OmniVision Technologies' CEO Discusses F1Q 2011 Results - Earnings Call Transcript

 |  About: OmniVision Technologies, Inc. (OVTI)
by: SA Transcripts


Ladies and gentlemen, thank you for standing by and welcome to the OmniVision Technologies Conference Call for First Quarter of Fiscal 2012. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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 Mary McGowan. Please proceed.

Mary McGowan – Investor Relations

Good afternoon, everyone, and welcome to our fiscal 2012 first quarter 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 Business Development; and Anson Chan, Chief Financial Officer.

During this conference 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, August 25, 2011. 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 OmniVision’s SEC filings.

During today’s call, we’ll also discuss certain GAAP and non-GAAP financial measures, the latter of which exclude 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’ll now turn the call over to Mr. Shaw Hong. Shaw?

Shaw Hong – President and Chief Executive Officer

Thank you, Mary, and welcome to all of you joining us on the call and webcast. Earlier this afternoon, we issued a press release describing our results for the first fiscal quarter of 2012. For those who have not read the release, I am pleased to provide you with the recap of our financial results.

In Q1, we achieved record quarterly revenue of $276 million and we shipped over 170 million image sensors. On a non-GAAP basis, gross margin was 31.8% and net income was $47.2 million or $0.76 per diluted share. In addition, we maintained a very strong balance sheet with a cash position of $560 million.

I like to share with you on other financial metrics before proceeding. On a rolling 12-month basis, I am pleased to report that OmniVision has topped the $1 billion market in total revenues. Our first fiscal quarter result is the third consecutive quarter showing this movement. This is record breaking for OmniVision. I firmly believe the seamless teamwork among our employees and with our supply chain partners in executing our strategies result in the success. We are focused and committed in making this happen. We have been investing in developing leading technologies producing a growth portfolio of products for various applications and markets, and serving and supporting our customers well worldwide.

Moving forward, we intend to reach the next level of growth by building upon these fundamental competences that I just mentioned, with additional focus on expanding our strategies to imaging sensors to providing system level solution to our customers. We believe there are many directions for strategic growth that are highly complementary to our core companies. We see potential growth through the high channel of creating end use. This means the technology is related to the input, the capture, the processing, and the output of the light and color to produce an image on all fields that could lead to new products in the market for OmniVision. This can lead to opportunities in the field of optic sensors, outside visible spectrum, image data processing, data interface chip, and the system solutions. The enormous growth of imaging solutions in mature and new markets directs OmniVision to look at broadening our technology and the products.

So now, I will review three key topics that are fundamental to achieving our future growth. First, an update on our technology strategy; second, some comments on expanding technology and meeting customers’ needs; lastly, an update on products in our key market strategies. As usual, on my each of these topics, these are key focus on execution. It is a commitment that we take seriously as we pursue success on a daily basis.

Let me start with technology. OmniVision’s strategic direction is based on the principles of disciplined investment in emerging technologies. We invest in our core competencies to meet the needs of promising new markets, along with increasing sophistication of the consumer. Our advancement in technology development produces sensors with increasingly low power consumption and higher performances. One excellent example is our proprietary BSI technology. This technology is the key enabler behind our leading imaging sensing solutions for the industry. With the best combination of low-light image capture, with excellent color reproduction, brightness, and overall clarity, our BSI image sensors are adopted by OEM all over the world for many different applications.

Our investment in technology development expands beyond image sensors and into providing system level solutions. We have been evaluating technologies that are highly complementary to our core business of imaging sensor solutions. We have a team of specialists focusing on specific applications such as hardware, software, system developments, optics, and transitional modules in the key markets.

With all our internal investment in technological development, we complement this R&D effort with a robust patent portfolio. In addition, we are leveraging the knowledge we acquired from the Kodak patent that we purchased several months ago. These patents not only solidify our IT positioning in the market, but also greatly enhanced our ability to innovate beyond imaging sensors.

Let me now talk about our technological expansion and how this meets customer’s needs. On recent announcement to acquire VisEra’s CameraCube production operation is such an example. The CameraCube bringing this capability in-house will streamline our operations reduce cost, and shortened development cycle of this product. Our current product line includes VGA CameraCube products. And we anticipate migration of CameraCube products to scale up the resolution cost. CameraCube offers significant form factor advantages and downstream (indiscernible) solutions. These benefits are increasingly driven by our high volume brand name customers. In particular, in the mass market mobile products it require small form factor and a cost effective solution. Plenty of growth initiatives will continue to be part

Steady year growth initiatives will continue to be part and reduce overall payment, the market and the customers requiring imaging solutions are continuously growing and we have to take advantage of setting the growth initiatives, when they present themselves.

