O2Micro International Limited
Q3 2021 Earnings Call Transcript

Published: 29 Oct 2021

[Operator:]

Good morning. And thank you for joining us today to discuss O2Micro’s Financial Results for the Third Quarter of Fiscal Year 2021. If you would like a copy of the press we issued earnings please call Daniel Meyberg at 408-987-5920 extension 8888 and we will e-mail you a copy immediately. It is also posted on the O2Micro website at www.o2micro.com under the heading Investors. There will be a replay available through November 14, 2021 at 9 a.m. Pacific Time or by the O2Micro website under the heading Investors. Following the presentation by management, the conference will be open for questions-and-answers as time permits. Gentlemen, you may begin.

[Daniel Meyberg:]

Thank you. Good morning, everyone. And thank you for joining O2Micro’s financial results conference call for the third quarter of 2021 ending September 30, 2021. This is Daniel Meyberg, Corporate Communications for O2Micro. I’d like to remind listeners that the discussion of business outlook for the O2Micro 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 associated risk factors. The 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 third quarter of fiscal year 2021 ending September 30, 2021. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q3 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, one-time charges, non-recurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2021 was $27.3 million. GAAP net income in the third quarter of 2021 was $3.7 million. If we exclude stock-based compensation of $443,000, the non-GAAP net income will be $4.1 million. GAAP net income per fully diluted ADS in the third quarter of 2021 was $0.12. Non-GAAP net income per fully diluted ADS was $0.13. Gross margin was 52% in Q3. The gross margin reflects the current revenue level and product mix. R&D expense was $5 million or 18.4% of revenue. This amount excludes stock-based compensation expense of $98,000. SG&A expense was $5.1 million or 18.7% of revenue. This amount excludes stock-based compensation expense of $345,000. The non-operating income was $342,000. Income tax was $279,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3 2021, there was no stock repurchase. Q3 2021, revenue by end market breaks down into the following percentages. Industrial was 63% to 65% of revenue. Consumer was 32% to 34% of revenue. Computer was 1% to 3% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2Micro finished the third quarter with $50.7 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.78 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q3 was $16.7 million. Our DSO is 55 days. DSO is less than 60 days mainly from account mix. Inventory was $18 million at the end of the third quarter. This represents 117 days of inventory and the inventory turnover was 3.1 times in Q3. Net cash generated from operating activities in the second quarter was about $4.3 million. Capital expenditure was about $968,000 in the third quarter for R&D and IT equipment. Depreciation and amortization was $1.1 million in Q3. At the end of the third quarter of 2021, O2Micro had 344 employees, 58% of which are engineers. Based on current market situation and the base updated managerial rolling forecast, the company has the following guidance for Q4 2021. Net revenues are expected to be $25.5 million to $26.5 million or down 3% to down 7% as compared to Q3 2021 of $27.3 million. Product gross margin is expected to be in the range of 50% to 52%. R&D expenses excluding stock-based compensation are expected to be in the range of $5 million to $5.5 million. SG&A expenses excluding stock-based compensation are expected to be in the range of $5 million to $5.8 million . Stock-based compensation should be in the range of $550,000 to $650,000. Non-operating income expected to be in the range of $150,000 to $250,000, excluding foreign exchange gain or loss. Income tax expense is expected to be in the range of $200,000 to $300,000. The goal of our management team and the Board of Directors is to maximize shareholders’ value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing asset on the balance sheet. Regards our share purchase program, we have been active in this program historically. Since 2002, we have repurchased over 20.3 million ADS shares for $101.3 million. As of the end of Q3, we had $7.6 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully plan and execute to target revenue and maintain gross margin in Q4 2021 and these efforts will be focused to continue in 2022. We also monitor the supply chains tightly and have added timely, both work in process level and inventory to support the dynamic demand from accounts in multiple end markets. In Q3, we added more testing to support Q4 2021 and the Q1 2022. The wafer capacity remains very tight in the coming quarters. In Q4, we expand the investment in R&D, new ISO training, new tape out, patent filing and expanding our supply chain with more complete second sourcing suppliers, testing capabilities of complex products and capacity with new purchase testers in 2021. We will always watch the expense carefully and continue to manage costs as needed. Although, we believe we have an eye current cost based on current and anticipated revenue levels. Returns to shareholders are very much on our minds and will continue to be a focus in the future. We will provide update to the additional measures to enhance shareholder value throughout this year. I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim?

