Friday, September 01, 2006

Calls of Note Part 2

Several firms commenting on OmniVision Tech (NASDAQ:OVTI) after the co reported wear results and provided below consensus guidance:

* JP Morgan notes OVTI shipped 58M sensors, up 10M q/q, but blended ASP dropped 14% q/q
(38% y/y), due to pricing pressure, particularly for VGA sensors, offset slightly by the ramping volume of 2MPx 1/4" sensors.

The company is seeing greater than expected demand for modules, leading to a packaging bottleneck. In addition to $17M invested in equipment installed at Xintec for chip scale packaging, OVTI expects to invest an additional $50M each for equipment installed at XinTec and VisEra. While the capacity constraint is expected to continue through 2QF07, the company expects to see a reacceleration of revenue growth in 3QF07.

In the meantime, F2Q guidance of $135-145M in sales compares with prior JPM estimates of $135M and street ests of $150.7M. Moreover, EPS guidance ($0.26-0.34 PF, $0.12-0.20 GAAP) is disappointing, and reflects continued margin pressure, pricing pressures and the capacity constraint. Firm is adjusting estimates accordingly: they are slightly raising revenue estimates, but gross margin pressure as well as higher than forecast operating expenses cause them to lower EPS estimates. Maintains Overweight, though incrementally cautious. In firm's view the risks associated with OVTI are mounting; however, they appear overly priced in with the stock trading at 11.8 times revised CY07 PF EPS of $1.41, a 48% discount to the mean of coverage. OVTI is sitting on $6.66 per share of cash and trades at an ex-cash P/E multiple of 8.2 times CY07E cash PF EPS estimate of $1.22.

* Piper Jaffray notes that as they had written in their August 17 note, they believe OmniVision faces an increasingly competitive pricing environment not only for lower-end VGA sensors but also for 1.3MP/2.0MP. In the past two quarters, 4QF06 and 1QF07, average ASPs declined 16.6% Q/Q (from $3.26 to $2.72) and 13.6% Q/Q (from $2.72 to $2.35), respectively. Firm believes that erosion in the ASP was a result of increased competition from focused CIS players, diversified semiconductor firms with internal fabs, and certain Flash manufacturers in pursuit of higher margins. In addition, they feel there may be a lack of meaningful near-term catalysts, such as visible upgrade cycles, that could accelerate the transition to higher-resolution CIS. As a result, they are lowering their revenue and EPS estimates as shown at left and lowering PT from $19 to $17, based on 13x (same multiple) new CY07 EPS estimate, in line with the company's comp. valuation group.

Notablecalls: I know OVTI has historically been a notorious bouncer, but I see very little reason to buy the stock here. ASP's just keep going down, there is no upgrade cycle to be seen. Soon they'll be losing money as end demand weakens. Tough, ver tough.

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