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Friday, February 29, 2008

Omnivision (OVTI) 3Q:2008 Results

Surprisingly, Omnivision managed to beat earnings consensus despite coming in at the low end of guidance for revenues. Next quarter's guidance of 170-190mm is below the consensus of 194mm. Gross margins and ASPs are expected to stay flattish which will get them to 27-40 cents for next quarter. VGA camera sensors, the kind that go in low end phones and cameras, made up 70% of the mix for the quarter and the company is saying 2 megapixel mix will increase going forward. China, where Omnivision does a lot of business, will be slower next quarter due to seasonal factors and an inventory adjustment. The company is indicating a stronger second half.

It's hard to get excited about Omnivision as they make a very low end product in a highly competitive consumer electronics space. However, for those same reasons, it's not a space where there's a lot of capital expenditure. Samsung has been trying to get a good product in this market to reduce their need for purchasing outside sensors. ST Micro makes a good product they've been using as leverage to undercut competition for other phone slots. Micron needs to gain share in this space so they can spin out and monetize their sensor business and I think they're going to take a lot of share at Nokia.

Omnivision, however, looks kinda dirt cheap. It's 12-13* earnings, will presumably ramp for the rest of the year following Q4 based on the company's comments, and has over $9 in book value. Furthermore, 20% of the float of outstanding shares is short. I'm not entirely convinced business will ramp all year starting in Q1:2009 like the company is indicating but this stock can keep moving higher near-term – its not hard to see it at 18. I would not buy this and put it away. It's a trading stock.

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