Traders who played a long bet OmniVision (OVTI) prior to its earnings lost. OmniVision shares fell after reporting weak gross margins. The company added to the confusion about yields during the conference call. In the week prior to earnings, speculators drove shares up to $16 on speculation that the company secured orders for the next-generation iPhone and iPad. OmniVision's 5MP OV5650 sensor is used in the iPhone 4. The 0.3MP OV297AA sensor is used in the iPod Nano and iPad 2. It is hoped that BSI-2 will be selected by Apple (AAPL). OmniVision dropped late last year after it was determined that Apple was using Sony sensors for its 4S.
During OmniVision's earnings call, the company reported some positives:
- Cash balance increased to $331 million
- Revenue of $290 million on shipment of 147 million image sensors
- Gross margin of 22.9% (non-GAAP) on earnings of $11 million or $0.20 per diluted share
- Strength in notebook, smartphone, and entertainment markets
- Higher 5 megapixel sensor sales in the mix
- Expectation for pick up in 8 megapixel sensor sales
- Days outstanding decreased from 66 days to 44 days
The company touted new products: a recent release of a 12 megapixel sensor and a video sensor with a resolution double that of 1080p.
The company report also contained some negatives:
- GAAP gross margin was 22.5%, a drop from 24.2% in the prior quarter due to sale of written-down inventory and an increase in allowance for excess and obsolete inventories
- Inventory increased $44 million to $291.3 million, due to mismatch between customer ramp schedule and company capacity ramp-up timetable with BSI-2 devices
- OmniVision forecast revenue in the range of $235 million - $255 million on earnings of breakeven and $0.11 per diluted share.
The main reason to buy shares in OmniVision is rests on the success of the BSI-2 sensor. OmniVision cited operational challenges on the supply chain weak gross margins for BSI-2. The company shifted from 8-inch wafers to 12-inch wafers. The latter uses copper mobilization instead of aluminum metallization. The higher cost structure will take more than one quarter to work through.
The recent sell-off in OmniVision offers a better reason for investors with a longer time horizon than speculators to buy shares. Confirmation that the company will supply sensors for next-generation Apple devices will give shares a boost. In the meantime, OmniVision merely needs to move towards a higher margin mix with its other customers to boost appeal for its shares. On the cost side, the company is working through improving its cost structure for BSI-2. If Apple ultimately selects BSI-2, OmniVision earns an easier path to achieve higher margins by scaling up production that would drive down costs.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (OVTI) over the next 72 hours.