[Jim Keim:]

Thank, Perry. Good morning, everyone. Let me highlight our company’s growth over the past two years. Q3 2021 represents 23% growth over Q3 of 2020. Q3 2021 represents 70% growth over Q3 of 2019. Our Q4 projection takes into account multiple factors that include, seasonality for battery management based on a traditional slowdown in demand for power tool, garden tool and e-bike products , as we head into the winter for the U.S., Europe and China. Growing supply chain issues affecting both our customers’ ability to produce systems and meet new product introduction target dates. Causes of these supply chain issues include COVID-19 resulting in lengthy plant closures for customers operating in significantly impacted countries like Malaysia and Vietnam, power outages in China impacting both for suppliers’ production schedules and our customers’ ability to build systems, a myriad of ongoing material shortages preventing customers from maintaining normal production schedules. While supply chain issues have impact on our revenue growth rates, our strong financial position has enabled us to accelerate expansion of our production capability in anticipation of ongoing growth in 2022 and beyond. For wafer fab, this includes expansion into new wafer suppliers, as well as expansion into additional processes and existing suppliers that can enhance our wafer supply. We have also expanded our assembly capability into additional suppliers and have significantly expanded our test capability. We continue to aggressively develop new products for both are intelligent lighting and battery management product lines. As Sterling will mentioned in his quarterly commentary, many new products are specifically focused on serving rapidly expanding applications for lithium-ion battery applications, as well as advanced lighting systems using mini LED. New products are targeted at more complex Consumer, Industrial and Automotive markets that will broaden our market focus and expand our customer base, while generating higher ASPs. These new products are based on our unique technology backed by a large intellectual property patent portfolio that is significantly larger than most companies our size. We strongly believe that these new products will continue to drive our revenue expansion in 2022 and beyond. While we continue to expand our revenue base, the major customers we already penetrated can carry our company the much higher revenues as we increase our product footprint with them, major OEMs that already use our products and battery management include Bissell, Black & Decker, Bosch, Dyson, Electrolux, Hitachi, Lexy, LG, Makita, Murata, Panasonic, Philips, Samsung, Sharp and TTI and Toshiba. Major OEMs that use our lighting products include BOE, Dell, HP, Hisense, Honda, Hon Hai Foxconn, Lenovo, Panasonic, Samsung, Sharp, Skywork, TCL and Toyota. Given our excellent technology in key growth areas and excellent customer positioning, we are confident of our ability to continue to grow long-term revenues within this customer base, while also expanding to additional major customers. I will now pass the call over to Sterling Du, our CEO for closing remarks.

[Sterling Du:]

