O2Micro International Limited
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good morning, and thank you for joining us for today to discuss O2Micro’s Financial Results for the Third 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 at 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 November 14, 2018, at 9

[Daniel Meiberg:]

Good morning, everyone, and thank you for joining O2Micro’s financial results conference call for the third quarter of 2018 ending September 30, 2018. 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 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. These 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 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 third quarter fiscal year 2018 ending September 30, 2018. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q3 2018. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results 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 third quarter of 2018 was $16.8 million. GAAP net loss in the third quarter of 2018 was $3.5 million. If we exclude stock-based compensation of $350,000 and the onetime fair value loss of $1.7 million, the non-GAAP net loss will be $1.4 million. GAAP net loss per ADS in the third quarter of 2018 was $0.13. Non-GAAP net loss per ADS was $0.05. Gross margin was 50.5% in Q3. The gross margin reflects the current revenue level and the product mix. R&D expense was $5.2 million or 30.8% of revenue. This amount excludes stock-based compensation expense of $60,000. SG&A expense was $4.7 million or 27.7% of revenue. This amount excludes stock-based compensation expense of $290,000. The non-operating income was $1.5 million. In Q3 period, 290,000 shares of EMC are sold in the $1.2 million cash and was cost on the $1.54 per share. I’d like to refresh some background of the EMC. The EMC, one of our long-term investments, become a listing company in Taipei Exchange on January 23, 2018. The company realized an unrealized fair value GAAP of $9.8 million as of March 31, 2018. Unless if the company also realized the unrealized fair value GAAP of $3.1 million as of June 30, 2018. And as of September 30, for the Q3, the company recognized an unrealized fair value loss of $1.7 million. So the current cost, the actual cost we purchased reinvesting in EMC is around $0.54. The income was $281,000 in the third quarter, and it’s mainly based on the estimated effective tax rate of each taxable location. In Q3 2018, we repurchased 6,455 ADS unit at a cost of $11,000. Q3 2018, the revenue by end market breaks down into the following percentages

[Jim Keim:]

