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| OVTI > SEC Filings for OVTI > Form 10-Q on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-2009
Quarterly Report
The following information should be read in conjunction with our unaudited condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties. Forward-looking statements generally include words such as "anticipates," "believes," "expects," "intends," "may," "outlook," "plans," "seeks," "will" and words of similar import as well as the negative of those terms. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K, including, but not limited to, statements regarding our projected results of operations for future reporting periods, the extent of future sales through original equipment manufacturers, or OEMs, and distributors, future growth trends and opportunities in certain markets, the capabilities of new products, the increasing competition in our industry, the continued importance of the mobile phone market to our business, continued price competition and the consequent reduction in the average selling prices of our products, anticipated benefits of our joint ventures and alliances, the development of our business and manufacturing capacity, future expenses we expect to incur, our future investments, our future working capital requirements, the effect of a change in market interest rates, and the sufficiency of our available cash, cash equivalents and short-term investments are based on current expectations and are subject to important factors that could cause actual results to differ materially from those projected in the forward-looking statements. Such important factors include, but are not limited to, those set forth under the caption "Item 1A. Risk Factors," beginning on page 44 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission, or SEC. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.
OmniVision, OmniPixel and TrueFocus are registered trademarks of OmniVision Technologies, Inc. the OmniVision logo, CameraChip, CameraCube, OmniBSI, OmniPixel2, OmniPixel3, OmniPixel3-HS, OmniQSP and SquareGA are trademarks of OmniVision Technologies, Inc. Wavefront Coded is a registered trademark of OmniVision CDM Optics, Inc., a wholly-owned subsidiary of OmniVision Technologies, Inc. Wavefront Coding is a trademark of OmniVision CDM Optics, Inc.
Overview
We design, develop and market high performance, highly integrated and cost efficient semiconductor image-sensor devices. Our main products, image-sensing devices which we refer to as CameraChip™ image sensors, capture an image electronically and are used in a number of consumer and commercial mass-market applications. Our CameraChip image sensors are manufactured using the complementary metal oxide semiconductor, or CMOS, fabrication process and are predominantly single-chip solutions that integrate several distinct functions including image capture, image processing, color processing, signal conversion and output of a fully processed image or video stream. Recently, we have also integrated our CameraChip image sensors with wafer-level optics, which we refer to as CameraCube™ imaging devices. Our CameraCube imaging device is a small footprint, total camera solution that we believe will enable the further miniaturization of camera products. We believe that our highly integrated image sensors and imaging devices enable camera device manufacturers to build high quality camera products that are smaller, less complex, more reliable, more cost effective and more power efficient than cameras using traditional charge-coupled devices, or CCDs.
Technology
In May 2007, we announced the introduction of our OmniPixel3™ architecture. The OmniPixel3 architecture represents a further refinement and pixel size reduction of our OmniPixel2™ and OmniPixel® architectures, which we introduced in September 2005 and August 2004, respectively.
In February 2008, we announced our new OmniPixel3-HS™ architecture, which incorporates a new pixel design that doubles the sensitivity of our 1.75 µm OmniPixel3 architecture. The performance of the new OmniPixel3-HS architecture significantly enhances image capture under very low lighting conditions, and thereby, we believe, allows for a new generation of compact camera solutions for mobile phones, notebook computers and other applications that require exceptional low-light performance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSI™ technology. OmniBSI technology is based on an idea called back side illumination, or BSI. Our first OmniBSI product, an 8-megapixel image sensor is built using an advanced 1.4 µm pixel, and we believe we are the first image sensor company to announce a viable process for the mass production of BSI sensors.
All traditionally designed CMOS image sensors capture light on the front side of the chip, so the photo-sensitive portion has to share the surface of the image sensor with the metal wiring of the transistors in the pixel and the metal wiring acts to limit the amount of image light that reaches the photo-sensitive portion of the image sensor. With our new OmniBSI architecture, the image sensor receives light through the back side of the chip. As a result, there is no metal wiring to block the image light, and the entire backside of the image sensor can be photo-sensitive. Not only does this enable us to produce a superior image, it also permits the front of the chip surface area to be devoted entirely to processing, and permits an increase in the number of metal layers, both of which result in greater functionality. Capturing light on the back side of the image sensor also allows us to reduce the distance the light has to travel to the pixels, and thus provide a wider angle of light acceptance. Widening the angle of acceptance in turn makes it possible to reduce the height of the camera module, and thus the height of the device which incorporates the camera.
