O2Micro International Limited
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro’s Financial Results for the First Quarter of Fiscal Year 2020. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg at 408–987–5920 extension 8888, 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 May 14, 2021, 9 am Pacific time or by visiting 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 Meiberg:]

Thank you. Good morning, everyone, and thank you for joining O2Micro’s financial results conference call for the first quarter of 2021, ending March 31, 2021. This is Daniel Meiberg, Corporate Communications for O2Micro. I’d like to remind listeners that the discussion of business outlook for O2Micro contains forward–looking statements. Statements made in this release that are not historical fact are forward–looking statements within the meaning 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 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 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 first quarter of fiscal year 2021 ending March 31, 2021. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q1 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, non–recurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2021 was $23.2 million. GAAP net income in the first quarter of 2021 was $2.5 million. If we exclude stock–based compensation of $405,000, the non–GAAP net income will be $2.9 million. GAAP net income per fully diluted ADS in the first quarter of 2021 was $0.08. Non–GAAP net income per fully diluted ADS was $0.09. Gross margin was 51.6% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.5 million or 19.3% of revenue. This amount excludes stock–based compensation expense of $91,000. SG&A expense was $4.7 million or 20.4% of revenue. This amount excludes stock–based compensation expense of $314,000. The non–operating income was $358,000. Income tax was $244,000 in the first quarter and is mainly based on the estimated effective tax rate of each taxable location.

[James Keim:]

Thank you, Perry. Good morning, everyone. We were pleased with our Q1 2021 revenue growth that was up 49% over the Q1 2020 revenue and 82% over the Q1 2019 revenue. We expect Q2 2021 revenues to remain strong. Despite ongoing production issues and limitations in the semiconductor supply chain that create many issues for our operations team. Our revenue growth and resulting profitability continued to be driven by several factors. First, our product groups have successfully developed next generation products that appeal to top tier and brand name OEMs. Secondly, our Company’s market focus of developing critical new products enhancing customer mobility, as noted in our company logo of breathing life into mobility. As stated previously, mobility was thrust into the limelight with COVID–19 pandemic that helped drive our Company revenues upward as the markets we serve experienced a surging demand. From a number of factors including, employees being equipped to work from home with computers and monitors. Remote learning, increasing sales of tablets, notebooks, and monitors. Stay–at–home mandates increasing sales of high–end TVs, high–end monitors for gaming, battery managed garden equipment, power tools, and vacuum cleaners. Hospitalizations from COVID–19, increasing sales of advanced monitors for diagnosis. Travel restraints, and social distancing, leading to a rapid surge in the sale of e–bikes. Even as vaccines enabled part of our lives to return to a more normal status, we will continue to see increased work from home, education from home and more sophisticated at home entertainment. Battery managed power tools, vacuum cleaners, garden tools, e–bikes, and e–vehicles are continuing to expand usage as increased mobility is here to stay.

[Sterling Du:]

