OmniVision Technologies, Inc.

Transcription

1 February 27, 2015 OmniVision Technologies, Inc. Current Recommendation Prior Recommendation NEUTRAL Outperform Date of Last Change 12/21/2014 Current Price (02/26/15) $26.51 Target Price $28.00 Earnings Update: OmniVision Reports Q3 Results SUMMARY (OVTI-NASDAQ) OmniVision is an OEM of CMOS image sensors and support circuitry used within handsets, notebooks and other mass markets. Its fiscal third-quarter earnings beat the Zacks Consensus and also provided encouraging guidance. The company has a strong position in the mobile and auto markets, increasing opportunities in security and is also expanding into other areas. We like its product roadmap, growth prospects, mix shift to higherresolution sensors, and strengthening position in the fast-growing Chinese market. However, short product life cycles, increased competition and price pressures. We are therefore reiterating our rating of Neutral on OmniVision shares. SUMMARY DATA 52-Week High $ Week Low $15.27 One-Year Return (%) Beta 1.51 Average Daily Volume (sh) 525,943 Shares Outstanding (mil) 58 Market Capitalization ($mil) $1,537 Short Interest Ratio (days) 2.97 Institutional Ownership (%) 82 Insider Ownership (%) 5 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 23.0 Earnings Per Share (%) 21.9 Dividend (%) N/A P/E using TTM EPS 15.2 P/E using 2015 Estimate 19.1 P/E using 2016 Estimate 29.8 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold Risk Level * Type of Stock Average, Mid-Value Industry Elec Comp-Semic Zacks Industry Rank * 22 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jul) (Oct) (Jan) (Apr) (Apr) A 390A 424 A 336 A 1,408 A A 397 A 352 A 331 A 1,454 A A 394 A 292 A 260 E 1,353 E E 330 E 339 E 1,322 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jul) (Oct) (Jan) (Apr) (Apr) 2013 $0.09 A $0.19 A $0.44 A $0.17 A $0.89 A 2014 $0.42 A $0.47 A $0.56 A $0.26 A $1.71 A 2015 $0.78 A $0.47 A $0.23A -$0.09 E $1.39 E 2016 $0.12 E $0.25 E $0.30 E $0.89 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS OmniVision Technologies reported third-quarter fiscal 2015 (ended Jan 2015) earnings per share of 23 cents, which comfortably beat the Zacks Consensus Estimate of 14 cents. However, the earnings were down 50.6% sequentially and 57.1% year over year, primarily on account of lower revenues. Following the earnings announcement, the stock rose 3.7% in the after-hours trading session due to encouraging guidance, indicating enhanced growth prospects. Revenues OmniVision reported revenues of $292.3 million, down 25.8% sequentially and 17.0% from the year-ago quarter. However, revenues were within the management-guided range of $275.0 $305.0 million. The top line also surpassed the Zacks Consensus Estimate of $290.0 million. The mobile phone market is very important for OmniVision (contributing 67% in the last quarter). Segment sales weakened significantly (as expected) because of inventory clearance and 4G transitionrelated slowdown in China. Overall prospects in China, India and Korea are good and there was also an important customer win in Korea. The company s notebook PC segment also saw a decline in revenues due to the commoditization of the camera feature in notebooks. The company s automotive business continued its strong growth momentum during the quarter and helped to offset some of the decline in the mobile phone market. Margins OmniVision reported gross margin of 22.1%, up 14 basis points (bps) from the previous quarter s 22.0%. The reported figure also improved 245 bps from 19.6% in the year-ago quarter. The expansion in gross margin was due to a favorable product mix shift toward the company s newer and higher resolution products, as well as productivity improvements, which reduced the cost of production. Operating expenses of $55.0 million were 3.0% lower than the prior quarter and 7.2% higher than the year-ago quarter. Both research & development and selling, and general & administrative expenses increased from the year-ago quarter but decreased sequentially. The net result was an operating margin of 3.3%, down 427 bps sequentially and 178 bps year over year. Net Profit/Loss Total net income for the second quarter of fiscal 2015 was $14.0 million or 23 cents per share compared with $28.0 million or 47 cents in the previous quarter and $30.6 million or 54 cents in the year-ago quarter. The net margin of 4.8% was lower than the 7.1% in the previous quarter and 8.7% in the yearago quarter. There were no one-time items. Balance Sheet OmniVision ended the quarter with cash and investments balance of $512.8 million, down $12.4 million from $525.2 million during the last quarter. Inventories were up 7.8% to $366.4 million from $340.0 million Equity Research OVTI Page 2

