O2Micro International Limited
Q2 2019 Earnings Call Transcript

Published: 3 Aug 2019

[Operator:]

Good morning, and thank you for joining us today to discuss O2Micro's financial results for the second 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 August 10, 2019 at 9

[Daniel Meiberg:]

Thank you, Chantel. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the second quarter of 2019 ending June 30, 2019. This is Daniel Meiberg, Corporate Communications for O2Micro.I'd like to remind listeners that the discussions of business outlook for O2Micro contain 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. Additional 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. I'd like to hand the call over to Perry Kuo.

[Perry Kuo:]

Thank you, Dan. We will now review our financial result for Q2 2019. Please note that financial result will be presented on a GAAP basis unless we designate otherwise. The non-GAAP result excludes stock-based compensation expense, onetime charges, nonrecurring gain and losses. Our full GAAP result are available in our press release that was issued earlier today.GAAP revenue in the second quarter of 2019 was $14.3 million. GAAP net loss in the second quarter of 2019 was $2.8 million. If we exclude stock-based compensation of $386,000 and net loss recognized on long-term investment of $187,000, the non-GAAP net loss will be $2.2 million.GAAP net loss per ADS in the second quarter of 2019 was $0.11. Non-GAAP net loss per ADS was $0.08. Gross margin was 50.1% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.8 million or 33.4% of revenue. This amount excludes stock-based compensation expense of $73,000. SG&A expense was $4.6 million or 32% of revenue. This amount excludes stock-based compensation expense of $313,000.The non-operating income was $89,000. Income tax was $290,000 in the second quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q2 2019, we repurchased 114,700 ADS unit, a cost of $173,000, Q2 2000 (sic) [2019] revenue by end market breaks down into the following percentage

[Jim Keim:]

Thank you, Perry. Good morning, everyone. Our Q2 revenue was up approximately 12% over a weak Q1 that had been impacted by inventory issues related to 2018 product shortages of MOSFETs, capacitors, resistors and other components.While Q2 saw an end to most product shortages affecting our customer base, Q2 brought on its own challenges. Trade war issues, coupled with an already weakening Chinese economy, significantly impacted Chinese TV OEMs who experienced TV sales significantly below their earlier projections. While TV OEM customers are projecting a stronger second half of 2019, ongoing weakness clearly remains in the China TV market. The good news is that there is growing focus on high-definition TV, leading to more design-in activity of our patented area backlighting technology.As an example, one well-known OEM recently introduced 8K TV using 64 of our area backlighting ICs in a single TV. While keeping a close eye on trade war issues, we are projecting Q3 growth of sales versus those in Q2 for all product areas

[Sterling Du:]

Thanks, Jim. O2Micro report the second quarter 2019 revenue of $14.3 million. The revenue was up 11.8% from the previous quarter and down 6.1% from the same quarter last year. The gross margin in second quarter 2019 was 50.1%. The gross margin was down from 50.5% of previous quarter and down from 52.1% the same quarter last year. Our revenue and gross margin were in guided range as a result of the product mix, which include strong growth in consumer product and in many new products ramping up.The global lithium-ion battery market compound annual growth rate is 10%. It will reach more than $100 billion in 2025, which is not far from today. The lithium-cobalt has 30% share among all the various type lithium-ion battery, including, not limited to, lithium-magnesium, lithium iron phosphorus and et cetera. Our battery product line offers solution for other type lithium battery by our semi customization program at the test and sampling stage to support other different types.Our product including digital front end, analog front end, battery management, we have updated our battery management with a new MCU inside and we have a second-level protection. And then we also have given various combinations like digital front-end plus MCU gas gauge and/or MCU-based gas gauge which can even support flexible gas gauge mode for the higher cell count of the battery.Our solution are applicable from a single cell to as many as more than 14 cells. Today, consumer electronics dominates the lithium battery market, while automotive sector is fast growing. We are pleased to see many new lithium-ion battery applications surface lately. The most recent, the cordless vacuum cleaner powered by lithium-ion battery is a good example.We are happy to mention more than three major cordless vacuum cleaner like Bissell, Dyson, Philips. They're all using our customized solution for battery protection or charger. We are not standstill and we'll continue developing a new design for the vacuum cleaner and developing a new silicon for the new functions.The Q2 2019, our battery product revenue back to the high growth, indicating the majority of our inventory in the Q1 sell-through, yet the visibility remain low as the trade war continue to put pressure on the manufacturer who are looking for the relocation for some of their partial production line.On the other hand, as Jim mentioned earlier, our 10-cell, ARM-based, MCU-based digital front end combined with a gas gauge are active in the design win. We are preparing the preproduction stage for the six-cell. We are doing a cost-effective version for more competitive customers. We continue to secure active design win, preproduction, mass production with the top-tier customer in Japan, Europe, North America and China. We are encouraged for the 2019 battery business as customers continue to adopt our product and show interest to the new technologies.As Jim mentioned that our TV LED high-performance local area backlighting solution were adopted by many first-tier customer throughout the global market. The latest, the Sony MASTER Series 85-inch HDR 8K is an example. Our customer utilized our precision timing control driver IC on each of their LED screen and which made up more than 5,000 LED each screen. Our IC drives every tiny LED to emit light with a synchronization with each other, which made it in total more than 1,000 tiny local area LED. It is so-called Sony Backlight Master Drive high-performance feature.The China TV markets remain weak. There's some improving indication of the China economy which could benefit us, however, it's not strong enough. The rest of the year was observation. Our high performance area local dimming technology continue to expand to China, Korea market following our successful story in Japan.The monitor market slightly grew as many monitor applications go for industrial usage, such as medical device, high-definition display, bulletin board signage and so on. Our new mini LED backlight driver offer high-performance brightness is certainly providing new solution for customer mini LED driving product. We predict this year TV and monitor will be back loaded and the market will be growing more in the second half of this year.Our charger product performed at stable pace. So we have design win with one new, high-performance DC/DC IC released to the market this Q2. It helps consumer to design fast charging by raising up to higher voltage at the AC/DC adapter side, then use charge pump technology to reduce the voltage to half while increase the current to twofold on the phone side. This way, the power loss between the AC/DC adapter and the phone could be only one-fourth. This is not permanent yet. The technology remain challenged to achieve the minimal energy loss when every time you transition from one state to the other or vice versa. Now we are in the early penetration stage to the global phone market and that there's plenty of room to grow, especially if we target high-end phone which is the trend.For the second half of this year, our growth driver will be the product for the TV and monitor market, the battery management for the power tool and in all kinds of various application and our power product for the phone, tablet. We continue to monitor our business expense, business operation to optimize operating cycle time, the cost of operating expense and on monetizing the assets of the company.At this time, I'd like to thank you for listening to our conference call and I turn it back to Dan. Dan, please?

