O2Micro International Limited
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Ladies and gentlemen, good morning, and thank you for joining us today to discuss O2Micro's Financial Results for the First Quarter of Fiscal Year 2019. 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.o2micro.com under the heading Investors. There will be a replay available through April 7, 2019 at 9

[Daniel Meiberg:]

Thank you, David. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the first quarter of 2019 ending March 31, 2019. 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 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. 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 first quarter of fiscal year 2019 ending March 31, 2019. Perry?

[Chuan Kuo:]

Thank you, Dan. We will now review our financial result for Q1 2019. 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, 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 2019 was $12.8 million. GAAP net loss in the first quarter of 2019 was $3.8 million. If we exclude stock-based compensation of $325,000 and net gain recognized on long-term investment of $15,000, the non-GAAP net loss will be $3.5 million. GAAP net loss per ADS in the first quarter of 2019 was $0.15. Non-GAAP net loss per ADS was $0.13. Gross margin was 50.5% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $5 million or 39.5% of revenue. This amount excludes stock-based compensation expense of $63,000. SG&A expense was $4.7 million or 36.8% of revenue. This amount excludes stock-based compensation expense of $262,000. The non-operating GAAP was $72,000. Income tax was $299,000 in the first quarter and is mainly based on the estimated effective tax rate on each taxable location. In Q1 2019, we repurchased 119,769 ADS units at a cost of $194,000. Q1 revenue by end market break down into the following percentages

[James Keim:]

Thank you, Perry. Good morning, everyone. Our Q1 revenue was affected by two primary factors, a very significant inventory correction and weaker-than-forecast TV sales by major OEMs and ODMs. I will briefly discuss both of these before moving forward to some positive events that are occurring that will help resume our ongoing growth. Regarding inventories. A large amount of inventory have been put in place in 2018 by a number of major customers suffering from various product shortages that include passive components, such as resistors and capacitors. This included a number of major backlighting customers in TVs and monitors as well as major customers in battery management, including power tool companies. As shortages abated in late 2018 with some markets growing weaker, these customers significantly cut back order rates for Q1 based on their large inventories of our product. While some inventories in TV and battery management carried into the early part of Q2, this situation is now largely cleared and will not remain a factor for the remainder of 2019. Regarding TV. TV sales failed to meet expectations of major OEMs and ODMs in Q4 and early 2019. Sales of TVs into China's domestic market remained lower than forecasted by OEMs, and sales coincident with Chinese New Year failed to reach expectations, and trade war issues continue to have significant negative impacts on China's economy. Our customers are nevertheless expecting a stronger second half of the year as we have historically seen approximately 40% of TV sets sold in the first half of the year and 60% in the second half. Our customers believe that 2019 will follow this pattern with the good second half improvement in revenues. The key issue is where this situation leads O2Micro revenues for Q2 and the balance of 2019. For Q2, we are projecting modest growth and are pleased to see reasonable levels of customer backlog already in place for the quarter. While TV sales are expected to remain low in Q2, our battery management business continues to grow as more key design wins go into production. For Q3, we are growingly optimistic as our customers forecast ongoing growth in battery management, seasonal TV sales growing significantly in the second half of the year and the revenue of our new smartphone products becoming more significant as key design wins at well-known customers go under production. Let's review each of these key product areas in more detail. Despite the inventory issues and weaker-than-expected market in our largest product line, intelligent lighting, our design wins continue to be significant, not only in TV, but in new HDR monitors that are rapidly gaining new market opportunities in such areas as gaming, medical and industrial applications. While continuing to expand our product offering and position in high-end 4K and 8K TV markets with more major OEMs, we are not ignoring our strong overall market share and our expanding design activity in lower-end TV and monitor products using our new product line, the backlighting products with integrated MOSFETs. As a result, we project good improvement in Q3 and Q4 revenues in both TVs and monitors. We should also reiterate that we continue to focus significant backlighting R&D effort in the industrial and automotive markets. This includes advanced products for robotics and autonomous driving applications where we are seeing good acceptance of our new products. 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 are pleased to report that we now see more OEMs focusing design efforts with our advanced patented general lighting products as we move forward into advanced commercial and industrial LED-based lighting systems. We believe this will enable the product line to have ongoing growth opportunities. As stated previously, our patented battery management product offering has had excellent growth over the past three years and is projected to see ongoing growth in 2019. This growth continues to be driven by 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 continue to see ongoing growth opportunities with major OEMs in power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and uninterrupted power supplies. We believe each of these market areas will continue to expand for the foreseeable future. As stated previously, our battery management products now include more complex ARM-based microcontroller products for market applications where our existing customers need more sophisticated battery management while also enabling us to engage with additional higher-end customers. We are pleased to report that customers have successfully evaluated our first ARM-based battery management product and are moving forward to design our 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 battery management products. We continue to file patent claims for our new products to protect both our company and customers' market positions. Our major customer list continues to grow and includes Bissell, Black & Decker, Dyson, Electrolux, LG, Makita, Narada, Panasonic, Philips, Samsung, Sharp, Shark and TTI. Finally, let's discuss our new power products, where we believe we have made major progress in achieving long-awaited key customer design wins. Our revenue growth in power products and smartphones, tablets and other products have been hampered by major shifts in this market that negatively impacted the anticipated revenues from second-tier customers' products where we have design wins. Although these market problems greatly hampered our revenue ramp, these early design wins enabled us to get market recognition and the intention of some key name brand OEMs who recognize the potential value of our technology and had either already designed in our product or are closely working with us to qualify or refine products to meet their advanced product needs. We currently have four design wins in initial production involving three key customers and four more design wins in prototype production that includes two additional customers. This includes products that is going into phones for brand name carriers. By Q3, we are expecting to have at least eight design wins in production with as many as eight key customers actively using or designing our products into their systems. And we'll give more detail on these design wins going forward, but we'll indicate that they involved chargers for applications including high powered 2-cell charging, IoT product, wearables and express charging as well as gas gauges and complex integrated custom product for key customers. I will now turn the call over to our CEO, Sterling, for closing remarks.