Now I would like to move on to discussion of our products and our key market strategies, which have been the basics of our company’s overall success. Our strategic direction for the market is building a strong business relationship with our customers. In order to achieve this, we continuously provide our customers of more product portfolio based on our innovative technologies. We offer products to high gross margins and we provide strong tiered technical and customer support to our customers worldwide.

For our product based on our innovative technologies, currently our first-generation BSI technology OmniBSI it consistently shipping at record level to customers worldwide in all markets and regions. So, OmniBSI we took the leadership role in imaging camera solutions for the smartphone and the notebook markets, where a premium for image quality was required.

We offer the broadest product portfolio based on the BSI technology in the marketplace. Our supply partners that use OmniBSI products are now highly stabilized to deliver consistent quality at a higher production notebook. OmniBSI shipments are based a large capacity event that was driven in manage via our strong sales supply partners. We continue to do business around the world with OmniBSI products and consistent positive customer feedback validates our leadership.

Additionally, we have planned to introduce another wave of products based OmniBSI technology. These products will leverage the stable, high-quality and efficient production of OmniBSI. This leads us to our latest BSI technology platform, the OmniBSI-2.

As we previously commented, our first product in to market is the 8-megapixel image sensor and we have recently announced the 5-megapixel products as well. These products can run multiple design socket designs at premier customers around the world in various regions. Many of these products are in the ramp up phase. The engineering and the production work behind the technology to bring it to mass production is intensive and significant.

Our key suppliers that enable our first-generation BSI technology now have the extensive experience to enable this latest BSI generation. Additionally, we have a portfolio of more products based on OmniBSI-2. They will be continuously we released to the marketplace in the coming quarters. So the high gross margins, the handset market continues to be driven by the smartphone segment.

A leading research firm has said smartphones account for more than 50% of the U.S. mobile phone market by the end of calendar 2011. This continues to drive an advantaged position for OmniVision as premier brand name smartphone customers require not just high resolution sensors, but high quality sensors. This fact is naturally to our strong advantage offering OmniBSI and OmniBSI-2 products.

Our sales and marketing team continue to leverage our broad BSI product portfolio with key design wins this quarter in multiple regions around the world. Additionally, the smartphone segment continues to be pushed down the cost curve, which opens up an enormous replacement market of the featured handset segment (indiscernible).

In the tablet market, this segment continues to grow at a very rapid phase worldwide. Today, we believe we have the dominant leadership position in this space and we are making sure our strategies incorporate the market trends. It is not clear how big the tablet market will ultimately reach, but it has reached a business level for us compared with our notebook markets. In this quarter, we also continue to ship the leading HD solution for the notebook market using our OmniBSI Technology.

In automotive space, we believe continue to gain market share with new key customer engagements. Our latest products with high sensitivity or high dynamic range continue to gain significant customer interest for image or data structure solutions in automobile. To take advantage of this and other markets, we continue to expand our operations.

We are expanding our sales and marketing channel in Japan and we are planning more direct sales channel for the India region. Additionally, details of these key business highlights and other will be given by Ray and Hasan.

For the strong field technical and customer support, we have been reviewing our imagination, although it provides our customer with the best service and support. To that end, we have staffed a technical and sales support team in all major regions and countries, including the U.S., Europe, Japan, Korea, China and Taiwan serving customer needs.

We work around the clock to resolve any issue in Asia that our products are successfully deliver to the customers end. We are excited with our growth prospects around the world. We are committed to expanding our efforts to find new opportunities, open new markets, capitalize on emerging market trends in digital image technologies and expand our market share.

With that, I will turn the call over to Ray, who will provide an update on the quarter sales activities. Ray?

Ray Cisneros – Vice President, Worldwide Sales

Thank you, Shaw. We are extremely pleased to post another quarterly revenue record in conjunction with the strong shipment volume, our business mix remains very strong with well balanced mix of products, customers, markets and regional coverage. We shipped record levels of our broad portfolio of 5-megapixel products and record levels of HD products.

Our entertainment segment, the segment that includes the tablet market continued to expand. We believe we maintained our leadership position in the smartphone market, we continue design wins scored this quarter in the 5 and 8-megapixel categories. We continue to expand our regional sales presence particularly in Japan and India. Let me now turn to more details.

In our first fiscal quarter, we shipped 171 million units as compared to 169 million units in our prior quarter. The average selling price in our fiscal first quarter was $1.61, as compared to $1.53 in the prior quarter. The setup is due to healthy products mix partially offset by some pricing pressures in competitive market spaces.

In the first fiscal quarter, units sales of sensors 2-megapixel and above represented approximately 37% of total shipments, the same percentage as the prior fiscal quarter. In this category of our BSI based 5-megapixel sensor product line continued to ship at record levels in to various markets and was dominated by the smartphone segment. This category also includes the 8-megapixel product line.

