Apple (NASDAQ:AAPL) supplier OmniVision Technologies’ (NASDAQ:OVTI) fourth quarter results surprised the Street as evidenced by a surge of around 14% in the price post the results. It is beyond doubt that investors would be relieved to see OmniVision put up a couple of strong quarterly performances on the trot. But, will OmniVision be able to continue its outstanding run? Or will it disappoint once again like it has done in the past?
OmniVision's improvements in the previous quarter cannot be ignored. Although the company's revenue declined slightly from the year-ago quarter, its net income shot up 70%. Additionally, its gross margin improved an impressive 260 basis points from last year, and now stands at 20.1%.
Moreover, OmniVision has issued a fantastic outlook for the second time in two quarters. It expects revenue in the range of $360 million-$400 million, miles ahead of the $305 million consensus. More importantly, if the company manages to achieve the mid-point of its guidance, it will report a year-over-year growth in revenue in the current quarter.
It expects adjusted earnings to range between $0.43 and $0.63 per share in the first quarter, putting the consensus estimate of $0.29 per share to shame. So, it is clearly evident that OmniVision has turned the corner. It was lacking consistency, but that seems to have changed now.
Growth is coming from emerging markets
The growing adoption of smartphones in Asian markets such as China and Taiwan is the key driver behind OmniVision's exceptional performance. The company has launched low-cost products aimed specifically at this market to profit from growing LTE adoption and smartphone growth.
For example, its PureCel image sensors have been optimized for budget smartphones and tablets. But, at the same time, they are equipped to deliver a cutting-edge performance and consume less power, allowing OmniVision to expand its customer base. Going forward, the company believes that its technology advantage will allow it to penetrate more markets and benefit from the 4G roll out in China.
China Mobile is a key customer
The LTE roll-out by China Mobile (NYSE:CHL), along with the transition to 3G smartphones, is proving to be a boon for OmniVision. According to CCS Insights, shipments of LTE-enabled smartphones are expected to hit 500 million units, driven by LTE deployments in China. This will be a massive jump from shipments of 250 million LTE smartphones last year.
In fact, China Mobile alone plans to ship 100 million LTE smartphones this year. The carrier is aggressively building out its network, planning to deploy 500,000 base stations by the end of the year and covering 350 cities with the LTE network. Moreover, China Mobile is expected to heavily subsidize smartphones this year to push LTE smartphone adoption. Its cost of subsidies is slated to rise a significant 29% in 2014 to $5.5 billion, and this is good news for OmniVision.
It is worthwhile to take a note of OmniVision's focus on diversification with focus on automotive applications, game consoles, notebooks, and security cameras. In addition, the company has hit gold in the Asian market, and it should be able to sustain its growth on the back of rapid growth in shipments of low-cost smartphones.
As such, at just 14 times last year's earnings and an expected annual earnings growth rate of 12% for the next five years, OmniVision looks like a valuable pick.