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March 1, 2006

5:00 p.m. EST

Executives

Jason Gold - Financial Dynamics, Investor Relations

Shaw Hong - President, CEO

Peter Leigh - VP Finance, CFO

Jess Lee - VP, Mainstream Products

Hasan Gadjali - VP, Advanced Products

Analysts

Paul Coster - JP Morgan

Satya Chillara - American Technology Resources

Tayib Shaw - Longbow Research

Harsh Kumar - Morgan Keegan

Tristan Gerra - Robert Baird

Jason Pflaum - Thomas Weisel Partners

Quinn Bolton - Needham & Company

Adam Benjamin - Jeffries & Company

Jennifer West - Merriman

Daniel Galvitz - CIBC World Markets

Dan Ries - Moness

Dan Scovel - Tokeneke Research

Presentation

Operator

Good day ladies and gentlemen. Thank you for standing by and welcome to the OmniVision Technologies third quarter 2006 earnings conference call. My name is Carlo and I'll be your coordinator for today's presentation. (Operator instructions) I would now like to turn the presentation over to your host for today's conference, Jason Gold of Financial Dynamics. Please proceed.

Jason Gold

Thank you, Carlo and good afternoon, everyone. Earlier this afternoon OmniVision issued a release reporting its financial results for the third quarter of fiscal 2006 ended January 31st. This release can be accessed in the Investor Relations section of our website at www.ovt.com or on the financial newswires.

Before we begin, here are a few items for everyone's reference. This call is being webcast live and a web replay will also be available for 12 months. We have arranged for a recording and a tape replay of this call which may be accessed by phone. It will be available approximately one hour after the call's conclusion, and will be accessible for 48 hours. The dial in number for this replay is 617-801-6888. A pass code is required and it is 99441035. Both the call and the webcast replay can be accessed from the Investor Relations section of OmniVision's website at ovt.com.

This conference call contains forward-looking statements within the meaning of section 27-A of the Securities Act of 1933, as amended, and section 21-E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements, which include statements about our financial projections for our fourth fiscal quarter; our expectations for growth in the image sensor markets; our expectations; our ability to continue to lead the market; the anticipated introduction, acceptance and benefits of our new products; our expectations regarding our ability to take advantage of future opportunities; and anticipated products and market developments beginning in the first quarter of fiscal 2007.

All of these involve known and unknown risks, uncertainties and other important factors that may cause actual results, or industry results, Company results, level of activity, performance achievements to differ from those expressed or implied by these forward-looking statements.

In evaluating these forward-looking statements, you should specifically consider various risk factors, including the risk factors detailed from time to time in OmniVision's Securities and Exchange Commission filings and reports, including but not limited to the Company's annual report on Form 10-K filed for the fiscal year ended April 30th, 2005 and its most recent quarterly report filed on form 10-Q. These factors may cause the Company's results to differ materially from the forward-looking statements made in this conference call.

Although the Company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee further results, level of activity, performance or achievements. These forward-looking statements are made only as of today's date, and OmniVision expressly disclaims any obligation to update or revise the information contained in the forward-looking statements. This concludes the Safe Harbor statement.

I would now like to turn the call over to OmniVision's President and Chief Executive Officer, Mr. Shaw Hong. Mr. Hong.

Shaw Hong

Thank you, Mr. Jason and good afternoon, ladies and gentlemen. Thank you for joining us on today's call. With me today are Peter Leigh, CFO; Jess Lee, VP of Mainstream Products and Hasan Gadjali, VP of Advanced Products.

On today's call, I will begin with an overview of our results and a discussion of highlights of the quarter. Peter will provide you with the financial details and then I will address our strategic view. After that, we will take your questions. For that, Jess and Hasan are here to provide additional insight.

We are very pleased with our financial results for the quarter. Revenue during the January quarter was a record $137 million. Earnings were also a record at $0.53 per fully diluted share. For comparison purposes, sequential revenue growth was 8%, and year-over-year growth was 35%. Our balance sheet at the end of the quarter remains exceptionally strong, with cash and short-term investments totaling $317 million.

