O2Micro International Limited
Q2 2020 Earnings Call Transcript

Published: 31 Jul 2020

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Second Quarter of Fiscal Year 2020. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg at [phone], 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 August 12, 2020, 9

[Daniel Meiberg:]

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the second quarter of 2020, ending June 30, 2020. This is Daniel Meiberg, Corporate Communications for O2Micro. I'd like to remind listeners that the discussions 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 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, 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 moment, I'd like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the second quarter of fiscal year 2020 ending June 30, 2020. Perry?

[Chuan Chiung Kuo:]

Thank you, Dan. We will now review our financial results for Q2 2020. Please note that financial results will be presented on a GAAP basis, unless we designate otherwise. The non-GAAP result excludes stock-based compensation expense, one-time charges, non-recurring gains and the losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the second quarter of 2020 was $17.3 million. GAAP net income in the second quarter of 2020 was $380,000. If we exclude stock-based compensation of $327,000, one-time charges of $1.2 million and net gain recognized on long-term investment of $1.1 million, the non-GAAP net income will be $805,000. GAAP net income per ADS in the second quarter of 2020 was $0.01. Non-GAAP net income per ADS was $0.03. Gross margin was 51.2% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $4 million or 23.1% of revenue. This amount excludes stock-based compensation expense of $67,000 and one-time severance payment of $957,000. SG&A expense was $4.0 million or 23.4% of revenue. This amount excludes stock-based compensation expense of $250,000 and one-time severance payment of $200,000. So non-operating income was $1.3 million. Income tax was $252,000 in the second quarter, and it is mainly based on the estimated effective tax rate of each taxable location. In Q2 2020, we repurchased 1,900 ADS units at a cost of $2,000. Q2 2020, revenue by end market breaks down into the following percentages. Consumer was 47% to 49% of revenue, computer was 5% to 7% of revenue, industrial was 45% to 47% of revenue, communications was almost zero. At this moment, I would like to provide some additional information. O2Micro finished the second quarter with $41.4 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.53 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q2 was $11.3 million. Our DSO is 59 days. DSO is less than 60 days, mainly from account mix. Inventory was $12.4 million at the end of the second quarter. This represents 119 days of the inventory, and the inventory turnover was 3x in Q2. Net cash used in operating activities in the second quarter was about $4 million. Capital expenditures were about $361,000 in the second quarter for R&D and IT equipment. Depreciation and amortization was $870,000 in Q2. At the end of the second quarter of 2020, O2Micro had 289 employees, 56% of which are engineers. Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q3 2020. Net revenues are expected to be 2% to 10% up from Q2 2020. 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 $3.8 million to $4.3 million. SG&A expenses, excluding stock-based compensation are expected to be in the range of $4 million to $4.5 million. Stock-based compensation should be in the range of $300,000 to $400,000. Non-operating income is expected to be in the range of $200,000 to $300,000, excluding foreign exchange gain or loss and the net gain or loss recognized on long-term investment. 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. In regards to our share repurchase program, we have been active in this program historically, and we plan to continue going forward. Since 2002, we have repurchased over 20.3 million ADS shares for $101.2 million. As of the end of Q2, we had $7.7 million remaining in our share buyback authorization. As reported in last quarter, we executed streamlining projects and completed in Q2. We believe now our quarterly cash breakeven point will be $14 million to $16 million, and a profitability breakeven point will be $16 million to $18 million excluding one-time charges, non-recurring gains and losses. In the first half our R&D project will push out to Q3. We will add and continue to invest our R&D and higher performance centers in the coming quarters. We also monitor the supply chains tightly and have added or in process to support the dynamic demand from multiple end-market timely. In Q2 2020, 195,000 shares of EMC were sold at a $724,000 cash-in. The average selling price of EMC in Q2 is around $3.73 per share with original cost of US$0.53 per share. We'll continue to sell EMC shares in Q3. As of June 30, 2020, we owned around 589,000 shares of EMC. EMC shares price was $3.97 on June 30 and it was closed at $4.08 today July 31, 2020. Returns to shareholders are very much on our mind 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. Given the uncertain demand and the macro environment, we are prepared to continue to manage cost as needed, although we believe we have aligned current cost based on the current and anticipated revenue levels. I would like to thank everyone for participating in the call and turn the call over to Jim Keim to talk more about our business. Jim, please.

