O2Micro International Limited
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Ladies and gentlemen, good morning, and thank you for joining today to discuss O2's Financial Results for the Second Quarter of Fiscal Year '21. If you would like a copy of the press we issued earnings please call Daniel Meyberg [phone] extension 8882. We'll e-mail you. It is also posted on the O2 website at www.o2micro.com under the heading Investors. There will be a replay available through August 14, 2021, 9

[Daniel Meyberg:]

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the second quarter of 2021, ending June 30, 2021. This is Daniel Meyberg, Corporate Communications for O2Micro. I'd like to remind listeners that the discussion for today's business outlook contains forward-looking statements. Statements made in this release that are not historical fact are forward-looking statements within the meanings of the Federal Securities Laws. Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the Company's 20-F annual filings, our annual reports and other documents filed with the SEC from time to time. Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. These statements made herein are dated information. The Company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, CFO and Director; Jim Keim, Head of Marketing and Sales and Director; and Sterling Du, O2's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be opened for your questions. At this point, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the second quarter of fiscal year 2021, ending June 30, 2021. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q2 2021. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results exclude stock-based compensation expense, onetime charges, nonrecurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the second quarter of 2021 was $26.2 million. GAAP net income in the second quarter of 2021 was $3.2 million if we exclude stock-based compensation of $442,000, the non-GAAP net income will be $3.6 million. GAAP net income per fully diluted ADS in the second quarter of 2021 was $0.10, non-GAAP net income per fully diluted ADS was $0.12. Gross margin was 51.5% in Q2. The gross margin reflects the current revenue level and product mix. R&D expense was $4.6 million or 17.7% of revenue. This amount excludes stock-based compensation expense of $105,000. SG&A expense was $5.1 million or 19.6% of revenue. This amount excludes stock-based compensation expense of $337,000. The non-operating income was $133,000. Income tax was $253,000 in the second quarter and is mainly based on the estimated effective tax rate of each taxable location.

[Jim Keim:]

Thank you, Perry. Good morning, everyone. Let me highlight our company's revenue growth over the past two years. Q2 2021 was 51% growth over Q2 of 2020. And Q2 2021 was 83% growth over Q2 of 2019. Let me provide a brief explanation of what is driving this growth as well as an overview of our company's strategic positioning, market focus and ongoing growth opportunities. As explained in prior quarterly updates, we did benefit in the past year from the COVID-19 crisis due to increased demand for mobility based products. As more people faced stay-at-home situations, this resulted in rapid growth and demand for monitors, TVs, tablets and notebooks that use our lighting technology. Battery management products used in vacuum cleaners, power tools, garden tools and e-bikes also enjoyed an acceleration in growth during the pandemic. However, this does not explain why we were well positioned to take advantage of these growth opportunities and why we believe our sales prospects continue to be excellent going forward. For a number of years, O2Micro invested heavily in R&D, far more than the typical company of our size. We did this for several reasons. First, to diversify from our historic notebook market, which one-time was 100% of our business; and second, to broaden our product scope into rapidly evolving lithium-ion battery management business as well as high end lighting devices for new market areas, our major R&D effort paid off in the growth that is now being evidenced.

[Sterling Du:]

Thanks, Jim. O2Micro reported the second quarter of 2021 revenue of $26.2 million. Revenue was up 12.8% from previous quarter and up 51.6% from the same quarter prior year. The gross margin in the second quarter of 2021 was 51.5% at gross margin was slightly down from 51.6% of the previous quarter, which is in our company average range. Our revenue exceeds guidance publicly released on April 30, 2021. Our battery business grew strongly at all the sectors, especially the cordless floor care product, which comes from the strong household demand as work-from-home or flexible work-from-home continues. We also see the garden tools, professional tools market expand rapidly. We believe it is a healthy product mix and strong growth coming from both consumer and construction industry. On the other hand, we see the new battery-powered devices product from the light, transportation, innovative household energy storage to industry grade uninterrupted power system. With the high growth demand of battery industry, innovative technology continue to improve, energy density and production capacity continue to expand. For example, CATL produced 30.5 gigawatt hour in 2019 and 230 gigawatt hour in 2020, project to produce 1,200 gigawatt hour in 2025, which will be 5 times growth in five years. We see such drastic capacity expansion will drive many new innovations in battery powered applications with higher energy density inside and the battery better cost structure. Meanwhile, higher energy density means, the higher resolution needed and faster AD converter needed. Our AFE Analog Front End and the BMU, which was designed with 14 bit high accuracy AD converter could meet customer needs. Our high accuracy AD converter reached 15 millivolt resolution performance, which is way beyond customer expectation. As power tool market growth comes from the existing marketplace and also newly creative applications it expands to more areas, including at home DIY tools, garden tools to the seasoned contractors. Power tool helps simplify the labor involved in the production and speed of the production time. Furthermore, our on-place OE1 PMA solutions enable power tool to be connected as IoT devices. 5G deployment will further enrich the power tool connectivity.

[Daniel Meyberg:]

Thank you, Sterling. At this point, operator, we'd like to open the call to questions.

[Operator:]

Thank you. We will take our first question from the line of Theodore O'Neill from Litchfield Hills Research. Your line is open. Please state your question.

[Theodore O'Neill:]

Thank you very much. My question is about the battery management market for industrial tools. We all see the proliferation of battery-powered consumer tools but in recent discussions I've had with commercial construction managers, they're seeing a change to almost all battery-powered commercial tools. And I was wondering if you could comment on if you're seeing this sort of thing -- seeing this trend as well?

