OmniVision’s (OVTI) earnings for the second quarter of fiscal 2010 (ending October 2009) beat consensus estimates by 11 cents. However, the stock fell 12.6%, due to the weak guidance for the third quarter.

Total Revenue

Revenue of $183.3 million was up 73.7% sequentially and 11.8% year over year. Revenue exceeded the high-end of management’s guidance range of $155-170 million (up 46.8%-61.0% sequentially). The significant increase in revenue is partly attributable to the pull-in of some orders from the fiscal third quarter into the fiscal second quarter.

Total unit sales were up 93.3% to 145 million, while the blended ASP fell 10.2% to $1.26. The 2 megapixel and higher resolution sensors comprised around 20% of total units shipped, similar to the first quarter. However, VGA and below jumped from a 65% revenue share to a 70% revenue share.

Revenue by End Market

The camera phone, notebook and other emerging products maintained revenue shares at 60%, 20% and 20%, respectively. Consequently, segment growth rates were similar to the overall growth rate of around 74%. The increase in sales into the handset market was driven by both high-end smartphones and low-end entry level and mainstream phones. However, the demand for mainstream and entry-level products was greater.

The strength in the notebook area was attributed to demand from notebooks and netbooks across North America, Taiwan and Japan. The other emerging products were driven by the Japanese digital video camera market, where OVTI has been picking up market share. Multimedia devices and security products also drove sales in the last quarter.

Margins

The pro forma gross margin for the quarter was 24.3%, up 113 basis points (bps) from the previous quarter’s 23.2%. The increase in gross margin was primarily on account of higher volumes, which improved utilization rates, helped by better yields on new generation products and partially offset by an unfavorable mix of business, as lower resolution sensors outgrew higher resolution sensors. This also has a negative impact on the ASP, which fell from $1.41 to $1.26.

Our pro forma gross margin estimate for the quarter excludes stock based compensation expenses. The operating expenses of $29.6 million were higher than the previous quarter’s $27.3 million. The operating margin was 8.2%, up 1,086 bps sequentially from -2.7%. More than half the improvement was on account of lower R&D expenses as a percentage of sales, although SG&A and COGS also declined as a percentage of sales.

Net Profit/Loss

Pro forma net income was $14.2 million, or a 7.7% net income margin, which compares to a net loss of $3.5 million, or 3.3% net loss margin in the preceding quarter and income of $9.8 million or 6.0% net income margin in the same quarter last year. The fully diluted pro forma earnings per share were $0.27, compared to loss of $0.07 in the Jul quarter and earnings of $0.19 in the prior-year quarter.

Our pro forma estimate excludes deferred stock compensation and tax adjustments in the last quarter. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a GAAP basis, the company recorded a net income of $8.1 million ($0.16 per share) compared to loss of $9.9 million ($0.19 per share) in the previous quarter and loss of $5.3 million ($0.10 per share) in the prior-year quarter.

Balance Sheet

Inventories were down 7.0% to $92.2 million, yielding annualized inventory turns of 6.0X (compared to 3.3x in the previous quarter). The company ended with cash and investments balance of $354.0 million, an increase of $45.0 million from the end of the previous quarter. Days Sales Outstanding were around 34, significantly better than the preceding quarter. OmniVision has $37.7 million in long-term debt and $89.2 million in long-term liabilities.

Guidance

Management’s guidance for the third quarter of fiscal 2010 is as follows—revenue in the range of $145-160 million (down 20.1%-12.7% sequentially). The consensus revenue estimate is $168.6 million, above the guided range. Management attributed the expected revenue decline to a change in seasonality.

The non-GAAP net earnings (excluding stock based compensation and related tax effects) are expected to be $0.14 to $0.24 a share. The GAAP earnings are expected to be $0.02 to $0.12. Consensus estimates (pro forma) are earnings of $0.20, within the guided range.

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