In our first fiscal quarter we ramped up the OV8820 the second 8-megapixel product line based on our first-generation BSI technology OmniBSI. The OV8820 has gained a significant market acceptance and will ship for major smartphone customer designs over the next several quarters.

In regards to the OV8820 our 8-megapixel product line based on our second-generation BSI technology OmniBSI-2, we anticipate to ramp up production at the tail end of our second fiscal quarter, although we have experienced the recent and unanticipated extension in our product development cycle.

In the mean time, in our first fiscal quarter we continue to score significant design wins in various mass market mobile applications on top of our currently secured business. Finally, we are now ramping up volume of our new BSI based 3-megapixel, the OV3660. This product will play a key role in high volume mid tier mobile devices.

Rounding out this segment were record level shipments of our 2-megapixel products based on traditional FSI technology. These shipped mainly to the future handset market. Unit sales of 1.3-megapixel sensors also remained comparable to the prior fiscal quarter at approximately 18% of total shipments. In this category, we incorporate our HD sensors that continue to ship in record volumes and particularly to the tablet market and the notebook market. Considering only the HD product line, there was a strong double-digit quarter-on-quarter percentage growth. We anticipate significant growth of the HD sensor category across all markets and customers.

Lastly, unit sales of sensors that were VGA and below represented approximately 45% of total shipments. Part of the first quarter VGA shipment was related to the front-end ramp-up curve of another specialized high performance 3x3 micron pixel VGA product. It will be used for videoconferencing, secondary cameras, and high-end mobile devices. We launched several similar specialized VGA products in the past and have shipped in significant volumes. This is the trend that OmniVision forged over the past two years and has changed the perception of videoconference cameras from low-quality to high-quality. And as previously mentioned, the same level performance is now adopted in certain select best-in-class notebook products around the world.

In terms of product markets, our mobile phone sales represented approximately 62% of our revenues in the first quarter, as compared to 65% in our prior quarter. In absolute dollar terms, our mobile sales were higher than last quarter. However, this slight decline as a percentage of our revenue was attributed to the continued growth we experienced in our entertainment segment predominantly fueled by the tablet market.

Our entertainment segment represented 14% of sales as compared to 11% in the prior quarter. We anticipate the tablet to continue to grow in a revenue mix across all geographies and segmentation. Our sales of sensors into the notebook and webcam segment were approximately 15% of sales for the same percentage as our prior quarter. Our sales into this segment are based on our premier OmniBSI HD OV9726, coupled with premier notebook OEMs across all global regions. The remainder of our sales backed into our other market categories mainly in DSC/DVC, security, and automotive.

The mobile phone segment continues to represent the largest portion of our revenue mix. Within this market, the smartphone segment continues to fuel the growth of the market and maintains the highest value customer targets. Already holding a strong position in the smartphone segment, we continue to drive all aspects of our operations for this market.

In our first fiscal quarter, we shipped record level volumes of our OmniBSI 1/3-inch and 1/4-inch 5-megapixel products into smartphone segment. Our OmniBSI 1/3-inch 8-megapixels products continued to ship at strong levels and successfully transitioned from our first generation 8-megapixel the OV8810 to our second generation the OV8820.

Also of note, in the first fiscal quarter, we continued to secure multiple smartphone designs with new customers or projects across various geographical regions including North America, Taiwan, Korea, and China. These new projects were full 5-megapixel and 8-megapixel products from both OmniBSI and OmniBSI-2 technologies. We are highly satisfied with all of these socket design wins, as they ensure that we will remain close to the premier players who will drive the highly contested smartphone segment.

Additionally, we maintain our strong position in the future handset market in the Far East. We shipped high volumes of 2-megapixel sensors into this market. To augment this segment, we have begun to ship volume quantities of our new OmniBSI-based 3-megapixel sensor, the OV3660. Initial customer feedback has been very favorable.

In the notebook and webcam segment, we continued to ship a steady volume at the level we saw in the prior quarter. As expected, our OmniBSI HD sensor, the OV9726 is the standard in HD video format cameras and notebooks and continues to ship at a strong clip as multiple brand name OEMs incorporated for the premier models. While Q1 volumes were strong, the recent developments in the notebook market at the OEM level have introduced the level of uncertainty that we will be monitoring closely.

The all-in-one PC trend in this market also continued to hold steady incorporating OmniVision HD format sensor products as well. Other products shipped into this market included our high-end performance VGA, our main screen VGA, our 2-meg and 3-megapixel sensors.

Looking ahead, we see the notebook PC and the webcam market incorporating novel and exciting ways in which imaging solutions will be used. In our entertainment market, we saw strong growth in the tablet segment. This was expected and we anticipate further rapid growth. As with the mobile market, most tablet products incorporated dual-camera design that favor a high-resolution sensor on the primary camera.

