Near the top of OmniVision's (NASDAQ:OVTI) third-quarter 2007 earnings release came the announcement that the board of directors has approved a $100 million share buyback. Unfortunately, that was pretty much the only good news. Let's grab a shovel and dig in, starting with the upside.
Non-GAAP earnings (which exclude stock compensation expenses) came in at $0.20 per share. Accounts receivable seem to be in check, and cash and short-term investments have increased to $341 million from $317 million a year ago.
And ... uh ... that's it for the good stuff. Here's the rest.
Revenue fell roughly 2% for the year to $134 million. On a GAAP basis, net income fell sharply to $4.1 million, compared to $29.6 million a year ago, although the year-ago figure does not include stock compensation expense. Without expensing, the third quarter's net income totaled $11.1 million during Q3 -- still far lower than a year ago. The decline partly stemmed from gross margin, which tumbled to a paltry 24.9% from 40.3% last year. Skyrocketing operating expenses were another big contributor, having grown by nearly 70% year over year.
Ugliness also infests the balance sheet. Inventory has risen about 70% over the last year. That's not great when your products are falling rapidly in price.
To top it all off, management announced a dismal outlook for Q4. Investors were warned to ratchet down expectations to $100 million-$110 million in revenue, and a net loss of $0.08-$0.16 per share. Despite the revenue shortfall, management expects the inventory situation to improve significantly by the end of the quarter. I don't see how, unless gross margin takes another big whack.
At least OmniVision has illustrated the advantage of having a cheap stock -- despite the poor results and outlook, the stock is only down 4% as I write. Its cash now accounts for almost half of its market cap.
OmniVision's business is suffering from taking on much larger competitors like Micron (NYSE:MU) and Samsung. These rivals have lower production costs, since their image sensors can be manufactured on older, fully depreciated fabrication equipment. OmniVision, on the other hand, relies on Taiwan Semiconductor (NYSE:TSM) for its manufacturing. Although TSMC likely performs the manufacturing on fully depreciated lines, it wants to be paid for its efforts, ensuring that OmniVision's expense structure will never be as favorable as its competitors'.
There is some hope for OmniVision, thanks to its Wavefront Coding technology. Customers have begun sampling Wavefront Coding devices, and the shares may eventually rise if those devices are well-received. In my opinion, though, any gains will most likely be temporary; competitors MagnaChip and STMicroelectronics (NYSE:STM) are working on similar technology, and Omnivision's higher manufacturing costs will likely continue to be a serious disadvantage. It looks to me like OmniVision's business model is as stale as last year's fruitcake.
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Fool contributor Dan Bloom owns shares of Taiwan Semiconductor, but has no financial interest in any other stock mentioned in this column. The Fool has a disclosure policy.
