O2Micro International Limited
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the First Quarter of Fiscal Year 2018. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg at 408-987-5920, extension number 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 through May 15, 2018 at 9.00 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, Paul. Good morning everyone and thank you for joining O2Micro's financial results conference for the first quarter of 2018 ending March 31, 2018. 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 facts 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 point, I’d like to introduce Perry Kuo, CFO of O2Micro for a discussion on the financial highlights of the first quarter of fiscal year 2018 ending March 31, 2018. Perry?

[Perry Kuo:]

Yes, thank you, Dan. We will now review our financial results of Q1, 2018. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results exclude stock-based compensation expense, one-time charges, non-recurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2018 was $14.1 million. GAAP net income in the first quarter of 2018 was $7.2 million. If we exclude stock-based compensation of $354,000 and a onetime sale value gain of $9.8 million. The non-GAAP net loss will be $2.2 million. GAAP net income per ADS in the first quarter of 2018 was $0.27, non-GAAP net loss per ADS was $0.09. Gross margin was 51.2% in Q1. The gross margin reflect the current revenue label and the product mix. R&D expense was $4.7 million or 33.6% of revenue. This amount exclude stock-based compensation expense of $52,000. SG&A expense was $4.7 million or 33% of revenue. This amount exclude stock-based compensation expense of $302,000. The non-operating income was $10 million, this amount includes one unrealized fair value gain on long-term investment of E&C around $9.8 million. E&C became a listing company in Taipei Exchange on January 23, 2018. Its market price is considered as a readily determinable fair value under the new U.S. GAAP guidance. So the company realized and unrealized fair value gain of $9.8 million as of March 31, 2018. Income tax was $265,000 in the first quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q1, 2018, we repurchased 147,141 ADS unit as a cost of $219,000. Q1, 2018 the revenue break down by end market into the following percentages. Consumer was 40% to 45% of revenue, computer was 10% to 15% of revenue, industrial was 40% to 45% of revenue, communications was less than 5% of revenue. At this point, I would like to provide some additional information. O2Micro finished the first quarter with $45.1 million in unrestricted cash and short-term investment. This represent cash and cash equivalent of $1.73 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of the Q1 was $8 million, our DSO is 55 days it is in our target range of 40 to 60 days. Inventory was $9.7 million at the end of the first quarter, this represents 124 days of inventory and inventory turnover was 2.9 times in Q1. Net cash used in operating activity was $1.4 million. Capital expenditures were about $28,000 in the first quarter for R&D and IT purchase. Depreciation and amortization was $397,000 in Q1. At the end of the fourth quarter of 2018 O2Micro had 375 employees, 62% of which are engineers. At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2018. This guidance reflects our best estimate for the current environment and is subject to change. This is the only fiscal official guidance and we will provide unless we update it with a public announcement in the future. O2Micro expect Q2, 2018 revenue to be up 2% to 10% sequentially. We are guiding the Q2 gross margin between the range of 49% to 51% and is mainly from the product mix. R&D spend excluding stock-based compensation should be $4.5 million to $5 million in Q2. SG&A should be $4.3 million to $4.7 million in Q2, excluding stock-based compensation expense. Stock-based compensation expense should be in the range of $350,000 to $450,000 in the second quarter. Interest income and the rental income and non-operating income should be in the range of $150,000 to $160,000 in the second quarter, based on the service income of our subsidiaries in different countries we expect our take amount to be in the range of $200,000 to $300,000. The goal of our management team and Board of Directors is to maximize shareholders value. We have accomplished this by taking the necessary steps, which included managing operating expenses and the monetizing assets on the balance sheet. In regard 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 $19.7 million ADA shares for $100 million and $400,000 as of the end of Q1 we had $8.5 million remaining in our share buyback authorization. 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. We believe our cash breakeven point is between $15.5 million to $17 million in quarterly revenue and our profitability breakeven point is between $17 million and $19 million in quarterly revenue given the wider range of gross margin from product mix and also the other income. Given the uncertain demand and the macro environment we are prepared to continue to manage costs as needed. Although we believe we have a nice current costs base on the current and anticipated revenue levels. 