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OmniVision's Q2 Earnings Beat - Analyst Blog
OmniVision Technologies ( OVTI ) reported first-quarter fiscal 2014 (ended Jul 2013) earnings of 42 cents a share, beating the Zacks Consensus Estimate of 29 cents.
OmniVision reported revenues of $373.7 million, up 11.2% sequentially and 44.8% over the prior-year period. Revenues were above the midpoint of management's guidance range of $355 million-$390 million but missed the Zacks Consensus Estimate of $376.6 million due to the weak smartphone market.
Total unit sales were up 10.6% sequentially to 208 million while the blended average selling price (ASP) was flat sequentially at $1.79. ASP did not increase in the quarter due to the combined effects of higher HD shipments as well as competitive pricing in China.
Overall, 2 megapixel and higher resolution sensors comprised around 47% of total units versus 50% in the prior quarter. The 8 megapixel and 12 megapixel categories, particularly for smartphones and tablets, saw strong shipment from the emerging markets.
The 1.3 megapixel category constituted 39% of total shipments versus 33% in the prior quarter. The VGA category constituted 14% of total shipments versus 17% in the prior quarter. 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 63% compared with 65% in the prior quarter. Currently, China has become the largest mobile market worldwide but the company witnessed some reduction in demand, which it expects to continue in the fiscal second quarter. However, OmniVision witnessed strong demand for 8 megapixel and 12 megapixel sensors for smartphones in Asian markets.
We believe that full 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.
OmniVision is likely to benefit as it supplies camera sensors to Chinese OEMs, which are expanding in both developing and developed international markets.
The entertainment end market contributed 22% of total revenue, up from 17% in the prior quarter, due to strength in the tablet segment.
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.
Also, wearable computers or smartphone devices are the next step in mobile electronics. The tech companies are also blending the fashion quotient to market their new unique devices and we believe OmniVision is well-positioned to capture the growth opportunity.
Contribution of the notebook and webcam segment decreased to 7% of total revenue in the first quarter from 8% in the fourth quarter. Though the tablets have cannibalized the notebook market, the company was able to maintain consistent shipments during the quarter. The company is poised to benefit from design wins in the PC and notebook platforms. 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 8% of revenues in the first quarter. Revenues from the emerging products group are now being driven primarily by the automotive end market. High-performance 720-P HD and VGA sensors are the primary products in this market. During the quarter, the company saw good growth in its security business due to the continuing increase of IP digital camera products.
OmniVision reported gross margin of 17.4%, down 10 basis points (bps) from the previous quarter's 17.5% and 170 bps from 19.1% in the year-ago quarter. The decrease in gross margin was due to an increase in provision for access in obsolete inventories, partially offset by some cost reduction in manufacturing activities.
Operating expenses of $48.2 million were lower than $49.9 million incurred in the year-ago quarter. OmniVision reported operating margin of 4.5% in the quarter versus 3.5% in the prior quarter and (0.3%) in the year-ago quarter. Both R&D and SG&A were down as a percentage of sales from the year-ago quarter.
Total net income for the first quarter of 2014 was $23.1 million or 42 cents per share compared with $8.9 million or 17 cents a share in the previous quarter and $2.3 million or 4 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 $23.1 million (6.2% of sales) compared to $8.9 million or a 2.7% net income margin in the preceding quarter and $2.3 million or 9.0% of sales in the same quarter last year.
Inventories were down 0.9% to $426.6 million from $430.3 million in the previous quarter. DSOs were 43 days, down from 44 days at the end of the previous quarter.
The company ended the quarter with cash and investments balance of $240.5 million, up from $212.3 million during the previous quarter. OmniVision has $35.7 million in long-term debt and $122.2 million in total long-term liabilities.
For the second quarter of 2014, OmniVision expects revenues in the range of $375 million-$410 million, GAAP earnings per share in the range of 21cents-38 cents and non-GAAP earnings, excluding share-based compensation and the associated tax impact, in the range of 36 cents-53 cents a 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 first-quarter results with both the top and bottom lines exceeding the prior-year figures.
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's shares carry a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include SanDisk ( SNDK ), Syntel Inc. ( SYNT ) and Silicom Ltd. ( SILC ). All these stocks carry a Zacks Rank #1 (Strong Buy).
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