FQ1 2012 we expect our GAAP and non-GAAP tax rates to stay at single digit percentages. In Q4 our GAAP net income attributable to operations was $34 million or $.56 per diluted share as compared to GAAP net income attributable to OmniVision of $44.7 million or $.75 per diluted share in Q3.
Excluding non-cash stock-based compensation expense, our non-GAAP net income actually (inaudible) to OmniVision for FQ4 with $40.8 million or $.66 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $51 million or $.84 per diluted share in our FQ3.
Moving on to the balance sheet we ended FQ4 with cash, cash equivalents and short-term investments totaling $466.9 million. This compares to $498.9 million at the end of Q3. Cash generated by business operations during the quarter was offset by payment for Kodak patent portfolio.
Accounts receivable at the end of Q4 net allowances were $142.6 million, an increase of 19.8% from the $119.1 million at the end of our Q3. Our days’ sales outstanding increased slightly to 49 days in Q4 as compared to 41 days for our quarter. All in all our accounts receivable remained in excellent shape. The increase in days outstanding was attributable to a short shipping month at the beginning of our FQ3.
As of April 30th 2011 inventory totaled $106.9 million, an increase of $13.3 million or 14.2% from the $93.6 million balance at the close of Q3. Our April inventory balance will present at an annual inventory of 6.9 times or 53 base sales. We’ve taken (inaudible 00:31:33) and built some inventory. Our level of inventory is still lower than our stated goal of 75 to 90 base sales and we’ll continue to work with our supply departments to meet the ongoing demand for our products.
With that I’ll turn to outlook. For FQ1 2012 which ends on July 31st 2011, we currently expect our 2012 FQ1 revenues will be in the range of $265 million to $285 million. Our GAAP earnings are expected to range from $.55 to $.68 per diluted share. Excluding the estimated expense and stock based compensation we expect our non-GAAP earnings will be in the range of $.64 to $.77 per diluted share.
Thank you Anson. In summary we are very proud of the results for our FQ4. We are continuing to strive to translate our advanced technologies into practical product solutions and our customers in all targeted market segments. Operator, we are now ready to take questions.
(Operator Instructions.) Today’s first question comes from the line of Doug Freedman with Gleacher. Please proceed.
Doug Freedman – Gleacher & Company
Thanks for taking my question guys. Congratulations on the strong quarter. If I could get a sense on what you’re seeing from the competitive landscape in terms of ASPs, I know we’re seeing positive ASP mix shift but can you talk about what you’re seeing on the ASP front on a like for like basis?
Sure. I think the best way to answer that question is it’s hard for us to really project on the like for like basis what we would, how our ASPs would compare to their ASPs. I could say the competition is always there in all our markets. Obviously the smart phone segment is very high value market. We dominate the Notebook PC market so we’re trying to maintain as best ISPs as possible. And then of course there’s the entertainment market that’s evolving extremely fast but we’re extremely happy in our position in the entertainment market driven by the tablets so we hopefully can maintain our ASPs as strong as possible. I think the best way to answer your question is what can we do to maintain our ASPs and obviously we’re extremely happy with our product portfolio and how we’re backing into key OEMs and hopefully that’s the best way to maintain ASPs in favor to OmniVision.
Doug Freedman – Gleacher & Company
I guess as my follow up, just for some clarification Ray. If you could give me an idea of what a 5-megapixel sensor pricing is doing year-over-year in terms of ASP erosion, that’s sort of what I’m looking for is on a like for like product base. Even relative to yourself would be fine.
Right. As you well know, the majority of our business backs into consumer type products and there’s always pressure, ASP pressures in those categories. So we see those kinds of pressures no different than our competition and anybody else that serves these markets. You know it can range anywhere from 10% to 15% on an annual basis, these kinds of pressures year-over-year from consumer categories.
Doug Freedman – Gleacher & Company
Great. Thank you.
Our next question comes from the line of Paul Coster with JP Morgan. Please proceed.
Paul Coster – J.P. Morgan
Yes thank you. Anson I wonder if you could give us some sense of how you expect seasonality to pan out in this next fiscal year. Generally we would expect Q1 and Q2 to be sequential growth quarters.
Hi Paul. Well with even current visibility, I would expect this is not easy to stay at the current type of trend. For instance because the majority of our business is still coming from the consumer side. And with that said, you know, you’re going to have a seasonal slow down post the Christmas holidays and even the lunar New Year.
