O2Micro International Limited
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Fourth 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.otwomicro.com under the heading investors. There will be a replay available through February 5, 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, Adra. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the fourth quarter of 2020, ending December 31, 2020. 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 prove 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 fourth quarter of fiscal year 2020 ending December 31, 2020. Perry?

[A - Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q4 2020. Please note that financial results will be presented on a GAAP basis unless we 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 fourth quarter of 2020 was $23.2 million. GAAP net income in the fourth quarter of 2020 was $4.4 million. If we exclude stock-based compensation of $364,000, net gain recognized on long-term investment of $133,000 and one-time Paycheck Protection Program, $604,000, the non-GAAP net income will be $4 million. GAAP net income per fully diluted ADS in the fourth quarter of 2020 was $0.14. Non-GAAP net income per fully diluted ADS was $0.13. Gross margin was 51.3% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was $3.8 million or 16.4% of revenue. This amount excludes stock-based compensation expense of $80,000. SG&A expense was $4.1 million or 17.7% of revenue. This amount excludes stock-based compensation expense of $284,000. The non-operating income was $920,000. Income tax was $215,000 in the fourth quarter and is mainly reflected the actual tax provisions on each taxable location.

[Jim Keim:]

Thank you, Perry. Good morning, everyone. We were pleased with our Q4 2020 results and expect Q1 2021 revenues to remain strong despite Chinese New Year holidays that will result in some interruptions in product flow from our supply chain partners. We would note that Q1 2021 revenue projections are up over 40% from Q1 of 2020, and over 75% from Q1 of 2019. This ongoing revenue growth reflects the strengthened market position of both our intelligent lighting and battery management product lines. Our ongoing revenue growth and profitability continue to be driven by several factors. First, our product groups have successfully developed next-generation patented products that appeal to top-tier and brand name OEMs that we now proudly call customers. Secondly, our company's market focus of developing energy-efficient products that enhance mobility was thrust into the limelight with COVID-19 pandemic. It immediately increased demand for mobility based products and helped drive our company revenues upward as markets we serve experienced a surging demand from several factors, including employees being equipped to work-from-home, with computers and monitors.

[Operator:]

I'm sorry, Sterling, we're not able to hear you. You may be muted?

[Sterling Du:]

Yes. Thanks, Jim. O2Micro reported the fourth quarter 2020 revenue of $23.2 million. Revenue was up 4.5% from the previous quarter and up 30.1% from the same quarter prior year. Gross margin in the fourth quarter of 2020 was 51.3%, and gross margin was down from 51.8% of previous quarter, which is in our company average range. Our revenue is in line with the guidance publicly released on October 30, 2020. Our major growth driver, intelligent lighting group's high and 4K 8K local DMI backline product had another strong growth quarter. It came from the rising demands of all sectors, including TV, monitor, tablet and Noble computers. The mini LED is the trend for the next advanced technology, which over 100 size of its packaged compared to the conventional package LED. It means the same local DME unit area could be deployed 100 times more mini LED unit versus conventional LED packaged die. Therefore, panel pixel HDR achieved much more fine resolution with a much higher contrast ratio. We see this first deployment happening in the table or smaller-sized professional monitor as initial high cost. We expect the mini LED costs will be closed down in the coming years. Our new market scan LED backlight ICs for the LCD display is further effective for mini LED local dimming. The market scan could be a combination of two scan, four scan all the way up to 32 scans. It reduces motion blur and so-called halo effect and optimized way with the multi-scan local timing technology being applied to the mini LED, an experience of the panel distance crystal ability when the object moves fast. In general, the customers spend more time at home, work-from-home, education-from-home, virtual meeting conference even cancer for home. It's up two factors, the growing number of the TV or monitor as well as the high-quality of the TV and monitor where the business grew. The global 4K TV market size expect to reach a $380 billion by 2025, at a compound annual growth rate, 21.2% according to some report.

[Daniel Meiberg:]

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

[Operator:]

Thank you. We'll go first to Tore Svanberg at Stifel.

[Tore Svanberg:]

Thank you and congratulations on the results. First question, you didn't talk a whole lot about capacity and so on supply. Obviously, there's a lot of constraints out there right now in the industry. So, could you maybe talk a little bit about how your company is positioned in regards to capacity?

[Perry Kuo:]

Sterling, do you want to address that?

[Jim Keim:]

Yes, Sterling, please.

[Sterling Du:]

Regarding the capacity here, we are continuously -- we are working on the incremental increase. We do get a very good support from our vendors for our forecast already released to the vendor. So for this area, actually, we get a very good support. That's why also we can see that we have very stable working process in the inventory area to support Q1, and we continue to see this trend. And for the incremental area, I think the two areas as we continue to work with our vendors, our foundry partner and also the back end is actually our product in longer product life cycle and also a good high-performance area. So this is actually kind of the good area that we can continue to work with our vendors to get the capacity. However, the flexibility is not so big as in 2020. So in 2021, we may continue to see this kind of growth, as we mentioned, through the quarters. Also, we are continuing to invest in our testers to enhance our testing capacity to support our special IC of which requiring more testing time. So this is this is the update from this area. So Sterling may probably comment on the too.