Growth was particularly strong in the mobile handset markets, which accounted for slightly more than 75% of OmniVision revenues in the quarter. The entire range of the Company's image sensors, designed specifically for camera phones applications, benefited from the overall strength of this market. Of particular note, we significantly increased the shipment of our 1.3 megapixel sensors during the quarter.

Overall, the strength of our business in the third quarter was slightly more than 75% in mobile handsets; more than 10% in digital still cameras; and, the remainder in advanced products which include cameras for security and surveillance, high-end video game consoles, webcam and mobile PCs, automotive products and medical applications.

I would like to start by discussing our major transition that we believe is under way. In 2005, we drove 1.3 megapixels into the handset camera mainstream, with our quarter-inch optical format sensors that enables smaller modules than our competition. In 2006, we expect that we will continue to lead the market, and drive 2 megapixels into the mainstream phones. The 2 megapixel market, in particular, is unique in that this is the first time camera phones are operating at near digital still camera level resolutions.

As such, a segmentation of requirements has already started, with some opting for fixed-focus solutions, and others desiring auto-focus as well as customer interface formats. So, similar to the leadership role we played in the transition from VGA to 1.3 megapixel, OmniVision will drive 2 megapixel into the mainstream.

We now have three 2 megapixel products in the market, each serving different and diverging needs within our customer base. Regardless of the market driver, our 2 megapixel product address both tasks, and provides an ideal solution to our customers. We are first to market with these products, and they are still the only products of their kind. They have clear competitive advantages, such as size, integration of advanced features and support our specific output interface such as SMIA, the industry standard introduced by Nokia and SG Microelectronics.

In the fall of 2005, we introduced the OV 2640, the world's first quarter-inch, 2 megapixel sensors with compression. We were months ahead of our competition in bringing the much-desired quarter-inch format to the market, which allow our customer to easily upgrade from their 1.3 megapixel products. The compression engine in the OV2640 provides our customer with the ability to use the same phone platform that they used with the 1.3 megapixel sensor.

Recently we introduced OV2645, the world's first quarter-inch 2 megapixel camera chip with fully integrated auto-focus control on a single chip. OmniVision is the first company to integrate the auto-focus function on a 2 megapixels in the sensors. Besides the auto-focus control function, the OV2645 takes full advantage of the new OmniPixel 2 architectures, including high sensitivity and superior low light performances.

We also introduce our new OV2648, which is similar to the OV2645, but it is also fully compliant with SMIA.

This past quarter, we experienced very strong demand from our mobile handset customers. These customers have been ramping aggressively in the past few quarters. In particular, our 1.3 megapixel image sensor has been particularly popular, as our handset customer migrates to higher resolutions and increased camera functionality.

OmniVision's advanced products continued to reach new milestones. Beginning in the third quarter, the Company increased its shipment to multiple leading toy and video game console vendors. On February 22, 2005 we announced OmniVision's answer for optical recognition, OV810, to the toy market. Since then, we have been working with multiple toy manufacturers to design this recognition chip into products for Christmas, 2006.

In the game console market, our chipset for the iToy camera of Sony PlayStation 2 have been very successful. As a follow-up, we have also introduced new products to address new game consoles and platforms.

OmniVision also began shipping to top-tier automotive parts suppliers, reaching a new market the Company anticipated. We will continue to grow through 2006 and beyond.

Another achievement that we are particularly proud of is that during the period, OmniVision surpassed the milestone of 250 million sensors sold. What is more, we sold well over 100 million sensors [in the year 2005] and in the third quarter alone, we sold approximately 42 million sensors. We believe that these milestones are significant, because they demonstrate our ongoing ability to deliver innovative products to broadening market sectors.

Our mainstream products business, which addressed our large volume customer in mobile handsets and digital still cameras, continued to demonstrate robust growth in the third quarter. As I mentioned earlier, growth was particularly evident in the mobile handset market. This growth is supported by our broad base of customers. This base includes the top tier of the handset makers, as well as significant share with the second tier of handset makers.

We would like to remind you that we have design wins with all the top six handset manufacturers, who are at various stages of design and production for new handsets. For contractual and competitive reasons, we do not provide details of a shipment underway at any given time. But one of our strengths is designing to particular handsets. The design rarely changes. In general, as long as the handset continues to sell, the design components do not change. The typical life of any given model of handsets average 9 to 12 months, although some can remain in production for much longer.

