OmniVision Technologies, Inc. Capitalizing on Consumer Demands for Quality Image Sensors in Digital Cameras and Smart Phones

With Sony Corporation (NYSE: SNE) recently announcing plans to invest $1.2 billion over the next year to double its production capacity for image sensors with the intent of capturing 30% of the mobile phones market many investors quickly called into question the future of OmniVision Technologies, Inc. (NASDAQ: OVTI), assuming the advanced digital imaging solutions developer might be in a fight that they can’t win.
One look at the technology backing OVTI should tell investors otherwise. While Sony has a big name and certainly has the money to throw around what they don’t have is the ability to produce the same kind of quality image sensors that OVTI has been developing for years and with consumer demands for digital cameras and mobile phones continuing to climb as well as the advancement of tablets the future for OmniVision remains bright.
On December 9, 2010 OVTI filed its 10-Q and the following day shares hit a 52-week high of 33.00 but they have been slowly dropping and have been as low as 27.71 on January 5, 2011. Shares have settled around the 28.40 – 28.80 range, slightly lower than the 50-day moving average of 28.86 but still above the 200-day moving average of 22.76. Oddly the dip in share price has had nothing to do with OVTI’s performance but rather the perceived threat from Sony.
The reality is OVTI has a significant technological advantage over its competitors in the image sensor market. This advantage lies in their back-side illumination (BSI) camera chips, a technology that Sony and others abandoned due to problems manufacturing the chips in a cost-effective manner. It is this technology that produces superior imaging quality for mobile phones and digital cameras, and a big reason why OVTI dominates these segments.
With the explosion of the smartphone OVTI has placed itself in the enviable position of being the camera chip supplier for Apple and its iPhone 4. The magnitude of that deal can be grasped when taking a look at recent reports that have said Apple has increased its shipment goal for the first quarter of 2011 to around 20 million iPhones. It’s safe to say that Apple users don’t settle for inferior technology and because OVTI has the BSI technology down it should keep their relationship with Apple solid.
In addition to the iPhone deal OVTI is also working with Apple on their second generation iPad, providing two cameras, a 5 MP camera and a VGA camera. When you consider that Apple controls about 90% of the tablet market at the end of the day OmniVision is doing just fine. Of course there was the rumor last year that Apple was considering acquiring Sony and that could have slowed OVTI’s progress but those rumors were quickly quashed by the iPad maker.
OVTI, which manufactures its image sensors using the complementary metal oxide semiconductor (CMOS) fabrication process, also stands to grab more of the market in the digital still camera and digital video camera applications sector as forecasters have predicted the 25.3 million units produced in 2009 will jump to 56 million units by 2013 with CMOS image sensor backing that growth. According to analysts that growth will come about due to consumer demand for portable, flash-based video cameras that offer high quality image capture and HD video that can then be integrated onto social media and video sharing platforms. These are the trends that project a bright future for OVTI.
Of course OVTI isn’t the only one on the block that manufactures CMOS image sensors and in their 10-Q they identified Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as competitors in that market. OmniVision acknowledged that they could face price competition in the market for mobile phones, notebooks, webcams, digital still and video cameras as well as other markets that they target including entertainment devices, security and surveillance systems, and automotive and medical imaging systems.
OmniVision noted, “Although we believe that we currently compete effectively in those markets, our competitive position could be impaired by companies that have greater financial, technical, marketing, manufacturing and distribution resources, broader product lines, better access to large customer bases, greater name recognition, longer operating histories and more established strategic and financial relationships than we do.”
This disclaimer shouldn’t be cause for concern for OVTI investors though as they have done a fairly good job building their name and establishing solid relationships.
If there is a drawback to OVTI it’s that they have very little control over the consumer’s demand for devices, making them particularly vulnerable during an economic downturn that may cause consumers to hold off on purchasing new devices. This was evidenced in 2009 and part of 2010 when the global economic conditions led to what OVTI called “one of the most challenging periods in our history. In particular, we believe consumers and businesses in markets into which we sell our products reduced spending in response to the tightening of lending standards by financial institutions, negative financial news and the continued uncertainty in the global economy. For example, beginning in our fiscal 2009, end-customer demand decreased significantly, negatively affecting demand for all consumer electronic products, security products and products for the automotive industry. Consequently, the overall demand for image sensors also decreased. This decrease in demand had a significant impact on our revenues, results of operations, cash flows and overall business.”
That being said the global outlook has improved dramatically and in their first quarter 2011 they reported revenues of $193.1 million, an 83% jump on a year over year basis and up 23% on a sequentially. Net income was reported at $16.9 million, nearly 5x the $3.5 million earned in the fourth quarter 2010 and up from a loss a year earlier.
Things improved in their second quarter 2011 when they reported revenues of $239.5 million, up from the $183.3 reported in the second quarter 2010. Net income in the second quarter also jumped significantly as the company reported the figure at $28.9 million, up from the $8.1 million reported a year earlier. The company went on to say that based on the current trends they anticipated third quarter revenues to be between $230 million and $250 million.
As it stands OVTI looks to be in a great position heading forward. Their gamble to stick with BSI technology when the bigger names were bailing has put them in favorable standing and left Sony, Panasonic, etc. playing catch up. With the settling of economic conditions, increased consumer demand for smartphones, digital cameras, tablets, and other electrical devices that use image sensors, and strong relationships with companies like Apple the future of OmniVision looks positive.