OmniVision Technologies (OVTI - Analyst Report) reported third-quarter fiscal 2014 (ended Jan 2014) earnings of 54 cents a share, which comfortably beat the Zacks Consensus Estimate of 21 cents. Following the earnings results, stock surged 15.1% in afterhours trading.
OmniVision reported revenues of $352.0 million, down 11.4% sequentially and 16.9% over the year-ago quarter. However, revenues were above management’s guidance range of $310.0–$340.0 million and the Zacks Consensus Estimate of $327.0 million.
Total unit sales were down 9.7% sequentially to $214.0 million and the blended average selling price (ASP) decreased 1.8% sequentially and came in at $1.64. The decrease in ASP was due to quarterly price erosion across product lines in all regional markets.
Overall, 2-megapixel and higher resolution sensors comprised around 44.0% of total units versus 36.0% in the prior quarter. The sequential increase in this category was driven by increased shipment of 5-megapixel sensors. The 1.3-megapixel category constituted 44.0% of total shipments versus 50.0% in the prior quarter. The VGA category constituted 12% of total shipments versus 14.0% in the prior quarter.
Revenues by End Market
The mobile phone market remains OmniVision’s largest, with a revenue contribution of 52.0% compared with 60.0% in the prior quarter. The decrease in mobile sales was due to lower volumes in smartphones and tablet platforms in North America, partially offset by growth in China.
Currently, China has become the largest mobile market worldwide and the company witnessed strong demand for 5-megapixel, 4-megapixel and 2-megapixel sensor shipments for smartphones in the Chinese market. The company also saw steady shipment volume for 8-megapixel products in China and Taiwan. Additionally, the company expects strong demand for its 4-megapixel sensor in the Asian markets.
We believe the full-HD format sensors will witness a rise in demand as all major handset original equipment manufacturers (OEMs) are using VGA with HD sensors for the front-facing camera in smart devices. The company has also secured design wins for the PureCel OV13850 and OV8858 with major OEMs in China and Taiwan.
The entertainment end market contributed 31.0% of revenues, up from 25.0% in the prior quarter, due to strength in the tablet segment. The ramp up of OmniVision’s 5-megapixel BSI and BSI-2 sensors and increased shipments of gaming consoles helped drive the demand in this segment.
We believe that tablet sales will pick up as all the major OEMs are planning to launch the 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.
Wearable computers or smart devices are the next step in mobile electronics. The tech companies are blending the fashion quotient to market their new unique devices better and we believe OmniVision is well-positioned to capitalize on this trend.
Contribution of the notebook and webcam segment increased to 7.0% of revenues in the third quarter from 5% in the second quarter. Though the tablets have cannibalized the notebook market, OmniVision is trying to develop cost-friendly products with improved performance. Many of the OEMs are using sensors to develop human interface solutions like gesture and eye tracking control for PC users. Also, the company is working on various imaging-based technologies with OEMs in order to drive growth in this segment.
Other emerging productscontributed 10.0% of revenues in the third quarter. Revenues from the emerging products group are now being driven primarily by the automotive end market and the security market. High-performance 720-P HD, 1080p and VGA sensors are the primary products in this market. During the quarter, the company witnessed strong growth in its security business due to the continuing increase of IP digital camera products.
OmniVision reported gross margin of 19.6%, up 80 basis points (bps) from the previous quarter’s 18.8% and 270 bps from 16.9% in the year-ago quarter. The increase in gross margin was due to continued reduction in the company's overall production costs.
Operating expenses of $51.3 million were higher than $47.9 million incurred in the year-ago quarter. OmniVision reported operating margin of 5.1% in the quarter, down 120 bps sequentially and 50 bps from the year-ago quarter. As a percentage of sales, both research & development and selling, general & administrative expenses increased from the year-ago quarter.
Total net income for the third quarter of fiscal 2014 was $30.6 million or 54 cents per share compared with $26.3 million or 47 cents in the previous quarter and $21.3 million or 40 cents 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 $30.6 million (8.6% of sales) compared to $26.3 million or a 6.6% net income margin in the preceding quarter and $21.3 million or 5.0% of sales in the same quarter last year.
Inventories were down 12.3% to $342.2 million from $390.3 million in the previous quarter. DSOs were 35 days, down from 40 days at the end of the previous quarter.
The company ended the quarter with cash and investments balance of $393.0 million, up from $265.6 million during the previous quarter. OmniVision has $32.2 million in long-term debt and $122.6 million in total long-term liabilities.
For the fourth quarter of 2014, OmniVision expects revenues in the range of $275.0–$305.0 million. Analysts polled by Zacks expect revenues of $288.0 million, below the mid-point of the guided range.
GAAP earnings per share are expected in the range of 5–21 cents and non-GAAP earnings, excluding share-based compensation and the associated tax impact, in the range of 19–35 cents per share.
OmniVision has leveraged its superior technology to solidify its position in the handset market and also expanded into other areas. The company reported strong third-quarter results with both the top and bottom lines exceeding the Zacks Consensus Estimate.
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 pixel technology and 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. The company is also seeing growth returning in the Chinese market, which is a big positive for the company.
OmniVision’s shares sport a Zacks Rank #1 (Strong Buy). Other stocks that are performing well at current levels include Ambarella, Inc. (AMBA - Snapshot Report), FormFactor Inc. (FORM - Analyst Report) and Himax Technologies (HIMX - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).