[James Keim:]

Thank you, Perry, and good morning, everyone. We were pleased with our Q2 results, additionally our Q3 forecast reflects growth of both our intelligent lighting and battery management revenues being driven by our ongoing design win activity. Our 2020 growth is attributable to three key factors I'd like to highlight. First, a disciplined and dedicated operations team that worked tirelessly to overcome many COVID-19 obstacles to keep product flowing from wafer fabs to assembly the test were shipment onward to our customers with a remarkable on time delivery performance. Second, our product groups have successfully developed next-generation products that appeal to top-tier and brand name OEMs that we now proudly call customers. Finally, I would like to talk about our company and market focus. Our company logo seen under our name on our website and the press release, announcing this call reads “Breathing Life into Mobility.” Mobility was thrusted to the limelight with the recent events of the COVID-19 pandemic in many, many ways. And it helped drive our company revenues upwards. Let me briefly mention these. Work-from-home meant employees being equipped with computers and monitors. Educate-from-home increased sales of tablets, notebooks, and monitors. Stay-at-home increased sales of high-end TVs, battery managed garden equipment, powered tools, and vacuum cleaners along with the surprising surge in high-end monitors for gaming. Hospitalizations from COVID-19 resulted in sales of advanced monitors for diagnosis, and travel restraints led to an upsurge in the sale of e-bikes. Although a vaccine may return some things to normal, much of that new normal will continue to include the ability to work-from-home and educate-from-home. The pandemic will have lasting impact on the way we live and increased mobility is here to stay. Finally, I will make some abbreviated remarks about our product lines. Intelligent lighting, enjoyed good growth over Q2 of the prior year. This was the result of our many design wins that include both 4K and 8K TV and expansion of HDR monitors into gaming, medical and industrial applications, along with expanded home usage. While we have a leading position in higher-end products for TVs and monitors, we have not ignored our overall market share and continue to expand design activity in lower-end TV and monitor products using our patented backlighting products with integrated MOSFETs. This market positioning is expected to enable our ongoing growth. Additionally, our R&D efforts in the industrial and automotive lighting have enabled ongoing progress and design wins. This includes advanced products for robotics and autonomous driving applications where we are seeing good product acceptance. While these design wins take longer to generate revenue, we believe this will help enable long-term growth of our intelligent lighting group. Battery management continues to see excellent year-over-year growth. Our Q2 revenue continue to be driven by the expansion of our designs with major OEMs and power tools, e-bike, e-vehicle, vacuum cleaners, garden tools, and energy storage system. We previously noted, our battery management product line includes ARM-based microcontroller products for market applications, where our existing customers need more sophisticated battery management. This enables us to engage with higher-end customers, including those in the rapidly growing energy storage market. Customers are moving forward to design our ARM-based battery management products into their next-generation high-performance systems. We continue to file battery management patent claims for our new products to protect both our company and our customers' market positions. Our major customer list continues to grow and includes Bissell, Black & Decker, Dyson, Electrolux, Lexy, LG, Makita, Murata, Panasonic, Philips, Samsung, Sharp and TTI. I will now turn the call over to our CEO, Sterling, for closing remarks.