Paul Coster – J.P. Morgan
Okay. And then on the Kodak acquisition, very interesting but can you explain first what the near, medium and long term benefits are of acquiring that in terms of customer margins, defensibility, etcetera. And for that matter even pricing.
Okay. Shaw had a comment on obviously you know if anything it’s, what, 800 or 900 degrees of additional freedom was to innovate and operate. That is definitely a near time benefit. Longer term that may translate into better designs, better products while comparative products, so to speak. Now whether or not we will do anything further with the portfolio for instance any plan to monetize it or not, it’s still early for us to discuss those things. Obviously in due time when we have formulated a plan we will discuss it on our calls.
Paul Coster – J.P. Morgan
Is it an important consideration in selling to some of your key tier one customers?
In terms of the additional patents I’m not sure that will have any medium- to near-term impact, particularly when it comes to any product shipment in fiscal ’12. I think we’ve been talking about that in the past, all our design wins were basically done six months ago. And so basically any acquisition of patent portfolio that happened just in March will not likely have any immediate effect.
Paul Coster – JP Morgan
Our next question comes from the line of Hans Mosesmann with Raymond James. Please proceed.
Hans Mosesmann – Raymond James
Yeah, thank you. A question about supply in terms of wafers. Are you getting enough wafers? It looks like your inventories went up a bit but still below your target range of 75 to 90 days. Can you just give us a sense of how the quarter materialized in terms of getting enough wafers and how does that situation look as you enter the summer? Thanks.
Sure, this is Ray Cisneros. They, yeah, I think in regards to supply, what we’re trying to do is be extremely, extremely strategic as we go forward with our products and technology. I don’t think it’s not so much the question about how many wafers we get as opposed to how we use them, and our key objectives, especially with the launch of BSI 2 and BSI 1, and then our continued improvement with our FSI technology, our interest is to maximize the value on each of those wafers. So we’re not necessarily groping at the total volume of wafers we’re receiving as opposed to strategizing what we have.
Hans Mosesmann – Raymond James
Are you constrained?
It’s actually not the best way to describe constrained or not constrained. I would say the market is fluctuating quite a bit because of the transition to new market segments and new categories of technology and products that we have to back into. So our description of where we stand right now in regards to supply/demand, I would say is more strategic level as opposed to looking at it just on a pure supply/demand level.
Hans Mosesmann – Raymond James
Okay, thank you.
Our next question comes from the line of Daniel Amir with Lazard Capital Markets. Please proceed.
Daniel Amir – Lazard Capital Markets
Thanks a lot. You provided a wide range of guidance here. Can you give us kind of a bit of visibility into you know, what would bring you to the high end compared to the low end? In what segment of the market – is it more the handset side? Is it more the PC or entertainment side? And also possibly a long product mix. Thanks.
Hey Amir. The range that we provide is actually not particularly wide. It’s actually very consistent with our historical level. But as to what specifically will end up in the higher end or low end, I’m going to have to back out into the process that we go by when we build guidance. It’s really a bottom-up build and if I can put a little more color on it we’re literally going to our sales force in the field and poll them and find out from them exactly what the demand will be like for this current quarter. If that’s positive you build the demand and obviously there will be fluctuations. It’s not necessarily confined to any particular protocol, the way you phrased the question; it’s more like each individual OEM varies their market share, their product sales and volume and so forth, and that will back its way into our supply plan and so forth. That’s what created the range.
Daniel Amir – Lazard Capital Markets
Right, but I mean are all, I mean are all the sectors, I mean are they all growing at the same pace? How should we look at it? Or is one stronger than the other? Just trying to get an idea of where the growth is coming from in which segments.
Sure, I could give you some background on that question. You know obviously we’ve got strong growth revenue in the handset market because of the smart phone category. That’s driving not one sensor but two sensors. And then in the notebook PC segment, as we commented in our prepared commentary, there’s been exceptionally strong growth in that category because of our exceptional position in our HD product portfolio. And then you’ve got the entertainment segment. We keep talking about the tablet category in the entertainment segment but on top of the tablet there’s a wealth of other novel products, multimedia players, TV – the TV category’s going to start coming into this picture.
These kinds of products also add a lot of strong growth, and then finally I like watching the security market. That’s developing very, very strong legs. On the traditional analog sector, of course it’s there, but there’s also the trend of digital IP security products. And then finally the automotive, on a quarter-on-quarter basis in dollar value we saw fantastic growth and that’s only going to continue trending upwards. So we’re looking forward to the next calendar year, this calendar year as it starts unfolding with all these markets driving it.
