Friday, June 1, 2007

OmniVision Turnaround Under Way (OVTI)

Just yesterday OmniVision reported earnings for the quarter ending April 30th. Revenues blew out analyst estimates and earnings missed.


Guidance, for the 4th quarter ending July 31st, 2007, blew away estimates.


Gross Margin was still low due to the lower-margin VGA products. They still have a very solid balance sheet with over $305 million in cash and cash equivalents and short-term investments. Starting with the 2nd quarter in the 2007 fiscal year, which ended on 10/31/06, they ramped up inventory production. Management was right in increasing inventories, since new demand is coming in right on target. Also, most of the high-cost inventory is gone, that should help the gross margin.

Demand is strong and is getting stronger. It was driven by entry level phones which use OmniVision’s VGA chip. They have gross margin initiatives that they will invest a lot of resources into and they are saying that it will rise. Their R&D expense was strong coming in over 13% of revenues compared to almost 9% in the same quarter a year ago. There are also new products in the pipeline. Just about a week ago, they came out with new 1.75 micron OmniPixel3 architecture.

There will be further demand strength driven by such sources as the automotive market, the medical market, and the laptop market. Their colonoscopy partner just got an FDA approval to make the colonoscopy products using OmniVision’s camera chips. The higher-resolution camera chips is OmniVision’s prime target because there is less competition there than in the lower resolution chips.

The start of the turnaround is in good shape, there will be further gains ahead.

Disclosure: I am long OVTI.

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