Thanks, Jim. O2Micro reported our third quarter 2021 revenue of $27.3 million. Revenue was up 4.1% from the previous quarter and up 22.6% from the same quarter last year. The gross margin in third quarter of 2021 was 52%. The gross margin was up from 51.5% of previous quarter, putting our company average range. Our revenue is within our guidance publicly released on July 30, 2021. The price of DC and ion battery cell declined by 97% in the past two decades, a battery with a capacity of 1 kilowatt hour cost about $7,500 in 1991 and it was just $181 in 2018. And the lithium battery price even dropped to $137 per kilowatt hour in 2020, which is awesome and are expected to drop further in the coming year. So lithium ion batteries are one of the most efficient energy storage device worldwide. The recent report shows a global lithium cell manufacturer capacity, the pipeline could be right four-fold from 2019 to 2030. That is 1.3 terawatt hour, Asian production base account for 80% of worldwide production volume. With a high growth demand of battery industry innovative technology will continue to improve the energy density and quality continue to expand. For example, the CATL is produce in 2019 32.5 gigawatt hour and it will grow five times in the next five years by 2025. Our battery business grew strongly in all the sector despite a dynamic market and a supply chain situation. We observed a higher number of the sales education took more market share, it was probably from the cost curve dropped sharply, as well as the battery quality improve, which enhance the yield rate of the high sale number battery pack. And one of the core product, let’s call it, floor care product, which come from the strong household demand, as the work-from-home or flexible working hour from home continues. The second contract is garden tools and the professional tools, will be a strong growth coming from both consumer and construction industry. On the other hand, we are looking at new battery power devices to build from a light transportation, innovative household energy storage and industry grade intra-power systems. October 1, 2021 this year, USB4 power delivery taxi announced expanded to a new standard 240 watts from existing 68 watt standard. This news expands the USB Taxi to the power tool marketplace and will fuel the future growth of the power tool to the next level. Meanwhile, higher energy density, higher resolution and faster AD converter are needed. Our AFE Analog Front End and the BMU 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. We also have outpaced OE1 PMA solution enable the power tool to be connected as IoT devices, 5G deployment will further enhance the power tool connectivity. For our intelligent lighting group business continuously win the design wins and spent. We believe the supply chain reveal the early sign of normalization, though, delivery remains critical. We see flexible working hour work-from-home continue to accelerate the high end TV market share. So we are committed in our post-COVID-19 business. The global 4KTV market size expect to reach the US$380 billion by 2025 at a compound annual growth rate at 21.2% according to some report from Grand View Research. We foresee today 8K will become the mainstream product in the coming years. Now the full array local TV, which we call local TV have till now dominate TV and desktop monitor. For the TV high end 4K and 8K local TV pilot product, the demand continues to be very strong. Our latest IC we rolled out has the ability to control the dimming through either analog function or PWM, which is a pulse width function. The two in one mode control further simplify the TV system design architecture, if our customer desire to support different type panel dimming solution with only one IC. However, one of the full array local dimming issue is by placing the LED on the back of the display facing the , the thickness of the device increases not only the LED package itself relative thick, but also some sufficient distance between is required for the light on individual chips to spread evenly through other display, that is intimate the hotspot. So the mini LED on the other hand solve this issue by multiplying the number of LED chips and a multi LED talk on the subject, therefore reduce the spacing between each light source and also the thickness of the . More important, they also take significant increase the number of zones, which will reduce the brooming which is like a halo effect which is that a small more area bright but it is smaller than the dimming zone in fact you have greater film. Also the mini LED lights has enhance LCD contrast performance level to close to the OLED LED from antenna LCD high brightness characteristics and long life time. They can also reduce the power consumption as more zones will be off in the dark image or the brightness will be thin. So since the mini LED technology offer much smaller size compared to conventional package LCD size, it also gives us TV system designer great space to design the dimming layout, while others offer the marquee scan technology. With a marquee scan, mini LED could easily compose many predefined motor local area due to its smaller size and technology present crystal clear picture event with a fast moving objects in the display. Last but not the least, both our LED backlighting and the battery technology group continued received the patent grant in the last quarter. We continue to grow the business despite the dynamic market situation supply chain management. We are optimistic and remain fundamentals of the business and focus on the high margin the high performance business. We started several expansion project which incur additional expense for new quarters including increment automotive grade ISO 26264 ATS, the consoles foundry qualification tape out, expand the packaging and updating facilities supply chain to ensure delivery on time. We always watch the expanse carefully as well the base to drive the future momentum. We always keep shareholder messages, especially in current dynamic situation. It is all that. Thank you for listening our conference call. I will turn back to Dan please.

[Daniel Meyberg:]

Thank you, Sterling. Operator, at this point we’d like to open the call up to questions.

