OmniVision Beats Despite Weak Demand

OmniVision Technologies’ ( OVTI - Analyst Report ) earnings of 4 cents for the fiscal third quarter (ending January 2012) were better than the Zacks Consensus Estimate of 0 cents.

Total Revenue

OmniVision’s reported revenue of $185.2 million was down 15.0% sequentially, down 30.3% over the prior year and slightly better than management’s guidance range of $160-180 million (down 17-27% sequentially).

Total unit sales were down 6.5% sequentially to 143 million, while the blended ASP dropped 9.1% to $1.30. The ASP decline was due to a lower mix of higher-resolution sensors.

Overall, 2 megapixel and higher resolution sensors comprised around 22% of total units shipped, compared to 24% of shipments in the previous quarter. OmniVision stated that the 8 megapixel and 5 megapixel categories were a mixed bag, with the 1/3 inch sensors seeing some temporary slowdown, while the ¼ inch sensors saw normal seasonal strength.

While the 3 megapixel category did reasonably well and the new OV3660 ramped successfully, the 2meg category declined, impacted by transition to higher megapixel sensors.

The 1.3 megapixel category was 19% of total shipments, compared to 23% in the previous quarter. The lowest-ASP VGA and below category was 59% of total shipments, up from 53% in the fiscal second quarter.

Shipment of the 2meg and up, and 1.3 meg sensors declined 14.3% and 22.8%, respectively, on a sequential basis, while the VGA and below category grew 4.0%. However, the 1.3 meg category did the best in the year-over-year comparison, increasing 46.2%, while 2 meg and VGA were down 43.6% and 10.9%, respectively.

Revenue by End Market

All end markets other than entertainment (19% of total revenue) declined in the last quarter. Revenue from the entertainment market grew 19.0% sequentially. This is an area where significant price erosion may be expected since it is essentially a low-end market.

The camera phone market remains OmniVision’s largest, with a revenue contribution of 52%. OmniVision continues to make inroads into the feature handset market in Asia, in addition to strengthening demand for the 5 meg and 8 meg sensors in the smartphone market. However, revenues were down 26.3% in the last quarter, due to weakness in entry level handsets.

The notebook and webcam segment shrunk to 8% of revenue in the last quarter from 9% in the October quarter. The 24.5% sequential and 44.2% year-over-year decline in revenues from the end market may be attributed to the tablet computer, which has cannibalized the notebook market. However, OmniVision remains optimistic about the impact of Intel’s ( INTC - Analyst Report ) Ultrabooks and other similar products.

Other emerging products grew from 11% to 12% of revenue in the last quarter, although the segment declined 7.3% sequentially in dollar terms. Revenue from the emerging products group is now being driven primarily by the automotive end market.

Margins

OmniVision generated a pro forma gross margin of 24.2%, down 637 basis points (bps) from the previous quarter’s 30.6%. The gross margin was impacted by lower volumes and the resultant decrease in production, weaker mix and a much softer ASP.

The operating expenses of 42.0 million were higher than the previous quarter’s $44.8 million. OmniVision had an operating margin of 1.5% in the last quarter, which was down 851 bps sequentially from 10.0%. The main reason for the operating margin decline was the weaker gross margin, although both SG&A and R&D also increased as a percentage of sales.

Net Profit/Loss

The pro forma net income was $2.4 million, or a 1.3% net income margin, compared to $14.8 million, or 6.8% in the preceding quarter and $44.7 million or 16.8% of sales in the same quarter last year.

Including amortization of intangibles, OmniVision just broke even, compared to 35 cents in the October 2011 quarter and 75 cents in the year-ago quarter.

Balance Sheet

Inventories were down 1.3% to $247.3 million, yielding annualized inventory turns of 2.3X (compared to 2.4X at the end of the previous quarter). OmniVision has previously stated that turns of 4.0X to 5.0X were reasonable, given the short lead times. DSOs were 65, up from 53 at the end of the previous quarter.

The company ended with a cash and investments balance of $236.5 million, down $228.3 million during the quarter. OmniVision repurchased 8.1 million shares worth $100 million and also spent $26 million to buy the CameraCube production operations from VisEra, which is a JV between the company and Taiwan Semiconductor Manufacturing Company ( TSM - Snapshot Report ) . OmniVision has $39.4 million in long-term debt and $90.8 million in long-term liabilities.

Guidance

OmniVision’s guidance for the fourth quarter of fiscal 2012 is as follows: revenue in the range of $195-215 million (up 5-16% sequentially), better than the street, which had the revenue estimate at around $193 million.

The GAAP earnings attributable to OmniVision shareholders are expected to be 0-13 cents a share (a very wide range), while the non GAAP earnings excluding share based compensation and the associated tax impact are expected to be 15-28 cents a share. The Zacks Consensus Estimate for the quarter was 1 cent when the company reported earnings, well below the guided range.

Conclusion

Despite the attractive product line, OmniVision continues to see demand issues. Having been replaced by Sony Corp ( SNE - Snapshot Report ) in Apple’s ( AAPL - Analyst Report ) new iPhone (OmniVision is now a second source), the company has been shut out of the iPhone’s huge success. Additionally, Apple’s tablet has been eating into the notebook segment, where OmniVision had made significant headway.

Although management continues to display optimism about Ultrabooks, we doubt that these devices will be anywhere near as popular as the iPad, at least in the next few quarters. However, they could stem the continued declines the company has been seeing in the segment.

Additionally, the guidance beating our expectations on both the top and bottom lines could indicate that the company is over the bottom.

OmniVision shares carry a Zacks Rank of #3, implying a Hold rating in the next 1-3 months.