In February 2009, we announced the introduction of our CameraCube technology. This is a three-dimensional, reflowable, total camera solution that combines the full functionality of our CameraChip image sensors and wafer-level optics in one compact, small-footprint package. Our CameraCube devices can be soldered directly to printed circuit boards, with no socket or insertion requirements. We believe our CameraCube solution can streamline the mobile phone manufacturing process, thus resulting in lower cost and faster time-to-market for our customers.
Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected production or performance issues with future products. During the early stages of production, production yields and gross margins for products based on new technology are typically lower than those of established products.
New Products
In September 2008, we introduced two devices based on our 1.4 micron OmniBSI architecture. The OmniBSI technology delivers best-in-class low light sensitivity, greater quantum efficiency and significantly reduced cross-talk, which allows our customers to introduce cameras that deliver sharper images across broader lighting conditions, with more vibrant, true-to-life colors. Additionally the OmniBSI architecture's wide angle of light acceptance is designed for ultra-thin camera modules for the next-generation mobile phones and other product applications.
The first OmniBSI device introduced, the OV8810, is a 1/3-inch, 8-megapixel CameraChip image sensor targeted at the mobile phone market. The device is small enough to fit within an 8.5 x 8.5 x 7 mm camera module and outputs data in full 8-megapixel resolution at 10 frames per second, or FPS, and records 720p high-definition, or HD, video at 60 FPS, or 1080p at 30 FPS. In quarter video graphics array, or QVGA, resolution, the OV8810 can output data at 120 FPS, ideal for slow motion preview. For fast transfer of image data, the OV8810 is outfitted with a parallel interface and a two-lane, high-speed mobile industry processor interface, or MIPI. This enables mobile phone makers to use the OV8810's parallel interface as input for a secondary camera, while alternately providing output via the MIPI interface.
The second OmniBSI product, the OV5642, is a 1/4-inch, 5-megapixel fully integrated system-on-chip, or SOC, image sensor with integrated TrueFocus® ISP, our most advanced image-signal-processor, or ISP, technology. The TrueFocus ISP increases picture clarity and sharpness and offers extended depth of field, or EDoF, capabilities. EDoF enables customers to utilize fixed focus lenses which reduces overall cost of their camera modules. The OV5642 can output video in full resolution at 15 FPS, supports 720p HD video at 60 FPS and 1080p at 30 FPS. An integrated JPEG compression engine simplifies data transfer for bandwidth limited interfaces. For fast transfer of image data, the OV5642 has a two-lane, high-speed MIPI interface.
In October 2008, we announced that the 1/4-inch, all digital OV7710 VGA CameraChip image sensor is in volume production and has shipped to multiple top-tier automotive customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
In November 2008, we introduced two new devices based on our OmniPixel3-HS architecture. The first device is the OV6930, a SquareGA (400 x 400 pixels) CameraChip image sensor with a 1/10-inch form factor. It uses 3 µm OmniPixel3-HS pixels, which enables it to achieve low-light performance of 3,300 mV/(Lux-sec). OV6930 is positioned for the medical device market. The second device is the OV9710 in quad flat package, or QFP. It is a 1-megapixel image sensor designed specifically for advanced automotive vision and sensing systems.
In January 2009, we introduced the OV7740, a 1/5-inch VGA CameraChip image sensor with 4.2 µm pixels based on the OmniPixel3-HS architecture. It is capable of operating at 60 FPS in VGA resolution, and 120 FPS in QVGA resolution. OV7740 is appropriate for leading-edge notebook computer and webcam designs. OV7740 is also an ideal solution for security, surveillance, automotive and games and toy applications.
In February 2009, as part of our CameraCube technology announcement, we introduced two new CameraCube imaging devices. The first product is the OVM6680. It has a SquareGA resolution. The second product is the OVM7680, and it has a VGA resolution.