[Daniel Meiberg:]

Thank you, Sterling. Chantel, 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.

[Jeremy Kwan:]

This is Jeremy Kwan for Tore. Congratulations, guys, on a very solid Q2. I want to just dig a little bit more deeply into that quarter. It came in quite a bit ahead of expectations, I think. Can you help us understand what the areas of outperformance was if there were any pull-ins perhaps in the quarter? Given the healthy Q3 guide, it seems like you saw solid demand. But can you give us a little more color, that'd be great.

[Jim Keim:]

Yes. We were actually helped in three areas. First of all, as Sterling mentioned, we did see the launch of some high-end TV product that has a lot of our products in it. We're very happy to say we have a number of customers that have moved forward not only with the area backlighting in TV, but now we're also seeing a similar trend in the monitor area. And we did see the launch of several customers who quickly put high-definition monitors into the market. So we were pleased with that area. That helped.We did have a good quarter in the battery management area where we did see some pull-ins of product that had to do with some new product launches which we were pleased to see. And then lastly, we did get not a huge contribution, but we began to see the first contribution from some of the smartphone product. And that also helped. So basically, those are the key areas that helped the quarter come in a little bit higher than we had originally anticipated.

[Jeremy Kwan:]

Thanks Jim. Can you talk a bit more about the smartphones, maybe the timing and the size of the ramp that you expect? I know it's just starting to build at this point, but can you just help us – maybe quantify that a little bit more for us.

[Jim Keim:]

I think our position at the company would probably be slow but sure as we see more design wins. We had mentioned, I believe, in the prior quarter four and we saw it ramping to eight, which is significant. This next quarter, we're going to add a few more customers. So we are beginning to see the ramp that we had anticipated for a long time. As I mentioned in my portion, should also help us some in Q4. Not a great deal, it's going to be a slow ramp as these customers slowly ramp into new projects with some small volume at first. But as we move into next year, I think we will begin to see this have more and more impact. And we are expecting to see quarter-by-quarter steady growth as we move forward.

[Jeremy Kwan:]

Great. And maybe just one more question before I return to queue. Can you help us understand maybe the seasonality this year given the various ramps and the new products that are coming on stream? Do you see anything different this time around in terms of seasonality? I know that Q1 tends to be a little bit weaker, Q4 maybe kind of more flattish. But is there anything that you see that can help shift that one way or the other?

[Jim Keim:]

The seasonality is, in fact, a good point to bring up. Normally, Q3 is very strong in TV. It is the strongest quarter for TV and significantly higher than other quarters. We will not see that in Q3 primarily due to the weak China market which has really been the lower end of the market. And China's been very weak.Also, Q3 for us is somewhat impacted because the power tool market, seasonality in power tool, we expect to be typical, which is a weak quarter in the battery management area. We expect to see battery management pick up typically in Q4. Q1 will be stronger especially for the power tool. So for us, Q3 is perhaps somewhat muted from what it would normally be, although we do see growth this quarter. And we expect growth, as I mentioned, in all three product lines, but not large, significant growth.

[Jeremy Kwan:]

Great, thank you.

[Operator:]

Thank you. Our next question will come from Lisa Thompson, Zacks Investment Research.

