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There was a strong possibility that OmniVision Technologies ) would come out with strong numbers for its second-quarter, and it did just that. The company’s revenue shot up 79% from the year-ago period to $390.1 million on the back of a 50% jump in shipments, and adjusted earnings also grew by an impressive 60%. The results beat analyst estimates comprehensively and the outlook for the third-quarter was even more impressive.

OmniVision calls for revenue between $390 million to $425 million in the current quarter, which is light years ahead of the consensus estimate of $365.24 million. In addition, the company is expecting earnings in the range of 33 cents to 46 cents, ahead of the consensus estimate of 35 cents at the mid-point.

A Pinch of Salt, but not Without a Reason

Thus, OmniVision has finally delivered a complete quarter with a sunny outlook. I had reservations whether the company would be able to meet the Street’s bottom line expectations, but it has done pretty well in that department. However, the company’s gross margin did take a hit again this time, dropping to 16.6% in the quarter from 30.6% last year and taking shares down 5% even though the overall performance was commendable.

A drop in gross margins wasn’t entirely unexpected, as OmniVision has been ramping up production of its advanced products which haven’t reached their optimum cost of production yet. But, these products, such as the BSI-2 sensor, are in great demand from OEMs and the company is doing its best to gradually bring down their manufacturing costs.

It makes sense to ramp up production of those products which are selling well and, in my opinion, OmniVision is right in sacrificing its gross margin for the time being. As they are upgrading their technology and writing off obsolete inventories, gross margins are taking a hit. Management stated that inventory write-downs will continue in the ongoing quarter, so there’s no immediate relief in the offing for OmniVision on this front.

A Few Strong Reasons to Buy

But, in my opinion, a 5% drop in stock price might make for a good entry point for potential investors. The stock has gained 25% in 2012, and there are a number of catalysts that could take it to even greater heights.

Demand for the company’s products is very strong, which is apparent from its outstanding outlook for the ongoing quarter. It supplies its sensors to a wide range of mobile computing devices, ranging from smartphones (both budget and high end) to tablets and notebooks. Moreover, having Apple ) as a client surely helps.

OmniVision’s sensors are present inside three of Apple’s latest products the iPhone 5, the iPad mini, 4th Generation iPad and the latest iPod. While the company commands both the sensor spots in the iPads, it had to split the iPhone once again this time with Sony ). Sony is supplying the primary camera sensor for the latest iPhone, a spot which it had won in the iPhone 4S last year.

This had led to some negativity around OmniVision when the iPhone 5 was released, but if we take a look at the bigger picture, presence inside all the products of Apple is a big plus. The new iPads have been crushing competition, while the iPhone 5 helped Apple reclaim its crown in the U.S. from Android. Thus, these will certainly help OmniVision’s top line move even higher.

Expanding its Horizon

But this is not the end. OmniVision is witnessing great growth in mobile devices and entertainment. Its BSI-2 sensors are in massive demand and the company expects this to go further up. The company’s cutting-edge technological innovation in 8 megapixel and 5 megapixel sensors has brought it good business, and propelled its mobile phone business to 59% of revenue from 48% last year.

OmniVision’s innovation is also helping budget smartphone makers to deliver better image quality through its recently released OV5645 CameraChip sensor which will probably help the company land more design wins. It also released an 8 megapixel sensor as well for high-end devices, thereby fortifying its product portfolio. These new products are gradually pushing up OmniVision’s average selling prices. Hence, as OmniVision reaches the optimum cost of production for its new sensors, I believe investors will see better margins from the company.

In addition, the company is trying to diversify its business by capturing design wins for other applications such as for the rear-view camera system in Tesla Motors ) Model S. There’s just one word for the Model S -- fantastic; and Tesla has won some great reviews for this car (take a look by browsing through the comments on this great video on Tesla and why it could be a good long-term investment). Hence, presence inside an upcoming company with a great product could help OmniVision gain more in the long run.

The Takeaway

OmniVision is well-positioned to benefit from speedy growth in sales of smartphones and tablets. Its impressive technological innovation is getting it more customers across different applications. The company’s gross margins might be under pressure now as it upgrades its technology and writes down obsolete inventory, but the direction is correct and should help OmniVision enjoy growth in the long run.


TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Tesla Motors and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Apple and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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