Our advanced products business, which has been set up to broaden our reach into new markets and to accelerate the growth of these new markets is also growing well. The advanced products business segments are the security and surveillance, video gaming consoles and toys, webcam and mobile PCs, automotive and medical markets.

Our security and surveillance cameras business continues to grow steadily. Most of this business is derived from the DIY market such as security systems that you can buy at consumer electronics stores, instead of in your home. Going forward, we will be focusing on higher end commercial security systems in which we can replace high cost CCTV solutions with lower cost SIMO solutions. In fact, we have already begun to receive orders for our new OV7940.

We are also seeing strong demand from the game and toy market as video game console demand for cameras continues to grow. We are well-positioned to take advantage of this emerging market by utilizing our current customer relationship, as well as the expertise that we have gained by being the dominant supplier to game and toy over the past couple of years.

We also made progress in the webcam business, as our shipments to this segment have doubled. Our increased shipments are due to: (1) OmniVision's increased market share in PC cameras and, (2) new shipments to embedded mobile camera customers.

Our automotive business is also progressing nicely, as current and prospective tier 1 automotive parts customers continue to qualify us to meet the stringent quality requirements for automotive components. We have already begun revenue shipment to these customers and see this business ramping throughout calendar 2006 and beyond.

Beginning in the first quarter of our next fiscal year, which begins on May 1, 2006 we expect to see the following three developments.

1. Our new family of 2 megapixel sensors will be rolling out in volume to top tier accounts.

2. Our ultra thin VGA and our newest 1.3 megapixel sensors will begin to ship in volume.

3. A new application in the gaming industry will begin to take hold.

We believe these three initiatives will drive strong growth and we look forward to discussing their progress on future conference calls. I will now turn the call over to Peter who will discuss our third quarter financial results in detail. Peter.

Peter Leigh

Thank you, Shaw and good afternoon, everyone. For the third quarter of fiscal 2006, which ended January 31st, OmniVision recorded revenue of $137.3 million compared to $126.8 million for the second quarter of fiscal '06, an increase of 8.3%; and $101.8 million for the third quarter of fiscal '05, an increase of 35%.

Direct sales to original equipment manufacturers and value-added resellers accounted for about 76% of revenue in the third quarter of fiscal '06, with the balance of 24% coming from sales through distributors.

We shipped approximately 42 million image sensors in the third fiscal quarter. Our ASP at $3.26 remained relatively stable in the third quarter, primarily as a result of higher shipments of 1.3 megapixel sensors.

Gross margin for the third quarter was 40.3% compared to 36.1% last quarter. The improvement in gross margin was principally the result of a favorable product mix and of improved production yields.

During the quarter, the Company booked additional provisions for excess and obsolete inventory of approximately $5.2 million, while revenues from the sale of previously reserved inventory were $2.2 million.

R&D expense in the third quarter was $10.5 million, up $0.6 million from the $9.9 million we reported in the prior quarter. As a percent of revenues, R&D expense was 7.6% down from 7.8% in the second quarter.

SG&A expenses in the quarter totaled $9.2 million, up from $0.1 million from $9.1 million in the previous quarter. SG&A as a percent of revenue was 6.7%, down from 7.1% in the second quarter.

Operating income in the quarter was $35.6 million, compared to $26.8 million last quarter. Our operating margin was 26% in the third quarter, compared to 21.2% in the second quarter.

We continue to expect that our effective tax rate for the fiscal year will be 20%. Our net income for the quarter was $29.6 million and our net margin was 21.6%. This compares to net income in the second quarter of fiscal '06 of $22.6 million, or 18% of revenue and $21.1 million or 21% for the same period last year.

Diluted earnings were $0.53 per share compared to $0.41 last quarter and $0.33 for the third quarter of fiscal 2005. Diluted earnings per share for the quarter were based on weighted average shares of 56.6 million.

