O2Micro International Limited
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning, and thank you for joining us today to discuss O2Micro's financial results for the Second 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 8888, and we'll 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 15, 2018, at 9 a.m. Pacific Time or by visiting the O2Micro website under the heading Investors. Following the presentation by management, the conference will open for question and answers as time permits. Gentlemen, please begin.

[Daniel Meiberg:]

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the second quarter of 2018 ending June 30, 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 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. That 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 would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the second quarter of fiscal year 2018 ending June 30, 2018. Perry? Chuan Chiung Kuo - O2Micro International Limited - CFO, Company Secretary and Executive Director Thank you, Dan. We will now review our financial results for Q2 2018. 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, onetime charges, nonrecurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the second quarter of 2018 was $15.2 million. GAAP net income in the second quarter of 2018 was $1.5 million. If we exclude stock-based compensation of $354,000 and the onetime fair value gain of $3.1 million, the non-GAAP net loss will be $1.3 million. GAAP net income per ADS in the second quarter of 2018 was $0.06. Non-GAAP net loss per ADS was $0.05. Gross margin was 52.1% in Q2. The gross margin reflect the current revenue level and the product mix. R&D expense was $4.6 million or 30.5% of revenue. This amount excludes stock-based compensation expense of $60,000. SG&A expense was $4.7 million or 31.2% of revenue. This amount excludes stock-based compensation expense of $294,000. The nonoperating income was $3.5 million. Income tax was $265,000 in the second quarter and is mainly based on the estimated effective tax rate of its taxable location. In Q2 2018, we repurchased 39,832 ADS unit at cost of $62,000. Q2 2018, the revenue by end-market breakdown into the following percentages

[James Keim:]

Thank you, Perry. Good morning, everyone. As stated last quarter, our yearly revenues have been growing since bottoming out in 2015. We also projected that this growth would accelerate as we move through 2018. Our Q2 results and Q3 projected revenues reflect this trend, which results in the following factors

[Sterling Du:]

Thanks, Jim. O2Micro reported second quarter 2018 revenue of $15.2 million. Revenue was up 7.8% from the previous quarter and up 4.8% from the same quarter prior year. The gross margin in second quarter of 2018 was 52.1%. The gross margin was up from 51.2% the previous quarter and down from 50.9% the same quarter -- excuse me, up from 50.9% same quarter of 2017. Our revenue was in the guided range, and gross margin improved from the previous quarter despite continued dynamic market, component shortage and market shifting. Along with the previous quarters, active resembling and (inaudible) of battery group products, we see incremental customer inquiry for the new products or an appetite for upgrading our products. We are happy to see our battery group introduced 2 new products to the production daily status, which propel our product base offering to a higher level, with a better cost structure and higher accuracies along with high performance. We continue to see our customer list growing while we carefully focus on top-tier customers. Our battery product lines group on a power tool market, where we maintained a leadership role to (inaudible), including floor cleaner, cordless vacuum cleaner and an e-scooter, e-bike, light electrical vehicles, all customers have inquired for us to fine tune and optimize the product for digital performance. We have the gas gauge effective product lines, which are made of some (inaudible) from the soft product with big customer interest. We have set up complicated testing and production methodologies for various requirements and yet kept customer request date of delivery on time, despite its final phase of complication of production of battery products. In the TV market, has been active in its resembling, involving new technologies, which support a higher-end display market without customized to drive -- with custom to drive, to find a future experience and including a mix (inaudible), mobile and industrial applications. Some customers are ready to focus on 8K, the resolution in product, although few 8K TV are available in the market. We continue to work closely with our major customer for the 8K panel local dimming backlighting by the major products. Today, still high-end 4K. We believe that 8K (inaudible) in the market drove (inaudible) 4K to high-end 4K model, which benefits to our technologies. Our local dimming technology is also seeing continued activities inside the high-end TV market with industrial rated monitors, automotive applications includes large display of streaming to enter the (inaudible) component shortage. We offer various IC options to integrate a higher voltage MOSFET to reduce the basic component cost. Although also integrate AC/DC converging increasing the power efficiency and reducing the customer system costs. We see the recent high-end phone adopting our new charger technology more than ever to reduce the charging time. While our R&D has previously heavy in local computer charging technology, the cost taken, our new charger (inaudible) for the smartphone, either directly (inaudible) for our mobile charger technology or we leverage a mobile technology to design a new higher integrated smartphone charger, (inaudible). O2 Express charger was direct (inaudible) from a local charger used by DELL computers in 2005. Another example is our state-of-art gas gauge, used to be designed for industrial-rated power tool application for accuracy gas gauge. We're pleased to see O2 Express charge, gas gauge and (inaudible) charger, which can provide combined 5 amp (inaudible), all 3 have the initial production in market. It is good start for (inaudible) our product technology for those (inaudible) still at early stage. On other hand, our (inaudible) charger for the smartphone 2-amp, 3-amp have seen increasing production design win, where revenue growth rate is (inaudible) the high end. The year 2018, (inaudible) our product for the PD (inaudible), battery management for the power tools. We continue to monitor our expense, operations, effectiveness to optimize the approaching cycle time, total operation and monetizing the asset of company. Keep in mind, aligned with the revenue growth, we added new engineers in the last quarter, which allow us to develop a new battery technology. At this time, I'd like to thank you for listening to our conference call. I'll turn back to Dan. Thank you.