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. As we mentioned last quarter 2017 revenues exceeded 2016 revenues continuing a trend of slowly increase in growth since our company revenues bottomed in 2015. We also stated the year-over-year revenue growth may accelerate in 2018 as our power products finally return to growth after years of revenue decline. Despite a weak TV and monitor market in Q1, we do expect to see this acceleration in our growth for 2018 for the following reasons. First in lighting, some of the component shortages in TV market appear to be easing, resulting in a recent acceleration of back lighting orders for Q2 and higher customer forecast for Q3. In battery management design wins continue to expand in the new markets. We expect to see reasonable growth in Q2, which has historically been the weakest revenue quarter for this product line. We also expect ongoing growth for battery management products in the second half of 2018 based on new design wins. In power products, we have seen increasing customer design win momentum and we are more confident in revenue growth. This includes additional new products and more customers qualifying the products. Let’s now review more specific activity in our three product lines. In our largest product line intelligent lighting, new product design wins have continued to accelerate in several areas. As the shortage of MOSFETs impacted our customers, many customers adopted our new line of backlighting products with integrated MOSFETs. We also see key OEMs, desiring to differentiate their higher end TVs and monitors, with more highly integrated application specific devices. We’re pleased to be delivering these in volume, while expanding our design activity with both existing and new customers. As mentioned earlier, these design wins coupled with higher forecast from our customers are expected to drive increasing revenues for the balance of 2018. We continue to focus more of our backlighting R&D effort in the industrials and automotive markets and have significant design wins in process that should keep our backlighting business strong. Our general lighting business remains focused on growth at the high-end of these markets, specifically our proprietary and patented free dimming and high-power general lighting products where we can enjoy reasonable margins and profits. With our strength in design wins, we expect this business to remain stable with modest growth in 2018. Our patented battery management products supporting critical cell balancing in lithium ion batteries continue to expand with more and more key design wins at major OEMs. This is resulted from the rapid expansion of lithium ion battery technology into more mobile products due to their small size, high-energy density and increasing cost effectiveness versus older technology led acid batteries. As a result, we continue to see major market growth opportunities in all key market areas including power tools, e-bikes, e-vehicles, vacuum cleaners, garden tools, uninterrupted power supplies, where lithium ion battery technology continues to become more reliable and costs effective with the use of our battery management products. This diversification of our design wins across more market areas is making our business less cyclical on a quarter-to-quarter basis, while continuing to experience excellent overall yearly growth. Our product plans in battery management include expansion into more costs effective products for existing markets and customers as well as expansion into more complex products for new market applications, where more sophisticated battery management is needed. This will include both higher cell count battery management products and arm-based highly integrated microcontroller-based products. We would also note that we have filed key patent claims for our new products to protect our company and customers' market positions. Our major customer list continues to grow and includes Black & Decker, Dyson, Electrolux, LG, Mekita, Merida, Panasonic, Samsung and TTI. Finally, let’s discuss power products. We are encourage to see both our product base expanding and more customers completing design wins with these products. Based on this wider diversity of design wins in customers we can more confidently project a growing revenue base as we move through Q2, and into the second half of the year. This will enable our power revenues to reverse their multi-year downward trend. These design wins for our smartphone and tablet products, include our new charger IC, on-the-go charger booster and accurate gas gauge gain market acceptance. Additionally, we are working on key design wins in other market areas, including high-volume industrial opportunities. I will now turn the call over to our CEO, Sterling for closing remarks.