Thank you, Jim. And good morning everyone. O2Micro report the first quarter 2021 revenue $23.2 million. Revenue was up from the previous quarter and up 49% from the same quarter prior year. The gross margin in the first quarter of 2021 was 51.6%. The gross margin was up from 51.3% of the previous quarter, which is in our company average range, and our revenue was in line guidance publicly release on February 6 2021. Our intelligent lighting group sees a rising demands of all sectors including TV, monitor, tablet. Our TV market focused on high–end of 4K, 8K, HDR, local dimming backlighting product to which would continue to be the market leader. Further all, the trend for the next advanced technology is the mini LED which offers much smaller size only 1% of the conventional package LED size. It means it could deploy 100 times more mini LED unit in the same area if designer wants to. Therefore, the panel pixel HDR achieved much more fine resolution with a much higher contrast ratio. The high–end AAA market will be the first deployment for mini LED following by higher TV, high end gaming monitor, when close becomes more effective. Let us talk about mini multi–scan and mini LED. Motion blur or LCD display comes from several factors including the pixel transitions and persistence. A sample and hold display creates very high persistency and it creates lots of motion blur even if a transition or instantaneously. Most common way LCD monitor use to refresh pixel in a top to bottom station. We address this market when market scan LED backlighting, technology. The multi–scan methodology could be combination of the full scale and all the way up to the 32 scans instead of only one scan. It reduces the motion blur and halo effect in optimized way. With a multi–scan local area dimming technology being applied to the mini LED the visual experience our panel display improved the crystal ability even the fast–moving object. The global 4K TV market size expect to reach the U.S. $380 billion by 2025 at a CAGR about 21%, according to the new report for the Grandview Research. Our battery product revenue grew strongly an older sector, such as cordless, floor care product. The cordless household appliance are internal power system. Battery storage system and so with energy density improve the battery management IC require higher resolution voltage or current and accurate temperature measurements. Our analog front end and BMU Business Management Unit were designed with 14 bit high accuracy AD converter to meet customer needs. A high accuracy see a DC which 15 minute both resolution performance while well beyond a customer’s expectation. Regarding a power tool in the market, the potential, the projected growth from the U.S. $30 billion in 2020 to U.S. $36.9 billion by 2025.

[Daniel Meiberg:]

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

[Operator:]

. Today’s first question is coming from Tore Svanberg, calling from Stifel. Please go ahead, your line is open. Thank you.

[Tore Svanberg:]

Yes, thank you. First question, now that industrial is approaching two–thirds of your business. Could you give us a little sense for some of the sub segments how big they are? I assume power tools is still the largest segment. But any more color you can give us there would be great the relative size of the sub segments?

[James Keim:]

Yes, well, the battery management activity is indeed continued to grow very quickly. We’ve really seen an expansion in the whole battery management area that includes the power tool activity. As you mentioned, we also have seen significant steps forward in some of the energy storage systems that we have mentioned with many design activities going forward. Some of the garden tool activity includes things like power mowers at this point in time, heavier duty products that are lumped into that category. So we continue to see larger cell count, higher content, battery management activity going forward. So this is largely driven by the battery management activity.

[Tore Svanberg:]

Great, thank you, Jim. And a question for you or for Sterling. As we think about the mini LED market. How should we think about content opportunity for O2Micro, I mean, it sounds like there’s going to be so many more LEDs and they will probably need a driver each. So, if you could comment on what sort of content opportunity you can have whether by percentage or factors, as you going from a regular LED monitor to mini one?

[Sterling Du:]

Yes, looking at it about three factors, number one is, the LED – mini LED is smaller size compared to the package conventional LED. So, the design will always go for the number of the mini LED usage will be more and that also create opportunity for the driver. That’s number one. Number two, because the package of the mini LED is much smaller. So, the driver is not going to be single driver, but one driver IC combined with a lot of the driving capability and that increase the packaging, and also the size and the content of our IC for the mini LED. And that means that the paying is much more than conventional one. Number three, so, when a smaller package of mini LED coming out and we cannot – we have to accommodate the MOSFET. If continue using conventional external MOSFET and that’s a losing that actually is not effective is the total solution area use is much smaller, much reduced. So that, we see the integrate MOSFET is the trend for the mini LED. So that also feel the SP content for each driver, we are going to ship in a current design. So with a three factor; yes, you are right. It’s going to be bigger IC integrated MOSFET. And also the number of the driver will be increased applicable to this mini LED market.

[Tore Svanberg:]

That’s very helpful Sterling. Last question for Perry. Perry, assuming that the semiconductor industry is going to remain tight on capacity this year, could you just give us an update on your situation especially some of your foundry suppliers, are you are you adding more foundries at this point or any anything that you could comment on as far as your suppliers would agree?

