OmniVision Turnaround Under Way

(Update below) Just Thursday OmniVision (OVTI) reported earnings for the quarter ending April 30th. Revenues blew out analyst estimates and earnings missed (see 1st table, below).

Guidance, for the 4th quarter ending July 31st, 2007, blew away estimates (see 2nd table, below).

Gross margin was still low due to the lower-margin VGA products. It still has a very solid balance sheet with over $305 million in cash and cash equivalents and short-term investments. Starting with the 2nd quarter in the 2007 fiscal year, which ended on 10/31/06, it ramped up inventory production.

Management was right in increasing inventories, since new demand is coming in right on target. Also, most of the high-cost inventory is gone, which should help the gross margin.

Demand is strong and is getting stronger. It was driven by entry level phones which use OmniVision’s VGA chip. It has gross margin initiatives in which it will invest a lot of resources and it's saying that it will rise. Its R&D expense was strong, coming in over 13% of revenues compared to almost 9% in the same quarter a year ago. There are also new products in the pipeline. Just about a week ago, it came out with new 1.75 micron OmniPixel3 architecture.

There will be further demand strength, driven by such sources as the automotive market, the medical market, and the laptop market. Its colonoscopy partner just got FDA approval to make colonoscopy products using OmniVision’s camera chips. The higher-resolution camera chips is OmniVision’s prime target because there is less competition there than in the lower resolution chips.

The start of the turnaround is in good shape; there will be further gains ahead.

Disclosure: I am long OVTI.

Update:
A big thank you goes out to Jim Hurley in California for this correction. Regarding earnings from Thursday's conference call, the actual earnings that I posted were actually for GAAP earnings while the estimates were for non-GAAP. It actually beat earnings by a wide margin and not missed as I reported. Earnings guidance was higher by a wide margin as well.

Non-GAAP earnings stood at 0.06 per share while the consensus analyst non-GAAP earnings estimate was (0.01) per share. Therefore, OmniVision beat earnings by 0.07 a share.

Guidance by management was between 0.13 to 0.21 non-GAAP earnings per share for the following quarter ending 7/31/2007 while the consensus analyst non-GAAP earnings estimate was 0.06 per share.