[Sterling Du:]

Thank you, Jim. O2Micro report that first quarter, 2019 revenue of $12.8 million. Our revenue was down 23% from the previous quarter and is down 9.5% from the same quarter last year. The gross margin in first quarter 2019 was 50.5%. The gross margin was up from 50.3% of the previous quarter and down from 51.2% the same quarter last year. Our revenue gross margin was in the guided range as a result of product mix, which including the strong growth in the consumer product and in many new product ramping up. Our battery product achieved double-digit growth annually since 2015. Q1 2019 battery product met inventory correction from external market factors, including a lot of inventory to the overstock in the end of 2018 last year for the concern of the trade war and annexation. Yet, if we look back past 10 years, the cost of the average lithium-ion battery price dropped 80%, while the lithium-ion battery energy density grew up double. This means a factor of the total cost of ownership of the lithium-ion battery has dropped to only 1/5 in the past 10 years while the weight reduced under to less than 1/2. Therefore, we believe the battery hiccup in Q1 would have been short-term given a macro view of the battery market continuing to favor our battery product strategy. Meanwhile, we see some new application produced each year, we quickly furnished to consumer market or industrial market. For example, the lightweight, hand-carried, powerful vacuum cleaner is on lithium-ion battery has become mainstream product, which was a niche, high-end product just a few years ago. We continue to secure active design wins mass production with the top-tier customers in Japan, Europe, North America and China. We remain optimistic for the 2019 battery business, and customer continue to adopt our products and show interest to the new technologies. Our product strategy is to offer solutions, not just a single chip. So in which we have, for one, we have a digital front end which offer from ambient environment data with reading with a very high speed, very high accurate A/D converter. For two, we have a smart gauge, which are based on a ARM-based and integrate digital front end, MOSFET, A/D converter and [e-fringe] with complicated algorithm inside. And for three, the business management unit will also integrate with the digital front-end to meet variety of needs of our key customer for different number of the sale in the different locations. The TV market has been weak in China. There are some improving indication of China economy which could benefit the recovery of this market. While new high-performance aerial local TV technology continue to have active design win among top-tier customers, we foresee the recover of the TV market in China will fuel our return to growth. Monitor market is stable. On other hand there's many modern applications growth for the industrial usage, such as medical device, for HDR display, gluten ball, gaming and et cetera. In addition to the 4K high-resolution and upcoming 8K high-resolution, LCD panel technology, we also have a new product for the mini LED backlighting, which offer superior brightness and contrast performance. In last year, the unprecedented component shortage will have been improved this year, this quarter, yet our 2019 TV market remains low visibility and very dynamic. We predict this year will be heavy backloaded in the second half. We will see how the important the Q3 and the Q4 this year play in. The whole market is huge. Our product are at this early penetration phase, and there's plenty of room to grow, especially we target for the high-end phone. We have the high battery power, high computing power that smartphone are the trend. Our solution address the high-performance analog charger for the smartphone with the current product line, including, but not limited to, for one, with a two parallel charger can up to 6 amps direct fast charging, O2 Express Charger of also up to 6 amps. For three, we have a 1-amp to 6-amp [ultrarapid] industrial standard chargers. We believe the smartphone charging current continual be rise with more new function packed in, and the screen size will increase. Looking forward to the rest of year 2019, our growth drivers are products for the TV monitor market and battery management for power tool. We executed our expense reduction plan. As our CFO, Perry, indicated, that we successfully lowered down the cash breakeven point to between $16 million to $18 million. We continue to monitor the business operation to optimize operation cycle time and the cost of operation, monetizing the asset the company. We hire new engineer at a needed pace and upgrade the new tester, which allow us to [broaden] the newest technology product while keeping in line with the revenue growth. At this time, I'd like to thank you for listening to our conference call and turn it back to Dan. Dan, please.

