Is It Lights Out at OmniVision?

As much as it hurts, it's always good to own up to your mistakes. After all, it's the best way to become a better investor.

I was sure that OmniVision Technologies (Nasdaq: OVTI  ) would be the sole supplier of the image sensor found in Apple's (Nasdaq: AAPL  ) latest and greatest iPhone 4S, only to be promptly proved wrong when Sony (NYSE: SNE  ) parts were found inside. Although my thesis for owning OmniVision shares extends beyond its relationship with Cupertino, the company has been testing my limits as a shareholder lately.

The specialist in back-side illuminated (BSI) sensors was clobbered after last quarter's results, when the company gave relatively soft guidance for what's typically a seasonally strong quarter. Back then, OmniVision forecasted second-quarter revenues in the ballpark of $255 million to $275 million, with GAAP earnings per share of between $0.42 and $0.54. Excluding items, non-GAAP earnings per share were expected in the range of $0.52 and $0.64.

The figures led to a precipitous 30% drop the following day, enough to persuade Fool Anders Bylund to go long for himself. Well, Anders and I are sure eating our words, as the stock tanked by as much as 19% today after OmniVision revised its guidance even lower, which has inevitably rekindled fears of not being invited to the iPhone main event, even though the secondary-camera spot was confirmed.

OmniVision now sees second-quarter sales between $212 million and $217 million, which was attributed to an "unexpected cutback in orders" and dampened unit sales for OmniBSI and OmniPixel3-HS offerings. The midpoint of that guidance represents a 19% decline from the prior guidance's midpoint -- an ominous coincidence considering the 19% drop in the stock today.

OmniVision CEO Shaw Hong said, "We are disappointed by the recent demand falloff that has affected our second-quarter revenues." Troubling words, indeed.

The OmniBSI-2 based 8-megapixel OV8830, which I had predicted as the iPhone 4S's shooter, will begin shipping in "very limited quantities" toward the end of the second quarter, further humbling this Fool. The only bright spot in today's announcement is that the company's board has authorized a $100 million stock-buyback program.

One of the critical aspects of my thesis was that OmniVision was several generations ahead of rivals like Sony, STMicroelectronics (NYSE: STM  ) , and ex-Micron (NYSE: MU  ) division Aptina. The guidance revision today is concerning me that competitors are catching up in BSI technology and stealing design wins at major OEM customers like HTC and Motorola Mobility (NYSE: MMI  ) . If BSI chips become commoditized and OmniVision loses its ability to differentiate, shareholders like me can kiss pricing power goodbye and say hello to contracting margins.

Hopefully the next generation of BSI-2 sensors will set OmniVision apart, but I'd be lying if I said I thought it was going to be clear sailing from here.

Fool contributor Evan Niu hates days like today as a shareholder of OmniVision Technologies. He also owns shares of Apple, but he has no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2011, at 10:08 PM, pjx777 wrote:

    now maybe the time to buy after you guys finally throw in towel. you've been wrong all along with this stock. no difference this time.

  • Report this Comment On November 08, 2011, at 8:34 AM, TMFZahrim wrote:

    Dollar cost averaging is tough to do in a stock you write about all the time, given our strict trading and disclosure policy. So Evan and I are pretty much stuck with our single-dip positions here.

    Like Evan, I was sure that the BSI advantage would last another year or two. We were both wrong. Now I'm waiting for the earnings report in a couple of weeks to clear up this mess. Is it Apple? Is it the Thai floods destroying gadget build cycles? Is it Jupiter passing through Sagittarius backwards during a full moon? We'll just have to wait and see.

    All of that being said, OVTI remains stupendously cheap with $8 of cash per share. The buyback simply ensures that at least some of that cash pile makes a difference to the market value. Buying here to get some cost averaging action wouldn't be a bad idea.

    Anders

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