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OmniVision Technologies, Inc. (NASDAQ:OVTI)

Q3 2012 Earnings Call

February 23, 2012 17:00 AM ET

Executives

Mary McGowan - IR

Shaw Hong - Chairman, President & CEO

Ray Cisneros, VP of Worldwide Sales

Hasan Gadjali - VP of Worldwide Marketing & Business Development

Anson Hoi Fung Chan - CFO & VP

Analysts

Patrick McCartney - Lazard Capital Markets

Paul Coster - JPMorgan

Harsh Kumar - Morgan Keegan

Raji Gill - Needham & Co. LLC

Hans Mosesmann - Raymond James

Betsy Van Hees - Wedbush Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the OmniVision Technologies Conference Call for the Third Quarter of Fiscal 2012. (Operator Instructions). I would now like to turn the conference call over to Mary McGowan of Blackburn Communications. Please proceed.

Mary McGowan

Thank you very much. Good afternoon, everyone, and welcome to our fiscal 2012 third 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 charges and our product plans. This is based on information as of today, February 23, 2012, and actual results may differ materially than 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. There are discussions with risk factors you should review, forward-looking disclosures and the earnings release we issued today, as well as the risk factors and other disclosures in OmniVisions SEC filings and reports including the most recent annual report on Form 10-K and the 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 in 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 received a press release describing our results for the third fiscal quarter of 2012. For those who have not read the release, I will provide you with a recap of our financial results.

In Q3, we recorded revenues of $185 million and we shipped $143 million in essentials. On a non-GAAP basis, gross margin was 24.7% and net income was $7.4 million or $0.14 per diluted share. Before I turn the call over to our management team to provide details on our Q3 financial results and our outlook I’d like to make a few comments on key events during the quarter.

First, I’d like to point out that revenues for our third fiscal quarter exceeded the high end of our guidance. This achievement allows our outlook for Q4 a test to our determination to attend the necessary pipeline stability for the near-term. We will continue working to re-bid our business momentum.

Last quarter, I spoke of our commitment to deploy considerable resources to support the long term growth opportunities available to the company. As part of that strategy, we introduced a second next generation piece of architecture called OmniBSI+. This newest architecture is an enhancement of our original OmniBSI technology. OmniBSI+ is the most improved performance over OmniBSI and the cost competitive solution to our customers. OmniBSI+ exemplifies our strive for continuous improvement in our commitment to distinguish our products from a technology standpoint.

In addition to driving product performance, this new architecture gives us the opportunity to maximize the utilization of our 8-inch wafer capacity. Since OmniBSI+ is based on the original OmniBSI architecture, it too uses 8-inch wafers. At the same time, we’ll release even more products based on our more advanced OmniBSI-2 pixel technology, which we did 12-inch wafers. The utilization of our 8-inch and 12-inch manufacturing capacity allows us to produce a wider array of devices to satisfy an even broader range of market needs.

I would also like to provide an update on the CameraCubes production of places, which we acquired from VisEra last quarter. OmniVision is making progress in promoting the CameraCubes to OEM for smaller and smaller consumer devices. Since its first introduction we have continued to drive our engineering process to deliver a margin that is increasingly cost effective and that shortens the time to market to our customers. And instead last quarter we continued to expand and increase in CameraCubes demand going into second half of calendar 2012.

And finally as you may recall, OmniVision’s Board of Directors authorized a stock buyback program to repurchase up to $100 million of the Company’s outstanding common stock. This action was taken as a result of the Board’s steadfast belief in the long-term strength of the company. It has margin and its ability to innovate and to compete. With that said, during the quarter we retained $100 million to our stockholders and repurchased approximately 8.1 million shares of OmniVision’s common stock on the open market.

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

Ray Cisneros

Thank you, Shaw. We are pleased to have exceeded the high end of our guidance. Some of our key customers experienced a strong holiday season. Going forward we are working diligently to regain our momentum.

In our third fiscal quarter we shipped 143 million units as compared to 153 million units in our prior quarter. The average selling price in our fiscal third quarter was $1.29 as compared to $1.42 in the prior quarter. The step-down is due to a reduction in higher resolution sensor product mix.

In the third fiscal quarter, unit sales of sensors 2 megapixel and above represented approximately 22% of total shipments as compared to 24% in the prior fiscal quarter. This shift was driven by decreases in our one-third inch 5-megapixel and 8-megapixel product shipments. Going forward we foresee a swing back to a healthier mix for our one-third inch format, high resolution products. In the meantime, our quarter inch format 5-megapixel sensors continue to ship at a strong pace with an incremental increase over the holiday season.