Today, we ship anywhere from 8-megapixel down to an HD resolution sensor for the primary camera of a tablet device. We also scored a fresh round of new socket design wins at the tablet segment with brand name OEMs in various regions. There will not be a shortage of business opportunities as we continual rounds of new product launches from all major OEMs in all geographic regions. We also get the added leverage that many of the tablet customers are the same customers we have in the smartphones market. Many times this becomes a 2-for-1 benefit in solutions, so the business opportunity can scale rapidly.

In the emerging market category, we also track our business in digital still camera, digital video camcorders, security, automotive, and medical. All segments exhibited continual growth or steady volumes. In the automotive market, key design wins were secured in several regions worldwide. This market continues to scale rapidly driven by multiple camera applications for a single vehicle.

A final comment about our emerging market is that new and radical technologies are being developed for applications that up until now have not been seen. Many represent products targeted for the mass consumer markets and in the future more details will emerge. For now, the point to make is that our opportunities for sustained growth are constantly being expanded.

In summary, we are driving aggressively for continual growth and leadership and we believe our results reflect that direction.

Shaw Hong – President and Chief Executive Officer

Thank you, Ray. I will now turn the call over to Hasan who will provide an overview of the company’s marketing efforts and opportunities.

Hasan Gadjali – Vice President of Worldwide Marketing and Business Development

Thank you, Shaw. Today, I am pleased to update you on some of the major achievements accomplished from our marketing strategies, which will take the company to the next level of growth. First, I would like to comment on the growth in the smartphone markets and its associated demand for our BSI products. To address these strong demands, we continued to reach significant milestones and launched new series of OmniBSI-2 products.

Starting from the most recent announcement of OV5680 and OV9770, we are redefining the markets 5-megapixel and HD performance benchmark. Our high-volume productions of the OV8820, 1.4-micron 1/3-inch 8-megapixel sensor is very popular for the high-performance smartphone segments. In the same high-performance, 1.4-micron OmniBSI-2 pixel design OV5690, a 1/4-inch 5-megapixel sensor has also generated strong interest for mass-market smartphone sockets.

Early this month, we also announced the sampling of our first OmniBSI-2 1.1-micron pixel new groundbreaking technology OV8850, a 1/4-inch 8-megapixel sensor for the next generation of high-end low profile smartphones. As we continued to expand our OmniBSI-2 products, we find ourselves defining a new benchmark for both 1/3-inch and 1/4-inch families of high-resolution high-performance sensors. Again, this breadth of product offerings enable us to maintain a leadership role in the rapid expanding markets for new premium products and many of the Tier 1 manufacturer look to us for their smartphone needs.

Apart from pixel resolution and performance, our OmniBSI-2 and newer OmniBSI products are also designing with the important 30 frame-per-second feature for camera sensors today. The 30 frame-per-second feature is now narrowing the performance gap between cell phone cameras and point-and-shoot digital still cameras. This is a major technical breakthrough. The high dynamic range feature or HDR originally used in our automotive products to take pictures under extreme lighting condition is already finding its ways into smartphones.

Under and overexposures are the most common problem in today’s non-HDR capable cameras. HDR has both short and long exposure which compensate for this extreme bright and dark conditions revealing the details in dark and bright areas. Such HDR features are becoming important in the next generation of smartphone cameras as consumer looks to higher quality picture taking.

Most OmniBSI-2 and newer OmniBSI products include this HDR capability. As our 300-millimeter OmniBSI-2 products move into mass production, we continue to see strong and expanding market demand for 200-millimeter OmniBSI products, particularly in the growing smartphone market opportunity around the world.

Let me provide one of the many examples. In the Asia-Pacific region, a number of feature phone manufacturing, switch their production capacity to smartphone due to the growing demand of this particular product. To support our customer and to capitalize on this trend, early this month we sponsored a conference in China. At this event, we have presented to OEM our broadest image sensor portfolio based on OmniBSI and OmniBSI-2 products.

Our objective is to have these customers shift their product mix towards high-end mobile phones. We are very excited about the response, and feel our product leadership in 5-megapixel and 8-megapixel resolution further enhance our close working relationship with these customers. Again, our reputation in delivering high-quality high-performance image sensors in a small form factors makes OmniVision an attractive partner for OEM in this region as well as throughout the world.

Let me now move onto our CameraCube technology. As the demand for smartphone cameras increases, so does the demand for the secondary front-facing camera. The size requirement of a second camera is becoming critical requiring low vertical heights and a smaller form factor. Our recent acquisition of the CameraCube production operations allows the manufacturing of miniaturized, reformable CameraCube chips. As we have done in the past, we anticipate we will be able to establish strong partnership and grow our business. So, specifically, we will be designing the major components needed for CameraCube for our VGA to higher resolution sensors and selling them to module integrators.