[Sterling Du:]

Thank you, Jim. Good morning, everyone. O2Micro reported second quarter 2020 revenue of $17.3 million. Revenue was up 10.9% from the previous quarter and up 21.1% from the same quarter last year. The gross margin in the second quarter of 2020 was 51.2%. The gross margin was down from 51.9% of the previous quarter and up from the 50.1% of the same quarter last year. Our revenue was in line of the guided range publicly released on May 8, 2020. Our strong gross margins are a result of product mix, strategic alliance program, strong growth in the consumer products and many new products ramping up in battery market. Our major growth driver, intelligent lighting group, the high-end 4K and 8K monitor, local dimming backlight products enjoyed unexpected growth momentum driven by the work-from-home policies and 4K HDR popularity. The high demand comes from either upgrading the personal experience or industrial upgrade to serve professional purpose, including medical instrument, content production professionals and so on. Motion blur on the LCD displays come from several factors, including the pixel transitions and persistence. A sample and hold display creates very high persistence that generate lots of motion blur even if transitions are instantaneously. Most commonly LCD monitor use this to refresh pixels in a to bottom fashion over a period of single refresh time, which is 160th second. And LCD monitor does the equivalent of [indiscernible] positioned from one frame to the next frame. For example, the modern 4K TV makes out at 120 hertz. In old days, 1K TV, which is model up to 240 hertz. Yet higher refresh rate doesn't fix the motion blur problem. The images are still being held. It is why a scanning backlight attempt to solve. It trails behind the top down refresh by a few milliseconds in order to prevent illuminating LCD pixels that are still in transition. Our new multi-scale LED backlight ICs for LCD display is made of series product line, including the two scans, four scans, all the way up to 16-plus scans. It reduces the motion blur as well as so-called halo effect. With the multi-scale local dimming technologies, the experience of display continues to improve. And together with our different design schemes, manual control or digital control, we expect to see our rich product line which served by variety of customers appetite. We also see a quite strong demand with TV with shelter-at-home policy in place. Like Jim indicated, we are in dynamic changing market situation and no visibility for the long-term. Our local dimming and multi-scale backlight ICs continue to be the preferred choice for the TV makers across the countries. The TV backlight subsystem is made of thousands of full array LED with local dimming with more realistic top range of the brightness, more precise shadow detail, the deeper blacks than standard LED TV. In other words, the picture comes from more crisper brightness and authentically dark background. It further create high contrast ratio depending on the scene, resulting higher light where brightness is necessary and less light where the darkness is demanded. Let's look at the lithium-ion battery chain. The average market price for battery had plunged from the $1,100 per kilowatt hour in 2010 to last year 2019, $150 per kilowatt hour. It is 87% full in a big way. Price are projected to further down to $100 kilowatt per hour by 2023 driving even more new innovation and automatic operation in variety of industrials. This discussed the trend of the power tool. Power tool are not limited to any single industry form at-home, DIY tours, garden tours to season contractors. Power tool helps simplify the labor involved in the production and the manual labor. Thanks to the electrical models. They can cut down an amount of the tiling labor in volume project to speed our production line. Power tool are now being fund in unexpected places and the new applications continue to flourish. On other hand, the 3D printing also revolutionized the tool-making industry and more tools, mean more batteries. Our battery products line over the BFE, Digital Front End, AFE, Analog Front End and PMAs and a STEM machine-driven PMU. Second level protection. While we have integrated DFE, MCU together gas gauge and MCU-based gas gauge applications. As Jim indicated, we have very productive Q2. Battery business was in high demand. In our battery products and work-from-home, stay-at-home policies continue drove the demand momentum. The 14-cells to 17-cells electrical bike applications grew very strong as personal transportation is a preferred choice than taking a mass transportation. We have a multiple silicon opportunity for the electrical bike. We see our battery product revenue grew strongly from other sectors such as cordless floor care product, the household hair care devices, uninterrupted power system, battery storage system and so on. With lithium-ion battery price goes down and the energy tends to improve, the battery management devices require high-resolution voltage, current and accurate temperature measurement, our AFE and BMU were designed with a 14-bit delta-sigma A/D converter to meet customer needs. In some example, we can reach 15 mini volt resolution, which is way beyond the customer expectation. We continue to grow the business despite the COVID-19. We are optimistic for the fundamental business. While the dynamic risk factor of COVID-19 remains uncertain and need more time to assess the impact with continued focus at high-margin, high-performance business in order to generate positive cash flow to create the best return for our shareholders. We always keep the shareholders' best interest in mind, especially at the current dynamic situation. At this time, I'd like to thank you for listening to our conference call and I turn it back to Dan. Dan, please?