Additionally, our latest 3-megapixel sensor OV3660 saw a successful ramp to good volumes. Lastly, our lineup of 2-megapixel sensors, which has a healthy demand over many quarters, is beginning to experience a decline as the market migrates to 3-megapixel or quarter inch 5-megapixel sensors. Unit sales of 1.3-megapixel sensors represented approximately 19% of total shipments as compared to 23% in the prior quarter.

In this category, we incorporate our HD sensors, which is the dominate form factor in this category. Going forward, we expect the HD product line will ramp up to much stronger levels as consumer products broadly adapt to the 720p and 1080p formats for displays, be it for wireless or desktop devices or for consumer, enterprise or industrial applications.

Lastly, unit sales of sensors that were VGA low represented approximately 59% of total shipments as compared to 53% in the prior quarter. A surge for a holiday season of a new specialized VGA for the self-view camera of high end smartphones drove this mix up. OmniVision has the broadest portfolio of high end and high quality VGA sensors designed for premier smartphones, notebooks and desktop PCs. This product category includes our CameraCube product line and its shipment volume is steadily increasing.

In terms of product markets, our mobile phone sales represented approximately 52% of our revenues in the third quarter as compared to 60% in our prior quarter. Our entertainment segment represented 28% of sales as compared to 20% in the prior quarter. Our sales of sensors into the notebook and webcam segment were approximately 8% of sales as compared to 9% in our prior quarter.

As widely known, the smartphone segment continues to drive the mobile market. For this segment, we sold a broad mix of eight and 5-megapixel sensors in both the one-third inch and quarter inch lens format over the holiday season. We continue to see these two resolutions being the mainstream volumes for smartphones through to the calendar 2012 and first half of 2013. We continue to promote that both our OmniBSI and OmniBSI-2 platforms to this segment. A rapidly developing trend in the smartphone segment is the incorporation of an HD sensor for the self-view camera. In this category, we are seeing solid traction and are engaging with multiple customers to enable high value solutions.

Similarly, a separate track that some smartphone OEMs are taking for the self-view cameras, the incorporation of our CameraCube VGA products. OEMs select our CameraCube products for their competitive pricing and ease of manufacturing.

Although the Smartphone category is the fastest growing in handset segment, an enormous volume of feature handsets are still being shipped worldwide in particular to emerging markets. For the feature handsets we continue to ship 2-megapixel products and increasingly our new 3 megapixel products.

On the aggregate, the notebook and webcam segment experienced a modest holiday season. There is much speculation on how much this is attributable to the strength of the tablet market and how tablets are cannibalizing the PC market. However, with OEMs intending to drive the sales of notebooks, it may be premature to assess longer-term trends for notebook sales. In the meantime we believe we have the strongest position in the premier category of the notebook segment with our broadly adopted, high quality 720p HD sensor, the OV9726. It was a highly popular choice for an integrated camera into premier notebooks for consumer and enterprise.

One of the most exciting market segments in our emerging market category is our entertainment market, which includes our tablet sales. OmniVision has enjoyed a strong position in the tablet product category throughout its emergence. During the holiday season, i.e. over our fiscal Q3, tablet products were one of the most popular holiday gifts. This drove strong shipment volumes for us.

At the recently held consumer electronics show in Las Vegas, some of the most highly applauded products were tablets. One highly dedicated tablet product even boasted their OmniBSI-2 8-megapixel censure, the OV8830. Going forward the tablet space is outpaced in most consumer electronic categories and OmniVision has laid the groundwork of products and the ecosystems to capitalize on this trend.

Another strong movement in our emerging market category is the automotive segment. Already a rising segment and due to our strength with premier European OEMs, our Japan-based design wins are starting to ramp up and will contribute to a steady growth.

Shaw Hong

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

Thank you, Shaw. In a smart phone market, the second of OmniBSI product offering by revamping our products line with OmniBSI cost technology. As Shaw mentioned earlier, the cloud technologies, one of the two next-generation pixel architecture that support extensive product introductions. BSI at large is an enhancement of the original BSI technology based on the 8-inch fabrication process.

Our recent announcement of the new 8-megapixel OV8825 camera chips, which is based on the OmniBSI+ Technology offers significant improvement in performance and image quality while maintaining a competitive cost structure. Within this mix, the OV8825 a highly attractive option was not born in tablet manufacturers who cease to upgrade their camera designs from our previous generation sensor, the OV8820. Using the same OmniBSI+ Technology our 10-megapixel CMOS image sensor, the OV10810, has been named the best image sensor of the 2011 by Electronic Design Magazine. Competition recognizes the most significant designs and innovations of the year. Our OV10810 sensor’s most selective for capability to capture high resolution still photography or account 1080p high definition video at the same time.

