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Wednesday, October 28, 2009

Keep an eye on OmniVision

OmniVision Technologies (OVTI) has seen its stock price decline roughly 40% since mid-September. Can we expect things to turn around?

Background --

The company designs and manufactures CMOS image sensors (CIS) for consumer electronics products such as digital cameras, videocams, phones, PCs, netbooks and notebooks. It is also establishing a presence in the automotive, medical and security markets. Image sensors are the chips that allow all these gadgets to take pictures, capture movies, see what is behind your car, etc. The market for these chips is clearly growing and, though Omnivision has serious competitors, they are one of the leaders in their field.

Financials --

Here is a company that actually showed a sequential quarter-over-quarter increase in revenue when they reported back in August. Unfortunately, they couldn't quite translate that into a profit. Though revenue was up 18.5% to $105.6 million, the company still managed to lose $9.9 million or $0.19 per share. While still a loss, it was a big improvement over the earlier quarter.

Margin also increased as older inventory manufactured at higher cost was used or written off and newer inventory was built up at a more recent lower cost. Better average selling prices (ASP) were also obtained due to the higher resolution and higher complexity of some newer products.

Explore more OVTI Data on Wikinvest

With revenue and margins up, how did OVTI still manage to lose money?

For one thing, R&D was over 17% of revenue; high but not exceedingly so for a high tech semiconductor firm. Cost of Goods Sold was up $8 million or 10.8% from the previous quarter while G&A costs held steady. There wasn't one big item you point to that prevented the company from being profitable and none of the analysts probed the issue during the last conference call.

Outlook --

The company has stated that the current quarter, due to be reported on in late November or early December, should show further growth in revenue. Management indicates that the company has garnered a number of design wins including one for Microsoft's next generation webcam. Guidance provided back in August was quite positive with management saying they expect fiscal year second quarter revenues to be in the range of $155 million to $170 million representing a 47% to 61% increase quarter-over-quarter and GAAP earnings expected to range from break even to a net income of $0.10 per diluted share.

As this current quarter draws to a close, does it look like they are on track to achieve the expectations described in their guidance?

There are reports that the company can barely keep up with orders. The following was reported at
OmniVision Technologies has notified clients to expect upcoming limited supply of CMOS image sensors (CIS) due to strong iPhone 3GS demand for the end-year holiday season, according to market sources. Tight supply is not expected to ease until late November 2009, the sources pointed out.
OmniVision happens to be a supplier to Apple and it is said that Apple has increased fourth-quarter orders for the iPhone 3GS by 17-20%. In addition, OmniVision is the sole supplier for 3.2-megapixel CIS products for new iPod nano, iPod classic and iPod Touch models, all of which were launched last month in preparation for the holiday selling season.

Further tightening supplies, PC and notebook vendors are gearing up to introduce new models following the launch of Windows 7.

Conclusion --

It appears that OmniVision is on track to hit their revenue target for this quarter. The question is, with supplies so tight, did they leave money on the table by not ramping up their inventory sooner? It looks like perhaps they did.

In any case, with the stock down over 40%, the company seems like a low risk proposition. Their relationships with Apple and Microsoft and numerous other tier one customers should support the growth that management is predicting.

The overall market for image sensors reminds me of that for telecom chips where successful small companies like Starent (about to be bought by Cisco) are able to prosper by delivering progressively more complex and integrated offerings, the so-called system-on-a-chip (SOC) solutions that make it easier and easier for OEMs to design in higher value functionality for customers. Leadership in these SOC solutions also make it harder for competitors to keep up. OmniVision is going down that path and, hopefully, should be able to return to profitability and bottom-line growth.

Disclosure: no positions

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