[Sterling Du:]

Thank you, Jim. O2Micro reported the first quarter of 2018 revenue $14.1 million, revenue was down 7.3% from the previous quarter and down 5.7% from the same prior year quarter. The gross margin in the first quarter of 2018 was 51.2%, the gross margin was up from 50.5% in the previous quarter and down from 52.7% in the same quarter of 2017. Our revenue was in our guided range and gross margin improved from the previous quarter, despite continued in the end market and the market shift. We are happy to disclose our battery product group and expanded our product base property and have let a new significant customers in last quarter. Three new battery product lines are either already production or through production close to the final [indiscernible] for production. Our battery product line made the final rate in account to our market where we maintain a healthy percentage of the sector. Now we are eager to seeing those same technology advance penetrating and it being adopt to a variety of other application where efficiency, low operating time with our ability and the safety are just as important as best. Recent optimization of our battery technology can be seen in five area, along with repository long-term significant growth potential. Personal transportation such as electrical bike, e-scooter and electric vehicle and RF generation transportation devices. UPS [indiscernible] industrial in the consumer applications. Hand held and also product that can clean up a long home applications for safely and reliable power is not only desirable but key to consumer acceptance of this new technology. Our battery technology continue to meet or exceed the new design challenges our customer by opening mix signal product to support the latest generation of smart phone and devices. Our new generation IC for filters latest UV applications [ph] and contain several system function SOC with MCU controlling effect and [indiscernible]. We are optimistic in the continued growth our battery product and their critical role in end consumer adoption of new battery technologies. We work closely with the world top tier and second tier TV, monitor and panel manufacturers to support the high end 4K or even advance 8K panel local TV making technologies. We support the higher end display market with our customers to drive to find a usual experiment to bring next era of the brand display product for home and industrial casing where both brighter colors and high contrast can be displayed with a lot of picture quality. Our local TV technology is seeing continued design activity in high-end TV market with growth potential not only in volume shipment by new customers. We have response to the market by opening various IC offerings integrating higher voltage MOSFET along with integrate AC/DC converter which increased power efficiency and reducing the customer assistant costs. For industrial applications, our industrial rated product offer the ability high performance low TV for the automotive applications. Our new year 2018 will drive clearly our product of TV supplies in market, battery management and our power product. We continue to see the shift from local to mobile device such as mobile phones, smartphone and tablet. Due to our product attaching to the local car maker expectance we see our products start to get more customer in the recent quarter. Our new targeted technology for the mobile device focused on costs effective and easy design flexible of design wins. Our O2 we have a two target technology right now, O2 Express charger and also new charger technology has been right now in production and thus providing the performance and without comprise safety we also reduce the heat dissipation and we only need minimum software support. We’re planning to monitor our expense, operational effectiveness along with optimizing operating cycle times, monetizing the asset our company we’ve had some new engineer last quarter, which should allow us to focus on newly technology carefully, for the revenue upward curve. At this time, I would like to thank you for listening to our conference call. I turn it back to Dan.

[Daniel Meiberg:]

Thank you, Sterling. One quick note, the mentioned of EMC is Excelliance, MLS Corp. listed on the Taiwan Exchange. Operator, at this point we would like to open the call to questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Tore Svanberg from Stifel Nicolaus.

[Tore Svanberg:]

Yes, thank you. Could you elaborate a little bit more on your battery management revenue? It sounds like it's going to expand into perhaps some higher unit markets here in the second half. So any more color you could offer there that would be great. Thanks.

[Jim Keim:]

Yes, we see it already expanding into higher unit volume markets, Tore. As I mentioned, historically the battery management while it's been growing nicely year-over-year Q2 is a weak quarter and that was the result of power tool. And we saw this very specifically last year in Q2, our battery management business was down in Q2 simply because of the cyclical nature of the power tools. However in the last year, we have significantly expanded our activity including high volume scenarios like vacuum cleaners, or working with some of the world leaders as well as the e-bike market recently has been very significant growth for us. And that has resulted in an expectation of not seeing downside in Q2 this year, but seeing upside in Q2 and that is the result specifically of the new markets. And we see ongoing growth not only in those markets as we move forward, but also continued expansion in power tool as well as other key areas for battery management. So at this point, we're very, very pleased to see the addition of new customers and also the adaptation of our product into more and more market areas. I hope that answers your question.

[Tore Svanberg:]

Yes, now that's very helpful. And my second question is on the fast charging or express charging. It sounds like you have quite a bit of confidence about growth in the second half of the year. And I was just wondering if that was driven by any specific platform or any specific customer? I assume this is all related to smartphone.

[Sterling Du:]

Yes, we have got good potential. Although that take some time, right now, we have the two production for the two our fast charging topology. They are not the USBPD so called because we don't require software support, but we providing lower VOM assistance costs and easy of design flexible. One is double charger design. When you charge the battery you can charge a high current with two charger when the battery providing the power for the system than using only one charger. So that we call the tooling of two charger. And the benefit of that one is the heat dissipation will be half is still good to the different location. To solve the heat problem as we all know the heat problem for smartphone increasing critical. Second O2Micro Express Charge is simply put the charger in the AC adapter. So the AC adaptor who adjust the current and voltage in terms of instructing set furnace smartphone itself. And that is during the whole high current charging heat dissipation outside of smartphone. So this one is also in a pre-production. And current our customer demonstrate this particular product in latest the Smartphone Exhibition in Hong Kong. So people saying that it's difficult to get the first production and right now we got it. And we do see there is a great potential, because there is a majority of the smartphone for second tier or third tier they like to match the overall the so called -- we called the low voltage, high current fast charging capability. This drives costs down comparable to the UCPD. So we are very excited to see the potential. And however the second half of this year for smartphone revenue is not only driven by these two particular topology we also have the regular 4 amp chargers going to be introduced to the customer and are currently 2 amp to 3 amp [technical difficulty].