In the Premium Product category, we are using our high performing OmniBSI-2 sensors with better image quality, speed and power to compete for applications in the mobile phone, tablet and PC markets. Most of these sensors are capable of 30 frames per second and the OmniBSI-2 has higher dynamic range which narrows the performance gap between the cell phone cameras and point-and-shoot digital still cameras. We believe the breadth of our product offering along with advanced performance factors position us well for premium obligation sensors.

Our position as one of the leaders in technology and in innovation was further validated this quarter. OmniVision was elected by the leading developers of Wireless Technologies to be part of its Ecosystems. Surely, it’s entire demand and supply chains our platforms partners have started to consolidate their resources to better support their platform reference in-line with very specific partners component so that the highest quality product can be designed and built by their customers.

We expect that over time this association will contribute meaningful to the company growth strategy.

This quarter, we also introduced the OV9730, which is built on an improved Omni pixels trade technology. This is the center of a better low light sensitivity and at 60 frames a second, deliver very rapid response time. We see this effort as highly suitable for real-time communication applications and the growing entertainment market.

Moving now to our CameraCube chip technology, we are on track to introduce a family of devices to support OEMs who are looking to further miniaturize their products. As mentioned in our last earnings call we are also working on our CameraCube chip product movement that will enable the transition from VGA to high resolution sensors. This is important for our future growth as we anticipate more customers may adopt the CameraCube chips and deploy it on product that requires a miniaturized setting of the camera.

Lastly we announced the OV9724. When packaged into CameraCube chip, it is one of the smallest high definition solutions on the market because it can fit inside the space of less than 2.5 millimeter in heart (ph). This size of high definition CameraCube chip is very suitable for front or secondary camera applications in a Smartphone.

Again, OmniVision continues to define the future of camera solutions for tomorrow. Looking at our emerging markets, we continue to make progress establishing leadership positions that we believe offer substantial revenue growth in the years ahead. In addressing the security markets, our OV10633 high value ring sensor for high definition IT cameras used in security and surveillance markets is now in volume production. We continue to see growing demand and expect this product to quickly move into high end, mainstream application. At the same time our high definition range automotive sensor the OV10630 continues to make headways winning design in many automotive camera systems.

The initial demand came from backups or real viewing camera application because of the proposed 2014 American Costs and Charity Act (ph). Going forward we see great potential on the internet-based 360 degrees surround view camera solution for the automotive industry.

Recently the Society for Automotive Engineers or SAE, published an article supporting an open and saleable internet-based driver assistance network in which solid systems can easily access information.

With the latest announcement of our OV10630 and OV10635 automotive center we feel OmniVision is well positioned in this growing automotive market.

On another front, automotive manufacturers and their suppliers continue to define new applications that could make the camera an important component for the driving experience. OmniVision’s OV7962 automotive center was recently designed into one of the world’s smallest smart camera development modules. Some of the sophisticated vision function includes advanced driver assistance systems, detraction and traction of moving objects, (inaudible) and wise swap detection. We continue to see demand for our sensors across many verticals and especially in new emerging applications. As promising markets continue to grow, we are seeing creative applications of our smaller size sensors that extend beyond normal handset products.

Shaw Hong

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

Anson Chan

Thank you, Shaw, and good afternoon everyone.

For third quarter fiscal 2012, (inaudible) of $185.7 million the assets was sequentially and down 40.3% on a year-over-year basis. Direct sales are relatively down account for 79.2% in the amazing third quarter of fiscal 2012 a slight increase from 79% in the prior quarter. (Inaudible). Our fiscal 2012 third quarter growth margins was 24.2% compared with 30.6% in prior quarter. Excluding compensation expense of $831,000 included in other revenues and our GAAP growth margin was 24.7% compared with 30.9% in the prior quarter. The decrease in gross margin is primarily attributable to a decline in ASP and (inaudible) inventory in the past two quarters. The cost basis of (inaudible) were relatively high because they were exclusive of all (inaudible) and cost reductions. In particular new issues that really accounted in prior quarters when we first bought out 8 million in (inaudible) had count over into additional costs during the quarter. Naturally, the cost of (inaudible) operations was slightly incorporated for the first time (inaudible) had negatively impacted the margin.

In third quarter we reported approximately $2.6 million and saw a progressively inventory of $3.7 million as additional means for acting in our inventories though $0.8 million of (inaudible) inventors of gross margin. In the second quarter of fiscal 2012 we recorded approximately $3.2 million for the period approximately on inventory and $4.2 million and some additional loans for our inventories with net $9 million of unfavorable impact coming from gross margin. We expect margin (inaudible) fourth fiscal quarter as we continue to work on consuming unlikely inventory.

