OmniVision Technologies, Earnings Call NUGGETS: Cost Side and Mix Side of Margins, Gross Margin Outlook

On Thursday, OmniVision Technologies, Inc. (NASDAQ:OVTI) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cost Side and Mix Side of Margins

Daniel Amir – Lazard: I guess in terms of the guidance year, it seems like there is a trade-off here of much higher sales on the expense of much lower margins. Are we in kind of a new base year of a sub 20% type of gross margin company or do you anticipate that at some point margins should increase again and I would appreciate if you can comment this both on the cost side and on the mix side?

Anson Chan – CFO and VP, Finance: Dan, it’s Anson. So we approach this subject last quarter about how our BSI-2 represents a significant ramp for the Company and demand. So what we have to do is to work with our vendors to increase capacity. That BSI-2 also represents our transition from 8-inch to 12-inch so that capacity expansion be translated into a significant equipment purchase for our vendors and these vendors basically have to pass the (callers) back to our product purchase and so that increase our cost structure. So, that’s what you are seeing in Q1 as we continue to increase our product shipment mix towards BSI-2, if this higher product costs translate into lower gross margin. What we have to do is basically have to work with our vendors in terms of negotiation and basically we have to think about more we buy, the quicker our vendors get to amortize their investment cost. So, as time pass by, as most of their investment cost get amortized, they have been more willing to come to the table and negotiate with us and give us a better price break. So, that will have an positive effect on the reported gross margin. The other thing that we can think of in terms of gross margin trend or trajectory, we call it that, will be factors such as market mix, but we do carry different margin profiles in the different target markets that we participate in. So as time goes by or some of these markets contribute different percentage of revenues we will have different margin to report as well. Another thing I can easily think of as well in this year in particular will be after our fiscal Q2 where some of the end-use customers continue to buy at the volume that they’re buying in Q2 and along those positions will be dependent upon how good the sell-through would be through that retail channel. Given this year will all these macroeconomic concerns, it’s not easy to forecast, but all of this can play a part in terms of the margin. One more thing I want to highlight is the fact that — actually you can see my balance sheet. We have purchased a lot of inventory already, so all the products that we ship in Q2 will be from inventory on hand, so any negotiation that we can accomplish in the coming quarters will not have any effect on those product costs, because we already paid for it and bought it. But if some of the negotiations would come to and we have a favorable effect, it’s possible that you may just see a bottoming out of margin for second quarter and by Q3 that’s possible that we can start to see some improvements, but largely depend on the things I just mentioned, namely negotiations, the market mix, and some of the end demand that we’re going to see.

Daniel Amir – Lazard: Just a one follow-up. Can you just comment a bit about the notebook and Ultrabook market? I mean what percentage of your business is now that PC side and is that a driving factor for your guidance here for the next couple of quarters?

Ray Cisneros – VP, Worldwide Sales: This is Ray Cisneros. In terms of the guidance for Q2, the percentage of the notebook business is not the majority of it. In other words, there are other markets that provide the strength in our Q2 guidance, such as the mobile market and the entertainment market, which includes our tablet business. Going forward, as many of you know the jury is (indiscernible) in regards to how well the PC notebook market will do through the remainder of the calendar 2012. There is a lot of mix reports out there how the market is faring and a lot of it is mixed in with how the tablet market encroaches upon that space. But for us, what we reported was, it was a good summer season in regards to the notebook business, but looking forward, it’s a little bit — it’s softened up a little bit going forward for us, but other strength comes from other markets for us.

Gross Margin Outlook

Paul Coster – JPMorgan: Anson, I’d like to go back to your comments on the gross margin outlook. I couldn’t quite figure out whether — what tens you’re using past or present, when you said that as BSI-2 volume exceeds expectations that leads to more rapid amortization of that fixed cost, and thus yielding the ability to negotiate better prices, something like you have already negotiated better price for some future point beyond second quarter of course or are you expressing that as an intention rather than fact.

Hasan Gadjali – VP, Marketing and Business Development: This is actually an ongoing process, it’s not a past tense, it’s not future tense either, its actually going on as we speak. We continue to negotiate and get better and cost structure for our products before we can produce better results.

Paul Coster – JPMorgan: It sounds reasonable that once they have amortized that cost you should get a price break, but there is no contractual obligation for them to yield in that respect, is that?

Hasan Gadjali – VP, Marketing and Business Development: No there are no contractual obligations where we have to rely on really on our long term business relationships, and frankly the volume that we are buying, look at our revenue guidance and you are going to look at the reported ASP, significant volume so I don’t think we consider a small customer. So we do have some negotiating power. Now there is no guarantee that we will generate positive results. So that’s all we need to work hard basically.

Paul Coster – JPMorgan: Is there anything you can do to diversify the supply of wafers that’s it from me question?

Hasan Gadjali – VP, Marketing and Business Development: That will be a future tense, in that sense I can tell you that every single PSI device that we ship today implement system supply chain. So first and foremost we need to work with our existing suppliers and work down the cost structure any future products, would be complete with matter but today I can tell you everything is from the same supply chain, same vendors.