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OmniVision Technologies, Inc. (NASDAQ:OVTI)

F2Q2012 Earnings Conference Call

November 29, 2011, 17:00 p.m. ET

Executives

Mary McGowan - IR, Summit IR Group Inc.

Shaw Hong - CEO and President

Ray Cisneros - VP, Worldwide Sales

Hasan Gadjali - VP, Marketing and Business Development

Anson Chan - CFO and VP, Finance

Analysts

Harsh Kumar - Morgan Keegan

Daniel Amir - Lazard Capital Markets

Brian Peterson - Raymond James

Paul Coster - JPMorgan

Betsy Van Hees - Wedbush Securities

Raji Gill - Needham & Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the OmniVision Technologies Conference Call for the Second Quarter of Fiscal 2012. At this time all participants are in listen-only mode. Later we will open the call for your questions, instructions for queuing up will be provided at that time. As a reminder this conference call is being recorded for replay purposes.

I’d now like to turn the conference call over to Mary McGowan of the Summit IR Group. Please proceed.

Mary McGowan

Thank you very much. Good afternoon everyone and welcome to our fiscal 2012 second 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 products plans. This is based on information as of today, November 29, 2011, and actual results may differ materially from those set forth in such statements. These and other forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially. For a discussion of these risks factors, you should review the forward-looking disclosures in the earnings release we issued today as well as the risk factors from other disclosures in OmniVision’s SEC filings and reports, including most recent Annual Report on Form 10-K and recent quarterly report on Form 10-Q.

During today’s call we will also discuss certain GAAP and non-GAAP financial measures. The latter of which excludes stock-based compensation expenses and related tax effects. A reconciliation between the two is available on our earnings release posted on our website.

With that I’ll now turn the call over to Mr. Shaw Hong. Shaw?

Shaw Hong

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

In Q2, we recorded revenues of $218 million and we shipped 153 million image sensors. On non-GAAP basis, gross margin was 30.9%. And net income was $30.1 million for the exchange per dollar this year.

Before I turn the call over to our management team to provide details on our Q2 financial results and our outlook, I’d like to make a few brief comments. First, I’d like to express my disappointment in the results for our second fiscal quarter. However, from Q2, OmniVision posted a record revenues in four of its last five quarters. Our focus has always being on executing and technology leadership. The focus remains the heart and soul of the company.

Leading our second quarter, we encountered an unanticipated cutback in orders from major customers. For sensors that were designed into assist the conventional consumer devices. This event derailed our ability to deliver the financial performance that we had forecasted in August. However, despite its near-term setback, we are continued to deploy considerable resources to support the long-term growth opportunities available to the company.

Second, given the quarter we successfully concluded the acquisition of CameraCube production operations from VisEra. As you may recall, our CameraCube technology enables us to design our sensors and accompanying lens elements as an integrated unit that creates a refillable (inaudible) image sensor device.

CameraCube offers significant form factor advantages and down screen cost reductions solutions to our customers. We anticipate that this transaction will enable us to further streamline our operations and shorten our development cycle for CameraCube, effectively, realizing the full potential of this product line.

And finally, early this month, OmniVision’s Board of Directors authorized a stock repurchase program to repurchase up to $100 million of the company to outstanding common stock. While we acknowledge that a company’s near-term financial performance is disappointing. We strongly believe in the long-term strength of the company, our R&D efforts in CMOS sensors over the last 50 years have positioned the company as leading digital imaging solution providers in the world. This is (inaudible) accomplishment. Furthermore, the company’s lower product portfolio that touched image sensor from mobile phones to tablet and entertainment platforms to automobiles to security and surveillance to medical devices is second to none.

Several of these opportunities are longer term in nature also significant and sustainable. These factors continue to (inaudible) long-term confidence in OmniVision and lie at the heart of the decision for stock repurchase program. We also believe that the stock repurchase program is in the best interest of our stockholder and demonstrates our commitment to increase stockholder value.

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

Ray Cisneros

Thank you, Shaw. Our execution felt short of expectations for our second quarter. This was brought about by a sudden cut back of orders from our largest end used customers of sensors. We also expect further degradation in demand for our third fiscal quarter. However, we believe our products and technologies offer high value solutions to the marketplace in our customers.

In all regions of the world, we are engaged with premier brand named customers and across all market segments. Our sales and marketing channels are well established and can reach deep into our markets. Our objective is to regain our momentum in the marketplace.