On the expense in the third quarter of fiscal 2012 totals $26.2 million, an 8% decrease from $29 million in our fiscal 2012 second quarter, a decrease in revenue expense was caused by decreases in non-recurring expenses, considering a relatively (inaudible). This was partially offset by an increase in stock-based compensation expense.

We currently expect that our R&D expense in the fourth quarter of fiscal 2012 will increase to a level comparable to the first half of the year, mostly attributable to increases in non-recurring union expenses. R&D expense in the third quarter included approximately $3.6 million of stock-based compensation expense. Excluding stock-based compensation expense, third quarter R&D expense was $22.6 million as compared to $25.8 million in second quarter of fiscal 2012.

SG&A expenses for the entire group quarter-to-quarter at $15.8 million both on third and second fiscal quarter. We expect SG&A expense to increase slightly in the first fiscal quarter if margins improve. Our third quarter SG&A expenses include approximately $2.9 million of stock-based compensation expense. Excluded stock-based compensation expense, SG&A expenses in the third quarter totaled $13 million as reported in the prior fiscal quarter. The (inaudible) at $2.3 million per quarter.

Non-GAAP operating income in the third quarter totaled approximately $500,000 as compared to $19.5 million in the prior quarter. Our GAAP pre-tax income for the quarter totaled $800,000 (ph) as compared to $27.7 million in the prior quarter. As a reminder, our GAAP pre-tax income for the second quarter included a significant one-time non-cash gain of approximately $8.6 million related to our acquisition of the chemical production operations from VisEra on (inaudible).

Non-GAAP cash rates for the first quarter was negative 24% and GAAP (inaudible) from income taxes was $22,000 which compares to the tax rate of 24% when you total in GAAP conversion for income taxes of $6.6 million in the prior quarter. Comparing the tax rate is not meaningful since our first quarter pre-tax income is nil. And meanwhile, the tax rate for the second quarter was skewed by a onetime $2.6 million tax provision announced related to $8.6 million noncash exchange.

Excluding these compensation, our non-GAAP tax rate for the third quarter was 0.9% and the non-GAAP provision for income taxes was $7,000. This compares to a non-GAAP tax provision for fiscal 2012 second quarter of $4.4 million. For the fourth quarter fiscal 2012, we expect on GAAP and non-GAAP tax provision will be between $1 million to $2 million.

In the third quarter, our GAAP net income attributable to OmniVision was $111,000 operating on a pro rata share basis which compares to GAAP net income attributable to OmniVision of $21.9 million or $0.35 per diluted share in the second quarter of fiscal 2012. Excluding stock-based compensation expense and related attributes, our non-GAAP net income attributable to OmniVision for the third fiscal quarter was $7.4 million or $0.13 per diluted share. This compares to non-GAAP net income attributable to OmniVision of $30.9 million or $0.38 per diluted share in the second quarter of fiscal 2012.

Let me now move to the balance sheet. We ended the third quarter with cash, cash equivalents and short-term investments totaling $236.5 million. This compares to $464.8 million at the end of the second quarter of fiscal 2012. The change in cash balance includes approximately $100 million used for the repurchase of the company’s common stock. During the third quarter of fiscal 2012, we repurchased approximately 8.9 million shares of the company’s common stock at an average price of $12.41 per share. As of January 31st, 2012, our share count was 52.3 million shares. The decrease in cash also includes approximately $26 million in cash paid to VisEra for the acquisition of the chemically production operations.

Lastly, I am taking delivery and for the additional inventory that we ordered right before we had the chance to apply the brakes on the supply chain also contributed to the overall decrease in cash balance. As of January 31st, 2012, inventory totaled $247.3 million, a decrease of only $3.3 million from the $250.6 million balance at the close of fiscal 2012 second quarter. Our January inventory balance represented an annual inventory return 2.3 times, 159 day fixed. We're continuing our efforts to move our inventory level. As we stated last quarter, we expect to complete our inventory correction in another one to two quarters, ultimately restoring our inventory level to our long-term goal of four to five times a year. If this continues, we expect to see positive operating cash flows in the coming quarters.

Accounts receivable at the end of the third quarter net of allowances were $132.7 million, an increase of 4.10% from the $126.8 million at the end of fiscal 2012 second quarter. Day sales outstanding increased to 66 days in the third quarter as compared to 54 days in the prior quarter. This is merely a refraction of a disproportionately higher share volume in the latter half of the third quarter barring any collection issues.