[Daniel Meiberg:]

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

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Tore Svanberg with Stifel, Nicolaus. Please go ahead.

[Tore Svanberg:]

Yes. Thank you, and congratulations on the results, and especially on the profits. My first question is on your relative visibility. Jim, I don't know if you can talk a little bit about order linearity and how your visibility is right now going into the September quarter?

[James Keim:]

Well, into the current quarter, Tore, we think we have a very good visibility in most of our markets. We continue to see high demand across the product lines as we mentioned, and we have a strong backlog in place. So we think we have excellent visibility at this point into Q3. Q4, customers are obviously more hesitant on a wait-and-see basis. But current forecast from the customers indicate fairly stable activity in our key product markets.

[Tore Svanberg:]

Very good. Which are going to be some of the markets that drive the revenue growth in Q3? Is it going to be industrial and consumer again? Maybe just add some color there please?

[James Keim:]

It's going to be heavy in the consumer area. As we mentioned on the call, we've seen a lot of strong ordering as a result from all the stay-at-home and education-at-home activity. And that has really driven demand across the consumer market quite strongly. At the same time, our industrial activity in some industrial areas are down, but our design win activity is up, so that's a very stable market for us as well.

[Tore Svanberg:]

Very good. Moving on to Sterling. Sterling, you talked about the multi-scan ICs. Maybe just a clarification, are you seeing that being implemented in monitors and now the technology is moving to TVs or the other way around?

[Sterling Du:]

Yes. You are right. It's happened in a monitor and quite popularity in a high-end monitor design due to the higher demands for the gaming requirement for the motion blur and then followed by the medical instrument. And then we also see that going to the TV and also the notebook display as well, yes. So that's what happened, Tore.

[Tore Svanberg:]

Very good. And just one last question on battery management. So you talked a little bit more about that this time around, just wondering if that's the case. Are you seeing perhaps a step up in design activity? You gave us a lot of detail on your battery management business and we do appreciate that, but just wondering about what the reason was?

[Sterling Du:]

Right. So like Jim indicated, travel restriction propelled the momentum of electrical bike and so is the e-scooter and a light electrical vehicle, which we are also engaged with. So there's a – twofold of these growth driver for those area. Number one is the number of the market, the size of the market continued to grow due to a dynamic situation. And a number two is, the silicon content increase that is because of the energy of battery density going up, and the silicon will become more complicated while the battery size also going up. So you need to do more precise – current control such gas gauge, and also measure the temperature, voltage and current. All of those required a more accurate and a high complicated A/D converter. And then people also looking at connectivity, which has upgraded traditional CPU from traditional low-end CPU to the connectivity-ready CPU, which is in this case, which is an ARM come further inside. We used to be not in a CPU – application CPU area in power tool, but right now because the CPU required connectivity for the IoT and we have opportunity to increase our silicon content to integrated CPU insight and also management, the power management and the communication together at the same time.

[Tore Svanberg:]

Very good. Thank you and congratulations again.

[Operator:]

Thank you. Our next question will come from Lisa Thompson with Zacks Investments. Please go ahead.

[Lisa Thompson:]

Okay, good morning. I thought I’d ask to clarify a little more on that multi-scan ICs stuff. You said it's moving into TVs. Is it in televisions now? Is that it comply only to the really high-end or will that migrate down to everybody?

