O2Micro International Limited
Q4 2021 Earnings Call Transcript

Published: 26 Jan 2022

[Operator:]

Please standby, we're about to begin. Good morning, and thank you for joining us today to discuss O2Micro's financial results for the Fourth Quarter of Fiscal Year 2021. If you would like a copy of the press release we issued this morning, please call Daniel Meyberg at [phone], extension 8888, and we will email 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 for the next 14 days by visiting the O2Micro website under the heading Investors Following the presentation by management, the conference will be opened 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 Fourth Quarter of 2021 ending December 31, 2021. This is Daniel Meyberg, Corporate Communications for O2Micro. I'd like to remind listeners that the discussion of business outlook for O2 Micro 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. 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 , floor will be open 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 fourth quarter of fiscal year 2021 ending December 31, 2021, Perry.

[Perry Kuo:]

Thank you Dan. We will now review our financial results for Q4 2021. Please note that financial results will be presented on a non-GAAP basis unless we say otherwise. The non-GAAP results exclude stock-based compensation expense. One-time charges, non-recurring gains, and losses. Our 4K results are available in our press release that was issued earlier today. Non-GAAP revenue in the fourth quarter of 2021 was 24.4 million. Non-GAAP net income, in the fourth quarter of 2021 was $2.8 million is grow stock-based compensation of $588,000, the non-GAAP net income will be $3.4 million. GAAP net income per fully diluted ADS, in the first quarter of 2021 was $0.09 non-GAAP net income per fully diluted ADS was $0.11. Gross margin was 54.3% in Q4. The gross margin reflects the current revenue label and the product mix. R&D spend was $4.8 million or 19.6% of revenue. This amount is close stock-based compensation expense of $200,000. SG&A expense was $5.3 million or 21.7% of revenue. This amount is gross stock-based compensation expense of $388,000. The non-operating income was $395,000. Income tax was $196,000 in the fourth quarter is mainly reflected the actual tax provisions of each taxable location. In Q4 2021, we repurchased 93,679 ADS units at a cost of $482,000. Q4 2021 revenue by end-markets, braced now into the following percentage, industrial was 60% to 62% of revenue. Consumer was 36% to 38% of revenue. Computer was 2% to 4% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2Micro finished the fourth quarter with $50 million in unrestricted cash and short-term investments. This represents cash and cash equivalent of $1.75 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q4 was 18.8 million. Our DSO is 65 days. DSO is more than 60 days, mainly from account mix. Inventory was $19.5 million at the end of the fourth quarter. This represents 152 days of inventory, and inventory turnover was 2.4 times in Q4. The increase in Q4 inventory from Q3 mainly is the waiver and the work in process inventory for battery product line. This buffer we have support on the higher demand in seasonal demand starting from Q2, 2022. Net cash generated from operating activities in the fourth quarter, was about 1.3 million. Capital expenditure was about $1.9 million in the fourth quarter for R&D, IT, and a equipment. Depreciation, and amortization was $1.2 million in Q4. At the end of the fourth quarter of 2021, O2Micro had 315 employees, 56% of which are engineers. Based on current markets to Asian and the best update in Nigeria loading forecast, the company has the following guidance for Q1 2022. Net revenues are expected to be $20 to $22 million products gross margin expected to be in the range of 51% to 53%. R&D expenses, excluding stock-based compensation, I expect it 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 $5.5 million. Stock-based compensation should be in the range of $500,000 to $600,000. Now, our operating income is expected to be in the range of $200,000 to $300,000 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 assets on the balance sheet. In regard to our share repurchase program. We have been active in this program historically, and we will continue to be active. Since 2002, we have repurchased over $20.4 million ADS shares for $101.8 million. As of the end of Q4, we had $7.1 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully print and execute to target revenue growth and maintain gross margin in 2022 compared to 2021. Jim has story in data, will talk more about our forecast efforts and investment for revenue growth with major accounts and the product expansion by second-source development and the tech facilities for more supply to ensure delivery. We also monitor the supply chain types and have 80 plus waiver and volume process for battery in Q4, 2021 to support the coming seasonal demand in 2022. Given the uncertain demand in the macro environment, we are continuously investing in R&D, pattern filing, expanding our supply chain with more second-source suppliers. Testing capabilities of compress products and capacity. And we always watch the expenses carefully and continue to manage costs as . Although we believe we have a nice current cost based on current and anticipated revenue levels, with new testers, and the new IC shift, we're now guiding Q1 gross margin, 51% to 53% from earlier quarters guided between 50% to 52%. In 2022, we expect gross margin can be improved from product mix and the cost reduction program, but could be offset by some cost up from the priors. 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 shareholders 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 Keim:]