Daniel Amir – Lazard Capital Markets
Our next question is from the line of Raji Gill with Needham & Company. Please proceed.
Rajvindra Gill – Needham & Company
Yes thanks, and congrats again on your good results. Looking at the mix, two megapixels and above was 37% of units – that’s significantly higher from what it was last year, if I remember correctly around 27% of sales. When you look out going forward and you also see VGA coming down pretty steeply also, from 45% versus say 60% a year ago, should we be looking at that mix moving in that direction proportionally? Any color there in terms of the mix would be helpful.
Hi, this is Ray Cisneros again. Yeah, we’re really happy with the mix moving in this direction. Obviously we’re talking about the five megapixel has done historically well in the past 12 months. Now you get to layer over that eight megapixel ramping up in both BSI 1 and then going beyond that, BSI 2. And then we have the HD category, although you know, technically it isn’t the category below the two meg but on the other hand it’s just a new category that we might even start tracking separately in the future. But overall, you know, obviously the trending is in the right direction. Let’s connect the dots next quarter and hopefully we can give you a continual trend upwards.
Rajvindra Gill – Needham & Company
This is just a quick follow-up on that. So the pricing you expect to continue to go up, the overall blended pricing for the company even with reductions in pricing on a like-to-like basis but the mix shift do you think will overwhelm the ASP erosion that you’ll face normally?
Yeah, this is Ray again. You know, you’re going to see that counterbalance always, right? As you continue marching forward, releasing higher resolution products – for example the eight megapixel, when that starts picking up higher volumes obviously that higher ASP will start counterbalancing any effects of price erosion on the macroscale for the company. So I’m not predicting anything but let’s just hope we can keep driving the mix and that’s going to obviously drive the ASP in the right direction.
Rajvindra Gill – Needham & Company
Okay, thank you.
Our final question comes from the line of Betsy Van Hees with Wedbush Securities. Please proceed.
Betsy Van Hees – Webush Securities
Thanks so much for taking my question and congratulations on the quarter. I was wondering if we could go back to the question on seasonality. Can you help us understand in the October and January quarters, what type of seasonality are we looking for? Can you maybe help put a range, a percentage range that we should be looking at in both those quarters? Thanks.
Hey Betsy. That may be very difficult at this point because we’re just in the beginning of the first fiscal quarter, and we’re just beginning initial shipments of some of the more advanced products. So to put it in an exact percentage change for the revenues would be a little premature, so I would maybe let it sit for a little while and then provide you the better updates once we have a better idea, most likely in the next earnings call.
Betsy Van Hees – Wedbush Securities
Thanks Anson, fair enough. So my next question would be how about can you look at units then? So units declined 13% quarter-over-quarter, so can we see units maybe getting back to the trend that we saw in the October quarter of 185 million? Is that fair to say?
This is Ray. Obviously we’re staging our company to continue the growing, obviously not just from the revenue side but from the shipment side. The reason we have to think this way is because the markets keep growing so that means we have to continue hitting those market share targets that we want to hit. So again, it’s not predicting anything but all I’m saying is we intend to continue growing.
Betsy Van Hees – Needham & Company
Okay, thanks Ray. And I know that we’re only allowed two questions but I’m going to squeeze one more in, and that’s back on the notebook business. So big quarter, 46% quarter-over-quarter growth based on last quarter’s number. Was that driven by units, was that driven by mix, a combination of both? And then can you talk a little bit about the trends that you’re seeing in the July quarter? Thanks.
Yeah, it’s all of the above because the growth was in units, obviously because as customers have adopted our HD sensor be it side-based HD sensor, the 97-26, that obviously, that particular product carries a higher average ASP than the previous ASP for the notebook PC segment and that’s really, really helpful from a dollar value basis. From a unit basis yes, we saw growth as well in the category and I’d have to look at the data but I’m assuming it’s the overlay of the HD sensors on top of our traditional sensors we normally ship.
Betsy Van Hees – Needham & Company
Okay, thanks very much and once again, congratulations.
That concludes our question-and-answer session for today. I would like to hand it back to Mr. Brian Dunn for closing remarks.
Thank you all for joining us on this call and webcast. On the upcoming quarter, OmniVision will be participating in the web-based security bus tour in Silicon Valley on June 14th. We hope to see many of you at that event. Thank you and have a good day.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.
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