Thank you, Perry. Good morning, everyone. Our yearly revenues have been growing since bottoming out in 2015. Q3 2018 results reflected this ongoing growth driven by our advanced products that include our expanding lineup of the plant’s backlighting products that support higher-end TV and high-definition monitors as well as new products, enabling more cost-effective performance for all of our customers. This resulted in a significant increase of backlighting orders for Q3 and increasing business projections for 2019. Our battery management design wins continue their expansion into new markets, enabling excellent year-over-year growth with less effects of seasonality from the power tool area where we remain a leading supplier. Our new power products for smartphones and tablets have begun ramping into production with increasing customer design wins, including market acceptance at higher-end customers. Let’s now review a more specific market activity on our product lines. In our largest product line, intelligent lighting, our new product design wins have continued to accelerate in several areas. As the shortage of MOSFET continues that has impacted our customers, we continue to see more customers adopting our line of backlighting products with integrated MOSFET. We also see key OEMs differentiating their higher-end TVs and monitors with more highly integrated application-specific devices, including our industry-leading local dimming products. These design wins have brought existing and new customers that continue to drive increasing revenues despite some concerns over tariff issues related to flat screen TVs and some ongoing component shortages. We also continue to focus more backlighting R&D effort in the industrial and automotive markets. We have significant design wins in process that should keep our backlighting business strong in the industrial automotive markets for many years. Our general lighting business remains focused at the high end of this market, specifically our proprietary and patented Free Dimming and high-power general lighting products where we can enjoy reasonable profits. We expect this business to remain stable with modest growth. Our patented battery management product offering continues to expand and support rapidly expanding markets, utilizing lithium-ion batteries based on their small size, high energy density and increasing cost effectiveness versus older battery technologies. Our patented lithium-ion cell balancing methodology continues to enjoy more key design wins at major OEMs. We see ongoing growth opportunities in all key battery management market areas, including power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and uninterrupted power supplies where lithium-ion battery technology continues to become more reliable and cost-effective with the use of our battery management products. The diversification of our design wins across more market areas makes our business less cyclical on a quarter-to-quarter basis while continuing to experience excellent yearly growth. As stated previously, our product plans in battery management include ongoing expansion into more cost-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 continue to file key patent claims for our new products to protect both our company and our customers’ market position. Our major customer list continues to grow and includes Bissell, Black & Decker, Dyson, Electrolux, LG, Makita, Narada, Panasonic, Philips, Samsung, Sharp and TTI. Finally, let’s discuss power products. Our new power products have begun to ramp into production with revenue growth in Q3 and onward into Q4. However, the effect of this growth was offset by lower-than-expected revenues and legacy power products primarily due to serious shortages to process the products at several of our customers. Nevertheless, we are encouraged to see our product base expanding to more customers, including well-known, higher-end brand name customers completing design wins with our new products. Based on this wider diversity of design wins and customers, we can more confidently project a growing revenue base as we move forward. These design wins for our smartphone and tablet products include our new charger IC, on-the-go charger booster and accurate gas gauge. Sterling will go into greater detail regarding these and other products. Additionally, we continue 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 third quarter 2018 revenue of $16.8 million. Revenue was up 10.6% from the previous quarter and up 8.3% on the same prior – same quarter prior year. The gross margin in the third quarter of 2018 was 50.5%. The gross margin was down from 52.1% of the previous quarter and up from the 50.3% the same quarter last year. Our revenue and gross margin were in the guided range. As a result, product mix reaching good strong growth in consumer product and the many new products renting up. We are pleased to see our battery product group continue to have new product introduction for the market. The new battery for testing IC equipped with a high-performance analog-to-digital conversion design. We have the 8-cell or 10-cell power to our customer to better monitor the temperature and the voltage in faster responding time and accuracy rate. Along with ongoing design wins and the production of battery group products, we see revenue growing at high speed due to an increasing customer base and the same customers design win in the revenue growth. Our next-generation product line of battery group addresses the need for high integration, mixed signal design, [indiscernible], faster respond time and connectivity rating. We foresee the future mixed-signal IC requires more complicated testing ability and also larger part of memory to do the testing, as well as the test type reduction. The large number of battery cell always represents more challenge for testing time regarding as more multiple channel equipped. Whereas we plan to allocate certain CapEx for the new tester purchasing and start to train and recruit more mixed-signal test engineers. In the customer point of view, our product lines grew from the power tool market where we maintain a leadership to home appliance, including floor cleaner, call as vacuum cleaner to the e-scooter, e-bike and intra power supply dorm in the light electric vehicle. Every customer requires slightly different at the time as it varies application and different power strength. This is where our special patent semi-customization technology play critical role. We also come out special ESD design, including layout, to support strict and harsh environment applications. The new regulation for our UL Sony Green Partner or Roth give us challenge as well as opportunity to design new IC for the next generation. We see that LCD TV market had been advancing to the 8K and fast speed. Nowadays, the 4K and HDR has been the standard in most LCD TV to date. Amount of competition between the LCD and OLED LED, the brightest of LCD TV, clearly has an advantage over OLED LED in which our local dimming technology play the critical role. While the view angle and the contrast, which OLED LED do better. It’s also the reason that our new-generation local dimming product, which has been request to design a challenge posed by key customer. They are active ongoing with several sample shift and some design win in some key outside customer base. To address handset component shortage in the general market, our new ICs integrate multiple MOSFET for no external MOSFET needed topology and also enable us time to the market for customer. We support the higher-end display market, which soon becomes standard, including the TV and the 4K/8K monitor in appropriate. In order to provide better power trend design for customer, our new AC to DC conversion IC and high current power MOSFET achieve low standby current, which meets the energy substandard as either design win or introduction stage in the customer side. Like our previous observation, the high end smartphone continue to advance to higher level intelligence, high accurate and a complicate, more powerful mobile phone measurement features. Our solution address those high-performance analog charges for the smartphone battery with the current product line, including, but not limited to

[Daniel Meiberg:]

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

[Operator:]

Thank you very much. [Operator Instructions] Our first question will come from Tore Svanberg, Stifel.

[Tore Svanberg:]

Yes, thank you. First question, Sterling, you seem to be having a lot of new products in the pipeline. And as we look at 2019, I was hoping maybe you could rank, which segment do you expect to grow faster or which products you expect to grow faster, just so we get a sense for how each of these are going to ramp for 2019.

[Sterling Du:]

Yes. So if we – the gross revenue point of view, our largest revenue pie today is coming from the backlighting. And with the new project, new IC and also, multiple MOSFET integrated, which increase our ASP. So the TV backlighting market, including the monitor, will grow the most revenue number in 2019, given new product and the base is larger. In terms of the growth percentage, due to the phone, revenue right now is relatively very small. So with the base is in a minimal base, the percentage growth will be falling to our phone growth. However, the revenue number is not significant compared to our power tool or go to the TV. In our power tool market, growth is very healthy, and we see the every quarter – quarter-to-quarter, year-over-year not only grow percentage-wise in a very high end, also the gross margin, also high. The most important is our power tool has been very diversified, as Jim indicated. They’re ranging maybe half dozen to a dozen different applications, go to half dozen to different nations and also address very different application, we have build up a very rich portfolio. So that’s for industrial, stable growth year-by-year.

[Tore Svanberg:]

That’s very helpful. And just to clarify or maybe you can clear it for us, so when you talk about the integrated MOSFET, O2Micro does the MOSFET internally, right? You don’t buy this off the shelf and then integrate?