In our second fiscal quarter we shipped 153 million units as compared to 171 million units in our prior quarter. The average selling price in our fiscal second quarter was $1.42 as compared to $1.61 in the prior quarter. The step down is due to a reduction in higher resolution sensor products mix plus the normal quarter-to-quarter price erosion.

In the second fiscal quarter, unit sales of sensors 2 megapixel and above are represented approximately 24% of total shipments as compared to 37% in the prior fiscal quarter. This shift was primarily driven by a step down in shipments of our third-inch BSI based 5 megapixel sensor product line. The 8 megapixel product line remains stable at about the same level and was primarily driven by our OmniBSI based 8 megapixel product line.

On the other hand, our new OmniBSI based 3 megapixel the OV3660 continue to ramp up and we anticipate strong growth in this product line. Likewise, we saw a strong growth in our quarter-inch OmniBSI based 5 megapixel product lines in particular with our SOC product.

Lastly, we saw a step down in our 2 megapixel product line primarily the one-fifth inch the format products which was due to a slowdown in some of our notebook business and competitive market pressure in the entry level in handset market.

Unit sales of 1.3 megapixel sensors represented approximately 23% of total shipments as compared to 18% in the prior quarter. In this category most of the shipments are HD sensors, the HD product line ships in many market segments and is fast becoming the ubiquitous default resolution for the interactive multimedia self view camera.

Lastly, unit sales of sensors that were VGA and below represented approximately 53% of total shipments as compared to 45% in the prior quarter. Quarter-on-quarter on absolute terms, the unit volume was nearly the same, but the percent increase was due to the step down in the higher resolution category. In this category, however, the majority if represented by our industry leading specialized high sensitivity VGA product lines used in self view cameras for premier brand mobile devices or notebook products. Additionally, this category also contains the CameraCube chip, integrated wafer scale camera module where we see strong growth near-term.

In terms of product markets, our mobile phone sales represented approximately 60% of our revenues in the second quarter as compared to 62% in our prior quarter. Our entertainment segment represented 20% of sales as compared to 14% in the prior quarter. Our sales of sensors into the notebook and webcam segment were approximately 9% of sales as compared to 15% in our prior quarter.

The mobile phone segment continues to represent the highest portion of our revenue mix. This market continues to be fueled by the smartphone category. In our second fiscal quarter we were pleased to see the launch of some smartphone products using our OmniBSI 8 megapixel sensor, the OV8820 by premier brand name customers in North America and Korea. We anticipate these customer engagements will drive this product line for several quarters. We also saw surge in our quarter inch OmniBSI based SOC 5 megapixel the OV5640, this is primarily being driven by premier brand names in the Far East for export business and major carrier telecom business within those regions.

Lastly, we are ramping up significant volume of our new OmniBSI based 3 megapixel the OV3660 into the featured handset segment in the Far East. This is quickly replacing the 2 megapixel category. Looking forward the smartphone category remains our key target. We are actively engaged with various premier brand named customers that are qualifying or evaluating OmniBSI or OmniBSI-2 based products for potential new designs.

In the notebook and webcam segment, we saw a decline in demand in our second fiscal quarter due to what we believe is a slowdown in the market as well as supply chain effects from the Thailand flooding. We believe that this tempering of the market will continue near-term and most brand named customers will have a cautionary outlook for calendar 2012. Nevertheless, our various HD product lines continue to ship at a respectable level, albeit at a slower pace than last quarter. Additionally, innovation is still being driven into the space such as the Omni 1 type PCs and rapidly emerging Ultrabook category. We anticipate the Ultrabook category will keep driving our line of HD sensors in the future.

In our entertainment segment, although we saw growth that was primarily driven by the tablet market using our OmniBSI based HD sensor and the OV9726, sales were much lower than forecasted due to the sudden drop in orders. Going forward we see this market being highly dynamic due to the pressures of declining ASPs for these tablet type products as well as innovative business spurring on a new competitive landscape. We also see opportunity in this space as many OEMs continued to drive various innovative imaging solutions on tablet type devices including utilizing higher resolution products.

In the emerging market category we also saw a steady growth in our automotive products. In particular, we are shipping our high sensitivity VGA devices to brand name OEMs who are using these sensors in 360 degrees surround view systems. Going forward, one of our important efforts is to line up key projects that will adopt our HDR megapixel product which we regard as a next frontier in imaging for the automotive market.

