O2Micro International Limited
Q4 2018 Earnings Call Transcript

Published: 30 Jan 2019

[Operator:]

Good morning and thank you for joining us for today to discuss O2Micro’s Financial Results for the Fourth 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 February 6, 2019, at 9

[Daniel Meiberg:]

Thank you. Good morning, everyone, and thank you for joining O2Micro’s financial results conference call for the fourth quarter of 2018 ending December 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. 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 fourth quarter of fiscal year 2018 ending December 31, 2018. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q4 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, 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 fourth quarter of 2018 was $16.6 million. GAAP net loss in the fourth quarter of 2018 was $3.1 million. If we exclude stock-based compensation of $353,000 and the net loss in line on long-term investment of $1.4 million, the non-GAAP net loss will be $1.4 million. GAAP net loss per ADS in the fourth quarter of 2018 was $0.12. Non-GAAP net loss per ADS was $0.05. Gross margin was 50.3% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was $5 million or 29.9% of revenue. This amount excludes stock-based compensation expense of $59,000. SG&A expense was $5.1 million or 30.7% of revenue. This amount excludes stock-based compensation expense of $290,000. The non-operating loss was $693,000. It includes interest income of $71,000 and other net income. Our rental income 101,000, cash dividend income from long-term investment $290,000 and some government subsidized $138,000. The net loss realized in long-term investment is mainly from unrealized fair value of EMC shares. In Q4 period, 360,000 shares of EMC were sold and US$1.3 million cash. The average selling price of EMC in Q4 is around U.S. dollar, $3.56 with original cost of U.S., $0.54 per share. The remaining shares of EMC as of December 31, 2018 is around 2.8 million shares. Income tax was 330,000 in the third quarter and it’s mainly based on the tax provision of each taxable location which including the income tax of 105,000 from the EMC shares trading. In Q4 2018, we repurchased 98,180 ADS unit at a cost of $158,000. Q4 2018, the revenue by end-market raised volume to the following percentages

[Jim Keim:]

Thank you, Perry. Good morning, everyone. Our yearly revenues for 2018 continued our steady growth since revenues bottomed down in 2015. We are projecting ongoing growth for 2019 as well. The 2019 growth is expected to be modest in Q1 2019 versus Q1 of 2018 due to slow Q1 TV sales coupled with some excess inventory correction by customers. We project reasonable growth in Q2 2019 versus Q2 2018 followed by accelerating growth in the second half of this year that will be driven by three factors. These three factors are; backlighting design wins in high-end 4K and 8K ultra high definition TVs as well as high-end HDR monitors. Secondly, we’ll see ongoing growth in battery management. Third, we’ll see expanding revenues in new power products that continue to gain wider acceptance in the smart phone and tablet market including higher end customers. Let’s now review more specific market activity in our product lines. In our largest product line, intelligent lighting, our new product design wins have continue to accelerate in several areas. Our industry-leading area backlighting product is capturing a growing number of design wins in the high-end TV market including the rapidly expanding 4K market followed by the 8K market. We also see the high-definition HDR monitor market growing steadily as more OEMs are offering HDR monitors using our backlighting product. We are also pleased that customers continue to expand design activity in lower M TV and modern products using our new line of backlighting products with integrated MOSFET. As stated previously we also continue to focus significant backlighting R&D effort in the industrial and automotive markets, this includes advanced products for robotics and automotive driving applications. Our general lighting business remains focused at the high-end of this market, specifically our proprietary and patented free dimming and high-powered general lighting products we can enjoy reasonable profits. We expect this business to remain stable with modest growth. Our patented battery management product offering had good growth in 2018 and is projected to continue this growth in 2019. This growth is being driven by the rapid expansion of lithium-ion batteries into more and more product areas as lithium-ion batteries become more cost-effective and have greater energy capability. With our patented lithium-ion cell balancing methodology we’ve been able to gauge with major OEMs in key markets including power tool, e-bike, e-vehicle, vacuum cleaners, garden tools, and uninterrupted power supplies. As stated previously, our product plans and battery management have included expansion into more complex microcontroller based products for market applications where more sophisticated battery management is needed. We are pleased to report that customers have now successfully evaluated our first arm-based battery management products and are moving forward to design our IC products into their next-generation high-performance products. Due to the complexity of these designs including firmware development major revenue is not expected until 2020 from our ARM-based products. We continue to file our key patent claims for our new products to protect both our company and customers market position. Our major customer list includes; Black & Decker, Bissell, Dyson, Electrolux, LG, Makita, Marotta, Panasonic, Philips, Samsung, Sharp and TTI. Finally, let’s discuss power products. Our new power products continue to ramp into production at notable customers and enjoy ongoing quarterly revenue. The effect of this growth has been muted however by lower than expected revenues and legacy power products primarily due to serious shortages of processors at several key cleanup of customers. Nevertheless, we expect this issue to soon be behind us as our new product revenue base continues to grow at more customers including well-known higher-end brand-name customers that are completing designs and going into prototype production with our products. These design wins for our smart phone and tablet products include our new charger ICs on-the-go charger booster and accurate gas gauge. Sterling will go into greater detail regarding these and other products. I will now turn the call over to our CEO, Sterling Du for closing remarks.