Our proprietary CameraCube assembly process will also be highly valuable to our module integrators partners both for manufacturing and time to market perspective. As the market continued to grow, the demand for the new camera platforms also increases. With our CameraCube production operations and new expanding CameraCube components business, we have the ability to play a defining role into creation of better and more innovative camera platforms.

Now, let’s look to a longer term focusing, first, on the emerging market. In this category, the pocket HD digital still camera currently use the 5-megapixel sensor. However, OEMs are now adding such features as zoom lens, rugged industry design to reduce breakage and waterproofing. Along with this enhancement, we see a move to 8-megapixel model, which are now quickly becoming the preferred camera solution.

For the security and surveillance market, demands for HD IP cameras continued to grow quickly, and CCTV still holds on the major shares of the market with multiple vendors demonstrating HD CCTV camera solutions. For these new requirements, OmniVision’s OV10633 HDR and OV2715 low-light sensitivity sensor, which offered the critical capabilities for this market continued to be designed into these new products.

As mentioned last quarter, the automotive markets, who are still an emerging category, has experienced healthy growth with OmniVision AEC Q100 certified products addressing three major automotive product categories, backup cameras, 360-degree view cameras, and machine vision. At the same time, new laws requiring real view optical detection are creating a substantial increasing demand for image sensors with OV7950 and OV10620 now in mass production. We believe we have established a leadership position for the automotive image sensors.

On the medical front, we continued to engage in the business development of single-use endoscopy products, where we see steady and strong interest. In such medical application, size is the key factor. Our OV6930 small single-chip cameras are already well established in both single and multiple use devices. Despite the fact that the opportunity are long-term in nature, the markets show strong potential and steady growth. We will continue to engage in the development of small high-performance sensors for this market.

Shaw Hong – President and Chief Executive Officer

Thank you, Hasan. I will now turn the call over to Anson, who will discuss our first quarter financial performance and provide guidance for our second quarter of fiscal 2012.

Anson Chan – Chief Financial Officer

Thank you, Shaw, and good afternoon, everyone. For the first quarter of fiscal 2012, we are reporting revenues of $276.1 million, up 6.9% sequentially and up 43% on a year-over-year basis. Direct sales OEMs and VARs accounted for 77.2% of revenues in the first quarter of fiscal 2012, a slight increase from 76.9% in the prior quarter. The remainder of our revenues came from sales through our distributor channels.

Our fiscal 2012 first quarter gross margin was 31.7%, 1 percentage point higher than the 30.7% that we reported in our prior quarter. Excluding stock-based compensation expense of $464,000 included in cost of revenues, our non-GAAP gross margin was 31.8%, up from 30.9% in the fourth quarter of fiscal 2011. Our margin improvement was driven by continued healthy demand for our premium products coupled by the favorable impacts and the increase in revenues recorded on the sale of previously written-down inventory and a decrease and recording of allowance for excess and obsolete inventories.

In the first quarter, we recorded approximately $5.1 million for the sale of previously written-down inventory and $3.6 million as an additional allowance for excess and obsolete inventories, with a net $1.5 million of favorable impact on our gross margin.

In the fourth quarter fiscal 2011, we recorded approximately $4.2 million from the sale of previously written-down inventory and $4.9 million as an additional allowance for excess and obsolete inventories, with a net $0.7 million of unfavorable impact on our gross margin.

As mentioned earlier in the call, we expect to ramp up the production of our BSI-2 devices towards the end of our second quarter. Consistent with our past experience with advance devices, we anticipate less than optimal yields during this initial rollout and this may translate into a temporary reduction in margin.

[Technical Difficulty]

Sorry, something happened in the recording, I am going to take it live. So, I think I will start again with the comment about the R&D expenses. I think I just finished commenting about margin. So, R&D expenses in the first quarter of fiscal 2012 totaled $28.3 million, a 16.7% increase from the $24.3 million in our fiscal 2011 fourth quarter. The increase in R&D expense was caused by an increase mass and other non-recurring engineering expenses coupled with our annual company wide salary increase that went in to effect on July 1st.

We currently expect our R&D expense in the second quarter of fiscal 2012 will increase further, mostly attributable to increases in mass and other non-recurring engineering expenses the salary increase taking the effect for the full quarter. R&D expense in the first quarter included approximately $2.6 million of stock-based compensation expense. Excluding stock-based compensation expense, first quarter R&D expense was $25.7 million, as compared to $22.1 million in the fourth quarter fiscal 2011.

SG&A expenses in the fourth quarter of fiscal 2012 totaled $16.1 million, as compared to $18.3 million that we reported in previous quarter. The increase in SG&A expenses was attributable to a higher level of expending in fourth quarter of fiscal 2011 has dampen the purchase of the Kodak patent portfolio then offset by higher payroll related expenses from the compensation adjustment I mentioned earlier. We expect SG&A expenses to increase in the second quarter of fiscal 2012 due to salary increases taking effect for the full quarter.