Shaw Hong

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

Hasan Gadjali

Thank you, Shaw. In the smartphone market our BSI products continue to capture design wins that are important for our future growth. Lately, we have seen interest for the one-quarter inch 1.4 micron pixel size OmniBSI-1 and OmniBSI-2 sensors, because there are more customers getting into high volume low cost smartphones. We continue to achieve design-in activities in the OV5640, OV5647 and OV5690, our one-quarter inch 5 megapixel products. Some Tier 1 customers are still seeking high performance one-third inch 1.75 micron OmniBSI-2 sensors for a high quality picture taking experience. For that, our OV5680 and OV9770 OmniBSI-2 products announced last quarter are well positioned to address this growing market.

Recently the market introduced high end low cost smartphones with 8 megapixel cameras. Some of these phones use our OV8820 1.4 micron one-third inch OmniBSI sensor. At the same time, repositioning our OV8850 one-quarter inch, 8 megapixel to address the next generation of high end high volume smartphone needs. Most of these sensors are capable of 30 frame per second and OmniBSI-2 version has built-in high dynamic range feature which narrow the performance gap between cell phone cameras and point and shoot digital still cameras.

On CameraCube technology, we continue to make headway working with our module integrated partners as well as expanding our CameraCube production operation. We have put that moment enabling the transition from our VGA to higher resolution sensor, we anticipate that more customers may adopt CameraCube and deploy it on phones that requiring a miniaturized secondary camera. The low cost has simple manufacturing of such miniaturized referable, CameraCube chips are becoming important factors for building a cost effective low profile smartphone. As the market for CameraCubes grow our proprietary CameraCube assembly process has become valuable to our module integrated partners both from manufacturing and a time to market prospective. We now expect an increase in CameraCube demand going into the second half of calendar year 2012.

Over the long-term, the security and surveillance markets demand for high definition IP camera continue to grow. It's under respond to our products, recently demonstrated at the China Public Security Expo in Shenzhen, we anticipate that our high performance, low light sensitivity HD sensor will continue to capture a majority share of this market.

Last month, we also started volume shipments on our well accepted HD HDR sensor, the OV10633. We continue to invest and expand in the automotive market by delivering camera solutions that are AEC-Q100 certified. This important certifications ensure common path qualifications and quality system standard.

Last month we announced the first Ethernet-based 360 degree surround view parking assistance system with our partners. This technology addressed the opportunity to deploy a parking assistance system on both luxury and non-luxury car process. This solution was recently demonstrated at the Embedded Technology Conference in Japan and was well received by potential automotive customers.

On the medical front, we recently engaged with customers at a Trade Fair in Germany. Here we addressed the use of OV6930, our camera sensor for endoscopy products. Along with the development of smaller size sensor for future medical applications, as a testament to the progress OmniVision is making. The OV6930’s excellent low-light sensitivity and image quality performed well in a clinical study on the Avantis Medical Systems Third Eye Retroscope. This retroscope employs the OV6930 in its catheter-based camera with a standard colonoscope that provides a continuous back looking view as well as forward view. Importantly, this medical device can improve colonoscopy accuracy by more than 20%, and is now shipping in volume to multiple medical device customers. We continue to believe that the medical markets offer strong potential and steady growth.

Shaw Hong

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

Anson Chan

Thank you, Shaw, and good afternoon, everyone. For the second quarter of fiscal 2012, we’re reporting revenues of $217.9 million, down 21.1% sequentially and down 9% on a year-over-year basis. Direct sales to OEMs and VARs accounted for 79% of the revenues in the second quarter fiscal 2012 a slight increase from the 77.2% in the prior quarter. The remainder of the revenues came from sales through our distributor channels.

Our fiscal 2012 second quarter gross margin was 30.6% compared with the 31.7% that we reported in our prior quarter. Excluding stock-based compensation expense of $712,000 including cost of revenues, our non-GAAP gross margin was 30.9% down from 31.8% in the prior quarter.

The decrease in our gross margin was attributable to a decrease in revenues recorded on the sale of previously written-down inventory coupled by an increase in the recording of allowance in excess of obsolete inventories, which further depressed our gross margin.

In the second quarter, we recorded approximately $3.2 million for the sale of previously written-down inventory and $4.2 million as an additional allowance or excess of obsolete inventories or the net $1 million of unfavorable impact on our gross margin.

In the first quarter of fiscal 2012, we recorded approximately $5.1 million for the sale of previously written-down inventory and $3.6 million as an additional allowance for excess in obsolete inventories with a net $1.5 million of favorable impact on our gross margin.