In February 2009, we also introduced the OV3650, a Ľ-inch 3-megapixel image sensor with 1.75 µm OmniPixel3-HS pixels. This image sensor is designed for mobile phones, notebook, webcam and other applications that require exceptional low-light performance without the need for flash.
In March 2009, we introduced the OV9810, a new 1/2.3-inch 9-megapixel image sensor with 1.75 µm OmniPixel3-HS pixels. This sensor is designed for the digital still camera, or DSC, and HD camcorder markets. It combines 9-megapixel photography with 1080p HD video on a single chip, eliminating the trade-offs between high quality still photography and high performance HD video. The OV9810 is capable of operating at 8.9 FPS in full 9-megapixel resolution, and offers true HD quality, or 1080p, video at 30 FPS.
In April 2009, we introduced the OV7960, a 1/4-inch VGA image sensor with 6 µm OmniPixel3-HS pixels. It has a low-light sensitivity of 12V/(Lux-sec) and is optimized for interlaced NTSC/PAL formats to directly interface with TVs and LCD screens. With the ability to capture images in the most challenging lighting conditions, OV7960 can be used in both professional closed-circuit TV applications and automobile driver assistance applications.
In June 2009, we introduced three new devices based on the OmniBSI architecture. The first device is the OV5650, a 1/4-inch 5-megapixel image sensor with 1.75 µm OmniBSI pixels. The OV5650 is designed specifically to address consumer demand for DSC quality imaging in a mobile phone. It's low-light sensitivity exceeds 1,400 mV/(Lux-sec) and its signal-to-noise ratio is less than 70 lux. The second device is the OV2665, a 2-megapixel image sensor with the same 1.75 µm OmniBSI architecture. It has an integrated ISP with features such as lens correction, auto exposure, auto white balance, and auto flicker. The last device is the OV5653. It is also based on our latest 1.75 µm OmniBSI architecture, but designed specifically for the DSC and digital video market. In video mode, OV5653 can deliver 720p at 60 FPS and full HD 1080p at 30 FPS.
In July 2009, we introduced the OV9715, a 1/4-inch 1-megapixel image sensor with OmniPixel3-HS pixels. The OV9715 is specifically designed for advanced automotive imaging applications, such as advanced forward-looking, 360 degree bird's eye view, and parking assistance systems. It is also optimized for use in automotive vision and sensing system combinations, such as rear view and trajectory based lane departure warning systems.
In July 2009, we also introduced the OV7739, a 1/7.5-inch VGA image sensor with OmniPixel3-HS pixels. The OV7739 is designed to address the low-light sensitivity demands of the notebook PC market. It supports high quality video conferencing and recording at 30 FPS in VGA resolution and 60 FPS in QVGA resolution.
Joint Venture with Taiwan Semiconductor Manufacturing Company Limited
On October 29, 2003, we entered into an agreement with Taiwan Semiconductor Manufacturing Company Limited , or TSMC, to form VisEra Technologies Company, Ltd., or VisEra, a joint venture in Taiwan, for the purposes of providing certain manufacturing and automated final testing services related to CMOS image sensors. In August 2005, under an amendment to the original 2003 joint-venture agreement, we and TSMC formed VisEra Holding Company, or VisEra Cayman, a company incorporated in the Cayman Islands, and VisEra became a subsidiary of VisEra Cayman. We and TSMC have equal interests in VisEra Cayman.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Through April 2007, our contribution to VisEra and VisEra Cayman totaled approximately $51.6 million, effectively meeting our commitment under the terms of a January 2007 amendment to the joint-venture agreement, in which we and TSMC have agreed to commit a total of $112.9 million to the joint venture. We have not made any subsequent contributions into VisEra and VisEra Cayman.
We initially accounted for our investment in VisEra under the equity method. Between August 1, 2005 and December 31, 2006, in accordance with Financial Accounting Standards Board Interpretation No. 46(R), "Consolidation of Variable Interest Entities," or FIN 46(R), we consolidated VisEra's operating results. On January 1, 2007, VisEra ceased to meet the definition of a VIE. Consequently, we deconsolidated on January 1, 2007, and has accounted for its investment in VisEra under the equity method.