[Perry Kuo:]

Yes, we are indeed we actually as I reported later, we allocate resources to the second source not only on the foundry supplier, but also on the back end. And also, we are adding the in–house tester for ourselves. This will be happening in 2021 ending quarter with even with the HR costs to support our customers demand in the coming quarters. And also like we also adding the inventory as you may see the balance sheet from the inventory level. So we have a higher inventory in Q1 to support the Q2 compared to before. So compared to earlier quarter. So we are also adding the inventory to support. So however that our foundry can offer the incremental part, we will just take it. So we have long–term relationship with our foundry. And we always can get the kind of the extra supply is limited but it’s helpful. This is my update.

[Tore Svanberg:]

And Perry you meant related to that do you spent $2.4 million in CapEx this quarter. Do you have an estimate for the full year?

[Perry Kuo:]

For the full whole year I speculate it depends on the delivery. But actually, we I speculated the CapEx this year will be in the area of the $10 million to $15 million, based on the delivery and based on the coming request from our customers.

[Tore Svanberg:]

Great, thank you very much.

[Operator:]

We’ll now go to calling in today from Litchfield Hills Research. Please go ahead.

[Unidentified Analyst:]

Thanks very much. I was wondering, are you seeing on the test equipment side. Are you seeing any constraints or lead time issues in getting your test equipment?

[James Keim:]

Sterling, you may add a comment.

[Sterling Du:]

Yes, we currently in the same thing. Yes, so, Perry Kuo?

[Perry Kuo:]

Yes, I think we received the first shipment, we start to see the delivery are getting longer and longer. Yes. But if we are in good faith, as we also added in house testing unit in Wuhan to support our testing program and also in–house testing. So we are in Q1 its own schedule.

[Unidentified Analyst:]

Do your customers expect your battery management systems to have a role in in minimizing or preventing thermal runaway? And if so, what trends do you see there?

[Sterling Du:]

Could you say that again from runaway?

[Unidentified Analyst:]

In terms of services thermal runaway?

[Sterling Du:]

Yes, we go to analog front–end ICs together with the secondary protection ICs. So our analog front end can detect voltage, current and of course, the thermal. So the way we contribute to this thermal management is we provide a very finite and a very fast responding time to sample the thermal and it becomes the digital signal, and then we can send to the CPU. While our secondary protection IC can quickly do the stay . They don’t need waiting for the CPU instruction. And they can do the so–called over–temperature protection. They can trigger the point that we shut down the power or shut down the throughput of the battery. So that’s we our IC the functionality in terms of the whole thermal management system. Of course, the whole thermal management system also made up by other parts, but we are critical one in a whole system.

[Unidentified Analyst:]

Do you see any differentiation in the marketplace where that’s more important or less important?

[Sterling Du:]

It is very important because when a density, energy density increase, and the thermal density also increase. That does not only linear sometimes it’s square functionality, so which means that the same cubic, the standard unit space, you go to pack more energy. So where you to throughput those battery, your thermal management, the importance is not only just linear sometimes it’s more than that is you going to go to handle that by your detection and also your responding speed. So that requirement is continue going up.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

We’ll now go to Lisa Thompson calling today from Zacks Investment Research. Please go ahead, ma’am.

[Lisa Thompson:]

Good morning, I wanted to follow up on the mini LEDs. Could you just give us a vague idea of a television set that’s the same size using mini LEDs versus conventional, how much is your content? Is it two times more ASP or 10 times just give us a big idea.