[Sterling Du:]

This particular product line, it is – we design our own MOSFET is a single type, monolithic type, which is increasing the circuitry and the MOSFET. And then we do have some product, does have some external MOSFET we acquire from a third party, but that’s a very small number.

[Tore Svanberg:]

Okay, very good. One last question. So direct charging or Charge Express is obviously becoming really important. And I’m just wondering from O2Micro’s perspective, as we look at the smartphone market, is that really going to be the main driver of your products? Or are you starting to see other type of R&D opportunities as well?

[Sterling Du:]

Yes. That’s a good question. Because the U.S. DPD, it is – cost is too high for the smartphone today. So smartphone maker like to address the charging speed up time, so the direct fast charging is one of the solution, and we have providing the hardware base and very easy to design. No software needed solution. Some of the very successful phone in China, they are using a software base and with the MCU, which we are much easier to design. We are a state machine base. So we see – we have already one customer reproduction. We have another one, the following two, and then we believe that will be one of the alternative urging customer could choose. Currently, we have three different option people can choose from. And for the next year, due to the latest phone from the top branding, the battery topology also becomes more complicated. And that give another new chapter that people can design the different topology. And that including to do a more so-called the charge boost and then to charging your battery by the high voltage and the regular current and then go to the phone yourself because half of the voltage and they increase your current. So this kind of conversion is also popular, and that companionship to our existing three different charging scheme.

[Tore Svanberg:]

Very good and congratulations on the continued progress.

[Operator:]

Thank you very much. [Operator Instructions] Our next question will come from Lisa Thompson, Zacks.

[Lisa Thompson:]

Good morning. So let me ask you about the macro environment. We’ve been hearing things about slowing sales in Asia and Europe. And I was wondering if you could kind of talk about the geography of maybe where your products go into and whether you’ve seen any cutbacks from customers not willing to hold inventory.

[Jim Keim:]

Yes. So those are wonderful questions, Lisa. I think the biggest correction we’ve seen is really in the inventory area. Some customers now are cutting back inventory, not placing as long as lead time orders. We have not seen a significant turndown at this point from an economic and market point of view in the products that we are shipping. So overall, we’re watching the situation carefully. But right now, we do not see a significant issue in terms of our markets deteriorating. So I hope that helped answer that portion of the question.

[Lisa Thompson:]

Yes, definitely. Do you have some sort of feel as to what percentage of your products go to what geographic locations?

[Jim Keim:]

Well, we’re in the high – let’s go over the product line. We’re in the high end of the TV market, but we also are probably the largest player in the mid to low end as well. So we go wherever the TV shifts, whether that’s Europe, U.S., Asia or wherever. So we are basically in all geographic areas as far as TV. What we have seen in the TV area is some market shifting going on between the players. There is a real fight on for market share particularly at the high end of the market. And we have seen some dynamics of gains and loss in market share, but we do not see that market deteriorating at this point. And looking at some of the glass shipments, which we watch carefully, we believe that market will remain stable. The same can be said for the power tools, which Sterling mentioned earlier, as well as garden tools, other products under which our battery management products go. We’re not heavily into the automotive area. We’re in some of the smaller TV market at this point. But we have seen a relatively stable market there. We do believe that there may be some downside in some of the power tool area in terms not necessarily of growth but in speed of growth due to potential economic issues. So we ship all over the world. Now our product, obviously, ships into China and heavily into Asia where it’s assembled, but the end customers are worldwide. Monitor market – and I mentioned that it’s not our biggest product area, but we are a leading supplier into the monitors. We actually see the monitor area starting to grow again with a great diversity of different types of monitors going into more industrial, high-definition monitors. And that’s actually becoming a good growth area, particularly for high-end area backlighting product. So we still see, with our product diversity, even if there are some limitations in economic growth, the opportunity to continue to grow in 2019. So that is a broad-based answer to your question.

[Lisa Thompson:]

Yes. No, that’s very helpful. Thank you. So I’m curious. It seems to be a lot more electric vehicles out there now. How big a part of your business is that? Because that seems to be something that big good product introduced every day. Is that good for you?

[Jim Keim:]

Well, we hope that it will be good for us. We are upscale in the market. We began heavily in the power tool market, then moved heavily into the vacuum cleaner market. We’re a leader in both of those markets. In this last year, we’ve done an excellent penetration into e-bikes and some small e-vehicles. We are not yet into the main line of the automotive business. However, we are designing chips at this point in conjunction with some customers where we have the opportunity to enter the actual automotive market. And we anticipate that we will see some design activity in 2019 and revenue in 2020. But you won’t see any significant revenue for the actual automotive market from us before that period of time.

[Lisa Thompson:]

Great. Good, thank you very much for that update. That’s all my question.

[Operator:]

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

[Operator:]

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines. And have a great rest of the week. Thank you.