Calls of Note Part 3

Baird has plenty of negative to say about OmniVision (NASDAQ:OVTI) following their checks that suggest 2007 could prove to be a very difficult year for the company.

Omnivision's gross margin is set to fall significantly over the next few quarters, in firm's view. Their checks indicate TSMC's gross margin on sales to Omnivision are approximately 40%, and estimate there should a 20% differential between Omnivision's gross margin and that of a fabbed competitor such as Micron. At 20% gross margin, Omnivision would lose money.

Per firm's checks, pricing is dismal: as low as $0.70 for VGA sensors, $2.50 for VGA modules. Omnivision no longer benefits from the tight supply environment of 2006, and excess capacity should bring pricing further down in 2007.

Samsung is now the second-largest supplier of CMOS image sensors. For 2007, Samsung is targeting the lower end of the mobile phone market - Omnivision's last stronghold. Micron's recent acquisition of Avago Technologies represents further bad news for Omnivision, as it will enable Micron to target sub-1mp CMOS image sensor markets which the company so far had ignored - targeting two-third of Omnivision's current revenues.

Omnivision missed two product cycles (1.3mp and 2mp) and is not gaining meaningful traction at 2 and 3mp resolutions, per firm's checks. WaveFront Coding Technology does not work and is currently experiencing "serious technology issues," per firm's checks.

Notablecalls: Oh well, if I were an OVTI shareholder, these comments would make me physically sick. Lower margins, increasing competition, sector not being in very good shape as witnessed by Motorola today - altogether it doesn't make up for a very cosy being. Expecting the shares to go lower.