Omnivision Q407 Conference Call

SeekingAlpha published a transcript of Omnivision Q4 2007 conference call. Clearly, Omnivision business is improving:

"Revenues were better than expected, particularly in 2-megapixel and VGA. More importantly, we saw acceleration in 2-megapixel orders for future quarters, demonstrating what we believe to be a fundamental shift in the mobile handset market to higher resolution sensors."

The gross margin was quite low at 22.3% compared to 24.9% last quarter. To improve it, Omnivision takes following measures:

"One, as a fab-less company, virtually all of our product costs are brought in and we are working very aggressively with all our vendors to reduce input costs and improve output yields;

Two, we are collaborating very closely with TSMC to develop new and lower cost technologies;

Three, as you may remember from last quarter, we entered into a foundry manufacturing agreement with PFC to develop new processes and new products using their 300-millimeter DRAM capacity;

Four, along with TSMC, we have continued to fund our joint venture with VisEra to expand their capacity and help prepare their facilities to handle 300-millimeter wafers;

Five, earlier this month, we also made an investment in the WLCSP, a chip scale packaging partner. This provides us with a second source of chip scale packaging capacity;

Six, we believe that TSMC’s acquisition of a controlling interest in XinTec, our original CSP provider, will bring a higher level of efficiency to XinTec’s production processes and lead to increased yields;

Seven, we are in the process of automating and upgrading our final testing facility by installing new test equipment, making our testing process more efficient."

"We are also very close to launching the OV3640, the first product based on the new architecture, a higher performance, 3.2-megapixel image sensor for high-end slim phones, which is capable of fitting into the all-important quarter-inch form factor."

"We are seeing a very good ramp in the PC notebook market, with design wins at four of the five leading notebook manufacturers. Our market share is very strong. We believe that we are well-positioned to take advantage of the acceleration in the attach rate for cameras in this market. Our OV7725 sensor offers superior image quality in all lighting conditions and we are winning designs at resolutions up to and including 2-megapixels.

From some of the market estimates we have seen, the number of notebooks shipping with a camera this year could exceed 20 million, which equates to an attach rate of about 25%. Adoption rates appear to be accelerating and PC notebook units could increase to over 30 million next year."

A question and answers session:

Q: Aaron Husock - Morgan Stanley

Thanks for taking my call. I guess to start, could you give us a little more detail on the mix in the quarter and where that’s going? I guess last quarter, you were around two-third VGA, 10% 2-megapixel and the rest 1.3. Where did that come out in the April quarter and where can that go in July?

A: Peter Leigh

As I indicated in my prepared remarks, VGA was up a little bit in the quarter, around 70% and the 1-megapixel and 2-megapixel shares were virtually unchanged. We do believe that 2-megapixel should increase as a percentage of revenues in the upcoming quarters.

Q: Aaron Husock - Morgan Stanley

One final question -- there’s been some talk in the market about a shortage of image sensors for the PC and notebook market in China. Can you just comment on that, what you are seeing there? Is there a shortage and do you guys have adequate supply?

A: Ray Cisneros

That’s an interesting comment but no, we don’t see that. Right now, we feel very strong about our position in the PC cam and laptop market, and so we can’t really confirm that and we don’t see it.

Q: Doug Freedman - American Technology Research

Is there a way that you can help us understand what the guiding factors are, how much we should look at ASPs being a contributing factor versus your ability to reduce cost?

A: Peter Leigh

I think the way you have to look at it is that historically in this market, prices have gone down at roughly 20% to 25% per year, and if you look at the last two quarters for OmniVision, actually we are at about a 20% decline. Historically, the company has been able to drive down its costs at about that rate. Our task now, of course, is to drive our costs down faster than that so that we can begin to see some margin expansion. We think we are on the right track to doing that and we hope to be able to deliver steady improvement over the next several quarters.

Q: Paul Coster - J.P. Morgan

The guidance that you have issued suggest that your market share in the next quarter, just on the back of the envelope here, in the handset market is potentially north of 25%. Do you agree and how do you think the competitive dynamics are shaping up in the space at the moment?

A: Ray Cisneros

Historically, we’ve mentioned that our market share is anywhere between 25% to 30%. Obviously it depends on which third party reference report you are going to look at, but yes, given our guidance obviously there should be some juggling of the numbers. It is only until the numbers are set and done do we ever get a good feel of the total market share as that, the overall number, the total available market continues to grow as well. But yes, we expect some favorable results.

Q: Harsh Kumar - Morgan Keegan

So are you suggesting that you might be doing market share in the higher end space, perhaps? That’s the only real explanation that I can think of why you would be outperforming the market significantly.

A: Ray Cisneros

It’s interesting. I should mention as well in the VGA space, as Peter has indicated, there was a slight increase in the VGA percent mix in Q4 and we see the same strong VGA position in Q1 as well. So we have a bi-fold surge here of 2-megapixel and VGA.