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It's always nice to see an investment thesis playing out -- even if it's quite a bit later than I first expected.
That's the case with camera-chip designer OmniVision Technologies (Nasdaq: OVTI ) . Shares jumped 12% following a fine first-quarter report and a totally brilliant second-quarter outlook. This was supposed to happen a year ago, but I still have skin in the OmniVision game and will take what I can get.
In the just-reported quarter, sales fell 6.5% year over year to $258 million. Non-GAAP earnings of $0.21 per share represented a 72% collapse from the year-ago quarter's $0.76 per share, but it was very close to the analyst target at $0.22.
But the big value driver comes from OmniVision's second-quarter guidance. Have a look:
|Metric||Guidance||Expected Year-Over-Year Growth (at Midpoint)||Analyst Consensus|
|Q2 Revenue (Millions)||$355 to $390||
|Q2 Adjusted EPS||$0.21 to $0.37||
OK, no investor is going to love the bottom-line plunge. CFO Anson Chan explained that demand for OmniVision's next-generation camera sensors, known as BSI-2, is so strong that its manufacturing contractors had to install a batch of new machinery just to support this product line.
This phenomenon explains both the rampant revenue growth and the weak margins -- OmniVision is simply selling too many chips for its own good. It's kind of a pleasant problem to have.
And there's leverage built into these numbers over the long run. The margin damage is expected to fall away over time, once largest manufacturing partner Taiwan Semiconductor Manufacturing (NYSE: TSM ) and other vendors have recouped their investments in new machinery.
Moreover, OmniVision's management claims that demand still outweighs chip supply by a long shot. "As such, we have to continue to build inventory to stock," Chan said. "We currently expect we solve the mismatch by the end of this calendar year."
The growth driver behind the curtain
That brings us right up to the elephant in the room. Did OmniVision finally claw back the juicy Apple (Nasdaq: AAPL ) iPhone contract it lost to rival Sony (NYSE: SNE ) in 2011?
The drastic revenue jump would support that conclusion, but the iPhone isn't the only possible explanation. Samsung has a comparable revenue driver in its massively successful Galaxy S3 smartphone line, which ships in volumes comparable to Apple's finest.
Now, the S3 is still a new product and not due for replacement anytime soon. The current version seems to use Sony chips, much like the iPhone 4S.
That being said, Samsung could very well use OmniVision modules as a drop-in replacement for the Sony solution. That way, OmniVision could benefit from unheralded hardware revisions to the Galaxy S3, or as a second source side-by-side with its Japanese rival. Either way, Sammy would be a significant contributor to OmniVision's revenue growth.
And of course, the holidays are coming -- which always shakes a truckload of new smartphones out of the woodwork. Management didn't specify whether the high BSI-2 demand was focused on a few new products or broader in nature, so there's another plausible theory for you.
Take a load off
So this time, there's no reason to panic if the new iPhone is ripped apart only to find another Sony-made camera inside. Apple remains the most likely catalyst here, but there are enough alternative theories to keep makers of tinfoil hats occupied for years. And OmniVision's top line rockets on, regardless of the identity of its biggest customer.
My original synthetic long position in OmniVision looked like a total bust for a while, but an active stock-repair strategy has locked in a healthy positive return after all. My written strangle is set to expire worthless in three weeks, which is exactly what I want it to do. That will leave me with a handful of regular shares plus a comfortable 20% option-writes return in 18 months (assuming that the stock doesn't take a very drastic turn before then). All's well that ends well, and that's just swell.
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