Thank you. Perry. Good morning, everyone. Our Q4 revenue was reduced from our initial projection for the quarter due to an unexpected delay in wafers from one of our key wafer suppliers due to an internal processing issue at their facility. This negatively impacted our intelligent lighting product line revenue, but had no significant impact to battery management revenue. Without this wafer supply problem, we were positioned with backlog to meet our original revenue projection. Even with us wafer supply problem, our revenues continued to increase year-over-year with Q4 of 2021 having 5% growth over Q4 of 2020 and Q4, 2021 having 36% growth over Q4 of 2019. The wafer supply problem that delayed shipments of product in Q4, will also negatively impact the Q1 revenue for intelligent lighting, but is expected to abate by Q2 as we remain optimistic about our growth opportunities in 2022. In fact, the customer demand for our lighting products remains at record high levels. We also see ongoing growth for battery management product in 2022, although Q1 does reflect normal market seasonality, along with some battery management inventory that exists in the channel. While this supply chain impacted our revenue growth expectation, our strong financial position has enabled us to accelerate expansion of our production capability in anticipation of ongoing growth and making up for some of the Q1 shortfall in later quarters. For wafer fab, this includes expansion into new wafer suppliers, as well as expansion into additional processes at existing suppliers that can enhance our existing wafer supply. Both activities are well underway and should contribute to expanded wafer production capability in Q2. In parallel, we are expanding our assembly capability into additional suppliers and continue to expand our testing capability. Our design win activity during the quarter remained strong in both intelligent lighting and battery management. As we continue to aggressively develop new products focused on serving rapidly expanding applications for lithium battery applications, as well as advance lighting systems using many LED's. Our new products are targeted at more complex consumer, industrial, and automotive market applications 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 products will continue to drive revenue expansion as we proceed through 2021. The major customers we have already penetrated can carry our company to 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, TTI and Toshiba. Major OEMs that use our lighting products include BOE, Dell, HP, Hisense, Honda, Hon Hai Foxconn, Lenovo, Panasonic, Samsung, Sharp, Sony, 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 the fourth quarter 2021 revenue of $24.4 million. The revenue was down 10.6% from the previous quarter. And up 4.9% from the same quarter prior year. The gross margin the full quarter of 2021, was 54.3%, the gross margin was up from 52% of the previous quarter, which exceeds our company average range. Our revenue is within the revised guidance publicly released on January 4th 2022. Our battery product group continue to come on the new technologies and the new product to address what customer needs. The battery coast on incurred twice the high sale number applications up, which needs more sophisticated safety protection and high-grade battery management system. On the other hand, how to better integrate the CPU and simulates software development environment remained a critical task. One of the challenge for the power tool company is to develop a stable and a fast response on the main software. Our technology not only shorten the design cycle, but provide systematic module software, but better make use of our high accurate analog to digital converter and other functions to achieve the high standard and safety battery management. Among many battery, business gross driver, vacuum cleaner, and a U-Pack continue to be the in the coming quarters. We observed, the call is throw care product coming from the strong household demand is work-from-home or the flexible working away from home situation. Now, market resume its course rate at the spring, in the summer or the high-season, on the other hand, the construction industry will resume their part to grow after the winter. As we mentioned, the high sale number of power tool will take share for the no sale power tool. The USB4 power delivery Type-C further stabilized the power tool charging structure, which enable the further growth. Our intelligent lighting group business continued to redesign with a new technology such as, the full array local deeming control. We also penetrate more market share in monitor business as higher monitor which favor our technologies. It took the market share in the last quarter. Though the supply chain reveals an early sign of a delivered leap, we continue to see the supply is under-demand. Especially the recent COVID impact, there were few packaging testing houses were under delivery pressure. The global 4K TV market size expected to reach $380 billion by 2025 as a compound annual growth rate of 21.2% according to the new reports on our growing new research. We foresee today 8-K high-end, what becomes mentioned could outline in the following year. An 8K TV need more of the local deeming zones to highlight the fine pixel of the LCD screen. As a Sony Experia 85-Z dot 8K TV with SEC 85 inch comes with a thousands of no-code deeming zones being an example. In order to provide the cost effect in the beta inter operative, our Netlist I think has ability to cancel the deeming through the either analog function, for PWM, pulse with function. Just two in one more control facilitate assistant designer to simplify a TV system design architecture in the better inter-operating. Since the technology over much smaller size compared to the conventional package LED size. It gives the TV system designer and a monitor designer greater freedom to design the Multi-Scan technology. As motion bar on the LCD display come from a stable factor, including the pixel transitions and the persistence. Our Multi-Scan technology, reduced the motion effect by refresh the many pretty fine smaller local area L EDs zoning from a different direction, simultaneously with a modest skim, the media LED could easily to a compose many pretty signs more than local area because is smaller effect. This technology present vertical clear picture, either with fast-moving object in a display. We continue to grow the business despite a dynamic market situation, tight supply chain. We're optimistic for the fundamental of business. We'll continue to focus on the high margin and high programs will apply to analog IC will start to automotive grade ISO-26262, SGS qualified program. And a statement source foundry reported to keep patient expand the packaging and the testability to ensure delivery on time and so on. We always watch carefully and keep shareholder best interest in mind, especially at current dynamics situation. At this moment, thank you for listening to our conference call, and turn back to Dan. Dan, please.