[Tore Svanberg:]

[Technical difficulty] China trading tensions if you see that having any impact on your TV business at all going forward?

[Jim Keim:]

Well it may have some long-term impact however at this point I don’t see any significant impact we do see a very significant focus on the high end of the market and gaining International market share doesn’t matter whether it’s Chinese, Korean, Japanese all are focused very much on winning high end market share. So we do see a focus in that area. Certainly there maybe some issues long-term wise from the trade activity, but we think we are quite well positioned in both the China market as well as outside the China market.

[Tore Svanberg:]

That’s helpful, Jim. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Lisa Thompson from Zacks Investment Research.

[Lisa Thompson:]

Hi. Okay, Dan first off say the name of that public company slowly?

[Daniel Meiberg:]

Sure it’s Excelliance MOS Corporation.

[Lisa Thompson:]

Excelliance Corporation okay thank you. Looking at the second half growth is the major driver the lack of TV component shortages or is it different than that?

[Jim Keim:]

Could you repeat that Lisa?

[Lisa Thompson:]

Sure, is the major driver to growth in the second half the fact there’s no more shortages in TV since that’s such a big part of your business?

[Jim Keim:]

Well for the first time I think we’re in a position where we’re looking at growth in all three of our product lines as we move into not only this quarter, but we’re very hopeful of seeing growth in all three product lines in Q2 and also extending that growth into Q3, Q4. So we see good growth opportunities in battery, we see good growth opportunity particularly in the second half as Sterling mentioned although we are seeing now more design wins and beginning of production in Q2. So I think that’s good. TV, I wish I had a crystal ball, what we can tell you is what our customers tell us they want more and more product. And they are giving us higher and higher forecast, almost on a weekly basis and what we have seen there are a few customers that appear to have some product shortages, but most are through the product shortages they had suffered first through panel shortages, then through some other component shortages including capacitors, resistors. The customers seem to be through that at this point. And they seem to be very optimistic about the TV business, we had positioned ourselves very well with some new products. So we’re expecting good growth as long as that holds up in the TV business. But our other product lines we think will do very well in the second half as well.

[Lisa Thompson:]

Okay. And I just want to understand smartphone a little better. When you look at that business line, which chips of yours or which technology are the biggest factor dollar wise as to what are people buying?

[Sterling Du:]

We doing the charger for the smartphone that’s what we do and we do the high-end sector inside the smartphone. So if that is the equation yes that is better to the higher ASP compared to other device in the smartphone in power management area.

[Lisa Thompson:]

And how many customers have you won design ends for that?

[Jim Keim:]

I don’t have the exact number for the design, but we do have about six to seven different company production for ICs, more or less of one or two ICs like that.

[Lisa Thompson:]

Okay. And are there any phones that you can point to that are going to be using your chip or use it now?

[Sterling Du:]

We have production with the seven different companies. Yes, they’re using our chip.

[Lisa Thompson:]

Okay, can you name a phone that would have it in it?

[Sterling Du:]

The phone company or what kind of chip inside?

[Lisa Thompson:]

Either the phone or the company that’s using it in their phone.

[Sterling Du:]

Yes, BBK, BBK is the part of the Oppo Group, COOFEA in the CoolPad, METTSU or TZU METZU. HCT and probably there is a HUAQIN probably in production, I’m not sure, exactly their production date. HUAQIN, a pretty big company. And probably with some others like some other name I need to recall, because we…

[Jim Keim:]

Local Chinese name here.

[Sterling Du:]

Or the China Model, pipeline for China Mobile. Yes, this difficult while probably six or seven maybe even eight different company produce based on our charge area and all get cached here [ph].

[Lisa Thompson:]

And gas gauge, okay. Great, thank you. That’s helpful.

[Sterling Du:]

Yes.

[Operator:]

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

[Daniel Meiberg:]

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