3 in the previous quarter. The company has $25.1 million in long-term debt and $98.1 million in total longterm liabilities. Guidance For the fourth quarter of fiscal 2015, OmniVision expects revenues in the range of $265.0 $295.0 million. The Zacks Consensus Estimate for revenues is pegged at 262 millions. GAAP earnings per share are expected in the range of 2 18 cents. Non-GAAP earnings, excluding share-based compensation and the associated tax impact, are likely to range between15 cents and 31 cents. The Zacks Consensus Estimate for earnings is pegged at breakeven. Conclusion OmniVision has solidified its position in the handset market and has also expanded into other areas leveraging its superior technology. The company reported encouraging second-quarter results with both the top- and bottom-line figures beating the Zacks Consensus Estimate. We commend the company s product roadmap, growth prospects, cost structure improvement, market diversification and management execution. Further, we are positive about OmniVision's pixel technology and camera-cube chip technology for low-resolution cameras, which normally form the front-facing camera in smart devices. The mobile market, especially in emerging markets like China, India and Korea continues to show strong growth trends. The company already has a strong position in China, which is the manufacturing destination for many phone-makers across the world. The local Indian market is looking up and the company has increased investment in the region. Management also mentioned an important customer win in Korea, so growth prospects look bright. Additionally, management said that the slowdown in China related to technology transition and inventory accumulation had probably run its course, so the business may be expected to look up going forward. Automobile OEMs are rapidly deploying camera sensors in vehicles such as rearview and surround view. OmniVision has gained significant market share in the Chinese market a major positive. Also, the company is seeing improvement at major OEMs in India, expecting the country to become a major growth driver for OmniVision over the next few years. As OmniVision continues its growth momentum in Asia and other emerging economies, it can result in volatility in the company s financial results, at least in the near-term. But we expect it to witness long-term growth. However, increased competition, North American challenges and price pressures remain concerns. Equity Research OVTI Page 3

4 VALUATION OmniVision s current trailing 12-month earnings multiple is 15.2X, compared to the 62.2X average for the peer group and 18.5X for the S&P 500. Over the last five years, the company s shares have traded in a very broad range of 4.8X to 164.9X trailing 12-month earnings and the current multiple is toward the low end of this range, indicating upside. Also, the earnings growth rate of 20.0% is above the industry average expected growth rate of 17.8% for OVTI shares in the next 5 years, indicating upside. However, on the basis of third quarter results, we are reiterating our rating of Neutral supported by a target price of $28.00 (1.47X 2015 P/E). Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low OmniVision Technologies, Inc. (OVTI) Industry Average S&P Semiconductor Manufacturing International Corp. (SMI) SunEdison, Inc. (SUNE) N/A N/A N/A 60.5 N/A Atmel Corporation (ATML) ARM Holdings plc (ARMH) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow OmniVision Technologies, Inc. (OVTI) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr EV/EBITDA Industry Average S&P N/A 2.1 N/A Equity Research OVTI Page 4

5 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET Equity Research OVTI Page 5

6 OVERVIEW Based in Sunnyvale, CA, OmniVision Technologies, Inc. (OVTI) is a fabless original equipment manufacturer (OEM) of complementary metal oxide semiconductor (CMOS) image sensors and the supporting image processing circuitry that are integrated into a single chip. Image sensors are devices that convert light signals into electrical signals. These electrical signals can be sampled, processed and then converted into an electronic image for exportation to the application device. Image sensors typically use either charge-coupled device (CCD) or CMOS image technology. CCD-based sensors are usually used in higher-end applications, because the technology produces higher light sensitivity, better image quality and higher resolution. CMOS image sensors have been growing at the expense of CCD sensors due to certain inherent advantages. A CMOS image sensor, along with the support circuitry, can be integrated into a single chip, giving rise to a camera-on-a-chip device or an application-specific integrated circuit (ASIC). The higher level of integration reduces the need for some supporting electronics, thereby lowering cost, power consumption and space requirements, concurrently increasing device reliability. The image quality gap is narrowing with each succeeding generation of CMOS sensors. CMOS image sensors dominate the camera phone market. OmniVision s products are mainly targeted at embedded wireless camera handsets and digital still cameras, although the company is seeing very strong demand in the notebook market as well. Other applications for its image sensors are in the security and surveillance, toys and games, and medical markets. Products are sold directly to OEMs or value-added resellers (VARs) and indirectly through distributors. The company s flagship product line is the CameraChip. This chip contains functional circuitry that captures and processes the image, processes any colors (through an optical lens), and creates a representative signal in the specified output format. While some competing technologies convert the image sensing array directly into a digital signal prior to any processing, OmniVision s technology processes the signals internally as analog signals and then converts them to a digital signal as the final Equity Research OVTI Page 6