[Perry Kuo:]

So for a little detail, that for the bottleneck of testing, we move our IC across the multiple type of tester to testing it. And as Perry also mentioned that we -- CapEx to buy -- acquire some new test, and they're arriving and some of them go to the consign some of them, we have our small pro testing those popular item. So for the packaging, the strategy we did is we try to find out the third source or fourth source for the packaging, the bottleneck, and we are lucky to find a few of the qualified appropriate alternative across the Taiwan and China. And for the wafer, and we should be careful to work with our customer for the forecast, in the meanwhile, some of the long-term high-volume one, we're also looking for internal solutions for the alternative of the foundry. So, these are three levels we are doing.

[Tore Svanberg:]

Yes, very good. And I assume you're probably 100% booked are you experiencing any delinquencies at all? Or are your customers able to get what they need?

[Perry Kuo:]

Well, I think some of the glitches always happen because nowadays, people like to get more inventory. And so far, we are working very close with our customer. Some of the IC, 100%, but some is not. And we internally sometime accommodate some of the capacity, the customer -- the supplier providing, we are able to meet the requirement of customers with a very tight schedule. And the one thing I'd like to point out that due to this dynamic situation, though, so the supply feasibility is reduced. So, we have been working day to night to make sure those low visibility and try to meet the customer request date. So, that's very tight consuming and keep us very busy.

[Tore Svanberg:]

Very good. Last question. You referred a few times to battery storage as an opportunity or a market you continue to sell into. Is that basically the sort of consumer battery packs? Or are you doing something beyond that, perhaps in the industrial or auto area as well?

[Perry Kuo:]

The answer to that is, yes, we are doing work in the industrial area, Tore.

[Tore Svanberg:]

Okay. Very good. So that will basically be for things like power tools and things like that.

[Perry Kuo:]

Yes, and solar storage, that kind of situation.

[Operator:]

And we'll go next to Lisa Thompson at Zacks Investment Research.

[Lisa Thompson:]

So, I have a few questions on how things are going. First, can you talk a little bit about the battery management business? What's your feeling about the growth rate this year versus 2020? Is it going to continue? Or is it going to accelerate because you're in more areas now?

[Perry Kuo:]

Yes. We actually expect very dynamic growth this year because, as Sterling mentioned in his portion of the call, we continue to see the cost of the lithium-ion come down. And as that has occurred, it's really dramatically expanded the market. So, we really see growing opportunities in all of these areas, and we've really seen acceleration of movement away from the traditional power cord over two battery managed products. As I mentioned on my portion of the call, one of the areas where there is very significant growth that has historically not been there is the whole e-bike are. Because we've seen with the COVID-19 situation, many countries begin to limit activity in terms of driving, and we see more and more people turn to e-bikes. Also many countries and major cities are limiting their car traffic downtown while they're opening up things for bikes, including shared e-bikes. And many of those at this point are growing very rapidly. So, we certainly have the opportunity to grow the battery management at a pace that's possibly higher than last year.

[Lisa Thompson:]

Great. I actually alerting to my second question. So I was going to ask you about e-bikes. Could you give a little bit more specific as to what products you're selling to that market? I mean which person, entity are you selling it to? Is it the component people or the people at the bikes themselves? And then contrast that with what might sell into any vehicle as you move up? And also throwing kind of the value of what goes into a bike the value of what goes into our product.

[Perry Kuo:]