[Daniel Meiberg:]

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

[Operator:]

[Operator Instructions] Our first question comes from Jeremy Kwan of Stifel Nicolaus.

[Jeremy Kwan:]

Quick question in terms of the breakeven point that you mentioned, Perry, essentially $19 million for a cash and [from the $19 million and $21 million] for income breakeven? Is that only for Q3 because of the higher onetime expense on R&D? Or is that something that's been ongoing [indiscernible]?

[Chuan Chiung Kuo:]

Thank you. This is only for Q3 for the year. Higher R&D [indiscernible] in Q3 for onetime only.

[Jeremy Kwan:]

Got it. Okay. And so on an ongoing basis, we can go back to that $15.5 million to $17 million cash flow breakeven number that you talked about before for Q4 and beyond?

[Chuan Chiung Kuo:]

I think in Q4, we, at this breakeven point, may be in line with the earlier guidance.

[Jeremy Kwan:]

Got it. And then, I guess, another question, if we look at the gross margin line, nice to see that pop up above 52% this quarter. And I know, Chuan, it's depend on the product mix, but going forward, can you -- is there any benefit from giving the volumes and higher revenue? Could there be, maybe, a higher baseline at some point in future?

[Chuan Chiung Kuo:]

Yes, you're right. With the higher revenue, we probably can gain some gross margin increase, but however, because of a lot of the new product renting, so I need some allowance for the new product renting. It may probably require 6 months to kill the year rates to up to our standard gross margin.

[Jeremy Kwan:]

Got it. Great. And speaking of your yield rates in foundry partners, have you gotten any feedback from them in terms of capacity constraints on their end? How's your capacity situation working with your foundry partners?

[Chuan Chiung Kuo:]

Yes, they are probably [indiscernible]. They are quite easy, and they are about to release the order as early as possible. That's why also you can see our inventory, we have about $600,000 more. It's on June 30, which is, we prepare for the Q3 growth [indiscernible] I think we don't have any big issues, but only just that we believe we are all that earlier to our vendors.

[Jeremy Kwan:]

Great. And maybe a final question before I drove back. Sterling, in terms of the smartphone charger product, is there -- are there any specific programs or customers that we can talk about at this point?

[Sterling Du:]

We have more than 500 customer production with multiple charger solutions and some also with gas gauge, but those more than 500 right now is more second tier or third tier in China area. We are engaged with first-tier customers, a few, but those -- that's because that's baseline. We need to get into the second tier or third tier. Then -- right now, we already have a track of the first-tier customer, which we are very pleased to see that, so not started our production yet, that means in 6 months to 8 months total, but there will be more exciting good news for the next year, following our second [indiscernible] which is getting to the first-tier customer in China. And that also will be our expectation that revenue will become more significant and more relevant.

[Jeremy Kwan:]

And then just a quick follow-up on that. With all the new products ramping and I think you mentioned a couple of times the cyclicality is going to be -- that's a little bit different. This thing is on our seasonality, I'm sorry. Is it something where we could see like Q1 is usually a down quarter, is that something where -- because the [indiscernible] are seeing because that changed this time around?

[Sterling Du:]

Yes, we -- there will still be seasonality in some of the markets like TV. However, we're not seeing -- I don't think we'll see the dramatics of the seasonality because we will have ongoing growth in some of the product lines as we move into Q1. We expect ongoing growth in battery management. We expect some upside in the power area. So that will help us sort some of the seasonality in the TV market.

[Operator:]

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

[Lisa Thompson:]

So the other income of $3.1 million, where is that from?

[Chuan Chiung Kuo:]

Lately, it's from our long-term investment with EMC. As I reported last quarter, it was risky in January 23. So the -- as of June 30, the stock price of EMC was $131.5, so we need to put these and realize our fair gain value.

[Lisa Thompson:]

Okay. And I've been reading that the laptop market is finally growing again. Do you still have some exposure to that?

[James Keim:]

Yes, we do. And we did see some upside in that in the Q2 time frame, and we're also seeing some additional backlog come into place for Q3. So we are pleased to see that. Glad you realized it.

[Lisa Thompson:]

Okay. And I guess, there is some consummation in the smartphone market? You're too small and too new in that to be really affected by big market trends, is that correct?

[Chuan Chiung Kuo:]

Yes.

[Lisa Thompson:]

Okay. All right. So it looks good. I guess, we will see a breakeven number in Q3 now. Looks like that's pretty much on track, right?

[Chuan Chiung Kuo:]

Yes.

[Operator:]

And there are no further questions in the queue at this time. I would like to turn the call back over to Dan for closing remarks.

[Daniel Meiberg:]

Thank you, everyone. Thank you for your time and attention this morning. Please feel free to contact me at my office at 408-987-5920, extension 8888 or you can e-mail me at [e-mail] with follow-up questions. Everyone, have a wonderful day, and thank you, again, for your time and attention. Goodbye.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.