Let me turn now to the balance sheet, which remains in excellent shape. As Shaw mentioned, we ended the quarter with cash and short-term investments totaling about $317 million. Accounts receivable at quarter end, net of reserves, were $76.5 million, up $3 million from last quarter. Our DSO were 51 days, down from 53 at the end of October. Inventory was $62.5 million on January 31, 2006 compared to $71.1 million at October 31, 2005. Inventory turns for the quarter were 5.2X.

Now I'd like to turn to the outlook for the current fiscal quarter, the fourth quarter of fiscal 2006, which will end on April 30th. Based on current business trends, we believe that revenue for this quarter will be in the range of $120 million to $130 million. We believe that for the fourth quarter, fully diluted earnings will be in the range of $0.35 to $0.40 per share. Now I would like to turn the proceedings back to Shaw for some strategic commentary.

Shaw Hong

Thank you. I'd like to elaborate for a moment on our vision. Simply stated, we want to own all the key elements of the image pipeline. When we talk about the image pipeline, we are talking about live capture, the conversion of light into images and the processing of these images. This emphasis allows us to concentrate on what we do better than anyone else in the world, and to do so within a disciplined framework. OmniVision's core competency is and will always be centered on the image sensor.

To this end, it is important that we continue to demonstrate technology leadership and, so far, we have shown remarkable progress. Last year, we deliver many products based on our OmniPixel platform. We also developed and introduced our OmniPixel 2 platform, which will extended our competitive advantages even further, while delivering even more products than we did on our previous platform.

We continued to develop a new generation of sensor architecture that will allow us to continue to reduce pixel size and increase the integration of the sensor and thus take us to even higher levels of performance.

As pixel size continues to shrink, the need for more advanced elements in the image pipeline is critical. As a smaller silicon geometry allows for greater integration, we believe that OmniVision is well positioned to add value into the rest of the image pipeline, such as optics and image processing and the compression.

This is where our wafer encoding in technology enters the picture. Our development of wafer encoding and the products which incorporate wafer encoding which we refer to as OmniFocus remains on track, and we look forward to introduce the first product incorporating this truly revolutionary technology by the middle of this calendar year.

To conclude, we believe our results demonstrate our commitment to technology leadership, our commitment to serving our customer as a strategic partner and our commitment to maintaining profitable growth. With these commitments guiding our strategic vision, we look forward to capitalizing on the many opportunities ahead. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question is from Paul Coster with JP Morgan.

Paul Coster - JP Morgan

Good afternoon, gentlemen. Let me get straight into the guidance, if I may. You have a sequential decline in revenues in the fourth quarter. Can you explain why that is? Then if you care to please, Peter or Shaw Hong, could you just look a little bit further out and give us some sense as to whether this is a seasonal fluctuation, and in the back end of this calendar year you'll see growth again.

Peter Leigh

Let me address the second part of your question first, if you don't mind, Paul. We think there is going to be very strong growth in the second half of the year. As to the specifics of fourth quarter, I'd like to hear from Jess on that.

Jess Lee

Well I think, Paul, what we're seeing in the fourth quarter is some impact from seasonality. But as Peter says, what we are really gearing up for is the ramp up of our high resolution sensors that we just introduced. We believe that a lot of this momentum from the newer products will take us to a return of sequential growth in the July quarter.

Paul Coster - JP Morgan

What's happening to gross margins in this next quarter, Peter? Are we going to see a decline from this 40% level?

Peter Leigh

Well, as you know, Paul, the gross margin does fluctuate from quarter to quarter, guidance does incorporate a modest reduction in margin.

Operator

Our next question is from the line of Satya Chillara with American Technology Resources.

Satya Chillara - American Technology Resources

Hi, good afternoon, gentlemen. Peter, on the question of gross margin guidance; you have done 40%, but the guidance could be down at 5 percentage points. Am I thinking straight or is it only slightly down?

Peter Leigh

Satya, I think the margin will be higher than 35%, but will not necessarily be equal to the 40% we reported this quarter.

Satya Chillara - American Technology Resources

I just wanted to make sure. Okay. In terms of a question for Jess, at one point in the press release you guys talk about 1.3 megapixel, VGA and 2 megapixel. Are you suggesting all of them will start growing in the July quarter? Or is there any variation in terms of timeline?