[Sterling Du:]

Okay, maybe give analytical factor. Number one, mini LED is still in the expensive range right now. So we don’t see any very coming soon die is going to go to be the TV especially large TV. So the first mini LEDs happening is going to be in a tablet. And followed by of course, probably some high–end TV and into the gaming the monitor is going to be mini LED is much, much better just because gaming monitor they handle the fast–moving object. So from the tablet to the gaming monitor in a high–end TV. Now, secondarily, if the LED drop the cost effective so that our TV can utilize which is in the future. And you compared with that and then we have looked at the how you combinational set up your mini LED by the market scan. So we are pioneer in a technology for the multi–scan. In a database how many combination of the multi–scan, you’re going to use. For example, the two scan that will be at the low end of the mini LED arrangement. But the 32 scan, even 64 scan and you look at that it’s more the mini LED more high performers. And so the IC, the number of ASP also go up. So that’s the second factor we have to look at that. Just gives you a very vague, which is, I really don’t know who is going to be much more popular in the future TV. So the number of our ICs is coming because bigger IC right now it’s small IC, but when you go to the tool scan, all the way go to 32 scans 64 scan the IC growth. So the IC itself, the pin count could be double. Okay, that’s number one. And number two, because the mini LED, they pack more unit of the mini LED and sector IC can also go up. So the total silicon area we providing, I think will be to get to 30% to 80% growth in terms of a silicon area. And how much going to present I will really depend on the future. And I will expect initially the ICU will be expensive, but it will become close to be a more effective together with a number of the mini LED TV or monitor shipment. So that’s about the vague idea. Thank you.

[Lisa Thompson:]

Okay, that didn’t help. But yes, I’m just trying to figure out how much you could grow, even if you sold the same amount of units, end user units. But we don’t know until this your product that at first show up in a tablet is already designed in.

[Perry Kuo:]

Yes, we have design activity going into tablet, and that will in fact be a good growth market for us. Because we see the tablet market really expanding at this point with a lot of focus on tablets. Everything from travel to education, we see many, many educational institutions now turning to tablet type devices. So we do expect that to open up significant market opportunity for us.

[Lisa Thompson:]

Okay, I could get back to what you said something about in battery management, you are introducing digital front end patent pending with key design wins. Can you talk a little bit more about what that is and where that’s going into?

[Sterling Du:]

As you mentioned, this is related to the fast–responding time to make the power measurement decision the digital front end. As conventional digital front end they receive the analog front end the signal and they make certain decisions but what are we providing is, we make fast decision without to notify the CPU that’s number one. We don’t wait for CPU sometimes too late. And number two, we also have complicated the algorithms behind the power management decision based on a more complicated effect such as maybe the aging of the battery, maybe only one cell the battery has issue or there’s a certain situation which is not related to battery, but from a charging current coming. And number four of course, we also measure the thermal which the temperature and we do the more complicated and faster responding time and providing the immediate data for the secondary protection IC to make decision. And that is our so–called patent pending technology handle the issues.

[Lisa Thompson:]

And what end user products would we see that in first?

[Sterling Du:]

I think we have potential the vacuum cleaner, which is a very fast–growing market segment. And also the e–bike because the e–bike using more battery cell in a higher density to reduce the weight and make the battery management more critical. So they need a more sophisticated protection IC and also DFE digital front end.

[Lisa Thompson:]

Okay, and one last question is, you mentioned again e–vehicles. Can you tell us what’s happening in that area as you move up to bigger things?

[Sterling Du:]

Yes, we have a plan but still undergoing and still in R&D stage, that’s what I can said. And that will be the same thing we do for the e–bike. But in e–vehicle it’s different. Just give you one example, the difference is in an e–vehicle you need to have the cascade and a lot of sticks. So which is will be a lot of small module to made out as a big module and many big module and come in a mega the battery pack, then you have a several battery pack inside of e–vehicle. So, communication will be totally different. So, that’s we are the technology we are working on.

[Lisa Thompson:]

Okay, great. Thank you. That’s all my question.

[Sterling Du:]

Thank you.

[Operator:]

Thank you so much. And we have no further questions in the queue. I’ll like the call back over to Dan for any additional or closing remarks. Thank you.

[Daniel Meiberg:]

Thank you, everyone, for your time and attention this morning. Please feel free to contact me Daniel Meiberg at 408–987–5920 extension 888 or at IR at O2Micro.com with any follow up questions. I’d like to thank everyone for your time today and have a great day. Thank you.