Can This Apple Supplier Sustain its Momentum After Earnings?

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OmniVision Technologies (NASDAQ: OVTI), a developer of digital imaging solutions, will be releasing its third-quarter results on Feb. 28. Investors would be expecting OmniVision to keep its streak of Street beating quarters intact apart from sounding out a decent outlook. The stock has done pretty well in 2013 so far, gaining just over 9%, and a good earnings report would certainly provide further momentum.

But for that to happen, OmniVision will have to turn in a performance at par with consensus estimates and issue a guidance that doesn’t disappoint. Let’s try and see if OmniVision can tick both these boxes.

On revenue  

Analysts (according to Yahoo! Finance) expect revenue of $411.35 million from OmniVision on an average, which translates into an impressive year-over-year jump of 122%. The company has beaten top line estimates in the last five quarters and the trend seems most likely to continue this time as well.

In its last quarterly report, OmniVision called for revenue between $390 million and $425 million for the third-quarter, which was significantly ahead of the $365.24 million analyst estimate then. However, it’s clear that estimates have moved up sharply ever since. But, OmniVision is still capable of trumping top line estimates driven by solid sales of the Apple (NASDAQ: AAPL) iPad.

OmniVision supplies image sensors to the cameras on the iPad mini and the fourth-gen iPad, apart from the FaceTime camera on the iPhone 5 and the latest iPod. Given the fact that Apple’s iPad line grew 48% in its previous quarter on the back of solid demand for the iPad mini, OmniVision should have raked in good revenue from its Apple account.

In addition, Apple last quarter was its best ever quarter in terms of iPhone sales and supply constraints lasted for almost two months after launch, which indicates that OmniVision continued to churn out the camera sensor during the quarter and this should aid its top line performance further.  

On earnings

The consensus estimate for third-quarter earnings stands at $0.41 per share, which, if achieved, would mark a remarkable improvement from the $0.13 a share it earned last year. According to OmniVision’s last guidance, it should earn $0.33 to $0.46 a share in the third-quarter. This was comfortably ahead of the consensus estimate of $0.35 three months back, but earnings estimates have risen sharply along with revenue estimates since then.

OmniVision has become confident about its bottom line prospects in the last two quarters, after struggling earlier due to high cost of production of its latest sensors. The BSI-2 sensor, which is helping the company’s sales improve at a fast pace, involves higher production cost due to requirement of upgraded equipment.

However, it seems that production costs are now reaching optimum levels, leading OmniVision to expect better on the bottom line. Moreover, since sales are expected to more than double in the third-quarter, a trickle-down effect should be seen on earnings as well. OmniVision had trumped earnings estimates comprehensively last time and chances are that it could do the same again, driven by higher sales and gradual smoothening of production costs.

About outlook

OmniVision has been delivering terrific outlook for the past two quarters, and there are reasons we might see the same happen again. Firstly, the iPad mini faced production constraints and Apple expects to match supply with demand in the current quarter, which should translate into more order from the Cupertino-based company.

In addition, the iPhone 4, for which OmniVision supplied the primary camera sensor, is still witnessing good demand according to CEO Tim Cook as supply remained constrained. Apart from this, OmniVision might also be supplying the camera sensor to HTC for its latest flagship since the Taiwanese company is also a customer. HTC’s One is the year’s first Android flagship and has met with good reviews as the smartphone maker looks to reverse its sagging fortunes. Driven by these customers, OmniVision should probably be able to sound out a decent guidance as well apart from delivering solid results.

OmniVision’s direction will become clearer when it releases its third-quarter report after the bell on Feb. 28. Tune into this spaced again in a few days for the complete earnings analysis and discussion about the company’s direction going forward.


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