Jess Lee

Hi, Satya, yes. The short answer to your question is yes. Obviously, VGA and 1.3 has got a bit of a head start, they are already in production. But the 2640, the product we announced back almost six months ago now, that will be ramping towards the end of the July quarter.

Operator

Sir, our next question is from the line of Tayib Shaw of Longbow Research.

Tayib Shaw of Longbow Research

Hi, guys. Can you give us an idea of what the margin outlook for the rest of the year, given the foundry capacity situation? Do you think we'll see margins stabilize in the next quarter? Or is there going to be a downward pressure through the rest of the year, if foundry capacity becomes more and more tight?

Peter Leigh

Well, I think the important point to recognize, Tayib, is that we have a very long-term strategic relationship with TSMC. Our goal with TSMC is to make money with one another, not off one another. So the question of how particular capacities, working in a particular quarter really does not impact margins to any significant degree.

Tayib Shaw of Longbow Research

Maybe if you can just provide some color on what is your foundry supply situation right now? I mean, do you have a guaranteed supply of [units] in place? Or is there something you can do to diversify your foundry suppliers and maybe have some of the older products produced at Power Chip?

Peter Leigh

Well as you know, we already have an important relationship with Power Chip, and, yes, of course, over time one would expect that that relationship will grow. But our primary partner is TSMC and TSMC has always delivered to us the that we need to deliver to our customers.

Jess Lee

As we said last quarter, we will be increasing capacity from supply from currently two fabs to four different fabs. The ports and the newer products we just announced.

Peter Leigh

Four different lines at TSMC.

Operator

Sir, our next question is from of Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan Keegan

Hi guys, a couple of questions. First of all, what was the option expense in the quarter?

Peter Leigh

I'm sorry, what was the option expense, did you say?

Harsh Kumar - Morgan Keegan

That's correct.

Peter Leigh

We will not adopt FAS 123R until the first quarter of fiscal '07, so currently our results do not reflect any option expense.

Harsh Kumar - Morgan Keegan

Can you tell me how much it was, Peter?

Peter Leigh

You mean what it would have been? No. If you look back in our Qs, you'll see in the FAS 123 footnote, you will see what roughly it varies from quarter to quarter; obviously depending on the stock price, but you will have to go back into the footnote and obviously we will include it in the footnotes in the 10-Q.

Harsh Kumar - Morgan Keegan

Got it. Another question for you, gross margins were up pretty big. You said it was product mix. Can you point us to maybe somewhat more specific to what happened in the product mix that drove the margins up?

Peter Leigh

Well, I think the most important thing to look at, is the fact that 1.3 megapixel sensors was the standout performer in the quarter, and generally speaking, the higher the resolution, the more our quality shines and consequently, the higher the margin.

Operator

Sir, our next question is from the line of Tristan Gerra with Robert Baird.

Tristan Gerra - Robert Baird

Good afternoon. Could you remind us how big Mainland China is in terms of your revenue?

Peter Leigh

About 20% of our revenue comes from Mainland China.

Tristan Gerra - Robert Baird

Okay. Can you comment about the yields for your new chip onboard products and whether you still have issues in that regard? Could that create a margin of risk when those products rank in volume? Or is that pretty much an issue that is behind at this point? If you can comment around that.

Jess Lee

Sorry, Tristan, I didn't quite catch the beginning part of your question.

Tristan Gerra - Robert Baird

I was asking about the yield issues, or potential yield issues on the new chip onboard, packaging products that are going to ramp in the second half of this year, and trying to assess the potential impact on gross margin if any. Or, is that a problem that is pretty much behind at this point?

Jess Lee

I don't know that we ever had an issue with chip onboard type products. We have been shipping to makers who make chip onboard in camera models for quite a while now, so that transition happened quite a while ago.

Does that get to your point?

Peter Leigh

In any event, I think the answer to your question, Tristan, is no we do not anticipate that these products will have any particular impact on margin in future quarters.

Operator

Sir, our next question is from the line of Jason Pflaum with Thomas Weisel Partners.