We expect our business to remain the best for at least the third fiscal quarter. In other words, we do not expect product mix to improve in any significant manner. Furthermore, we expect the shipments of our BSI-2 devices to create headwinds to our near-term gross margins. These products are still in their initial rollout stage and yields are at a suboptimal level. Consequently, we may see further reductions in gross margin.

R&D expense in the second quarter of fiscal 2012 totaled $29 million a 2.4% increase from the $28.3 million in our fiscal 2012 first quarter. The slight increase in R&D expense was caused by an increase in non-recurring engineering expenses and stock-based compensation expense. We currently expect that our R&D expense in the third quarter of fiscal 2012 will decrease mostly attributable to reductions in non-recurring engineering expenses. R&D expenses in the second quarter include approximately $3.2 million of stock-based compensation expense. Excluding stock-based compensation expense, second quarter R&D expense was $25.8 million as compared to $25.7 million in the first quarter of fiscal 2012.

SG&A expenses in the second quarter of fiscal 2012 totaled $15.8 million as compared to $16.1 million that we reported in the previous quarter, a small decrease in SG&A expenses was attributable to a reduction in commission payments to our channel partners offset by an increase in stock-based compensation expense. We expect SG&A expenses to remain comparable in the third quarter of fiscal 2012. Our second quarter SG&A expenses included approximately $2.8 million of stock-based compensation expense. Excluding stock-based compensation expense, SG&A expenses in the second quarter totaled $13 million as compared to the $13.9 million that we recorded in the prior fiscal quarter.

The amount of amortization for acquired patent portfolio remains the same at $2.3 million per quarter. Our GAAP operating income in the second quarter totaled approximately $19.5 million as compared to $40.6 million the prior quarter. Our GAAP pre-tax income in the second quarter totaled $27.7 million as compared to $41.2 million in the prior quarter. Our GAAP pre-tax income includes a significant onetime non-cash gain of approximately $8.6 million related to our acquisition of the CameraCube production operations from VisEra, a joint venture with TSMC. In this transaction, VisEra recorded a gain and under the equity method, we recorded our share of the gain which totaled $8.6 million and which we have reported as benefit from the acquisition of production operations on our income statement.

Separately, we have included in our GAAP tax provision, an additional $2.6 million related to this one-time equity income. As a consequence, our GAAP tax rate for the second quarter was at an elevated level of 23.9% and a GAAP provision for income taxes was $6.6 million. This compares with a tax rate of negative 2% that resulted in a GAAP benefit from the income taxes of $0.8 million in the prior quarter. As a reminder, the GAAP tax rate for the first quarter includes the reversal of certain previously recorded tax reserves, when the related statutory limitations expired. Excluding the effect of stock-based compensation our non-GAAP tax rate for the second quarter was 12.8% and our non-GAAP provision from income taxes was $4.4 million. This compares to our non-GAAP tax benefit for fiscal 2012 first quarter of $0.7 million.

For the third quarter of fiscal 2012, we expect our GAAP and non-GAAP tax provision will be minimal. In the second quarter, our GAAP net income attributable to OmniVision was $21.1 million or $0.35 per diluted share as compared to GAAP net income attributable to OmniVision of $42 million or $0.68 per diluted share in the first quarter of fiscal 2012. Excluding stock-based compensation expense and related tax affects our non-GAAP net income attributable to OmniVision for the second fiscal quarter was $30.1 million or $0.48 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $47.2 million or $0.76 per diluted share in our first quarter of fiscal 2012.

Let me now turn to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments totaling $464.8 million. This compares to $506.1 million at the end of the first quarter of fiscal 2012. The cash decrease was attributable to the significant increase in our inventory balance during the quarter, which I will explain.

As of October 31, 2011, inventory totaled $250.6 million an increase of $106.8 million or 74.3% from the $143.8 million balance at the close of our fiscal 2012 first quarter. Our October inventory balance represented an annual inventory turn of 2.4 times or 152 day sales. This significant increase in inventory was brought on by the sudden cutback of customer orders during the quarter. Obviously, we are disappointed by this level of inventory; we are actively working with our supply chain to lower our on-hand inventory level. Currently, we expect to get back to a more reasonable level of inventory in two to three quarters, ultimately restoring our inventory level to our long-term goal of four to five turns a year.