[Sterling Du:]

Thank you, Jim. O2Micro report the fourth quarter 2018 revenue of $16.6 million. The revenue was down 1.4% from the previous quarter and up 9% from the same quarter prior year. The gross margin in the fourth quarter of 2018 was 50.3%. The gross margin was down from 50.5% of previous quarter and down from the 50.5% the same quarter prior year. Our revenue and gross margin was in the guided range, as a result of the product mix which included we have strong growth in consumer product and the many new product ramping up. In 2018, our TV achieved our objective to grow despite component shortage and the market shifting. We have defined the importance of our customer as a result of technology management. In addition to Sharp, which was merged by Hon Hai. We see the LCD TV mainstream move up to the 4K HDR high-end and some of the 8K. Furthermore, LCD TV evolved to the barriers of state-of-art technologies such as laser, LED backlighting, super local dimming backlighting, mini LED backlighting and et cetera. We foresee the potential of high-end LCD TV growth to the different format trying to pair the OLED LED performance. In the mainstream market the larger size continue to be favorite, 4K HDR, 4K new HDTV and the Smart TV press their footprint to the center of the smartphone, gaming, ATV store or the connectivity base for the whole IoT. The dryness of LG TV clearly has advantage over OLED LED in which our local dimming technology function has the critical growth. Regarding the view angle and the contrast ratio OLED LED does better. And yet using that new high sense, new laser TV as an example in which we stand out acquired light by adding the third laser to existing to counter laser LED for the backlighting while enhancing the brightness contrast. In 2018, the component shortage slows down our TV growth rate to address the passive component shortage in a general market of IC integrated multiple MOSFET to specific set of MOSFET and enable the first time to market for customers. With 2019 the slowdown and the low visibility we are holding -- hopeful that this shortage could be lessen and that favor us. The 4K monitor market remains relative stable in major of the industrial market. The mainstream monitor markets slowdown due to geopolitical concern and supply chain we organize. To cope with the state in the market we increase the certain content under the same custom base, which is our new AC/DC conversion IC and high current MOSFET and we can reach the standby current and meet the energy star standard. As per the design win or preproduction with the customer in both LCD TV and the monitor. Our battery product achieved double-digit growth in 2018. While we secure top tier customer in Japan, Europe, North America, we anticipate some tailwind ahead in 2019 due to external factors. It is too early to tell the global impact to our battery market. Our growth strategy will be number one that will effect diversification, second IP protection. For the diversification, we introduced three new products series. One, we have a new digital front-end to support the battery cell number 5, 10, 14, 20 for the various applications Second, we have a smart gas gauge based on based on the ARM core and also integrate that DFE, Digital Front End and some MOSFET at a very fast responding time, sigma, delta A/V converter in a e-flash. Number three, we also combined the BMU which is based on step machine with a DMV as well which support cell number, 5, 8, 10, 14, and 17 to meet a verification of customer needs. This new battery, DMV [ph] IC quick with the high performance analog to digital conversion will help five cell to 20 cell power tool customer, better monitor temperature, voltage in fast responding time in accurate way, along with the ongoing design win and preproduction of battery group product we see revenue growing due to its increasing customer base and the same customer design win and the revenue growth. Our new generation product line of battery group addresses the need for high integration, mixed signal design, semi programmable ability and a fast time, the responding time connectivity rating. This new smart gas gauge adopt the popular ARM-based core combining to IC function to one. And like which is are the MCU, Microcontroller best case add to the DMV. We also plan to purchase and already installed some of the new tester to handle this company IC testing. This time, management should be the important. We continue to create the IP and enhance IP portfolio for peripheral applications. Though the smart phone is stagnant our product are at very early stage of penetration. There are plenty of room to grow for us especially we are targeting high-end, high battery power and high computing power smartphone system. Our solution address to the high performance analog charger for smartphone with the current product line including but not limited to number one, we have two parallel charger can charge up to six amp and second we have a direct fast charging we call O2 extra charge also can charge up to six amp. And we also have a one amp to six amp industry standard charger. We believe the smartphone charger current will continue to rise due to more new function to packing. Our charger solution can help both efficiency and heat dissipation. So, looking forward to year 2019 our growth driver, our product of the TV, backlighting market for monitor, our battery management for power tool, various applications and the formation for the new product such as smartphone. We also track our expense regularly, monitor with our business operation to optimize our operation cycle times, our cost of operation and monetize the asset of company. We hire some new engineers, purchase new tester which allow us to have a newest technology and product by keeping inline with the revenue growth. And at this time, I’d like to thank you for listening to our conference call. And I’ll turn it to Dan. Dan, please.