Jason Pflaum - Thomas Weisel Partners

Yes, good afternoon. Maybe I can start by circling back again with the gross margin guidance. The guidance certainly implies a decent step down here. I was hoping you would give a little more color as to what potentially the drivers of that step down could be. It seems that you are benefiting from a better mix, at least on handset side of the business. Are there pricing considerations that are in play there? Maybe you could just help out there. Thanks.

Peter Leigh

Well the principal driver, as you suggest, is pricing. We are always in a competitive marketplace and we will be competitive on prices. So that does play a part in the margin computation. No question about it.

Jason Pflaum - Thomas Weisel Partners

Maybe you could just talk generally about the price and expectations. I know you don't like to go part for part, but what type of pricing in general are you expecting this quarter?

Peter Leigh

We don't have a specific number to give you for ASPs, although I think what you will see is the secular decline in image sensor prices will reassert itself in the fourth quarter. So my expectation is that unlike this quarter, where we saw a slight increase in ASPs, ASPs for the fourth quarter will be somewhat lower.

Jason Pflaum - Thomas Weisel Partners

Should we see a reacceleration in pricing erosion this quarter?

Peter Leigh

Well, I wouldn't necessarily say that. Remember, your ASP is a function both of the prices you get for individual parts and the mix of the parts in your volume. It is unlikely that the mix will have such an important positive impact this current quarter as it did when you looked at Q3 versus Q2.

Operator

Sir, our next question is from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company

I just wanted to follow up on Jason's question. It sounds like if we put pricing aside for a second, that your product mix, the improvement in yields might actually argue if pricing were flat quarter to quarter, that you could see actually an increase in gross margins. Is that right?

It sounds like pricing is really going to be the key determinant. Because your product mix is moving in the right direction, your yields are moving in the right direction.

Peter Leigh

Yes, if you could persuade our customers to continue to pay the prices they paid a couple of quarters ago, I think we would be very happy indeed.

Quinn Bolton - Needham & Company

So it really is just, again, a function of pricing going forward. You guys feel pretty good with where you're at, in terms of wafer costs, in terms of product mix and yields on your 1.3 and 2 megapixel products.

Shawn Wang

Yes, I think that is correct. That is the reason we won't say there is price erosion. So this kind of price, ASP a little bit down, and we are looking forward to improve the year and introduce the new products. That is what we are looking at.

Quinn Bolton - Needham & Company

Okay, great. And then just two quick follow-ons. One, I wondered if you could give us an outlook for your transition over to the 300 millimeter wafer size? And then one for Peter, any sense you can give us on just sequential change in R&D and SG&A in the fourth quarter? Thanks.

Peter Leigh

So on 300 millimeters, we are not yet on 300 millimeters. I think the important point about 300 millimeters is that that is an economic decision. At the point where the product is more economical on 300 millimeters, we go to 300 millimeters. What I think is more important is the technology and how you push the technology envelope forward.

On your second question, I'm sorry, you have to repeat it. The question of OpEx, thank you. The answer is that you will see some modest increase in OpEx, somewhat similar, I think, to what you've seen Q3 over Q2.

Operator

Sir, our next question is from the line of Adam Benjamin with Jeffries & Company.

Adam Benjamin - Jeffries & Company

Thanks. In prior quarters, you guys have provided the product mix between VGA and 1.3. Can you provide that this quarter?

Peter Leigh

Yes. In general terms, what we see is that 1.3 is clearly a more important contributor than VGA in the current quarter.

Adam Benjamin - Jeffries & Company

So is it like a 60-40 split?

Peter Leigh

Order of magnitude, that would work.

Adam Benjamin - Jeffries & Company

With respect to the gross margin improvement, excluding the inventory reserves, it actually is probably higher than the 40%, if I got that correct. Can you give the relative contributions of the difference between the product mix and the yields as to which contributed which percent?

Peter Leigh

I don't have those numbers to give you, Adam, but the answer is those contributing factors are listed in the order of importance.

Operator

Sir, our next question is from the line of Jennifer West with Merriman.

Jennifer West - Merriman

I was wondering if you could talk to your expectations for ASP declines in calendar year '06? Related to that, given your expectations of higher resolution products ramping in '06, and taking pricing into account, what are your long term gross margin expectations -- or maybe just your gross margin expectations for exiting '06?

