Tuesday, February 27, 2007

Calls of Note Part 2

- Jefferies comments on OmniVision (NASDAQ:OVTI) ahead of results saying continued severe VGA pricing pressure is impacting revenue and gross margin as the shift to higher margin and ASP megapixel sensors has been slow to materialize. They would stay on the sidelines until there are indications of pricing pressure subsiding or a mix to higher ASP megapixel sensors.

Firm believes rev for CQ4 will likely be inline to slightly below St. and their estimate of roughly $140MM. Jeffco believes gross margin will likely be below their estimate of ~30% due to continued VGA ASP pressure, lower 2MP sensor mix (<10% from ~12% in CQ3), and the well documented test and packaging constraints. They believe EPS will likely be below consensus of $0.19 (vs. guidance of $0.16-0.23). Firm does believe there is an increased potential for a share buyback due to the elimination of $50MM in capex to XinTec.

Firm believes OVTI will likely guide CQ1 rev below their est and St. of ~$130MM (-8% Q/Q) due to greater handset seasonality and a continuing high mix of VGA sensors. They believe OVTI's EPS guidance will imply gross margin below 30% vs. firm's 31% as the sensor mix will likely continue to favor VGA (likely 70% of units in CQ1) and believe it will not be possible for OmniVision bring down costs fast enough to offset the ASP declines of 5-10% Q/Q.

Does this stock bottom here? Although OmniVision is trading close to its historic trough valuation of 2x cash (~$12) and the sensor mix will likely improve in 2H:07, with a likely negative earnings revision, they believe there will be a better entry point. Maintains Hold and $14 tgt.

While WR Hambrecht couldn't really do much damage to OVTI's share price yesterday, Jeffco's comments along with general market weakness will likely do the trick today. As regard to the results, no edge here.

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