Accounts receivable at the end of the second quarter, net of allowances were $126.8 million a decrease of 9.9% from the $140.6 million at the end of our fiscal 2012 first quarter. Our days sales outstanding, however, increased to 54 days in the second quarter as compared to 47 days from prior quarter. This relationship between drop in absolute balance but an increase in DSO is a reflection of the reduction in overall revenues from the first to second quarter and a proportionally higher shipment volume in the latter half of the second quarter.

With that, I’ll turn to our outlook for the third quarter of fiscal 2012, which ends on January 31, 2012. We currently expect that our 2012 third fiscal quarter revenues will be in the range of $160 million to $180 million. This range primarily reflects a combination of what we perceived as weaknesses in the macroeconomic environment and the continuation into our third quarter, the order cutbacks that we experienced in our second quarter for the various key projects that are currently in production.

Our GAAP EPS are expected to range from the loss of $0.06 to earnings of $0.06 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 $0.05 to $0.17 per diluted share. This guidance does not reflect any potential stock buyback relating to the $100 million program that we have announced earlier in November.

Shaw Hong

Thank you, Anson. In summary, despite the headwinds we experienced in Q2 and those that we anticipate for Q3, we remain confident in the long-term growth opportunities for OmniVision. Our employees around the world are working tirelessly to introduce innovative technology and to turn the company once again to record revenues. Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Harsh Kumar with Morgan Keegan. Please proceed.

Harsh Kumar - Morgan Keegan

A couple of questions. First of all, the order cutbacks, is that primarily related to one customer or are you seeing cutbacks in orders from multiple customers? And is the cutback in orders related to one product or is that multiple products at one or many customers?

Ray Cisneros

This is Ray Cisneros. The order cutbacks are associated with several customers and they are associated also with several market segments. It's in several products. So, it was across the board, obviously, some customers more than others, but that’s the short answer to your question.

Harsh Kumar - Morgan Keegan

Okay, fair enough. And then, Ray, also I think you had mentioned in your previous call, or previous press release, about BSI 8830 that there were some technical issues. Would it be fair for us to assume that that product is completely fixed and you can you are free to ramp it with customers?

Ray Cisneros

So, here is the way to answer that Harsh. First of all, I just want to say how the process works because there is a lot of confusion as to when and when a product goes or when a product does not go into production. The process is heavily weighted with the process of working on our product development hand in hand with our customers as they go through qualification and final acceptance. So, when we see products go into production is heavily dependent on this schedule and the schedule varies across the board from customer-to-customer and market-to-market.

But that said, however, as we mentioned previously our 8830 base product technology right now is shipping in limited volumes and that’s a good thing because there is customer and the customer is already engaged in production. Going forward of course, we still have engagements with various markets with various of our customers and then as I described to you the process of how that works, it will go hand in hand when we get customers to signal that everything is green light and go ahead for production, and that is a step-by-step process. So, it's a fluid process and so we anticipate hopefully we can get some of these products into production.

Harsh Kumar - Morgan Keegan

Last question from me for Anson. Anson, what is your cash breakeven just based on operations alone outside of what you do on the PP&E side?

Anson Chan

If you look at the current quarter Q2 results, if you back out the $8.6 million as one-time non-cash gain, I think you are getting pretty close to the cash point. That's basically you have, I think, a operating cash outflow in the current quarter that’s for two quarters we close to breakeven from a operating cash perspective. And then the CapEx has something that we will continue to invest in the business but after we state effect that we are at the end a fabless company. So the amount of CapEx we would commit from the cash use perspective is not going to be that significant.

Operator

And our next question comes from the line of Daniel Amir with Lazard Capital Markets. Please proceed.

Daniel Amir - Lazard Capital Markets

I just wanted to get an idea here. You have been highlighting a number of times in the call that you believe that you can gain back momentum. At least I didn’t hear anything here in the call that really gives confidence here, considering your revenues are down now 100 million compared to just a couple quarters ago. So what gives you that confidence that you can regain back your revenue growth? Can you comment a bit about design activity, customers, end-markets that you can give a little more confidence to investors that what you are saying is true?

Ray Cisneros

Sure. This is Ray Cisneros again. I think your question is very important for us as well, because we sit in front of a variety of customers, a variety of markets and a variety of products that we offer to the marketplace, and it's across the board. Our every technology platform that we offer to the marketplace, we’re actively engaged with customers around the world. I could confidently say that in terms of the customers we’ve had, historically the customers that we have shipped in that we had a very good business with, we still have those kind of customers. And so, you add all that up together, plus the fact that if you track our product announcements, you see a variety of products still being announced from OmniVision that are very, very competitive in the marketplace.