Yes. So let ask many questions. So that's a one-by-one. So, the bike, we are -- the share buy is electrical buy that we are focused, and the battery pack is the immediate customer for us, battery pack manufacturer. Normally, they pack about 10 to 14 battery cell, average is about 14 cells and not even go to 70 sales. It depends on how heavyweight of the bike want to go how far the decent. And for those 14 or 17 or 10 cells, they're packed together and the most concerning will be the life of the battery pack, and that driven by the imbalance of the battery and also external environment, which we call ambient temperature. And that effect of temperature, voltage and current. So need very precise ICs to tell which cell of this 14 cell or 17 cells has been in low capacity or low quality. And then to certain corresponding action, including the balance or do certain after the bleeding for the battery cell. So our part is decided two portions. One is major temperature voltage in current. And we can -- now if you look at when the battery cell from the 10 to 14 to 17 so every time you make your 1 cell. And as your number of the cells growing, so the measurement time should be very fast. And also the major resolution should be sensitive so we can do the leading AD converter to achieve that goal. As I mentioned, we can do resolution 15 meaningful, and that's very key because when the battery cell go to the CV mode CC mode that constant current and then constant voltage from the CC to the CV the voltage variation is a very limit, and that you need to tell very minor -- the difference of your voltage go up or go down. Second is the current. The current was most identified safety issue when you have short circuits or cell and that had to be responding very quickly because any 1 cell of the 17 or 14 has an issue, and you need to scan the most you have scan 17 times to reach that particular programmatic sell, right. So the responding time, at also very fast, so we are -- one of the fastest the ad converter responding time, should cycle. So, these two make us the major choice for the battery pack company for the electrical bike. Now as you just can be imagined, and we have also some customer from out the battery pack customer, they also sell to a light electrical vehicle, not to the full-size electrical vehicle and start is maybe they need more case of the battery pack. But go to the fuel car we have a few customers utilize our battery pack, which is using our IC inside, right? So that's the transportation. And then go to the downward than you can looking at the like scooter, like the other two wheel or three wheel personal transportation. But for those sectors, their battery cell is not as high as like 14 or 17 cell. Our advanced technology ICs may not be showed up particular advantages. So our market is still focused on the electrical bike. And they not only do the domestic in China use. They do the sale or share bike and they also expectation to many places in the world, including, as Jim indicated, Europe also has a major -- the marketplace, they're shipping those eligible bikes and that could be holding 17 cells. Thank you.

[Lisa Thompson:]

Okay. So, what's like the pricing that you would sell to a bike versus to a scooter? Is it the same product or the same amount of money because the bigger vehicles get charged more?

[Perry Kuo:]

Yes. We have EMU. We have AFE. We have DFE. And for all these different product lines, we have 4 cell, we call the 4 cell, 5 cells as 1 group, and we have 7 cells, 10 cell, 14 and 17. So each product, we have older different combination of the ICs because the voltage is different. So that's the higher voltage, higher -- high sale number, IC is always more expensive because it's different technology to do it.

[Lisa Thompson:]

Yes. Okay. Great. That makes sense. So -- but the numbers now, I mean, the fact that you're having a sequentially up first quarter is very exciting because I don't remember that ever happening before, the horrible quarter. So could we expect them sequentially each quarter will be improving this year?

[Jim Keim:]

Well, we certainly hope to because you're right. Traditionally, you actually see some pullback in late December and then a softer market in Q1 due to the TV, in particular, that market tends to be lower in that time frame. However, what we've seen this year is -- and by the way, some of the major TV manufacturers have seen those trends. But nevertheless, we have other markets including the battery management market that has continued to grow our revenue through that normal downtrend. So basically, we do see the opportunity to continue to grow quarter-to-quarter. That's what we certainly hope to see. And that's, I think, as Perry and Sterling mentioned, we are, in fact, buying testers and really getting prepared for higher level demands.

[Lisa Thompson:]

That's great. And the only other difference I see, it looks like you might be depending a little bit more than you did in 2020 based on what you're saying for the first quarter, and that should continue?

[Daniel Meiberg:]

Perry, do you want to answer that?

[Perry Kuo:]

Yes. Lisa, can you -- I said is here. So can you ask again? Sorry.

[Lisa Thompson:]

It looks like that you might be spending more than last year, just based on what you're saying about Q1. Is that accurate as far as operating expenses?

[Perry Kuo:]

Yes, the OpEx -- I think that there are some factors. Of course, the variable one could be proportional to the increase of the revenue. So this is -- this would probably only the smaller amount increase in the OpEx. And the second is actually a result from the weakened U.S. dollar. Our salary here is paid by local currency renminbi, Japanese yen, Korean won and also NT dollar. So weakened U.S. dollar probably will result -- the weakened U.S. will result in some increases in OpEx. Also, I expect that some of the increase in the freight for the delivery. And also, I do expect some traveling in the second half of 2021, it's probably -- we can get back some traveling. But however, I think that the total OpEx rate will be lower than last year, will be do. Yes.

[Lisa Thompson:]

The dollar amount or below?

[Perry Kuo:]

The percentage?

[Lisa Thompson:]

The percent. Okay.

[Perry Kuo:]

The percentage will be lower than the last year.

[Lisa Thompson:]

Well, I know Dan it's happy to hear about the increased travel with that.

[Daniel Meiberg:]

Here you go.

[Lisa Thompson:]

Here you go, okay. Great, thanks. That's all my questions.

[Daniel Meiberg:]

Lisa, thank you.

[Operator:]

And that does conclude the question-and-answer session. I'd like to turn the call back over to Dan for any closing remarks.

[Daniel Meiberg:]

Thank you all for your time and attention this morning. Please feel free to contact me at [phone] extension 88884 at irotwomicro.com with any follow-up questions. Have a great day and thank you again for your time and attention. Goodbye, everyone.

[Operator:]

And that does conclude today's conference. Again, thank you for your participation.