Peter Leigh

Well, we don't have a crystal ball that can tell us precisely what is going to happen to ASPs over the next several quarters, but what we have said is we expect margins to remain in the mid to upper -- mid-30's.

Jennifer West - Merriman

What kind of ASP assumption are you using there? .

Peter Leigh

We don't base it specifically on an ASP, because remember the ASP is a composite. What we look at is the individual products and the individual contributions.

Jennifer West - Merriman

All right. Thank you.

Operator

Sir, we have a question from the line of Daniel Galvitz with CIBC World Markets.

Daniel Galvitz - CIBC World Markets

Hi guys, great quarter. Just a little about the wafer encoding. Two things: what are you seeing on the competitive fronts that competes with wafer encoding? And in addition, can you spell out what the price savings are, in addition to the other benefits?

Shaw Hong

Jess, would you please answer this question?

Jess Lee

The first part of your question, in terms of our competitors for wafer encoding, we don't see anything in the horizon that is a direct competitor for this technology. There are some "software" auto-focus solutions out there, but they aren't really the type of wafer encoding.

Basically what you have to do when you do wafer encoding is you have to optically encode light and then decode it with a processor. Some of these would be -- the copycats, if you will, are not following the same path. They are just doing image processing. If you do image processing without actually changing anything on the front end, it doesn't help.

I am sorry -- the second part of your question?

Daniel Galvitz - CIBC World Markets

Just about the cost savings. Obviously you have a profile savings, you're getting rid of also the moving parts which enhances durability, et cetera, but is there a tangible cost savings that we can point to?

Jess Lee

Well, initially what we're focusing on is maximizing the performance of the system. We are not targeting a big cost savings. What we're targeting more is the size reduction, the reliability increase, and just high performance in that you get immediate focus as opposed to having to wait for an auto-focus to take place.

Over time, though, you can expect that because this is implemented in silicon, silicon follows Moore's Law in that it does dramatically decrease over time. So we are looking forward to a pretty significant price advantage for an auto-focus type of solution.

Daniel Galvitz - CIBC World Markets

Just to clarify that, the VSP chip that I guess is a companion chip, I would assume what you're saying right now is that it is sort of an offset to the removal of mechanical parts at the moment?

Jess Lee

Basically we are shifting the cost and the complexity of the mechanics into this VSP. So currently we haven't disclosed pricing on this yet, but what we have said is that this will be competitive -- not a huge cost advantage, but competitive.

Daniel Galvitz - CIBC World Markets

Thank you very much.

Operator

Answer our next question from the line of Dan Ries with Moness.

Dan Ries - Moness

For modeling purposes, where could you see the 2 megapixel product in, say, the October and January quarters? So if we look out to the back half of the year, in terms of share of your total shipments?

Jess Lee

I think what our expectation is right now, just based on the traction that it's been getting is that in terms of units, VGA, 1.3 and 2 meg, obviously VGA and 1.3 are still going to be a higher volume, but we expect that our 2 meg will catch up fairly quickly to somewhere above the 50% level of where 1.3 is.

Dan Ries - Moness

Just on the gross margin for this quarter, with the write-off and the reserve taken, would it be proper to subtract $3 million from costs to get a clean of either of those? Is that basically the math of it, or is it more complex than that?

Peter Leigh

That is correct. You can certainly do that.

Dan Ries - Moness

So the gross margin would have been somewhat higher. Okay. Thank you very much.

Operator

Sir, we have another question from the line of Paul Coster with JP Morgan.

Paul Coster - JP Morgan

Great. Peter, the tax rate for '07. We have 20% this year, we're currently modeling 25%. Is that correct?

Peter Leigh

We haven't finished all our work on taxes for '07, Paul. I think it will be likely that it may go up a little bit, but not up as far as 25%.

Paul Coster - JP Morgan

The cell phone market, Shaw Hong, we seem to be in sort of the mass adoption phase. Arguably, that kind of pans out over the next year. Can we sustain growth beyond calendar year '06 into late '07, in advance of the auto market kicking in?

Shaw Hong

Yes, that is what we are expecting. For 2006 we are expecting steady growth. Beyond that, other product will kick in. So in the meantime we keep growing our handset market and very aggressively getting to the new market segment.