And then, the final point to make I think is the market size. These markets are still growing and they are enormous. So, given all that, we feel and we know we’re in a good position to regain momentum, but as I described to you or as I just answered in previous question, the process is complex. When you work with very large companies and very complex technologies, the process thus take a step-by-step flow on how things get executed and how we start ramping up on some of these projects we’re working on.

Daniel Amir - Lazard Capital Markets

Okay, and the follow-up question is. To your best availability how should we look here going forward? Do you feel confident that the January quarter is kind of the bottom in the business, or do you expect that you will see further order cutbacks going forward as well and your visibility remains very poor?

Ray Cisneros

Right. Obviously, we can’t comment in any detail anything beyond Q3. However, again, I’ll reiterate, we’re sitting in front of a lot of customers, a lot of projects and a lot of great products that we offer to the marketplace. I like our bets on how we go move forward beyond Q3, and we’re confident about our position in the marketplace. We’ve got the best technology investments going on, we’re competitive in the marketplace and these markets continue to pull products and demand from suppliers like OmniVision.

Operator

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

Brian Peterson - Raymond James

Can you talk about whether the inventory build is predominantly weighted towards finished goods, work in progress or raw materials? And any potential for some inventory headwinds on gross margins over the next couple of quarters?

Anson Chan

Let me try to answer that. In terms of raw material from the raw material, we don’t need to carry that on our balance sheet because we’re primarily fables. So, we order wafers and a lot of them are actually from TSMC and by the time the wafers come out from TSMC we consider that WIP. Then, from WIP to finished goods, we typically require up to 12 to 14 weeks of lead time to convert all of that to our backend services up to the point where we can ship up in the warehouse and deliver to our customer’s locations. I’m sorry, the next question was?

Brian Peterson - Raymond James

Just is the potential from inventory or additional inventory valuation reserves, and how that might impact gross margins over the next couple quarters?

Anson Chan

So, what we go through is a quarter-end review process. Every quarter-end we go through the same process. Essentially, what we do is compare our on-hand inventory against potential 12 month forecast and we try to put up a reserve against any excess in inventory and obviously if anything that we believe are obsolete, we put up reserve against that as well. So, it’s a quarter-by-quarter, skill-by-skill evaluation process. It's kind of hard to predict in the next three months, what the forecast will be like then and then compare against the on-hand inventory at that point in time.

But I would want to say that, as I mentioned on the prepared remarks earlier, we are actively working with our supply chain to bring down our inventory balance. And hopefully, in two to three quarters, we’re bringing back to a more normalized level. And I will also say that I know there are some investors out there who monitor our purchase commitment that we disclose our quarterly report every quarter. I’d say that, you can expect the number to come down as well, because, like I said we are trying to bring down the future purchases on inventory as well.

Brian Peterson - Raymond James

Okay. And the follow-up from me. Did you guys and I’m sorry if you mentioned this on the call, did you guys buy back any stock this quarter? And what are any expectations maybe for the next quarter regarding the buyback? Thanks.

Anson Chan

Well, we did announce a buyback program $100 million worth of. Right now, we’re still in the blackout window, as soon as the window opens we’re going to market and buy and we will look forward to provide an update to everyone on our next earnings call.

Operator

And our next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Paul Coster - JPMorgan

So the guidance, obviously, where it has been attributed to order cutbacks in the macro environment, but you have also acknowledged that you’re basically addressing growth markets. And I can’t believe that the unit volumes broadly speaking are going to be declining industry-wide. So we have to draw the conclusion that you’re losing market share. The product cycle leadership that you had a year or so ago seems to have evaporated. Are we correct in assuming that you’re losing market share here? And what has gone wrong in terms of the product cycle or the technology cycle, I should say?

Ray Cisneros

It’s difficult for us to draw conclusions on market share. If you look at the 2011 calendar year, we are looking at a fairly-fairly still robust number of units OmniVision delivered to the marketplace once 2011 is tallied up. And the other point to make is these cycles, these product cycles are extremely-extremely fast from customers and every customer is not synchronized the same seasonality wave or calendar of cycles. So, I’d argue that what you see perhaps in one quarter or two quarters of OmniVision doesn’t reflect a long-term OmniVision position. I’d warn everybody that these kind of products, these kind of technologies move extremely fast and so do our customers. So, where there is opportunity lost perhaps today, there is opportunity gained immediately going forward in the future. So, that’s what I can say for your questions.