7 step prior to output. This further shrinks the size of the chip, reduces complexities, lowers power consumption and thus cost. OmniVision also produces chips that interface between the camera chip and various industry standard buses that perform image compression. The bulk of CameraChip wafer production, including the fabrication of DSP and interface chips is outsourced to Taiwan Semiconductor Manufacturing Company, while a smaller amount goes to Powerchip Semiconductor. The company has a joint venture with TSM (Visera), in which the two companies have equal interest. Visera takes care of color filter application to its color image sensors and the stacking of wafer level optics. Wafer probing and testing is done at King Yuan Electronics and Tong Hsing Electronic Industries, while die packaging is handled by Silicon Precision Industries, Tong Hsing and XinTec. Foxconn Technology and Cowell Electronics were the largest customers in 2014, accounting for 13.8%, and 12.5% of the revenues, respectively. Taiwanese distributor World Peace Industrial Group remained the only distributor generating more than 10% of revenue in Distributors accounted for around 19% of total 2014 revenue. CMOS sensor competitors include Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba. Suppliers of the competing traditional CCD image sensors include Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp, Sony and Toshiba. REASONS TO BUY We see improving revenue growth prospects on the one hand and more favorable costing on the other. Revenue growth is expected to come from strength in its core smartphone segment due to emerging markets strength, growing position in the cheaper handset categories and increasing demand for higher resolution sensors. Although smartphone growth rates in North America, Europe and Japan have slowed to a crawl, the impact on OmniVision will be mitigated by its growing position at Chinese manufacturers. China remains one of the fastest-growing markets, although the transition from 3G to 4G and competition in the market is resulting in temporary softness. Other growth Equity Research OVTI Page 7

8 markets include India, Africa and Brazil. India in particular is likely to experience significant growth as its enormous feature phone customer base is upgrading to smartphones, which should be beneficial for the company. Revenues from India jumped 50% sequentially in the last quarter. Other markets, such as tablets, auto and security are also expected to do well. The emerging wearable technology market also expands the scope for its wafer-level camera technology and management said there was growing interest in its technology from eyewear, fitness product and watch makers. OmniVision s new sensors are now being integrated into next-generation products. OmniVision is one of the largest suppliers of CMOS image sensors for multiple end markets, particularly the handset, notebook, webcam, security, auto and medical markets, with a significant share of the total image sensor market. The company has consistently delivered new, technologically advanced products. The OmniPixel platform has been expanded to include a range of different array-sized products from the VGA to the 14 megapixel camera chip. Products with greater pixel densities generate higher average selling prices (ASPs), higher revenue and better margins for OVTI. The 1.3 meg ASP is about twice the VGA ASP and the 2 meg ASP is 50-70% higher than the 1.3 meg ASP. Therefore, the upward migration of megapixel resolutions and broader application across electronic devices are positives. OmniVision s products tend to lower the cost of ownership. The company s CameraCube module integrates the functionalities of an image sensor, embedded image processor and wafer level optics in one compact small-footprint package. These surface mountable devices can be directly soldered to the PCB, with no additional requirement for sockets or insertion. The high functionality, small size, simplified supply chain and resultant decline in BOM costs make it the ideal solution for the latest generation ultra slim handset market. Additionally, given its thermal tolerance levels (up to 260 C), the product is expected to have broader application in other areas, including notebooks, automotive electronics, surveillance and medical. OmniVision has also developed sensors based on High Dynamic Range (HDR) technology. HDR refers to the in-built capacity of a sensor to adjust very quickly to lighting changes in the environment, to pick up a wide range of light signals and display them in a single image. The higher the dynamic range, the greater the sensitivity of the sensor. The sensor switches to HDR mode when there is a change in the lighting, and quickly switches back to non-hdr mode when the lighting normalizes. This ground-breaking technology also lowers the cost of ownership for users, because the existing CCD technology requires multiple chips with HDR capability, which naturally comes at a higher price. Camera phone revenue has grown at a double-digit clip over the last few years. The strength in fiscal 2014 was largely because of OmniVision s superior technology that has enabled it to generate a steady flow of design wins. The company is strongly positioned in the smartphone segment. OmniVision has the policy of initially building a position through entry-level handsets with its cheaper VGA sensors, which are then transitioned to higher-resolution sensors. This strategy continues to be deployed to drive growth in under-penetrated developing markets such as China and India. In fact, China is growing very strongly at present, a trend that should continue as Chinese customers replace their feature phones with smartphones and China moves on to 4G/LTE. Industry analysts predict that the increasing global proliferation of low-cost 3G smartphones as well as the transition to 4G/LTE in China, will be the primary drivers for smartphone growth and OmniVision is well positioned to benefit from this growth, given its strong relationships with baseband partners, manufacturers and OEMs, especially in Asia. With the intention of reducing its dependence on the highly competitive handset market, management has been pursuing growth in other emerging markets. The diversification strategy proved most effective over the last few years, with the revenue share of other end markets growing from 31% in fiscal 2011 to 41% in fiscal Management has also focused on faster-growing international markets particularly in Asia, Latin America and Africa, which is helping to offset some of the market-related weakness and customer loss in North America. Equity Research OVTI Page 8

