The Black Box

[Fletch]

Hey Cortisone,
I sold all OVTI awhile back after I read this...
http://tinyurl.com/bf9yh If link doesn't work....copied below....
The chart looks real good and wedged......I just don't like staying in ones I'm way up on......
that leave gaps.......but earnings aren't trusted......
It could be a buy tho,
Fletch

OmniVision gets more ominous
Commentary: Time will tell who gets the last laugh
By Herb Greenberg, MarketWatch
Last Update: 1:22 PM ET Dec. 2, 2005
Disable MW live quotes | E-mail it | Print | Discuss | Alert | Reprint |

Editor's note: This is a free version of Herb Greenberg's RealityCheck. Click here for information on how to subscribe.

SAN DIEGO (MarketWatch) -- "Give it up." "Walk away." "You fool." "Hardee har har." And so goes the steady stream of love letters from Yahooligans who are, no doubt, fans of OmniVision Technologies.
MARKETWATCH TOP NEWS
U.S. stocks mixed after data; Altria up 5% on ruling
Ill. court overturns 'lights' ruling against Altria
U.S. Nov. CPI falls 0.6%, biggest drop since 1949
Trading, fixed income boost Bear Stearns' profit
Dollar slammed again against yen
TRADING CENTER



TRACK THESE TOPICS
My Portfolio Alerts
Company: Omnivision Technologies Inc Add
Create
Column: Herb Greenberg
Create
Get breaking news sent directly to your in-box
Edit My Portfolio | Edit Alerts

They are also a throwback to the good old days of the Hostile React-o-meter, one of this column's great contra-indicators, which is spinning outta control -- outta control, I tell ya!

On Thursday afternoon the company, whose products mostly go into cell phones, reported what appeared to be a blowout second quarter. The company then increased third-quarter guidance, which was (wink-wink, nudge-nudge) conveniently (and suspiciously) transmitted by several analysts in the days and weeks prior to the actual earnings release.
On Thursday afternoon the company, whose products mostly go into cell phones, reported what appeared to be a blowout second quarter. The company then increased third-quarter guidance, which was (wink-wink, nudge-nudge) conveniently (and suspiciously) transmitted by several analysts in the days and weeks prior to the actual earnings release.

That one-two punch of better-than-expected results and higher guidance caused OmniVision's (OVTI:
omnivision technologies inc com
News, chart, profile
Last: 20.53-0.12-0.59%
11:13am 12/15/2005
Add to portfolio
Analyst
Create alert
Insider
Discuss
Financials
More OVTI
OVTI20.53, -0.12, -0.6%) stock to surge even further. Friday morning alone it rose more than 18%, to above $21, putting it several points above where it was a year ago when it first landed on the Watch List of my subscription newsletter, Herb Greenberg's RealityCheck. So what if it fell below $12 in the wake of a continued deterioration in earnings quality.

Earnings quality, in fact, is the reason OmniVision hit this column's radar in the first place. Enter the most recent quarter. The company boasted higher-than-expected gross margins. That's good. But the higher margins came despite an 18% quarter-to-quarter slide in average selling prices.

That simply doesn't make sense, especially at a so-called "fabless" chipmaker like OmniVison, which doesn't do its own manufacturing. Such companies historically live and die by pricing: The higher the pricing, the better the margins and profits; the lower the pricing, the worse the margins and profits.

Yet here's OmniVision, with prices falling and margins rising in a capacity-constrained industry that has growing competition.

Is OmniVision really an exception to the rule? On the company's earnings call, CFO Peter Leigh suggests it is, saying that "we've been successful in driving down our production costs at a rate which is faster than the sales prices are declining."

But he offered no detail and even contradicted himself in his prepared presentation, when he said, "The decline in the average selling price reflects principal changes in product mix and to a lesser extent lower prices in the marketplace." Then, three sentences later, he said, "The increase in our gross margin was principally due to a favorable product mix and better production yields."

So, on one hand he said the decline in selling prices reflects an implied worse product mix -- or more sales of lower-priced, lower-margin lower mega-pixel chips rather than higher-priced, higher-margin higher mega-pixel chips; yet on the other hand he said the increase in gross margins reflects a better product mix.

You can't have it both ways! No way. No how. Can't happen. Prices were sharply below what even the most bullish analyst, JP Morgan's Paul Coster, had expected. Yet margins were higher than he expected. And even he, in a note to clients, didn't seem overly enthusiastic that OmniVision's diversification of sales to still-camera makers has gone backwards.

Other analysts, in their notes, are dubious of the company's ability to sustain whatever momentum it currently has. I say "whatever" because this is a company that historically has buried the real story in its 10-Q, which won't come out for several weeks. Last time there was controversy over what Leigh said on the conference call about sales of previously written-off chips versus what was disclosed in the quarterly filing.

Can't wait to see what it'll be this time, which is why I don't give it up, don't walk away and accept looking like what some would say is a fool. As for the hardee-har-har: We'll see who gets the last one.

Herb Greenberg is senior columnist for MarketWatch, based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell stocks short or invest in hedge funds.