[Daniel Meiberg:]

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

[Operator:]

[Operator Instructions] And our first question will come from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes. Thank you. First question, if you look at the TV inventory correction, what gives you the confidence that it's sort of complete? I don't know if you have any numbers you could share with us. Are you starting to see the orders come back? Just trying to understand a bit more the conviction that that correction is over?

[James Keim:]

Yes. Most of the major customers have started to take product either last month or this month. So they have actively put backlog on the books to take product. Some of them, particularly in the battery management area, have already started to reaccelerate their orders.

[Tore Svanberg:]

Very good. And if we look at the smartphone design wins for the second half, how are you going to report these in revenue? Is it going to be in communications? Or will this be a separate category based on reporting?

[Chuan Kuo:]

Communications?

[Tore Svanberg:]

No. The smartphone design wins that you have for the second half that are going to go into production. As you get those revenues...

[Chuan Kuo:]

Yes. That will be in our consumer, yes. Not in communication.

[Tore Svanberg:]

In consumer? Okay. And can you comment a little bit on the relative gross margin of smartphone versus your other segment?

[Chuan Kuo:]

The smartphone in the ramping period, I think is very complex. I expect the gross margin will be a little bit lower, under the corporate average, 50%. By the long while, I think in the mid-range, I think later this year and beginning the next year, we'd like to improve the year and the cost down up to 50% every year. I do believe that we will continue to improve the gross margin a little bit – over the corporate gross margin in the long run.

[Tore Svanberg:]

Very good. And then just last question, could you elaborate a little bit more on the cost initiative that you took? I don't know if you could comment at all on – was this an area that you decided to invest less in? Or yes, if you could just elaborate a little bit there, that'd be great.

[Sterling Du:]

The cost reduction plan, right?

[Tore Svanberg:]

Yes.

[Chuan Kuo:]

Yes. The cost reduction plan, for the total cost reduction plan, we have a different area. I think it's – the first that we have some executive volunteer salary cut, but this is based on via volunteer. And the second, we streamlined the operation in different areas, like in the logistic, like in the – prioritize the different projects and to consolidate and also prioritize the project by reducing some engineering expenses in the foundry side. And the third one is of course, that we consolidate some shipment and to improve our logistic cost-related solutions. And also we do some engineering consolidation and also prioritized some projects. So we have some headcount cut in the Q2. Yes, this is – all the cost reduction plan – overall, the cost reduction plan. As to the cost reduction plan for the product itself, I think that we do a one-year [slate] for the year improvement throughout our volume production. And the second is that we negotiate with some good vendor support on the – our volume product. So this is continue good for our multiple product lines across the border.