[Daniel Meyberg:]

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

[Operator:]

Thank you. . Using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, . We will now take our first question from Theodore O’Neill, Litchfield Hills Research. Your line is open. Please go ahead.

[Theodore O’Neill:]

Thanks very much and congratulations on a good quarter. Question about inventory so your inventory level is more than twice what it usually runs pre -COVID. And so, I was wondering if you could talk us through how that number goes back down and if it does. And what, if any, is there a risk that some of the inventory goes obsolete before it's been able to sell.

[Sterling Du:]

Yes, our inventory, I think that the Q4, the inventory is power 2.2 million more in the wafer area. So in the regular area, our time would like to keep the inventory trends on roll-offs three times. Currently because of the longer logistic time, and also, we'd like to keep the wafer up so we would like our inventory policy try to get a waiver. And about the waiver, as we are the designing our product, and product is actually enjoying longer product life. So the concern to the inventory on idle inventory list, which is much less. And also according to our historic data, we don't have a lot of the idle inventory problem. So to answer your question, yes, the Q4, the inventory -- the increase in the Q4 compared to Q3, mainly for the wafer and volume process for the battery products. And in the future, we'd like to street times. Okay. It seems like everyone and his brothers trying to make electric vehicles now, and I was wondering if you could talk about your market opportunity selling product into the EV space. So what EV -- yes. We mentioned about we are due to ISO - 262 SDS program that's auto rating. So 2.1 internal that would probably take about another 1.5 years will finish internal 262 262. And the external is about packaging and testing wafer popular while using, the process but these are auto rating ability. We have been upgrading the architecture to EV battery management parts and that's that still in a so-called a documentation area and we continue gathering information. Right now, it's too early to reveal what kind of schedule we're going to proceed. But yes, we are -- any additional so that depends on number 1 is a 26262 qualification. And number 2, while internal, should we come out certain metric innovative solution for the EV battery management. But on the other hand, we do have the IC go to the EV or called a smart card per se. We have parts right now in the sampling stage to support the foundation for the things including inter rate and the cameras. As we know, , automotive in the future, especially EV, slowed the driver assistance systems is made about at least 10 cameras. So we are very happy to see our other multiple right now. We see the world count from the auto industry. They're module maker or intermediate makers. Yes. Thank you.

[Theodore O’Neill:]

Okay. Thanks very much.

