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OmniVision Technologies’ (OVTI - Analyst Report) earnings of 17 cents for the fiscal fourth quarter 2013 (ending Apr 2013) surpassed the Zacks Consensus Estimate by 8 cents.

Total Revenue

OmniVision reported revenues of $336.2 million, down 20.6% sequentially but up 53.8% over the prior year period. Revenues exceeded management’s guidance range of $300–$330 million. OmniVision saw strength in mobile handsets in the Chinese market, which was offset by seasonal weakness in other geographic regions.

Total unit sales were down 25.4% sequentially but up 27.9% year over year to 188 million while the blended average selling price (ASP) increased 6.5% sequentially and 20.9% year over year to $1.79. ASP growth was led by better product mix.

Overall, 2 megapixel and higher resolution sensors comprised around 50% of total units shipped, down 4.4% sequentially but up 106.3% year over year.  The 8 megapixel and 5 megapixel categories, particularly for smartphones and tablets, saw strong shipment from the emerging markets. 

The 1.3 megapixel category was 33% of total shipments, down 45.3% sequentially but up 201.5% from last year. The VGA category constituted 17% of total shipments, down 20.7% and 60.5% from the previous and year-ago quarters, respectively. The sequential declines in the lower-resolution categories were due to the ongoing transition to higher-resolution sensors.

Revenues by End Market

The camera phone market remains OmniVision’s largest, with a revenue contribution of 65% compared with 61% in the prior quarter. The rapid adoption of smartphone devices is the main growth driver of this market. The company witnessed strong demand for 5 megapixel and 8 megapixel sensors for smartphones in Asian markets, particularly in China. Currently, China has become the largest mobile market worldwide. OmniVision is likely to benefit as it supplies camera sensors to Chinese OEMs, which are expanding in both developing and developed international markets.

We believe that full 1080p HD format sensors will witness a rise in demand as all major handset OEMs are replacing VGA with HD sensors for the front-facing camera in smart devices. This is a positive for OmniVision.    

The entertainment end market contributed 17% of total revenue, down from 26% in the prior quarter, due to weakness in tablet and gaming segments.

We believe that tablet sales will pick up as all the major OEMs are planning to launch latest models, which may boost demand. Further, the rise in demand of smart TVs, which come with built-in cameras is likely to boost demand for OmniVision’s 5 megapixel BSI-2 sensors. 

Contribution of the notebook and webcam segment increased to 8% of total revenue in the fourth quarter from 7% in the third quarter. The modest growth may be attributed to tablets, which have cannibalized the notebook market. However, it is poised to benefit from design wins in the PC and notebook platform. Many of the OEMs are using sensors to develop human interface solutions like gesture and eye tracking control for PC users.

Other emerging products contributed 10% of revenues in the fourth quarter. Revenues from the emerging products group are now being driven primarily by the automotive end market.

Margins

OmniVision generated a gross margin of 17.5%, up 59 basis points (bps) from the previous quarter’s 16.9% but down 500 bps from 22.5% in the year-ago quarter. The gross margin benefited from higher volumes and the resultant increase in production, a more favorable mix and a stronger ASP.

Operating expenses of $46.8 million were lower than $47.9 million incurred in the previous quarter but higher than $45.7 million incurred in the year-ago quarter. OmniVision reported operating margin of 3.6% in the quarter, down 202 bps sequentially but up 197 bps from the year-ago quarter. Both R&D and SG&A were down as a percentage of sales from the year-ago quarter.

Net Profit/Loss

Total net income for the fourth quarter of 2013 was $8.9 million or 17 cents per share compared with $21.3 million or 40 cents a share in the previous quarter and $2.7 million, or 5 cents a share in the year-ago quarter.

There were no one-time items in the quarter. Consequently, pro forma net income was the same as GAAP net income of $8.9 million (2.7% of sales) compared to $21.3 million or a 5.0% net income margin in the preceding quarter and $2.7 million or 1.2% of sales in the same quarter last year.

Balance Sheet

Inventories were up 15.3% to $430.3 million from $373.3 million in the previous quarter, yielding annualized inventory turns of 2.6X. DSOs were 45, up from 37 at the end of the previous quarter.

The company ended the quarter with cash and investments balance of $212.3 million, down from $220.3 million during the previous quarter. OmniVision has $35.7 million in long-term debt and $131.1 million in long-term liabilities.

Guidance

For first quarter of 2014, OmniVision expects revenues in the range of $355–$390 million, GAAP earnings per share in the range of 21–38 cents and non-GAAP earnings, excluding share-based compensation and the associated tax impact, in the range of 35–52 cents a share.

Conclusion

OmniVision has leveraged its superior technology to solidify its position in the handset market and also expanded into other areas. We like its product roadmap, growth prospects, cost structure improvement, market diversification and management execution and believe that it will be able to deal with the short product life cycles and temporary slowdown in the computing and smartphone markets.

Further, we are positive about OmniVision's camera-cube chip technology for low resolution cameras, which normally forms the front facing camera in smart devices.

Automobile OEMs are rapidly deploying camera sensors in vehicles such as rearview and surround view. OmniVision has gained significant market share at major OEMs in Europe and North America, which may boost its revenues in the future.

OmniVision shares carry a Zacks Rank #1 (Strong Buy).  Other semiconductor stocks such as Amkor Tech Inc. (AMKR), Formfactor Inc.(FORM - Analyst Report) and Atmel Corp. (ATML - Analyst Report) , all have  a Zacks Rank #2 (Buy), and are worth considering at the current level.

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