Paul Coster - JPMorgan

Well, do you feel like you bit off too much in trying to move to a new geometry as well as a new design for BSI-2? And my other question really is, can you share with us now since you have been talking about CameraCube for the better part of a year or so, what percentage of unit shipments are CameraCube, what margins you are realizing out of that product? What customers might be using or what products might be using CameraCube? Thank you.

Ray Cisneros

In regards to the first half of your question is, did we bit off more than we could chew, I would say, every technology that gets launched in OmniVision and for that matter in our industry space, or any semiconductor space is highly-highly complex. And it's a learning process, it's also a situation where you learn from your customers as they go through the product evaluation of your product portfolio. And so, I wouldn’t say it's any different than any other platform. It's just the nature of being involved in a highly complex industry.

In regards to the CameraCube, I’d say it's really good growth outlook we have. Although if you consider the volume we ship on a quarterly basis, it's going to take several quarters before it becomes I’d say anything above 10%, but in the meantime we’re happy with the traction we’ve gotten we’re seeing. And in regards to where it's going, it's certainly a variety of opportunities that exist for this kind of product. But the first adoption is going to be in the handset business and the first adoption in the handset business is where there is cost. Cost is being driven as the primary factor as well as form factor because these particular devices are extremely small and are extremely effective in downstream manufacturing. So, we’re anticipating and we’re interested in having learning a lot in this particular product line.

Operator

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

Betsy Van Hees - Wedbush Securities

Ray, I was wondered if we could go back to BSI-2? I’m a little confused, and hopefully you can help us and investors. So the 8830 is shipping in limited volumes. Is it shipping in production to anyone or is it qualified, and so that if there could be a tear down of our product, for example, we would be able to see it?

Ray Cisneros

Yes. It is shipping in production. It is shipping in the customer’s product in production. If you find that product you could tear it down and find our product in there, but obviously due to confidentiality agreements we have we can’t divulge particular names and products, but it is in the marketplace. In regards to what goes on from here on, we are engaged with multiple customers, with multiple projects evaluating and qualifying our 8 megapixel based on OmniBSI-2 technology. And obviously as soon as any one of these projects moves into production it means volume, but suffice it to say, we are engaged in multiple opportunities around the world.

Betsy Van Hees - Wedbush Securities

Okay. And so the limited volumes then that it is shipping in and it is because of yield issues and customer demand or a combination of the above?

Ray Cisneros

Let’s just clarify your kind of question. The limited volume means it's a low volume type of product that’s in the marketplace, and that’s because for our own customers' reasons, it's the way their product sells. So, that’s what we mean by limited volume.

Betsy Van Hees - Wedbush Securities

And then you talked about ASP pressure. We talked about the product mix, which is impacting overall ASP and you talked about ASP pressure. That is something we haven’t heard in a while. So could you talk a little bit more about that ASP pressure, where you are seeing it and if it is broad-based or specific to certain market segments?

Ray Cisneros

Yes, the ASP is obviously, you see the step-down in the ASP and our first order business is to explain the step-down due to the product mix going from a slant of higher resolution product mix to a lower resolution product mix due to the cut back in orders we experienced in Q3, and then of course, also we mentioned it as a reason for the guidance, I’m sorry, Q2 and now a reason for the guidance in Q3. So, that’s the big driving factor for the step-down in price. And then, what I mentioned in my prepared commentary is, it's normal quarter-over-quarter price erosion. That was as simple as that. That's common and fair.

Betsy Van Hees - Wedbush Securities

Okay. So, there wasn’t any additional ASP pressure, it was just normal, what you guys see on a quarterly.

Ray Cisneros

It was normal, yes.

Betsy Van Hees - Wedbush Securities

And then I wanted to go back to the question that was asked earlier in terms of the cutbacks and orders. I know you guys have ship into a broad-based a lot of different end applications, but you do lump your business into three major groups. So could you help us understand where in order of ranking what was the biggest cutback was it smartphones, entertainment, notebooks that have been impacting the current quarter? And then as we look at the guidance can you rank that for us in terms of what market segments are the most challenged?

Ray Cisneros

I’d just say, let’s talk about three major markets; the handsets, the tablet segment and the notebook PC segment. Those were the markets that are affected, that were affected in terms of step-back and cutbacks in orders. And so, I’d just leave it at that that comment.

Betsy Van Hees - Wedbush Securities

So, you can’t help us in terms of understanding, as we are looking at and trying to model the business moving forward, what areas you think are going to be the weakest, and you can’t help us there?

