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OmniVision Technologies’ (OVTI - Analyst Report) earnings of 40 cents for the fiscal third quarter (ending Jan 2013) surpassed the Zacks Consensus Estimate by 18 cents.

Total Revenue

OmniVision’s reported revenues of $423.5 million were up 8.6% sequentially and 128.7% over the prior year and were toward the upper end of management’s guidance range of $390–425 million. The mobile phone and entertainment markets were the main growth drivers in the quarter.

Total unit sales were up 1.2% sequentially to 252 million while the blended ASP increased 7.7% to $1.68. ASP growth was led by a favorable shift in the product mix toward higher-resolution sensors (8 and 5 megapixel sensors are doing extremely well).

Overall, 2 megapixel and higher resolution sensors comprised around 39% of total units shipped, up 27.3% sequentially and 212.4% year over year.  The 8 megapixel and 5 megapixel categories particularly for smartphones and tablets saw strong shipments, fueled by the holiday season. 

The 1.3 megapixel category was 45% of total shipments, down 5.1% sequentially but up 317.4% from last year. The VGA category constituted 16% of total shipments, down 22.9% and 52.2% from the previous and year-ago quarters. The sequential declines in the lower-resolution categories are because of the ongoing transition to higher-resolution sensors.

Revenues by End Market

The camera phone market remains OmniVision’s largest, with a revenue contribution of 61% compared with 59% 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 the Chinese market during Christmas and Chinese New Year holiday seasons. 

The entertainment end markets (26% of total revenue) increased in the last quarter from 29%. This segment is fueled by growth in tablet market, which is witnessing rapid adoption among consumers. Several new tablets containing OmniVision sensors were launched in the third quarter.

The notebook and webcam segment increased to 7% of revenues in the third quarter from 6% in the October quarter. The modest growth in end market revenues may be attributed to tablets, which have cannibalized the notebook market. However, it is poised to benefit from design wins in the notebook and ultrabook segment.

Further, OmniVision remains optimistic about the impact of Intel’s (INTC - Analyst Report) Ultrabooks and other similar products. It is in an advantageous position as the decline in the PC and notebook business is being offset by the rising popularity of tablets and smartphone devices.

Other emerging products contributed 6% of revenues in the third quarter. Revenues from the emerging products group are now being driven primarily by the automotive end market.

Margins

OmniVision generated a gross margin of 16.9%, up 30 basis points (bps) from the previous quarter’s 16.6% but down 734 bps from 24.2% 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 $47.9 million were lower than the previous quarter’s $50.8 million but higher than $44.4 million incurred in the year-ago quarter. OmniVision had an operating margin of 5.6% in the last quarter, which was up 201 bps sequentially and 529 bps from the year-ago quarter. Strong revenue growth helped R&D and SG&A decline as a percentage of sales from both the previous and year-ago quarters. The gross margin improvement also helped. .

Net Profit/Loss

Total net income for the third quarter of 2013 was $21.3 million or 40 cents per share compared with $10.3 million or 19 cents a share in the previous quarter and $0.1 million, or $0.00 a share in the year-ago quarter.

There were no one-time items in the last quarter. Consequently, the pro forma net income was the same as the GAAP net income of $21.3 million (5.0% of sales) compared to $10.3 million or a 2.7% net income margin in the preceding quarter and $0.1 million or 0.1% of sales in the same quarter last year.

Balance Sheet

Inventories were down 6.4% to $373.3 million from $398.7 million in the previous quarter, yielding annualized inventory turns of 3.5X. DSOs were 37, down from 59 at the end of the previous quarter.

The company ended with cash and investments balance of $220.3 million, up from $139.6 million during the previous quarter. OmniVision has $35.7 million in long-term debt and $126.3 million in long-term liabilities.

Guidance

For the fourth quarter, OmniVision expects revenues to be in the range of $300–$330 million, GAAP earnings per share to be in the range of 0–15 cents while non-GAAP earnings, excluding share-based compensation and the associated tax impact, are expected to be 14–29 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 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. Design wins at key players, such as Apple (AAPL - Analyst Report) should further its growth prospects.

OmniVision shares carry a Zacks Rank #1 (Strong Buy).  Another semiconductor stock PLX Technology Inc. (PLXT), also carrying a Zacks Rank #1, is also worth considering at current levels. 

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