With that, I’ll turn to our outlook for the fourth quarter of fiscal 2012, which ends on April 30, 2012. We currently expect our 2012 fourth fiscal quarter revenues will be in the range of $195 million to $215 million. Non-GAAP EPS expected in the range from breakeven to $0.13 per diluted share. Excluding the estimated expense in related tax effects associated with the stock-based compensation, we expect our non-GAAP earnings will be in the range of $0.15 to $0.28 per diluted share.

Shaw Hong

Thank you, Anson. In summary, despite the headwinds we experienced over the last few quarters, we believe that our strategy for controlling overall costs while investing in key R&D efforts is critical to our future success. These actions are already underway and we are laser focused on our objective of regaining momentum in the marketplace.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Patrick McCartney with Lazard Capital Markets. Please proceed.

Patrick McCartney - Lazard Capital Markets

Hi. Thanks for taking my question. Could you discuss a little bit how things are going with your largest customer and to what extent that was maybe a driver for your guidance in the next quarter? And if we could expect to see that bump continuing through the rest of the year? Thanks.

Ray Cisneros

Hi, this is Ray Cisneros. We don’t break down discussions of our financials based on customers and sizes of customers. We report the aggregate of our numbers and trends and markets, but I could say from the standpoint of our business, our product portfolio is backing into all markets, all regions. And we’re extremely happy with that as well as the technologies across the board as resolutions start migrating. And one interesting trend that happens as well is it’s just not a camera-based type solution that we see going forward in the future, but there are system level type solutions that our customers are looking for. And that presents now another dimension to our business.

Patrick McCartney - Lazard Capital Markets

All right. And so turning to ultrabooks, do you see that sort of as an incremental opportunity for the back half of this year? Or should we really think of that as just notebook sales?

Ray Cisneros

That’s a very interesting question. As you know, the PC notebook industry is I would say in best case suffering something of a stagnant sort of level of outlook. That’s across the board. We see that as just general information in the PC business, but theoretically, yes, the ultrabook represents perhaps another layer of opportunity. On the other hand, is it a tradeoff with the basic notebook business? Is it a tradeoff with tablets cannibalizing some of this market? That’s a hard question, but you and I can probably sit down and talk a whole hour on the subject.

Operator

(Operator Instructions) And our next question comes from Paul Coster with JP Morgan. Please proceed.

Paul Coster - JPMorgan

Anson, I’m afraid that your section of the prepared remarks was the first half of it, was almost inaudible. I don’t know if others concur with this. I’ve had some e-mails concurring already. You may want to repeat yourself if the same questions come through. I heard nothing on the gross margin discussion. So perhaps you can take us through it again. I suggest you step away from the microphone a little bit.

Anson Chan

No worries, Paul. I’m sorry about that.

Paul Coster - JPMorgan

Much better now.

Anson Chan

Good, good, good. I’ll walk you through the gross margin again. So again, margins 24.2% this quarter. Now the non-GAAP, which excluded stock-based compensation of $831,000, that add up to 24.7%. The decrease in margin is really attributable to decrease in ASP as well as the shipment of inventory that we built up accumulated in the past two quarters. The cost basis of these items are relatively high because we’ve build them before we had the chance to improve the yield and get some pricing cost reductions. On a cost basis essentially we’re locked in at the time when the inventory avenues were built. And on top of that the yield issues that we ran into in prior quarters, when we first built our 8-megapixel OmniBSI-2 products and that translated into additional costs during the third quarter.

And then finally, related to the CameraCubes purging operations, we acquired that particular operation in October 2011. So our third fiscal quarter is the first time that we recorded, in the cost of revenues, as operating cost of this particular production line. And, lower utilization during this current ramp-up phase of this particular product line negatively affected the gross margin.

Paul Coster - JPMorgan

Okay. And then looking forward, do you expect the elevated inventory level to continue to weigh on gross margins, or have the high-cost products now worked their way through?

Anson Chan

So the high-cost higher-cost products, all part of our inventory correction activities. And that’s tying into part of my comment about how quickly we can possibly bring our inventory turned down to the fleet’s forefront again. So in the next, at least for the near term in Q4, we believe gross margin will still be depressed, we’ll still be consuming these non-inventory items.

Paul Coster - JPMorgan

So you think it will be worked out by the end of 4Q? You think that problem, though, will have been resolved by the end of the fiscal fourth quarter?

Anson Chan

I think it will be resolved when we work through our own inventory, and it's based on my comment earlier, I would expect one to two quarters.

Paul Coster - JPMorgan

Okay, thank you.

Operator

And our next question comes from Harsh Kumar with Morgan Keegan. Please proceed.

Harsh Kumar - Morgan Keegan

A couple of questions. You’re seeing what I would describe as a non-seasonal pickup in your April quarter on revenues. I’m curious if you can talk about what density of sensors you’re seeing that pickup in or what geographies or any kind of color you can talk about. The handset guys are not doing as well nor some of the tablets guys, as you’re implying from your guidance.