Our first quarter SG&A expenses included approximately $2.2 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A expenses in the first quarter totaled $13.9 million, as compared to the $16.1 million that we reported in the prior fiscal quarter.

Moving to the amortization of acquired patent portfolio, which is the line item that we introduced in the fourth quarter of fiscal 2011, the expense totaled $2.3 million as compared to $0.8 million in the previous quarter. The reported amount now represents the amortization of the Kodak patent portfolio over a full quarter.

Our GAAP operating income in the first quarter totaled approximately $40.6 million, as compared to $36 million in the prior quarter. Our GAAP pre-tax income in the first quarter totaled $41.2 million, as compared to $36.9 million in the prior quarter. Our GAAP tax rate for the first quarter was a benefit of 2%, and resulted in a GAAP benefit from income taxes of $0.8 million. This compares with the tax rate of 8% that result in GAAP income tax provision of $3 million in the prior quarter; included in the GAAP tax rate for the first quarter was the reversal of certain previously recorded tax reserves, when the statue of limitations for the related tax that expired.

This refers as a result in a one-time non-cash tax benefit of approximately $2.4 million. Excluding the effect of stock-based compensation, our non-GAAP tax rate for the first quarter with the benefit of 1.6%, in a non-GAAP benefit from the income taxes were $0.7 million. This compares to our non-GAAP tax provision for fiscal 2011 fourth quarter of $0.9 million.

For the second quarter of fiscal 2012, we expect our GAAP and non-GAAP tax rates will be in the low teen’s percentages. In the first quarter, our GAAP net income attributable to OmniVision was $42 million or $0.68 per diluted share, as compared to GAAP net income attributable to OmniVision of $34.7 million or $0.56 per diluted share in the first quarter of fiscal 2011.

Excluding stock-based compensation expense and related tax effects, our non-GAAP net income attributable to OmniVision for the first fiscal quarter was $47.2 million or $0.76 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $40.8 million or $0.66 per diluted share in our fourth quarter fiscal 2011.

Let me now turn to the balance sheet, we ended the first quarter with cash, cash equivalents, and short-term investments totaling $506.1 million. This compares to $466.9 million at the end of the fourth quarter of fiscal 2011. The significant portion of the cash increase came from cash generated from our business operations during the quarter. Accounts receivable at the end of our first quarter, net of allowances were $140.6 million, a slight decrease of 1.4% from the $142.6 million at the end of our fiscal 2011 fourth quarter.

Our days sales outstanding decreased slightly to 47 days in the first quarter, as compared to 49 days for our prior quarter. As of July 31, 2011, inventory totaled $143.8 million, an increase of $36.9 million or 34.5% from the $106.9 million balance at the close of our fiscal 2011 fourth quarter. Our July inventory balance represented an inventory turn of 5.2 times or 70 days sales. We believe our inventory level is at a much healthier level now and is in line with our stated long-term goal of four to five turns a year.

With that, I will turn to our outlook for the second quarter of fiscal 2012, which ends on October 31, 2011. We currently expect our 2012 second fiscal quarter revenues will be in the range of $255 million to $275 million. This range primarily reflects the expansion of the development cycle with our 8-megapixel product line as well as cautionary part due to macroeconomic uncertainties with various companies sale already discussed in their earnings calls.

Our GAAP earnings are expected to range from $0.42 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 $0.52 to $0.64 per diluted share.

Now please note that this set of guidance exclude any possible accounting effects from our purchase of the CameraCube production operations from VisEra. We are currently preparing for asset transfer and are anticipating to close the transaction during the second fiscal quarter.

Operator, we are now ready to take questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from the line of Daniel Amir with Lazard Capital Markets. Please proceed.

Daniel Amir – Lazard Capital Markets

Yes, thank you for taking my call. A couple of questions here, can you give a little more clarity on the guidance here I mean typically your quarter is up, you guided now. What are the macro headwinds? Are you seeing it more in the handset market, is the customer specific, is it more in the non-handset area, if you could give any clarification that would be helpful. Thank you.

Ray Cisneros

Hi, this is Ray Cisneros. In term of the macroeconomics I think what everything that’s going on in the markets; we saw some unsettling in our numbers in front of us. So, in particular in some of the bigger segments such as the notebook and PC segments, those recent events definitely have some perturbations in the marketplace. So, we’re taking a cautionary approach when we look at that those kind of situations. And everything what’s happening in the economy globally is certainly we feel probably influencing some of the numbers.

Daniel Amir – Lazard Capital Markets

So, it’s largely PC-related and not mobile handset related?