[Operator:]

Thank you. Our first question comes from Theodore O’Neill with Litchfield Hills Research. Please go ahead.

[Theodore O’Neill:]

Thank you and congratulations on the good quarter. My question is about capital expenditures. So since there seems to be a global mandate to move to everything electric and your quarterly revenue is almost doubled in the last 15 months. Are you seeing any constraints to continued growth and could you sort of talk about it at least in general terms, CapEx might look like to keep up with this kind of growth?

[Perry Kuo:]

This is Perry. Let me answer to the CapEx. Regarding the CapEx, this is more related to the testing capacity. Due to the IC development, our testing time, the new -- for the new IC, the testing time is much longer than the original IC, which means the complexity and also higher interest failure to other competitors and also we may sell it at higher ASP, this will continue. And that the testing time, this is a much more times than the ASP goes. So that’s how we need to invest in the testing. And currently the testing capacity still very tight in Taiwan and also in China. So our testing capacity the -- for the CapEx in 2021 will enable us to launch more new IC and this certainly will continue to give our moment -- the momentum to grow in the sales for the future in the battery area and also some complex LED products.

[Theodore O’Neill:]

So you’re comfortable that there’s -- there -- you can get the equipment that you need to keep this growth going?

[Perry Kuo:]

We already get 90% of the tester already in-house and we are running...

[Theodore O’Neill:]

Okay.

[Perry Kuo:]

And we are doing the -- I think 90% of the test already in-house and 70% to 80% already have the first run, first trial and already we enhance our testing capacity.

[Theodore O’Neill:]

Okay. Thank you very much.

[Operator:]

Our next question comes from Tore Svanberg with Stifel. Please go ahead.

[Tore Svanberg:]

Yes. Hi, everyone. A few questions, first of all, Jim, in regards to the guidance for Q4, had it not been from the supply constraints? Do you think you would grow sequentially or does the seasonality in power tool kind of still take the revenues down sequentially?

[Jim Keim:]

We think we have actually grown Tore and they did not mention, we actually have some major customers that are shutdown for us. We have one very major shutdown in Malaysia, several are in Vietnam, and they have plants totally shutdown. So, some of the supply chain issues have really interrupted some of the growth capability simply due to production capability of our customers.

[Tore Svanberg:]

Understood. And just a clarification question for Perry, Perry, when you gave the SG&A guidance, was it $5 million to $5.5 million similar to R&D?

[Sterling Du:]

Perry, are you there?

[Perry Kuo:]

Yeah. Tore, it is $5 million to $5.5 million. Yeah. I’m sorry, yeah, yeah, $5 million to $5 million -- $5 million to $5.5 million, yeah.

[Tore Svanberg:]

Okay. Perfect. Just want to clarify that. Lastly to you, Sterling, could you talk a little bit about some of the new applications and new products that are going to be ramping next year. It sounds like 2021 was a bit of an investment period for the company, so just trying to get some insights into new product ramps in 2022?

[Sterling Du:]

Yes. We are excited by the -- our mini LED. We have total nine different solutions to address these markets and each solution has a different schedule, but some of them already in sampling and close to pre-production. And we also see this mini LED will be become sort of trend for the notebook and also go to certain high end desktop monitors. And we published the new mini LED has been fueled by the interest. The new Apple introduced their notebook, although they are not belong to a custom, I can say that. However, the mini LED will, one, increase our ASP, second, the mini LED will enable the regular LCD panel to reach the performance like OLED LED, as we know OLED is still have been cost -- still very costly due to the production the difficulty in a challenge. And also number three, we have several patent to cover, as I just mentioned, the marquee scan. The way of the marquee scan in the mini LED is much superior to the local dimming, it is because LED is easy to divide more smaller zone and you have more number of the small zone and easier to do it. And that will be increased our -- the contrast brightness and also reduce the burden to moving market -- moving objects. So, for our battery, we have a long past discussed our ARM based BMU and we’ll be excited to see several updates the BMU rolling to the market and close to the city. And next year those ARM based CPU, the BMU will be take to major account and that will enable the new wave for the power tool be connected. In the meanwhile, we also do the cost down for those ARM based CPU BMU and also add more functionality to it. In the meanwhile, both European and Japan based customer, they all require certain functionality to add power existing product and they all already be either stable or already in a sample in stage. So we believe the next year 2022 of a battery product portfolio will continue to be more bright, more spread and also together with the support the battery capacity production has been going to grow every year, compound growth rate I think in China certain base will be 70% and those will be the major momentum or growth driver for the battery.