Anson Chan

Hi. Yeah, I’d say on the very top level, the biggest consumer cycles are summertime and then the fall, leading into the Christmas time. So you could roughly consider our fiscal Q4 a ramp-up leading into some of those late springtime, early summertime-type consumer cycles. And that’s sort of what we’re looking at the moment, with some of our fantastic customers that are engaged with us, have product plans to perhaps look at those cycles. So, that’s basically the framework in which we’re in. And then if you want to break it down for resolutions, as we mentioned in our prepared remarks, we do see a healthier mix on our third inch format products improving and so that’s going to weigh in on sort of our results going forward.

Harsh Kumar - Morgan Keegan

Got it. And any color on the densities themselves, not the quarter or the third but whether it’s two megapixel plus or VGA or anything like that?

Ray Cisneros

Right. We’re definitely seeing in our category of 2 megapixel and above we’re definitely going to see a pickup in that category so on the whole, this should benefit OmniVision. I will say though, however, the HD market is incredibly fast paced, a big market, and we’re also backing into that. So there’s going to be a counterbalance to each of those two categories.

Harsh Kumar - Morgan Keegan

And then maybe as a follow up I can ask a question to Anson. Anson I think your cash balance went down $200 and something million. I can explain maybe $126 million, $100 million for buyback, $26 million for VisEra. I’m curious where the other $100 million is?

Anson Chan

Okay. If you looked at the balance sheet that we disclosed on the earnings release you see a significant drop in the AP balance. That really has to do with the fact that most of the wafer that we put in order right before we had a chance to break, they came through in the quarter because of the payment terms we ended up paying for that inventory.

So that kind of explains the decreased AP as well as only a slight decrease in inventory balance as a result of that. So that’s really the other $100 million of consumption of cash, but then going forward as we continue to work through our inventory you start to free up the working capital, we will start to see a positive operating cash flow going forward.

Harsh Kumar - Morgan Keegan

So this is like a prepayment, then, is that correct?

Anson Chan

Not so much prepayment, it’s a timing of when customers cut back their order and when we also have this long lead time. So a lot of times we have to order ahead of customer orders with our 12 to 14 week lead time. And so in Q2 when orders start to get cut back from customer end, some of our commitment that we made to purchase wafers and background services from our vendors, they stay. So most of these products get completed and we take delivery in the third quarter. As a result of that, that brought down AP balance.

Operator

Our next question comes from Raji Gill with Needham & Co. Please proceed.

Raji Gill - Needham & Co. LLC

So if I look at the mobile phone business it was down about 50% year-over-year on the third quarter, which kind of represents kind of a trough in the year-over-year growth rate. I guess what makes you kind of confident going into April that you can re-accelerate the year-over-year growth rates into more positive territory? And then along those lines, clearly there’s been share loss related to yield problems. Where are the yields now? Or any color in terms of the whole yield situation?

Ray Cisneros

Yes, let’s talk I think a better way to look at products. It’s not so much one particular component about products and then how they reflect in our performance. Yield is only one component. The key issue to remember I think when it comes to products is I have mentioned, I think, in previous calls, every single customer walks the same process, multi-step process, with us and that’s basically taking us from receipt of our product, qualification of our product, acceptance of our product and then delivery of our product. If you look at that complex process, it’s just not yield that determines where we’re at with delivering product. It’s a complicated process.

So it’s not a straightforward answer to just reply to your question, how is yield affecting our performance with our products. You’d have to rethink it out and rephrase it and maybe it's a different discussion.

Raji Gill - Needham & Co. LLC

Well, clearly mobile phone business has dropped off a cliff year-over-year in January. There’s no doubt about that. There’s a reason for that. It could be many issues. You guys are very vague about exactly what are the issues. I’m just trying to get a better sense of why should we be more confident that mobile phone business will start to pick up in the next several quarters as implied in kind of your guidance, given kind of the overall weakness in the handset market outside of the two kind of big customers, Samsung and Apple?

So I just want to have a better idea of what’s happening in the mobile phone business in the past and then what will happen in the future?

Ray Cisneros

I think its more important to talk about the future, but I could say right now that the mobile phone business, as we all know, is driven by the smartphone category and what I can just tell you right now is that we’re fully engaged with all our customers as we have in the past. We’re still engaged with them going forward in the future.

How those results lay out going forward remains to be seen, but I could tell you right now, you see our guidance in Q4, its better than Q3 and I could just say that I feel confident with our product portfolio and I feel confident with our sales channels. I feel confident with our customers. And so we’re just going to have to walk through this together.