[Operator:]

Will turn to our next question. Tore Svanberg at Stifel your line is open, please go ahead.

[Tore Svanberg:]

Yes. Thank you. And congratulations for getting above $100 million again for the year. Jim, could you elaborate a little bit more on the process technology issue your third partner had. I mean, how easier to fix is this? It does sound like it is now. It's going to be behind you and that things will be normalized by Q2. But if you could just share a little bit more detail on that, that'd be great?

[Jim Keim:]

Yes, we'll give you as much detail as we feel comfortable with which isn't necessarily going to totally explain their issue. But it was equipment related in the fab and thus created simply a shortage of wafers for us that did impact us in the second half of the quarter and on goes into the January time frame for us. So it was equipment related. That equipment issue has been resolved. We do not expect any ongoing problem and we do expect that we'll see normal wafer flow. As we mentioned, we are well along the path also of bringing up some alternate sourcing in the wafer area for lighting product and specific. And that will also begin to have some impact as we move into Q2.

[Tore Svanberg:]

Very good. And on that particular topic, could you share with us your plans there? Historically, you've worked with primarily in Taiwan and China, but are you looking at perhaps foundries in other regions as well?

[Perry Kuo:]

Sterling, do you care to give that information?

[Sterling Du:]

Yes. We did have other foundry partner in Asian country other than Taiwan and China. We did have the previous production -- the relation with them, but just, we're expanding these product production base further and to address these issues. Because as you know, we had probably have to concentrate on certain foundry in China. Right now, we tried to reduce the wait and bring up other countries foundry percentage, and then we can achieve that, we can get enough -- the wafer on time delivery.

[Tore Svanberg:]

Very good. And a question on gross margin for this year, obviously, it came in higher because of the industrial mix in Q4. I'm just wondering what's going to be some of the moving parts for gross margin this year. Obviously, lighting is going to come back, so that will have an impact. But you also talked about the ability to deliver some of the higher ASP products. And then some of that will be offset by higher supply costs. So obviously, there's a lot of dynamics here, but could you see a path to improving gross margin from here on out?

[Perry Kuo:]

Yes. Tore this is Perry. Yes. With the improved product mix by the high performance IC and with higher ASP, as you mentioned. And also, we have improved our contractual by on testing our facilities. But however, we may probably experience some further cost up from suppliers, which may not be as big as last year, but we may probably experience some in the coming quarters. So, based on these, I think that we are moving up from the 50% to 52% in our regularly guidance range to the 52.5% area, I think in the first half and probably will move to 53% in the second half of this year. So this is my -- based on current situation I give you the best estimate.

[Tore Svanberg:]

Yeah, that's great color. Last question for you, Sterling. Sterling, when you talked the battery you mentioned some seasonality for Ebike and that also sounds like the construction companies tend to be seasonally stronger by Q2. Should we take that to understand that your Q2 backlog is actually pretty strong and you should return to sequential growth by then?

[Sterling Du:]

Yes, we are. Yeah.

[Perry Kuo:]

All right. Okay. Very good. Thank you. All right. Thank you.

[Sterling Du:]

Thank you.

[Operator:]

We'll move to our next question from Lisa Thompson of Zacks Investment Research. Your line is open. Please go ahead.

[Lisa Thompson:]

Thank you. And good morning. So looking at the results, you have the highest -- I think that was the highest gross margin ever for the quarter. If you take out the one quarter, you had that license fee. So and that was all due to having a bigger mix of battery. Is that correct?

[Perry Kuo:]

Yes. And also, we have improved our product mix in the lighting area as well in Q4.

[Lisa Thompson:]

Okay. Great. And Perry, did I get that right? Did you say $1.3 million for CapEx?

[Perry Kuo:]

For the Q4 is not. $1.9 million Q4.

[Lisa Thompson:]

Okay, 1.9.

[Perry Kuo:]

1.9

[Lisa Thompson:]

Could you go over what you expect for 2022 because I know it's supposed to be a lot lower, right?

[Perry Kuo:]

Yes. In Q1, I think it will be in the area of $1.5 to $2 million for the final payment. The major portion will be for the final payment for the tester purchased last year. And from the Q2, we don't have any payment for the taster owning for the R&D and also for the taster, some equipment. And also IT internal our IT. So that will be around $2 million for the rest of the quarter in 2022, could be $500, 00 to $1 million per quarter.