[Jim Keim:]

Well, yes, we are seeing a trend and one of the key areas for this whole area of power tools is the ability of, for instance, a construction company to keep track of their tools. So what happens on a major job, for instance, they actually will have global positioning built in, they'll be able to track actually the individual tool, where it is at and should that tool somehow go astray, they can actually make it dysfunctional. So basically, this is a major, major activity within the power tool industry, and we do see this as being a very dynamic, growing market.

[Theodore O'Neill:]

Last quarter you talked about CapEx for the year coming to between $10 million and $15 million. Is that still your thought for this year?

[Perry Kuo:]

The CapEx altogether, testing and also other area, we are still in the $10 million to $15 million, but it will be up to the delivery schedule. So based on the current update, it could be in the area of a little bit $10 million round.

[Operator:]

We'll take our next question from the line of Lisa Thompson from Zacks Investment Research. Your line is open. Please state your question.

[Lisa Thompson:]

Good morning, great to see another great quarter and another one coming up. I have a few questions. First off, SG&A seemed like over little high for the quarter. Did you do anything special, spend on something or was that just hiring?

[Perry Kuo:]

The SG&A is partially -- is partially related to the revenue growth, higher revenue, of course. And the second one is because we are setting a more service team to the different market sectors and also the extra costs up in the logistics to the short-turn early time, shortly time notice from the customers. Also, we are adding some traveling -- China resumes from traveling to visit the customer and also the account. So this will be at least up a little bit -- up a little bit in the amount and also but however, we also will control the ratio of the rate -- of the SG&A to the revenue, yes.

[Lisa Thompson:]

Okay. Great. In the industry, we keep hearing now that there's like record double ordering for products. Are you seeing that also and I know this isn't your first rodeo. Are we to fear that maybe next year, there will be some inventory corrections?

[Jim Keim:]

Lisa, we monitor that issue very closely, and it's always a concern. One of the things we mentioned in the call is that we focus on major customers. So we deal directly with major customers. We do not have distribution channels that typically build up a lot of inventory. And one of the things we do with the major customers is we monitor their forecast and usage very closely so that we avoid to the maximum extent any buildup of significant inventories, and we will continue to do that. So at this point, we do not see a major downside risk to ourselves due to any customer holding significant amounts of inventory.

[Lisa Thompson:]

Right. One thing I noticed for this quarter, it looks like your battery management business is accelerating its growth, which is more than a double-ish. Do you see that continuing based on what you see happening with customers and the market?

[Jim Keim:]

Well, the battery management business indeed had a very strong quarter, although I will say that lighting also enjoyed a very strong quarter due to both the monitor and TV business. So our growth wasn't just out of the battery management area. We do see ongoing opportunities to expand growth. I will mention that both Perry and Sterling indicated, we are looking at expanding our operating capability, including additional fab capability, test capability as well as assembly capability. And actually, at this point, we have restricted somewhat our customer base due to the rapid expansion. There's only so fast we can expand with the current supply base but we are now doing that expansion and so we do expect ongoing growth, but it can't just be unlimited growth due to the time and money it takes to expand.

[Lisa Thompson:]

Great. That sounds like a good problem to have. So talking about back to the lighting business, I keep reading now a lot of talk about mini LEDs and laptops and notebooks. Do you think that business is going to come back?

[Jim Keim:]

Well, the mini LED business is certainly going to grow. I think in the prior call, we did mention that we are doing some significant work in the mini LED, including R&D and we did recently release a press release on a patent that is directly related to mini LED. So we see the mini LED market ready to really grow, first of all, in the tablet business and then it will grow on up into the TV business over time. But the mini LED business will be a major, major growing business over the next five years.

[Lisa Thompson:]

So speaking of the patents, I guess you released two of them, two press releases on them this quarter. Could you just dumb them down a little for the rest of us the effects of those two specific patents?

[Jim Keim:]

Sterling, do you want to comment on that?

[Sterling Du:]

Yes. These are for the mini LED I think I have only second impression, but I did -- I did write-off some of the battery, what we did for the battery pattern we just put a press release, including -- we detect when a battery sale, when you have a multiple battery cell and certain of the cell has been either a malfunction or shortage or even they have a bad connection between each individual sales at that moment, you're going to see some -- you maybe detect the voltage have a significant dropdown however, but you don't know it is going to be the battery intrinsic will have chemical issues or just the safety issue. So we come out with a methodology to give a small step up mini current to testing that voltage and to see that the current and voltage we call the IV curve to match certain of the reasonable explanation and to determine this is coming from the failure or it's just simply the aging problem or the health status of the battery. So this is a patent we just -- one of the pattern we issued. And other pattern, sorry for that, I don't recall not clearly at this moment.

[Lisa Thompson:]

All right. That sounds really good. Is there anybody in particular that's going to take that up first that's most important to?

[Jim Keim:]

In the mini LED area, we are working with several very significant entities. We're not able to do the nondisclosures. I'm not able to give out names and specific activity but when we are doing these developments, we are working with customers.

[Lisa Thompson:]

Okay. Thank you. That's all my questions.

[Operator:]

We have no further question. I will hand over the call back to Dan for any additional closing remarks. Please go ahead.

[Daniel Meyberg:]

Thank you. I'd like to thank everyone again this morning for your time and attention. Please feel free to contact me at [phone] extension 8888 or at [e-mail] with any follow-up questions. I'd like to thank everyone. Have a great day and for your time and attention. Goodbye.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.