Operator

Our next question comes from Hans Mosesmann with Raymond James. Please proceed.

Hans Mosesmann - Raymond James

Thanks. A question on BSI-2 as it relates to the new product, BSI+. The BSI+ has been inserted there as an interim solution. I don’t recall you talking about that, say, a year ago. And where are we exactly with the BSI-2 yields? Are they where they need to be? And I’m not talking about inventories and all that. Where are they today in terms of BSI-2 yields?

Ray Cisneros

Hi, this is Ray Cisneros again. So let’s break this down. BSI-2, as you can see from our product releases were full out releasing products based on BSI-2. Those products are definitely backing into customers. Those products are definitely backing into projects.

Now keep in mind my statements just previously about how the customer has to walk through the qualification of those products and acceptance of those products. So we’re extremely, extremely happy about our BSI-2 position and the products that back into those.

So again it’s not about yield, it’s about getting the product out of the door, getting to the finish line and getting it into mass production and getting into these customers that will use it.

When it comes to BSI+, that’s a natural improvement in migration from the base platform of BSI-1, if I may use that term. And that’s going to always happen. When you’re based on a technology, you’re going to constantly make improvements and it’s a pure 100% technical improvement off that BSI-1 platform and there’s some image parameters that we improve on. So we’re giving the marketplace a very good combination of performance and cost. And then BSI-2 continues to move on.

Hans Mosesmann - Raymond James

Okay. And then a quick follow-up. CameraCubes, that production line is under-utilized. When does it become utilized more efficiently?

Anson Chan

It's Anson. I think, last quarter as Hasan mentioned about CameraCubes, we do believe that the volume will start to go up starting from the second half of (inaudible) 2012. So that’s when the citations start to go up. What you’re seeing now as we report in third fiscal quarter, that’s just more of the startup issues that we have. We’ll continue to be under employed for a little while until the bonds (ph) starts to ramp.

Operator

Our next question comes from Betsy Van Hees with Wedbush Securities. Please proceed.

Betsy Van Hees - Wedbush Securities

Ray, I’d like to go back to Raji’s question and I think we’ve heard before this comment that you’re fully engaged with all your customers and when we look at the mobile handset business, if we go back to January, your January quarter of last year, it was $191 million and then if we do the math correctly on the quarter you just closed, it was $96 million. And so I think it’s a pretty valid question that he’s asking in trying to understand as we’re looking forward, how do we have the confidence level to see the numbers move forward? And then I was hoping you could give us a little more clarity on what’s happening in terms of where the yields are and where things are happening with BSI-2. That’s my first question.

Ray Cisneros

Okay. So we could continue talking about this. It’s fine. So what I want to say is the smartphone category is extremely, extremely important for OmniVision, and all I can tell you right now is that in the smartphone category we are fully engaged with multiple customers. It’s just not about one particular customer that participate in that market segment.

I can tell you that from a higher resolution in the smartphone category we have our sights set on improving our position in the marketplace with delivering higher resolution sensors. I’m not going to confirm anything right now outside of the Q4 guidance, but all I’m saying is that based on BSI-2 products and BSI-1 products we are working extremely, extremely hard with all these customers to get into mass production.

In regards to yields of BSI-2 products we have multiple projects right now in the process of being qualified with our customers, and the status and the progress is definitely positive, and we’re looking forward to future quarters in regards to delivering results.

One thing that I must say here is there’s a lot of focus on the smartphone category, but something that we’re consistently highlighting to everybody is the entertainment market that incorporates the Tablet business.

From that standpoint we also see some incredibly great opportunities for us going forward for material results in regards to shipping, high resolution sensors, different technology platforms from us and to premier OEM players in the world in the Tablet business.

So the growth from OmniVision is looking very much driven by these two major categories, and I hope I’m helping you out here with how we’re looking.

Betsy Van Hees - Wedbush Securities

I think it’s fair to say that although your revenues did decline 50% year over year in the handset market, the smartphone market I think grew pretty substantially if we look at all the information that’s coming out from the third party guys that are out there. But Anson, I did have a question on the inventory levels.

So inventory went up on a day’s basis again, and so you had to pay for that inventory. Is there any issue that we could have a potential inventory write-down? Do you have the right mix there or is that a possibility, that we could see some pretty big inventory write-downs moving forward?

Anson Chan

There’s always that possibility but I’ll say it again. Every quarter end we go through the exact same exercise. We go through a SKU by SKU basis compared to that particular SKU’s 12-month forecast and to the extent that we cannot consume them, we start to reserve them. Now that’s basically the process we go through. Rarely do we have obsolescence issues. Most of the time we put up reserve for excess issues.