Ray Cisneros

Yeah. I would categorize that for our cautionary look at things, I would say, the PC is probably a bigger or an area we’re more focused on when we consider uncertainties in the numbers.

Daniel Amir – Lazard Capital Markets

Okay, thanks a lot.


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

Raji Gill – Needham & Company

Yeah. A follow-up on that question, you cited two reasons for the below seasonal guidance. One was this extension of the development of the product cycle on the 8-megapixel, which has to do with smartphones. Could you maybe elaborate what’s going on there? Has that resulted in share loss at some of your key accounts, any details there would be helpful?

Ray Cisneros

Sure. This is Ray Cisneros again. And I think the way to look at is when we launch a product, this 8-megapixel is not any different than all our other products that we attempt to launch. It’s quite intensive and extensive R&D and development. So that means, we plan on, I would say, a development lifecycle. And once we execute on that we go into mass production. So, what we see in our 8-megapixel plan is we have a plan and our plan is to hopefully hit at the tail end of this quarter as we mentioned when we can start delivering the 8-megapixel.

Raji Gill – Needham & Company

But has that extension resulted in share loss in the smartphone market?

Ray Cisneros

Well, I mean, I can’t comment for any individual customers and we don’t breakdown sort of the way we back into particular customers, but I can tell you this that when we have our plans we work very closely with our customers. Our customers understand what our plans are. And so far we have a plan in place and that’s about the extent we could say on that.

Raji Gill – Needham & Company

Just one last question if I can, you talked about the guidance being below seasonal mainly related to the PC, but PCs are only 11% of your sales, and they have been declining. So, would you maybe qualitatively, maybe rank was it the extension of this development cycle in the 8-megapixel that’s more meaningful or is it really the PCs?

Ray Cisneros

Right. I think it’s a combination of both. And obviously, our BSI technology is critical for us to ramp up and execute as we mentioned previously. It’s a big part of growth path. And certainly, our BSI-2 is a significant portion of how we need to grow and the vehicle that’s going to take us there.

Raji Gill – Needham & Company

Thank you.


Your next question comes from the line of Srini Sundararajan with Oppenheimer. Please proceed.

Srini Sundararajan – Oppenheimer

Hi, thanks for taking the call. This is Srini from Oppenheimer. My question is regarding like as to what percentage of your guidance was impacted by the macro and what percentage was impacted by anything else?

Ray Cisneros

Yeah, I understand your question. And obviously, as it pertains to this particular forum, we’re not going to break it down how to answer that question, but surprised to say is as I mentioned on our previous answer both components are very important. Our BSI-2 technology is very important for us to make sure we execute and we intend to do that. We have an engineering team in place that has a plan and we intend to execute against that plan. At the tail end of Q2 that’s our target next to start delivering early shipments of BSI-2 and then the macroeconomics, I mean, that’s something out of our control, but we tend to try to err on the conservative side when we look at our guidance figure. So, you’ll have to take that kind of response as an answer to your question.

Srini Sundararajan – Oppenheimer

No, that’s a great answer. My second question or a follow-up question is just if when you talk about a plan, does it mean that you fell short and therefore now doing a plan or this plan was already discussed with your key customers well ahead of time?

Ray Cisneros

You got to repeat your question. It’s a little mixed there how you posed it.

Srini Sundararajan – Oppenheimer

Yeah. Can you hear me well now?

Ray Cisneros

It’s not the clarity. It’s the way you phrase. Can you just clarify your question?

Srini Sundararajan – Oppenheimer

Okay. When I look at what you said, which was that you are planning and that kind of suggest to me that you might have fallen short somewhere and therefore you are now trying to plan it together with the customer to fix your problems. And my question is was this planning known to you all along or are the plan was just hatched based on certain shortfalls that might have happened?

Ray Cisneros

I see. Well, as you heard in our prepared commentary, it was unanticipated adjustment to our plan, and certainly, that always happens in complex product technologies. There is this particular product and this particular platform is no different than any other highly intensive technologies and platforms we’ve launched in the past. Things are always going to have some risk and that’s the business that we are in and certainly anytime we have a change in our plan our best interest is to try to come back to the original plan and we now we need to make adjustments and therefore work with our customers.

Srini Sundararajan – Oppenheimer

Thank you very much.


Your next question comes from the line of Brian Peterson with Raymond James. Please proceed.

Brian Peterson – Raymond James

Hi, this is Brian Peterson stepping in for Hans Mosesmann. Just on the gross margin line, you guys said that there should be temporary reduction next quarter, which I sort of take to mean that things should maybe bounce back a little bit in January. If I kind of look at relatively to what you are thinking about for October would you expect January to be up, all else equal or is that not or am I reading too much into things?

