OmniVision Technologies Earnings Call Insights: Margin Drop, Target Gross Margins

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On Thursday, OmniVision Technologies, Inc. (NASDAQ:OVTI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what investors shared.

Margin Drop

Philip Lee – Lazard Capital Markets: How much is the decline in the gross margin due to yields compared to the inventory write-down.

Anson Chan – CFO and VP, Finance: For fiscal Q4 the so-called drop in margin is really attributable to Tier 1 off items that I mentioned on the call which is the allowance for additional E&O inventory and a sale from reserve inventory as well. So, these two effects from Q3 to Q4 accounts for more than drop in margin.

Philip Lee – Lazard Capital Markets: Then I guess you see for next quarter the yield being the main issue that margins remained depressed?

Anson Chan – CFO and VP, Finance: I won’t say it’s just because of yield issue. As I try to mention in my prepared remarks we start to ship out in more high volume of BSI-2 devices and BSI-2 devices being such a complicated sensor on cost structure it’s actually very high at the moment. This is something that we have to battle and obviously we are doing everything we can just that we won’t be able to fix it immediately. The other thing that I saw and I mentioned also in our prepared remarks is that there always be some production risks associated with new product introductions so you continue to ramp on these production risk, they do represent little risk and to extent that there are any unexpected low risk issues then it will run its way through the P&L and reflect some unfavorably – result in unfavorable results.

Philip Lee – Lazard Capital Markets: As a follow-up we just step back and can you give us a view on the competitive landscape and where you believe your new product stand versus the competition?

Anson Chan – CFO and VP, Finance: I’m sorry can you repeat that question, I couldn’t quite hear it.

Philip Lee – Lazard Capital Markets: Yeah. Can you give us a view on the competitive landscape and where your new product stands versus the competition?

Ray Cisneros – SVP, Worldwide Sales and Sales Operations: This is Ray Cisneros, in regards to competition we see it across the board definitely as usual markets are continuing to expand and competition continues to come in and out. So from a general statement we are definitely seeing competition always there, it’s no different today as it was yesterday or as we probably anticipate going forward in the future. I will say though because the markets are expanding, I think typically they expand faster than most analysts predict. It represents obvious opportunities for OmniVision to always pick and choose what markets will be lucrative and give us the best return on our investment, so it’s a broad question you asked, I’m giving you broad answers. Hopefully, that but it still helps.

Target Gross Margins

Paul Coster – JPMorgan: Anson, I just want to make sure I understood, I’m sorry to keep going back to this question. But the margin, are you saying that they would’ve been the same as the fiscal third quarter, but for the write-off of the one-time items that you detailed? And then looking forward okay so I get it, the first quarter you got some risks associated with BSI-2 and the cost structure is greater. Can you talk us through what though the target gross margins are for that product, say, two or three quarters out from now?

Anson Chan – CFO and VP, Finance: First of all about Q4, the answer is yes. Actually if you were to – I’m not saying everyone should do that, but if you were to tie the pro forma out, is it too effective to talk about meaning the revenues from sales of parts and additional inventory reserves, you get to something very, very comparable to our Q3. And the reason is we just don’t really have a whole lot of shipment of brand new SKUs yet, so any potential yield risks were not – simply were not run its way through our P&L yet. So that’s finally dovetailing to the second part of the question, which is about Q1. I don’t normally quantify gross margins I will stick with that. But needless to say though we do not believe margins will all of sudden recover to historical high levels and hence in prepared remarks I said that gross margins will remain depressed. And largely attribute to BSI-2 I won’t say it’s all because of yield though, it’s simply because the part is complicated and so there are a lot of effecting steps involved. In our whole supply chain also they have new equipment and what not. So all in all the cost structure is high and so we have to work with our supply chain. We have to improve the yield ourselves and so forth before we can have a more favorable cost structure for this particular product. And which doesn’t really help because we are also in fiscal ’13 going through a significant transition, more of our premium products will in the form of BSI-2. So just kind of push us to work even harder and try to get to a better result. So we will take time we will take at least a few quarters.

Paul Coster – JPMorgan: My last question is, you previously peaked at revenues in the 260 to sort of 280 range and now you are ramping on BSI-2. Do you think those kinds of revenues can be achieved again? I mean, Shaw, are we really at the very early stage of this next generation product or do you feel like you are very quickly going to get back to sort of peak levels in other words are we already back at peak levels?

Ray Cisneros – SVP, Worldwide Sales and Sales Operations: This is Ray Cisneros. I think not getting into specifics of what we can say about going forward type of financials what I could tell you is that we are having a good mix of products that are ramping up right now for a variety of applications and customers and it’s the kind of trend that we like to see. Hopefully our guidance that we’ve given is in the right direction for our fiscal Q1 and then when we come back in one quarter from now we’ll see what the numbers are, but what we can say is weak a good mix of products coming forward and hopefully that spells good things for OmniVision.

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