Paul Coster - JP Morgan

So where is that growth going to come from if the rates of growth of the overall market starts to slow?

Jess Lee

One of the things we're looking at is the increase in contribution of our share of any given handset. Obviously as we move into higher resolutions, our dollar share in that handset increases. With the introduction of wafer encoding, again our share of contribution in that handset will also increase. As we add more functionality into what a camera is, that number does goes up.

Shaw Hong

Hasan, would you please talk about our new product segment?

Hasan Gadjali

We have a couple of new product segments in the advanced products group. Especially on, as Shaw mentioned in the call just now, that we have the PC cameras and webcams. Webcams for the notebooks is now beginning to take off. Brand names like HP, IBM, Dell, are planning models that have cameras in it and we are starting shipments of these cameras, in VGA as well as the 1.3 megapixel into this market segment. Also OmniVision, we have returned a little bit to the PC camera market and we have got market share, so actually our shipments for the webcams and PC cameras have increased.

On the other hand, the toy and game console, on have on the game console side we have new products that we are addressing, new markets, because the iToy for the PlayStation 2 received very successful markets and now it is the coming of the new consoles of both Microsoft and Sony and all of these game players. We are working heavily and actively in this market and we will start to see new cameras in those consoles.

Paul Coster - JP Morgan

What are the plans with the cash, please, Peter? And then I'll sign off. Thanks.

Peter Leigh

Well of course we are very comfortable with the cash position, Paul. It gives us maximum flexibility to pursue our strategy and that may include some small additions of technology, if we find somebody who has the technology similar to say a CDM that brought us wafer encoding, then we would be in a position to move aggressively to add that to our portfolio.

Operator

Sir, we have a question from the line of Dan Scovel with Tokeneke Research.

Dan Scovel - Tokeneke Research

Thanks. Nice margins this quarter. A couple of questions on the income statement. Your interest and other had a boost of about $1 million. What was going on there, and is that expected to continue?

Peter Leigh

Well, I don't think it will continue at that rate, Dan. We had higher cash balances and that was the major contributor, along with the fact that as you know, Mr. Greenspan had been raising rates until he retired.

Dan Scovel - Tokeneke Research

You had a separate line item of $1.2 million on top of the $2.3 million, in the interest and other.

Peter Leigh

That is our share of equity income from our non-consolidated invested companies.

Dan Scovel - Tokeneke Research

That's a variable that we can't necessarily count on going forward?

Peter Leigh

It is going to vary, as all these numbers do, but I don't think it is going to vary hugely.

Dan Scovel - Tokeneke Research

In a similar vein, your minority interest spiked up as a negative. What is the best way to try to model that here?

Peter Leigh

Well bear in mind that the minority interest this quarter includes [Visara] and so I think you can't compare this quarter exactly to last quarter. Order of magnitude, again, while it obviously fluctuates, I would concentrate on this quarter as your base, not the comparison between this quarter and last quarter.

Dan Scovel - Tokeneke Research

Okay. Also, any 10% customers in the quarter?

Peter Leigh

Yes, there would be at least a couple, but that is as much as I want to say about them?

Shaw Hong

How many?

Peter Leigh

Two.

Dan Scovel - Tokeneke Research

Two, okay. And finally just to confirm, you said you are expecting growth to resume in the July quarter?

Peter Leigh

Correct.

Dan Scovel - Tokeneke Research

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I would like to turn it back over to Shaw Hong for any further comments.

Shaw Hong

Thank you. In closing, I want to reiterate our confidence in the ability of OmniVision to continue to advance image sensing technology. We are increasing our share of the image pipeline across a broad spectrum of the marketplace. We are well positioned to introduce new and advanced products ahead of other players. Due to our alliance, to our relationship with our customers, and to our dedicated and hard-working employees.

We appreciate all of the work our team continues to contribute to our success and we thank you for participating in our call. We look forward to speaking with you all a quarter from now. Good bye.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.

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Source: Omnivision Technologies F3Q06 (Qtr Ending Jan 31, 2006) Earnings Conference Call Transcript (OVTI)
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