[Tore Svanberg:]

Very good. Thank you very much.

[Operator:]

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

[Lisa Thompson:]

Hi, everyone.

[Chuan Kuo:]

Hi.

[Sterling Du:]

Hi, Lisa. Good morning.

[Lisa Thompson:]

Good morning. So – all right, let me ask you a couple of questions. Could you just clarify, what was that that you sold that was $2 million? I didn't quite catch that.

[Chuan Kuo:]

The $2 million almost, $1.9 million, the cash that we sold our long-term investment, the company called EMC, listed company in Taiwan, so in Q1, we sold...

[Lisa Thompson:]

Oh, okay, that's what the sale…

[Chuan Kuo:]

Okay, okay. That's the shares sold.

[Lisa Thompson:]

All right. Sorry, didn't catch that. Let's just go back to talking about smartphones because it's interesting that it's finally catching on. Who are you competing with that these phone makers decided to use yours instead of what they've been using before?

[Sterling Du:]

We have quite variety of product solutions so some of them compete with TI at the high-end. Then we also have like a three-amp charger, and that competes with the MediaTek and sometimes is also with Qualcomm. Then we also have other DC/DC, and that competes with dialog.

[Lisa Thompson:]

So why are they finally moving over to you? What's the thinking?

[Sterling Du:]

In a phone – because each phone has a different variety advertised, so we have two category. One is the so-called industrial standard, and that is compete with the power efficiency. Because most of the charger is between 90% to 97% and how you're going to be – increase your efficiency and accuracy of your gauge reading – reader, so that is the so-called the amount is the industry standard. So the way O2Micro does. We have our own algorithm to do the battery estimation of the capacity left and we call the coulomb counter, which we count the each capacity of the current in and the current out. And furthermore, we also have built a so-called battery modeling laboratory in South China, and then we have our customer to submit their battery with a different battery supply to our phone customer and we build the algorithm model for those battery they submit. Every battery batch they submit to us, we have around between six weeks to eight weeks to build a model. And this model contains a lot of data parameters, and that can utilize in each voltage chip and then achieve what I said is more accurate. So in a very simple word, we increase the efficiency of charging, and then we increase the accuracy of the gas gauge. And that is for the standard. And then as we all know that the phone has been so-called the evolution to different kind, the bigger size or fast charging or different protocol or people using two-cell battery or using one-cell, but using big capacity. Then there's all kinds of concern regarding the heat dissipation and also the cable connector, socket they're using and we called that fixture. Those are cost. They want to lower down the cost. So they require – we come out so-called the semi or some minor change the IC for them, and those, we call the semi customer. And those IC, normally, we will not do it only for one, we do a few of them together, and that is the second part. That's the second category. And that one, as Jim indicated, some of them – of those so-called customized – semi-customized high-performance charger IC, is either in prototyping or already in the sample stage.

[Lisa Thompson:]

Great. So you said you're going to have about eight phones this year. Is there any reason that these customers wouldn't switch all them new stuff over to you? Or is that you're only used for the high-end?

[James Keim:]

Well, Lisa, what they will do due to obviously, some of these are very sizable customers and very large volumes. They will typically bring you in to a smaller-volume application, a specialty application or a high-end application, but is actually decent volume. Thus, they will use you in that application, and then if that goes well, then they begin to expand into other platforms. So that's how they virtually all work.

[Lisa Thompson:]

Okay. That makes sense. So how long will it be, do you think, before you get an indication that they're happy and they're going to bring on new stuff?

[James Keim:]

Well, we can tell you, as I mentioned, we are already shipping in volume to a number of customers. So, so far the results of that are good. And from that result, we would expect those to continue to do two things

[Lisa Thompson:]

Great, it sounds good. I look forward to hearing about it. Thank you. That’s all my questions.

[James Keim:]

Yep.

[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, everyone. Thank you, everyone, for your time and attention this morning. Please feel free to contact me at [phone] extension 8888, or at [e-mail] with follow-up questions. Have a great day, everyone, and thank you again for your time and attention. Goodbye.

[Operator:]

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines, and thank you for joining us this morning.