[Daniel Meiberg:]

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

[Operator:]

Thank you. At this we’d like to open the floor for questions. [Operator Instructions] Our first question will come from Tore Svanberg with Stifel Nicolaus.

[Tore Svanberg:]

Yes. Thank you. It sounds like you have confident that Q2 will sort of get back to year-over-year growth. Could you just elaborate a little bit on that? Is that coming from new products? Or are you expecting inventories to be low enough in Q1 so that things going to back on track in Q2?

[Jim Keim:]

Yes. Tore, this is Jim. In fact we know where the excess inventories are. We’re actually had a few customers, that’s not unusual because some of these customers have been on allocation for various types of product for sometimes so they build up some inventory. That problem will be cured in Q1. That's about half the issues. The other half of the issue for Q1 comes from the weak sales in TV which is not typical for the time a year and also we have fairly weak China market and part of that is driven by Chinese New Year. So this is pretty typical for the TV monitor market. We do see the design wins. We do see good forecasting out of our customers that resumes that growth as we move through Q2 and that's really driven primarily by some high-end TV designs that we have secured as well as some additional battery management design wins with very high-end customer. So, we’re quite confident of moving back up in Q2.

[Tore Svanberg:]

That’s helpful, Jim. And for Sterling, Sterling, you talked about some new products and battery management with some new digital front ends. Could you elaborate a little bit on what that means for sure the market opportunity, because if you have the ability now to manage cells, I think you said all the way up to 24-cell. But I’m not sure if I got that correctly. But how does this sort of change the addressable market in battery management for you?

