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What Comes After “Worse” For OmniVision Technologies?
When a company goes from bad to worse and then another step further, what do you call that? Whatever word investors in OmniVision Technologies (Nasdaq:OVTI) may choose, and most of them would likely be unprintable, it is clear that this specialty chip company is indeed in trouble. Although much will be made of the company's share losses to Apple (Nasdaq:AAPL), this is increasingly looking like a broader sector issue as well.
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A Bad Quarter
OmniVision told investors a little while ago that this fiscal second quarter was going to be bad, and it was. Although revenue actually slightly exceeded the company's most recent guidance range, it still represented around a 9% year-on-year decline and approximately a 21% decline in sales. OmniVision took a one-two punch on the top line, as shipments fell about 11% sequentially and average selling price fell a similar amount. Notably, higher-end products (two megapixels and up) made up a significantly smaller share of total sales in the quarter. (For related reading, see A Primer On Investing In The Tech Industry.)
Profitability likewise took a dive. The company did surprisingly well on the gross margin - actually increasing from last year. Operating income was another story, though, dropping more than 30% on both a GAAP and adjusted GAAP basis. If there's a bright spot it's that selling, general and administrative expenses are apparently under control.
No Light, Just More Tunnel For Now
Don't expect things to get better any time soon at OmniVision. Management noted a much higher level of order cancellations and deferrals, and inventory spiked up as a result. Based on management's guidance, though, it doesn't look like those products are going to ship out quickly - management slashed revenue guidance for the next quarter to a level about 15% below the already lowered consensus estimates. (For more on OmniVision, read Smoke Starting To Billow From The OmniVision Story.)
Apple Isn't the Only Story
Investors have made a lot of the fact that Apple is dual-sourcing image sensors for the next iPhone from both OmniVision and Sony (NYSE:SNE). Unfortunately, it looks as though ongoing production issues with Taiwan Seminconductor (NYSE:TSM) and possible materials and packaging issues have reduced yields to a point where Sony is going to be the majority supplier for this phone. Giving a large competitor a chance to show its stuff to Apple could be a misstep that haunts OmniVision for some time to come.
But again, it's not just an Apple story. Given management's comments on other categories like video graphics array (VGA), it seems that there's weakness all over the board. The company is not selling as many sensors for notebooks or webcams, and that's compounding weakness in phones and tablets from customers like Research In Motion (Nasdaq:RIMM). Maybe that helps allay some fears that OmniVision is losing share to Sony, Aptina, or STMicroelectronics (NYSE:STM), but it's hardly good news.
The Bottom Line
OmniVision is ample evidence of the danger that goes with reaching out to grab falling knives. Does OmniVision have technology that is competitive in the market? Yes. Does OmniVision have market opportunities sufficient to drive meaningful revenue and profit growth? Yes. When will this business bottom out and resume a growth trajectory? I have absolutely no idea. (To learn more about investing in the technology sector, read Technology Sector Funds.)
Maybe the fact that this looks like a broader consumer electronics issue mitigates some of the risk, but not by enough. Likewise, the stock seems underpriced so long as the company is a viable concern that can grow again, but this situation just keeps getting uglier and uglier. As I have almost no confidence in my model here, I just cannot advise stepping up and buying these shares now, though I realize investors with the courage to buy in when things look terrible may well reap much greater gains if and when the turnaround comes.
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Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
A Bad Quarter
OmniVision told investors a little while ago that this fiscal second quarter was going to be bad, and it was. Although revenue actually slightly exceeded the company's most recent guidance range, it still represented around a 9% year-on-year decline and approximately a 21% decline in sales. OmniVision took a one-two punch on the top line, as shipments fell about 11% sequentially and average selling price fell a similar amount. Notably, higher-end products (two megapixels and up) made up a significantly smaller share of total sales in the quarter. (For related reading, see A Primer On Investing In The Tech Industry.)
Profitability likewise took a dive. The company did surprisingly well on the gross margin - actually increasing from last year. Operating income was another story, though, dropping more than 30% on both a GAAP and adjusted GAAP basis. If there's a bright spot it's that selling, general and administrative expenses are apparently under control.
No Light, Just More Tunnel For Now
Don't expect things to get better any time soon at OmniVision. Management noted a much higher level of order cancellations and deferrals, and inventory spiked up as a result. Based on management's guidance, though, it doesn't look like those products are going to ship out quickly - management slashed revenue guidance for the next quarter to a level about 15% below the already lowered consensus estimates. (For more on OmniVision, read Smoke Starting To Billow From The OmniVision Story.)
Investors have made a lot of the fact that Apple is dual-sourcing image sensors for the next iPhone from both OmniVision and Sony (NYSE:SNE). Unfortunately, it looks as though ongoing production issues with Taiwan Seminconductor (NYSE:TSM) and possible materials and packaging issues have reduced yields to a point where Sony is going to be the majority supplier for this phone. Giving a large competitor a chance to show its stuff to Apple could be a misstep that haunts OmniVision for some time to come.
But again, it's not just an Apple story. Given management's comments on other categories like video graphics array (VGA), it seems that there's weakness all over the board. The company is not selling as many sensors for notebooks or webcams, and that's compounding weakness in phones and tablets from customers like Research In Motion (Nasdaq:RIMM). Maybe that helps allay some fears that OmniVision is losing share to Sony, Aptina, or STMicroelectronics (NYSE:STM), but it's hardly good news.
The Bottom Line
OmniVision is ample evidence of the danger that goes with reaching out to grab falling knives. Does OmniVision have technology that is competitive in the market? Yes. Does OmniVision have market opportunities sufficient to drive meaningful revenue and profit growth? Yes. When will this business bottom out and resume a growth trajectory? I have absolutely no idea. (To learn more about investing in the technology sector, read Technology Sector Funds.)
Maybe the fact that this looks like a broader consumer electronics issue mitigates some of the risk, but not by enough. Likewise, the stock seems underpriced so long as the company is a viable concern that can grow again, but this situation just keeps getting uglier and uglier. As I have almost no confidence in my model here, I just cannot advise stepping up and buying these shares now, though I realize investors with the courage to buy in when things look terrible may well reap much greater gains if and when the turnaround comes.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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