[Lisa Thompson:]

Okay. Yes. Now I know. I'm thinking what you just said.

[Perry Kuo:]

Okay.

[Lisa Thompson:]

So $2 million for the rest of the other three quarters added up?

[Perry Kuo:]

Yeah. It will be about $3 million to $5 million for 2022.

[Lisa Thompson:]

Okay. Got it. All right, to that a help. Also, you talked about possibly like in the Chinese TV markets, that China might be losing market share, but then factories are shut down. Can you explain what the heck's going on in China between cities being shut down and ports being shut down, and I don't really know where you make stuff and where you ship stuff. And whether you put anything on boat or whether you can fly the stuff, can you just go through that all because it's very confusing what's going on over there.

[Perry Kuo:]

Perry, do you want to answer that? Production

[Lisa Thompson:]

Somebody?

[Perry Kuo:]

So the -- these are your can you -- the production of our product or?

[Lisa Thompson:]

Yes. Between where you get the parts for your products, and where they go. Are they just going from a factory in China to another factory in China? Or are they going outside of China? And do these shutdowns of various cities affect you?

[Perry Kuo:]

So actually, we do have -- we have a wafer and then to the wafer propping, then the assembly, and then testing. Sometimes we have to do some of the screening. As we are a design house, so we make use of the excess manufacturing capacity and also special parts from the different factory. Actually, the major production across the border --

[Perry Kuo:]

Borders between the agent countries. So it actually gives us the longer elasticity than others. So normally, you may probably go through our two to three countries and it goes through two to three customers. So in general, our parts need to go through two to three cities or two to three countries. Yeah.

[Lisa Thompson:]

And have you been affected by anything in logistic that way recently from shut down?

[Perry Kuo:]

Yeah, we do experience some COVID-19, the lock down by the city, and break out in some cities last quarter in China, and sometimes we are also affected by the long holidays by different countries due to the customs clearance.

[Lisa Thompson:]

Okay. All right. Because I remember in the past you had problems one year and that you had higher logistics costs because you were using airfreight or something. Is that a solution to anything with quotation?

[Perry Kuo:]

The higher logistics in the past, mainly which could just send direct from one province to another province in China from the north to south . But during the COVID-19, it's a forbidden in some period of time that we need to transport from one province to the border land the goods need to transfer to the truck, in another province. So we need to transfer from one to one. So in the COVID-19, the highly control times in China, let's, we need to pass from one province to another province. We cannot ship direct from one city to another city, which are located in different provinces. been very difficult times in the year 2021.

[Lisa Thompson:]

Okay, so keep an eye on that. So that means the cost should go down once everything up and opens up again, correct?

[Perry Kuo:]

Yes, a country in city, some factory affected and currently in city also. These are actually the dynamic effect of which I have reported. I didn't go into the detail because every week may have a different story and a different case we need to resolve.

[Lisa Thompson:]

Okay. Is it hard to predict then I guess?

[Perry Kuo:]

Oh, yes .

[Lisa Thompson:]

You mentioned -- you did mention that you thought maybe Chinese TV manufacturers might be losing market share to other countries? Do you see that or not?

[Perry Kuo:]

So Jimmy would like to cover it this.

[Jim Keim:]

Yes, we believe that for the international market that we have seen some loss of market share from China. And again, that may have to do with the combination of production issues there which are very complex shipping issues. And God knows what else may occur. But nevertheless, we have seen, in our opinion, particularly in higher-end systems, that there has been perhaps some market share loss from some of the Chinese manufacturers.

[Lisa Thompson:]

I think that's all my questions. Thank you.

[Operator:]

And with no other questions holding, I would like to turn the conference back over to Dan for any closing remarks.

[Daniel Meyberg:]

Thank you. I'd like to thank everyone for your time and attention this morning. Please feel free to contact me, 98759 888 or O2Micro.com with any follow-up questions. Have a great day and thank you again for your time and attention goodbye.

[Operator:]

And again, ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.