[Sterling Du:]

We have a BMU driven by state machine early 2018. We’ll push to the market and gather quite popular expectance. Now, we have are the new one which ARM-based which is both Jim and I mentioned that. And that is ARM-based because we see the opportunity, the power tool is part of the -- one of the IoT. They like to be conductivity. So major power tool companies like redesign their CPU. And we take this opportunity. We introduce our ARM-based, another previous state machine base. Of course the ARM-based, the MCU base, the new DSE plus BMU, plus the AD converter and an e-flashing side can support our customer to upgrade to connectivity rating. So this opportunity we see. So back to your question, we increase our certain content and we convert ourselves -- we upgrade ourselves for the original partially BMU function to the battery management unit, BPU to the more complicated and providing state-of-art industry standard ARM-based and enjoy all the power tool -- the software tool and ATV tool and they connect to Wi-Fi and Bluetooth that open the door to enable our customer power tool, they can be come out as smart power tool. So this is the opportunity.

[Tore Svanberg:]

That’s very helpful. Last question for Perry, Perrry, is the cash flow breakeven still 18 million?

[Perry Kuo:]

Yes. Still keep our original level, yes, 18 million.

[Tore Svanberg:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question will be from Lisa Thompson with Zacks Investment Research.

[Lisa Thompson:]

Hi. My first question is just to clarify what you said about SG&A in the fourth quarter. Why was it exceptionally high and going back down?

[Perry Kuo:]

Okay. Yes. Lisa, this is Pertty. In Q4 we did received lot of request for the very short time demand and shift to other destination. So actually we spend around 200,000 to 250,000 more in logistics. And I expect the Q1 will be down to the regular area and we can manage list with our current venders for the Q1. So the Q1 SG&A as I guided this is will be – SG&A will be back to the regular level.

[Lisa Thompson:]

Okay. Thanks. I didn’t quite catch that. And going back to your breakdown of sales, what portion of your TV sales is the 4K to 8K? And as that increases could that accelerate growth in TV as that becomes the bigger piece of the business?

[Jim Keim:]

The answer to that is, yes, that will be become a bigger piece of the business particular this year in the 4K. There’s not enough content out in the 8K yet for that to be in a major growth. But the 4K market is now growing quite quickly. We have some very good design wins in both that in HDR monitors that I mentioned. So we do see that driving revenue growth as we move towards the backend of Q2 and then mainstream in Q3. So we do see very good growth in the Q3, Q4 timeframe particularly out of the 4K in TV.

[Lisa Thompson:]

And so, does by math, does that then accelerate your growth? Is it big enough?

[Jim Keim:]

Yes, it does. That along with we do have some additional battery management design wins that also come on stream as we move into the Q3, Q4 timeframe and then Sterling and I both mentioned little bit about this smartphone tablet business. We also expect that to contribute in Q3, Q4.

[Lisa Thompson:]

All right. And then just quickly on the ARM-based product. So that goes into the internet of things stuff where you have devices that are connect to the internet, right? So, what industries are you targeting that for like who have interest in that right now. I know you do the power tools, right, where you want to be able to locate them, if somebody steals them or where is that all go?

[Jim Keim:]

That’s correct and that will be one of the first applications we expect to go into production as the matter of fact. We may see some production in power tool right at the tail end of this year, but certainly next year we are engaging with that business in particular traceability of tools is a critical part of that activity.

[Lisa Thompson:]

Okay. And then what other things is out there? Or is that pretty much the first folks to come in?

[Perry Kuo:]

The potential could be extent to some solar or some even UPS so that they have a connectivity that people can collect the condition of the device without really getting – get wireless connect such like the power tool, but as Jim indicated that power tool will be the first application and very practical for our customers.

[Jim Keim:]

Right. Another one that we are seeing one customer we expect also come up is in robotic vacuum cleaner.

[Lisa Thompson:]

Okay. That’s kind of cool.

[Jim Keim:]

Yes. We like in.

[Lisa Thompson:]

All right. Great. I think that’s all my questions. Thank you.

[Jim Keim:]

Okay. Thank you.

[Operator:]

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

[Daniel Meiberg:]

Thank everyone for your time and attention this morning. Please feel free to contact me at 408-987-5920 at extension 8888 or at [e-mail] with any follow-up questions. Have a great 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.