9 OmniVision has come a long way since it first started diversifying into the automotive market. With high-end cars now adopting multiple cameras for surround view, night vision, pedestrian and optical detection, mirror replacement, lane departure and so forth, the addressable market for OmniVision has continued to grow. As a result, management now believes that it is one of the leading suppliers of sensors into this market. Moreover, given the long product life cycles and high barriers to entry, segment revenues should be more stable. OmniVision s new sensors for distortion correction have entered mass production and the company expects major growth as machine vision becomes ubiquitous in high-end cars. Another market with great promise is security. Broader technology usage is leading to a change in the way security is now being managed. As a result, CCTVs are often making way for IPTVs and home monitoring systems are gaining momentum. Another important ongoing trend is the installation of 360 degree camera systems that require multiple sensors, thus expanding the market for the company. As the imaging market expanded, the demand for higher-resolution, better-quality images is also on the rise. This has resulted in a rapid transition from VGA resolution solutions to HD imaging solutions. Since higher-resolution sensors are also higher-priced, this is positive for the company. Management stated that there are many products scheduled to be launched, which will continue to build momentum in this category. The dynamics in the notebook/other PC market look unfavorable for OmniVision, as the company is the leading player in a market that is being cannibalized by tablets and other mobile PCs. However, OmniVision might not fare as badly as other suppliers, because other than the usual upgrades to latest generation sensors, the company is benefiting from the increased scope for its technology. For instance, a key OEM is shipping products incorporating its technology for gesture recognition. This has opened up a new market for OmniVision, because human interfaces are increasingly desired in both computing and entertainment devices. Moreover, OmniVision is also seeing huge success in the tablet market, which is offsetting the declines in notebook. OmniVision has increased focus on cost control, which has helped it raise the gross margin. Management is in the process of diversifying the supply chain at various levels, which is expected to lower costs in the long term. The company is also improving manufacturing efficiencies by lowering the die size (for PureCel for instance), which along with favorable mix changes, yield improvements and volume increases are strengthening margins. REASONS TO SELL The smartphone market dynamics are not going in OmniVision s favor. First, OmniVision lost an important socket at Apple, which is expected to impact its results in the near term. Although Samsung (which uses its own devices) toppled this prime customer to take the number one spot in global smartphone shipments, OmniVision had gained from continued growth in Apple s volumes. However, now that it has been designed out of both the front facing camera socket of the iphone 6/6 Plus as well as the ipad Air 2 camera socket, the phone business will take a hit. Moreover, the company continues to see fierce competition in the growing low-end Chinese smartphone market from Asian suppliers, resulting in high inventories in China, ASP erosion and share loss. The good thing here is that its business is far more diversified today, both in terms of customers and product lines, so there will be growth in other areas. The life of a handset model is typically 9-12 months, and the design and components do not change within this period. Since the company derives a major chunk of its revenue from this market, it is required to innovate continuously. Therefore, the possibility of losing its technological edge is a Equity Research OVTI Page 9

10 constant risk. Moreover, it has to spend heavily on research and development as well as the protection of its IP. The fact that it generates a significant portion of its revenue from a handful of customers makes it more risky. Competition is stiff in the image sensor market, where the company is pitted against firms such as Sharp, Toshiba Sony, Samsung and STMichroelectronics. The large number of players and flood of lower-end products have increased pricing pressure tremendously. Although the company s technological lead and the launch of many new products have supported margins, the trend remains negative. We also notice that the company continues to introduce lower-priced products, which are being met with great enthusiasm. Therefore, pricing pressures should continue. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of OVTI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research OVTI Page 10