[Sterling Du:]

It will be migrated down to everybody. And for the high-end, low-end difference for the TV is how many string you are using. You're probably using a smaller number of the strings of LED. One big LCD TV probably have a 1K LED behind it. And if you control those LED to good as the hundreds of the group than that is for high-end, which is your control is more complicated. Now when you have the hundreds of the separate small group, our local dimming in some extreme cases is thousands group, such as high-end TV, very high-end. And then you are able to do the multi-scan because the single string LED you have no way to do multi-scan. But when you talk about you have hundreds or even thousands small group of local area LED backlighting then you can do multi-scan. So naturally the multi-scan for the TV will be happened for the high-end and going down. So when multi-scan happening is when your pixel was transitioned. The concept is when your pixel is transitioned, and if that create some so-called steel image on our eyeball, and then you needed LED to turn off to the duct. And that steel image will disappear sooner than otherwise. So that’s the basic functionality. And the way you do the multi-scan and created a complexity of your silicon content and also you have to do very accurate synchronization because when you do the multi-scan from top down fashion, you need to be – make sure in milliseconds of space, you can successfully to wipe out, go to the darkness, so that the transition has gone. And that has to do that very fast and also once again and once again for every second and never be – have any timing issue. So that's the challenge of the design.

[Lisa Thompson:]

So are your customers all looking into doing – designing this in their entire product lines? Where are you in this stage?

[Sterling Du:]

Right. We have the product already in a production, but as I said, there's a two scan, which is just divided by the whole display to two, you have four-scan, and you have eight-scan all the way. Right now, even we have a challenging design for the new one, which is not production yet, it's 16-plus scans, 16-plus way to scan. Sometimes this number could go high when the more requirements for the crisper brightness and darkness, and also motion blur, the function to erase the motion blur. So that's how the people require. When they go to the high-end, they need to require more multi-scans.

[Lisa Thompson:]

Okay. So it's coming out now then as a new product rollout.

[Sterling Du:]

Right.

[Lisa Thompson:]

And on what structure is about that power tools and things. You said that as the price comes down, you can build them into more appliances and stuff. So it was pretty much the tools, the lawn tools, the vacuum cleaners, those things have been out for a while. What do you see it being going battery operated in the future? Are you seeing new product lines that you've never seen before? Where they're adding in batteries?

[Sterling Du:]

Yes. For example, Dyson have handheld cordless vacuum cleaner. It’s very popular. And then LG come up very popular one right now. They are the lighter and the smaller than Dyson one, so which innovation continue to move on. And the reason that LG can do that is because energy densities go up and they improved material of the battery. And so that's why they can achieve smaller weight of the handheld cordless vacuum cleaner, even lighter than Dyson from LG right now is on the market and very popular. And that has created challenging for the battery management design because they push to the avenue of the maximizing performance of battery, including the efficiency, the protection of safety and as well as the heat dissipation. So all of those require the high-end – high performance A/D converter, so these are one example. Another example is something out of blue, like this Dyson new – for the hair care, which is – can curve you – not curve – make your hair straight, and that's the battery power and very, very light and you use like hair brush and it's – not brush, a hair comb. And then you can straight line your hair without heat. You don't feel the temperature and not hurt your hair material and that’s something which is out of blue and the people never have seen this kind of devices and also very expensive and very popular. So this is another example.

[Lisa Thompson:]

Okay. That makes sense. I'm waiting for everything in the kitchen to be battery operated. So I don't have cords everywhere.

[James Keim:]

Yes, you're right. Yes.

[Lisa Thompson:]

Okay. All right. So I guess the only big concern that we should have is that everybody bought a TV while they were staying home, next year, are they all not going to need TVs? Like I think that's the only fear out there.

[Daniel Meiberg:]

Jim, can you help us with that one?

[James Keim:]

What we see is people upgrading and continuing to upgrade. We've seen this both in the TV and in the monitor area. After people began to see the higher grade, they want to move up and we expect that todays high-end will become the midrange, and there’ll be a new high-end. So we expect to see more and more 8K TVs. We expect to see more HDR monitors, and also larger monitors. So we continue to see the demand and we actually see our customers in these key areas are expanding their production capability.

[Lisa Thompson:]

All right. That's a great sign. Thank you. That's all my questions.

[Daniel Meiberg:]

Thank you, Lisa.

[Operator:]

Thank you. And there are no further questions in queue. I would like to turn the call back to Dan for any closing remarks.

[Daniel Meiberg:]

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

[Operator:]

Thank you. This concludes today's conference call. All participants may now disconnect.