Since the deconsolidation on January 1, 2007, we have accounted for our investment in VisEra under the equity method. See Note 5 - "Long-Term Investments" and Note 17 - "Related Party Transactions" to our condensed consolidated financial statements.
Joint Venture with Powerchip Semiconductor Corporation
In May 2004, we entered into an agreement with Powerchip Semiconductor Corporation, or PSC, a Taiwan based company that produces memory chips and provides semiconductor foundry services, to establish Silicon Optronics, Inc., or SOI, a joint venture in Taiwan. The purpose of SOI is to conduct manufacturing, marketing and selling of certain of our legacy products. Toward the end of fiscal 2009, SOI began to investigate the market potential of touch panels that track touches with optical sensors. These devices compete with the current resistive and capacitive touch panels. We contributed approximately $2.1 million to SOI in exchange for an ownership percentage of 49.0%. In March 2005, we assumed control of the board of directors of SOI and we have consolidated SOI since April 30, 2005.
As of July 31, 2009, we owned 43.9% of SOI. See Note 6 - "Consolidated Affiliate - Silicon Optronics, Inc." and Note 17 - "Related Party Transactions" to our condensed consolidated financial statements.
Capital Resources
As of July 31, 2009, we held approximately $258.9 million in cash and cash equivalents and approximately $50.1 million in short-term investments. To mitigate market risk related to short-term investments, we have an investment policy designed to preserve the value of capital and to generate interest income from these investments without material exposure to market fluctuations. Market risk is the potential loss due to the change in value of a financial instrument as a result of changes in interest rates or bond prices, and changes in market liquidity and in the pricing of risk. Our policy is to invest in financial instruments with short maturities, limiting interest rate exposure, and to measure performance against comparable benchmarks. We maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations with ratings of "A" or better and money market funds. We do not believe that the value of our cash and short-term investments will be significantly affected by recent instability in the global financial markets.
In June 2005, our board of directors authorized us to use up to $100.0 million of our available cash under an open-market program to repurchase our common stock. At the expiration of the program in June 2006, we had cumulatively repurchased 5,870,000 shares of our common stock for an aggregate cost of approximately $79.6 million.
In February 2007, our board of directors approved an additional stock repurchase program that provides for the repurchase of up to $100.0 million of our outstanding common stock. Subject to applicable securities laws, such repurchases will be at times and in amounts as we deem appropriate, based on factors such as market conditions, legal requirements and other corporate considerations. As of July 31, 2009, we had cumulatively repurchased 6,671,000 shares of our common stock under this open-market program for an aggregate cost of approximately $99.1 million. See Note 14 - "Treasury Stock" to our condensed consolidated financial statements.
Current Economic Environment
We operate in a challenging economic environment that has undergone significant changes in technology and in patterns of global trade. We remain a leader in the development and marketing of image-sensing devices based on the CMOS fabrication process and have benefited from the growing market demand for and acceptance of this technology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Recently, general domestic and global economic conditions have been negatively impacted by several factors, including, among others, the subprime-mortgage crisis in the housing market, going concern threats to investment and commercial banks, other financial institutions and major automobile companies, reduced corporate and consumer spending, and decreased consumer confidence. These economic conditions have resulted in our facing one of the most challenging periods in our history. In particular, we believe consumers and businesses in markets into which we sell our products have reduced spending in response to the tightening of lending standards by financial institutions, negative financial news and the continued uncertainty in the global economy. This has negatively affected demand for all consumer electronic products, security products and products for the automotive industry. Consequently, the overall demand for image sensors also decreased relative to the prior year levels. This decrease in demand has had a significant impact on our revenues, results of operations and cash flows and overall business.
These conditions could also have a number of additional effects on our business, including insolvency of key suppliers or manufacturers, resulting in product delays, inability of customers to obtain credit to finance purchases of our products, customer insolvencies, increased pricing pressures, restructuring expenses and associated diversion of management's attention, excess inventory and increased difficulty in accurately forecasting product demand and planning future business activities. It is uncertain how long the current economic conditions will last or how quickly any subsequent economic recovery will occur. If the economy or markets into which we sell our products continue to slow or any subsequent economic recovery is slow to occur, our business, financial condition and results of operations and cash flows could be further materially and adversely affected.