[Tore Svanberg:]

Okay. Very helpful. Thank you very much.

[Operator:]

Our next question comes from Lisa Thompson with Zacks Investment Research. Please go ahead.

[Lisa Thompson:]

Good morning. So I would like to ask a little bit about the revenue breakdown this quarter. It looks like TV sales were flat to down versus last year. Is that the industry that you cut those Malaysian and Vietnamese customers are shutdown?

[Jim Keim:]

No. The Malaysia and Vietnam are in the battery management area. The TV business, as you mentioned, has been somewhat down, particularly we’ve noticed out of China suppliers. However, the monitor business continues to be quite strong.

[Lisa Thompson:]

Is that because they have sup -- critical path constraints or is it just demand is down?

[Jim Keim:]

In TV, what we see is some market shifts going on and basic overall demand has gone down in TV, but not monitor.

[Lisa Thompson:]

Okay. So that’s not the issue. All right. As far as the battery products, you keep mentioning automotive, yet are you selling anything to that market now and if not, when does that happen?

[Jim Keim:]

Well, let me…

[Sterling Du:]

We are in the -- I’m sorry. Jim, go ahead.

[Jim Keim:]

Yeah. Well, first of all, let me just say and I’ll just briefly indicate. In automotive we’ve actually, we do have penetration in the automotive market and have had for some time in the intelligent lighting area. For battery management, I think, Sterling indicated that we are going through a lot of ISO activity to prepare to supply into that market. So I’ll let Sterling cover that for you.

[Sterling Du:]

The ISO 26262 will be expand about more than almost two years and we -- so that’s reasonable to expect that even though we have some sampling probably to 2022, but meaningful will be for 2023, yeah.

[Lisa Thompson:]

And can you just describe a little bit about kind of what volumes and ASPs that business will have, is it significantly different?

[Sterling Du:]

Lisa, probably, I need to do more research, because the battery pack for the each automotive, we are not directly talk to the automotive guys, we talked to the battery pack manufacturer and the ASP is high, but the number of the chip utilize the battery pack that depends on the topology and architect each automotive are going to use. And we are currently still early stage before that. Right now we are doing in the IC alone and the IC can control the certain cluster and then the number one battery pack including many clusters. So that probably needs more time. We do the customer investigation where we know -- where we have a more clear idea.

[Lisa Thompson:]

Okay. Good. Interesting. Going back to the TV market and the shutdowns in Malaysia and Vietnam, do you think that, it’s possible then that Q1 will be sequentially up quarter, if they open back up? How do you think that’s going to work out?

[Jim Keim:]

Yes. That’s certainly possible. It’s very, very hard to project, Lisa, given the current situations in the market, issues are very dynamic. We have some customers that actually aren’t even projecting what they can deliver in Q4, because of various parts shortages and material problems. So we’re not going to project Q1 at this point, but that is possible, yes.

[Lisa Thompson:]

Okay. Interesting. All right. Thank you. I think that’s all my questions.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Dan for any closing remarks.

[Daniel Meyberg:]

Thank you. Thank you all for your time and attention this morning. Please feel free to contact me at 408-987-5920 extension 8888 or at [e-mail] with any follow up questions. I like to wish everyone a wonderful day and thank you again for your time and attention. Good-bye.

[Operator:]

This includes today’s conference. All participants may now disconnect.