In management's discussion about its earnings restatement, image sensor maker OmniVision Technologies (NASDAQ:OVTI) casually noted that the Securities and Exchange Commission was conducting an inquiry into the restatement. Apparently a hornet's nest was stirred up over the weekend, because the company issued a press release today trying to clarify the matter.
MarketWatch (NASDAQ:MKTW) columnist Herb Greenberg was seemingly the first to catch the wording in the company's filings when he reported on it in his Friday column. He noted that when the company announced its earnings and held its conference call back on Nov. 30, it made no mention of the inquiry. Over the weekend, it seems, the company was bombarded with questions about it, though the press release OmniVision issued did not really say more than was already known.
The restatement at issue was announced back in June and was the result of the need to correct the timing of the company's revenue recognition policies. After an employee found a problem, the company's audit committee examined it and, while finding no wrongdoing, restated the earnings. Upward, the company took pains to point out, and it has new internal controls in place to boot.
OmniVision makes image sensors for digital cameras and cell-phone cameras. While its primary product, the CameraChip, is the leading technology, it faces competition from semiconductor powerhouses such as Agilent (NYSE:A), Micron (NYSE:MU), and STMicroelectronics (NYSE:STM). However, OmniVision supplies four of the five leading mobile phone suppliers.
As Fool contributor Jim Schoettler noted in his article on the company's CFO shuffle, distributors can return any products they don't sell, so OmniVision doesn't recognize revenue until it actually sells the product. If OmniVision receives inaccurate information, its own numbers will be off, which was one of the issues it corrected in the restatement. The other was that the company incorrectly classified certain sales as transferring title upon delivery rather than upon shipment. In both cases, OmniVision did not recognize the revenue soon enough and so it had to revise its earnings -- upward.
At the time, investors did not like being surprised by the restatement or the possible delay in filing the annual report, and crushed the stock some 37% over three days. Lawyers, as they are so quick to do, rushed in to file class action lawsuits, even though net income for 2004 rose $2.7 million.
OmniVision seems loath to go beyond reiterating what led up to the inquiry, though one might wonder whether it also includes the insider selling from earlier this year before the restatements were announced. Seven insiders sold more than $11 million worth of stock just three months before the restatement was announced. Investors are knocking down the stock's price another 10% today, apparently angry over being surprised again.
The matter is becoming an impediment and distraction to what otherwise is a seemingly finely operating business. Investors, though, should keep an eye out for other tidbits of information management tucks away.
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Fool contributor Rich Duprey likes to be tucked into bed at night. He does not own any of the stocks mentioned in this article.