Market Environment
We sell our products worldwide directly to original equipment manufacturers, or OEMs, which include branded customers and contract manufacturers, and value added resellers, or VARs, and indirectly through distributors. In order to ensure that we address all available markets for our image sensors, we organize our marketing efforts into end-use market groups, each of which concentrates on a particular product or, in some cases, customer within a product group. Thus we have marketing teams that address the mobile phone market, the notebook and webcam market, the digital still camera, or DSC, market, the security and surveillance market, the toys and games market, and the automotive and medical markets.
In the mobile phone market in particular, future revenues depend to a large extent on design wins where, on the basis of an exhaustive evaluation of available products, a particular mobile phone maker determines which image sensor to design into one or more specific models. The time lag between design win and volume shipments varies from as little as three months to as much as twelve months, which could cause an unexpected delay in generating revenues, especially during periods of product transitions. Design wins are also an important driver in the many other markets that we address, and in some cases, such as automotive or medical applications, the time lag between a particular design win and revenue generation can be longer than one year.
The overwhelming majority of our sales depend on decisions by the engineering designers for manufacturers of products that incorporate image sensors to specify one of our products rather than one made by a competitor. In most cases, the decision to specify a particular image sensor requires conforming other specifications of the product to the chosen image sensor and makes subsequent changes both difficult and expensive. Accordingly, the ability to timely produce and deliver reliable products in large quantities is a key competitive differentiator. Since our inception, we have shipped more than one billion CameraChip image sensors, including approximately 75 million in the three months ended July 31, 2009. We believe that these quantities demonstrate the continuing capabilities of our production system, including our sources of offshore fabrication.
We currently outsource the wafer fabrication and packaging of our image-sensor products to third parties. We outsource the color filter and micro-lens phases of production to an investee joint venture company. With our new CameraCube products, we also collaborated with the industry's leading wafer-level lens suppliers, and outsourced the assembly process. This approach allows us to focus our resources on the design, development, marketing and testing of our products and significantly reduces our capital requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
To increase and enhance our production capabilities, we work closely with TSMC, our principal wafer supplier and one of the largest wafer fabrication companies in the world, to increase, as necessary, the number of its fabrication facilities, at which our products can be produced. VisEra, our joint venture with TSMC, and our investments in two key back-end packaging suppliers are part of a broad strategy to ensure that we have sufficient back-end capacity for the processing of our image sensors in the various formats required by our customers.
We currently perform the final testing of the majority of our products at our own facility in China. As necessary, we will make further investments to expand our testing and production capacity as well as our overall capability to design additional custom products for our customers.
Since our end-user customers market and sell their products worldwide, our revenues by geographic location are not necessarily indicative of the geographic distribution of end-user sales, but rather indicate where the products and/or their components are manufactured or sourced. The revenues we report by geography are based on the country or region in which our customers issue their purchase orders to us.
Many of the products using our image sensors, such as mobile phones, notebook and webcams, DSCs and cameras for toys and games, are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. Historically, demand from OEMs and distributors that serve such consumer product markets has been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. However, because of the current economic downturn, we experienced weaker than normal conditions in all of these markets in the third and fourth quarters of fiscal 2009. We saw early signs of improvement in our business during the first quarter and we believe the historical seasonal cycle to our business has returned. In addition, since a very large number of the manufacturers who use our products are located in China, Hong Kong and Taiwan, the pattern of demand for our image sensors has been increasingly influenced by the timing of the extended lunar or Chinese New Year holiday, a period in which the factories which use our image sensors generally close.
We believe that the market opportunity represented by mobile phones remains very large, although the opportunities presented will be deferred until the current global economic conditions improve. We also believe that, like the DSC market, mobile phone and notebook and webcam demand will not only continue to shift toward higher resolutions, but also will increasingly fragment into multiple market segments with differing product attributes. For example, we see the further expansion of the smartphone segment within the mobile phone market and the recent introduction of the netbook product segment within the notebook . . .
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