Ray Cisneros

I’d say, they’re in proportion. In proportion they are tracking, I’d say, in similar step-downs from what we’re used to seeing in the particular segments as well as key customers. So, I’d say, handset would be probably the first order of magnitude, and then I’d say between tablets and PCs, they might be pretty closer together.

Betsy Van Hees - Wedbush Securities

And my last question. Anson, in terms of the inventory, can we expect some inventory write-downs? I know you have been having inventory write-downs, inventory reserves, but is there a shelf life on the products that you have, because inventory, as you noted, when up quite drastically?

Anson Chan

We don’t have a specific shelf to life per search engines, but again like I was trying to respond to a questions from earlier, it's a quarter-end exercise. We go through every three months and obviously a lot of the to quantify how much write-down we may have three months from now. A lot will depend on outlook for the 12 month going out at that point and at the end of January. It's little hard to predict, but suffice to say we will go through the same exercise, same diligence. If we have to write things down because of further degradation of top line forecast, obviously the write down will be higher. In the 12 months going out from January 2012 were to turn positive. You may actually see less of a write-down for inventory.

Operator

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

Raji Gill - Needham & Company

A question on the gross margins. If you look at the guidance, would it be fair to say that the implied guidance of the gross margin would be 28% range and that will reflect a 200 basis points drop sequentially? And if that is fair, you had mentioned that margins could continue to come down further as you work nearly two to three quarters of inventory. So we are just trying to get a sense of where the margins could shake out over the next couple of quarters.

Anson Chan

I can’t comment specifically on your model that I did say on the prepared remarks that it's possible for the margin to go down further particularly if we were to see quarter-to-quarter incremental improvements. In terms of unit shipments for the BSI-2 products because again these products are still in a very early stage of introduction and the yield is below optimal. So the more we ship the less the margin will be and so that will present itself with a headwind. That said, we also have additional effect coming from assets to clean up some of the inventory we have on hand. Ray talked about some of the ASP pressure earlier, so that's from the revenue side. On the cost side, because we already procured this inventory, so they are on our books. We will not be able to enjoy some of the price down path that are offered by our service of vendors. So naturally, you have a squeeze in gross margin as well. So to put these factors together, it's possible that margins will go down further.

Raji Gill - Needham & Company

Yes. So they are going to go down further we don't know how much, but they are going to go down further for at least a couple of full quarters, it is fair to say?

Anson Chan

It has been for a couple of quarters. So Ray was talking about opportunities that we are working on. Beyond Q3, it's possible say for instance, our product mix starts to improve. We start to ship more high megapixel products. Those will offset some of the margin compression that we are talking about now.

Raji Gill - Needham & Company

But you have already I mean, would you say the design cycles are pretty much over already, so you will be carrying a lot of excess wafers that you have purchased that you're not going to be able to sell?

Ray Cisneros

No, that's an inaccurate statement. Design cycles are not, as I mentioned previously, they vary across markets, they vary across customers, and they vary across what kind of products we have had positioned with particular projects that we are engaged with to get qualified and shipped out. So, they are not fully all synchronized across the board into one sort of cycle rhythm you may imagine.

Raji Gill - Needham & Company

Then the last question, if I do the math, and it seems like the camera phone business was down about 24% sequentially, I mean, you do give the camera phone revenues out. And then PCs were down like 53% sequentially. So the 24% sequentially, I’m just wondering I mean, you don't specify any information about increasing the competitive landscape. You mentioned order cutbacks related to your end demand type of issues. But maybe if you could comment on the competitive landscape coming from other competitors, where they are in terms of your viewpoint of BSI, and are you concerned about that at all in the upcoming quarter?

Ray Cisneros

Obviously, we’ve been in business for 15 years in this space, and we've seen a lot of competitors come and go and this is no different. That said, however, we always respect our competition. Everybody is moving very fast with technology, and on top of that, the barriers to entry start getting tougher and tougher. We're certainly part of that wave to enable a separation of those that can and cannot do the latest technologies. However, you need to look at the entire market as well and how many true suppliers can provide leading-edge technology, and I would account OmniVision in that space, and we like our chances.

Operator

We have no further questions at this time. I’ll turn it back over to Mary McGowan of the Summit IR Group for closing remarks.

Mary McGowan

Thank you all for joining us on this call and the webcast. We anticipate holding our next quarterly conference call on February 23, 2012. Thank you and good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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