Anson Chan

It’s difficult for me to comment further out than one quarter. It’s our company policy to only provide guidance for the current quarter, but when I mentioned earlier in the prepared remarks that the margin will may have a temporary dip, because of a less than optimal yield when we ramped up BSI-2, that’s consistent for all our historic experiences. Now, I can also comment that based on, again on historic experiences, typically take us maybe two to three fiscal quarters before we can get to a more optimal yield. So, if you want to you can put that into consideration as to whether or not or when, how much you can start to expand again or recover.

Brian Peterson – Raymond James

Okay. And just on inventory levels, it looks like it was up about 35% this quarter, can you just talk about your comfort level with that? And that’s it for me.

Anson Chan

Yes, we are extremely comfortable with that level. As I also mentioned in the prepared remarks, given our lead time, which is like 12 to 13 weeks, having an inventory turn, annual turn about four to five turns is more reasonable. And in the last two to three quarters, we are running very lean and so now we finally got opportunity to build back up inventory at a much healthier level and is inline with our long-term goal for the company.

Brian Peterson – Raymond James

Thank you.


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

Betsy Van Hees – Wedbush Securities

Thanks very much, and good afternoon everybody. I was wondering if we could start with the July quarter, if we go back and we talk about the different segments, so you said that, notebook was 15% of revenue. So, if we look at last quarter it was 15% so actually grew 7% quarter-on-quarter. If we look at the mobile business last quarter, you said it was 65% of overall revenue, which was about $168 million and then it decreased to 62% of overall revenue. So, it was about $171 million, which means it increased 2%. So, when we look at the quarter and units were being relatively flat at $171 million, increasingly only a modest 1%. Did we see unit volume go down in mobile phones and unit volume go up in notebook and then also in entertainment? I mean, if you could kind of help us there to try and understand how that worked. And if you can also talk a little bit more about some of the ASP pressure that you saw? That’s my first question. Thanks.

Ray Cisneros

Sure. I think I could address sort of the market mix question you had. What we had was a very significant uptick in the entertainment segment driven by the very strong tablet market. That’s a market that is extremely, extremely exciting to watch and grow and expand in various segments. So, that sort of offset sort of the percentages of the other markets. PC, notebook looking back at Q1 was fairly equivalent to the prior quarter. So, that helps that going forward we felt a little softness in the PC market, notebook market.

In terms of the mobile market, we saw very similar numbers in terms of units although we did see continual growth in the 5-megapixel and 8-megapixel categories feeding into the smartphone segments. So, that’s kind of how they are offsetting and balancing each other out there. In terms of ASPs, yes, there is always continual pressure in our markets. We back into so many consumer markets. And so there is continual price pressure they are always – there is competition in our customer’s demand continual cost reductions year-over-year. That being said, however, as you know, our strategies are to drive some of our emerging markets like medical and automotive to start offsetting these kind of business mix as we drive, and hopefully in the long-term, some of these price pressures are alleviated by those strategies.

Betsy Van Hees – Wedbush Securities

Thanks, Ray. That was very helpful. So, if I go to my second question it’s regarding the BSI-2. So if I understand correctly what we were targeting, you guys were targeting, was that it was going to ramp, and was actually going to ramp this summer. I think that was the plan that BSI-2 was going to ramp this summer. So, I was wondering in terms of this unexpected extension in product development cycle when did you see this occur? If you could give us some help their understanding when you saw this. And then what gives you the confidence level that you are going to be able to get this corrected and be able to ramp products at the tail end of your quarter?

Ray Cisneros

Sure. When it comes to BSI-2, as I mentioned, it is a very significant technology platform that requires quite a bit of intensive resources. However, we are a billion dollar company. We’ve been in our business for over 15 years now. This is all we do is develop image sensors. And we are well-seasoned veterans to get the job done. I work with our engineering teams and product development teams and production teams on a daily basis and I have the confidence that when we have a plan, we execute on the plan if there is some adjustments. There, obviously, we have to accommodate those adjustments. So, that is no different than any other platform we’ve ever launched. And so again, we are focused, our intent is to execute on our plan and that’s the new adjustment right now at the tail end of Q2.

Betsy Van Hees – Wedbush Securities

Thanks, Ray. But when did you see this occur and when did this problem start with BSI-2 that caused this delay in the ramp cycle?

Ray Cisneros

Right. I think the recent events, suffice it to say, obviously from this call – since the last call obviously those were – that’s the time period in which we saw these events occur, these developments occur.

Betsy Van Hees – Wedbush Securities

Okay, thanks.


And at this time, I’d like to turn the call back over to Ms. McGowan for closing remarks.

Mary McGowan – Investor Relations

Thank you all for joining us on this call and webcast. Our next quarterly conference call is expected to follow the Thanksgiving holidays. Thank you and have a good day.


We thank you for your participation in today’s conference as it does conclude your presentation. You may now disconnect, and have a great day.

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