With that said, looking at the Q3 balance, we did put up a reserve of $3.4 million and then going forward when you look at our Q4 guidance, the forecast is definitely improving. So I won’t say that won’t necessarily go up in terms of reserve dollar, but the chance of that has partly reduced because we achieved more stabilization of our business. Customer orders are stabilizing and obviously we’re working hard to rebuild momentum going forward. So to the extent we can execute and rebuild momentum, increase the forecast, there’s a chance that we can even reduce the reserve.

Betsy Van Hees - Wedbush Securities

Thanks. And Anson, it was really hard to hear you during your prepared remarks. R&D declined and I was wondering, and I know you commented on it in your prepared remarks but could you explain what happened there as to why the R&D went down?

Anson Chan

Yes, I’d be glad to explain that. I’m sorry about the technical difficulties we encountered earlier. For an R&D perspective, this third fiscal quarter indeed went down. It’s a 9.8% decrease from second quarter. The decrease is really caused by the nonrecurring engine expenses. We call it the basic and mass release expenses.

As we have indicated in the past, mass releases tend to be very lumpy, so it varies from quarter-to-quarter. And then going to Q4 we do expect R&D expense to go up to a level that’s comparable to our first half of the year. So if you think about fiscal Q1 and Q2 of fiscal 2013, is where you would think. Does that help?

Operator

And our next question comes from Harsh Kumar with Morgan Keegan. Please proceed.

Harsh Kumar - Morgan Keegan

A couple of housekeeping questions. And Anson, I couldn’t understand a lot of what you were saying either but how should we think about tax rates going forward into the next year? And also maybe if you can help us with the tax rate for April 2011 quarter?

Anson Chan

So let me start with Q4, that’s basically what we would like to say now anyways. We won’t be talking about a rate for Q4. In the prepared remarks I said that the tax provision will be between $1 million to $2 million for both GAAP and non-GAAP measures. So fiscal 2013 is really difficult to predict. Now we have new proposals from administration. You have pick something. I would say just use what you have for fiscal 2013 to model going out. It’s going to change when it comes time.

Harsh Kumar - Morgan Keegan

Okay and then share count. What should we think given all the buybacks you’ve had? How should we think about share count for April end quarter?

Anson Chan

Okay, okay. The share count outstanding is about $52 million plus. It’s on the balance sheet if you can see on our release. But from the value that share base, is it’s a little higher mostly because of the timing where that buyback took place. If you remember the window for buyback opened after earnings call last quarter. The buyback happened the middle of the quarter. So from the waiting perspective you basically benefiting from half the buyback amount of 8.1 million shares. In Q4 though we’re probably going to benefit from the full weight of 8.1 million shares buyback. So the diluted share count should come down.

Harsh Kumar - Morgan Keegan

So 53, somewhere in that neighborhood. Is that correct?

Anson Chan

It won’t be too far off if you look at that from that perspective.

Harsh Kumar - Morgan Keegan

And then as you look out into, let’s say the April quarter, your guidance is pretty phenomenal, obviously a pretty nice positive surprise to the Street. Out of all your areas cellular, entertainment and computing; which one do you think you see the most benefit and in which category?

Ray Cisneros

This is Ray. Definitely the Q4 number is reflecting I would say a pretty good surge in the entertainment category. We’re looking at opportunities that are driving some high value solutions and we’re really happy about participating in that.

And meanwhile the smartphone segment is going to remain at a steady pace and going down the line we expect the smartphone segment or the handset category for us to contribute a little bit better.

Operator

(Operator Instructions) And we do a follow-up question from Betsy Van Hees with Wedbush Securities. Please proceed.

Betsy Van Hees - Wedbush Securities

Anson, I was wondering if you could help us out with cash flow from operations. What was it this quarter?

Anson Chan

We really do not disclose too much about cash flow at this point in the quarter but if you look at the cash balance, take out the $100 million buyback which will be in the financing section and then from investing. So $26 million the payment for (inaudible) was you can back into approximately $90 million of cash outflow from operating activities.

Betsy Van Hees - Wedbush Securities

And then in terms of SG&A, how should we be looking at it for this quarter?

Anson Chan

For Q4?

Betsy Van Hees - Wedbush Securities

For Q4, yes.

Anson Chan

Yes. SG&A, a piece of that would be for commission payments to our channel partners. And if you look at the guidance for Q4 because it’s going to go up, do expect SG&A to go up a little bit as well.

Operator

At this time there are no questions queued. I’d like to hand it back to Mary McGowan.

Mary McGowan

Thank you all for joining us on this call and web cast. We anticipate holding our fourth quarter and year-end conference call on May 31, 2012. We look forward to seeing you then. Thank you and have a good day.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect.

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