[Lisa Thompson:]

Hi, just following up on the third quarter. What are your feelings then around the fourth quarter? So it sounds like that could be sequentially up and possibly at a level that gets to your cash flow breakeven. What is your feeling about that?

[Jim Keim:]

Well, we'll let Perry talk about cash. This is Jim. I will talk about the seasonality which I mentioned for Q3. As we just said, Q3 is a little bit muted versus what we would normally see. I did mention in my portion and hinted at Q4. Right now, we would project that we do see some reasonable growth in Q4, and that is based upon the battery management business which typically shows good seasonality in Q4. We do also expect to begin to see more smartphone contribution in Q4. The TV has historically been a little softer in Q4, but we would expect it to be on par with Q3 based upon some of the area backlighting product that we mentioned.

[Perry Kuo:]

Yes. Regarding the cash breakeven, with the higher revenue in Q4 we are expecting, I do think that we are moving into the area of the cash breakeven, a range of the breakeven point. But however, I think that we still are getting closer to that point. One of the certain area that we will continue to invest some NRE project to support our future growth driver in the year 2020. So in considering this, I do think that we are getting closer to the cash breakeven point while continuously investing in R&D.Quite apart from the cash breakeven point, with the current monetizing asset progress, we do collect the cash back from the two real estate in Q3 and also we continue to sell the EMC shares. I do have a stronger confidence that we are going to increase the cash level in this year compared to last year.

[Lisa Thompson:]

Okay. Great. And just to clarify, go ahead.

[Sterling Du:]

This is Sterling. We happen to see several key IC need to do the final thing that happen in the Q4 time frame. So that's why Perry's mentioned that NRE is going up. Those are going to be some of the production or preproduction in the next year. So it's kind of this NRE are being quite crowded in the end of the year. So that's the NRE going up there.

[Lisa Thompson:]

Okay. And just to kind of clarify what your terminology is. When you say, for example, smartphones will become meaningful revenue, like what does that mean like percentage-wise or dollar-wise? How much money does meaningful mean to you?

[Jim Keim:]

Are we talking smartphone, Lisa?

[Lisa Thompson:]

Yes, because you use that term with them. So I think – does that mean like $1 million or 5% of revenues? What does that mean to you?

[Jim Keim:]

Yes. Those are good type numbers, Lisa, exactly right on. It's become meaningful. We would like to see the smartphone business get up in the $1 million a quarter revenue to begin with. We're not there yet. We would expect to, given the normal situation, to probably get there Q1 of next year. That's how we see it. And we're now on a ramp. It's good we don't have one customer or two customers. We have eight customers. They're all moving through prototype production and into small-scale production. So that gives us a little bit better perspective. And we're now seeing very steady growth and that would be – a goal of ours would be to get to that $1 million a quarter type revenue in Q1 and keep growing from there.

[Lisa Thompson:]

Okay. So you expect that to increase sequentially, right? There's no seasonality in that business for now?

[Jim Keim:]

Not for us. We're still not big, right? So we did begin some of that ramp. As I mentioned, that did help us a little bit in Q2, will help us a little bit more in Q3, a little bit more in Q4 and then hopefully get over that $1 million a quarter mark and then can just continue to grow it from there.

[Lisa Thompson:]

Great, sounds good. Thanks a lot. That’s all my question.

[Jim Keim:]

Thank you, Lisa.

[Operator:]

Thank you very much. We do have another question from Tore Svanberg, Stifel.

[Jeremy Kwan:]

This is Jeremy again. Just wanted to follow-up on the smartphone question.can you give us a sense of – are these targeted at high-end premium handsets or is it kind of spread across the spectrum there? And also, can you give us any idea in terms of the geography that these might sell into?

[Sterling Du:]

So this is Sterling. We target for the high end. The reason is because our technology develop coming from the notebook. As you know, notebook is multiple cell and the smartphone, although are using one-cell but the capacity continue to grow. So that the fast charging, which we used to be developing for the notebook computer, and we modify that under the same pattern, range, scope and we utilize in smartphone. And that is currently in production for the fast charging. And that's in our fast charging plant.We also have more fast charging coming out. Like today, in my speech, I mentioned about DC/DC that could be used in a charge pump technology and convert the 2x voltage to half in the phone side. That's again, that's also for the high-end phone. And as we all know that the phone becomes more power hungry and come with two problems. One is the power heat dissipation. So you need to leave the heat dissipation outside the phone. So we hope the goal is try to make the AC/DC to generate heat and then the phone inside less heat through dissipation.And number two, the problem is the battery size. The battery size is growing so the charging time becomes prolonged. So then you need more time different than fast charging, using O2Micro or using a so-called charge pump or using a USBPD or using some of the special protocol from the chipset providers, such as Qualcomm or MediaTek or simply try to using in a new phone to narrow the DC, try to narrow your DC in range so that you can fast charge.So all kinds of charging capability with O2Micro, most of them we have a solution for people to choose from. So answering your question, yes, we are targeting for the high-end phone and that we believe tomorrow the high end will become the trend to come to Main Street.

[Jeremy Kwan:]

Thank you Sterling, that's very helpful. One last question. Going back to the lighting market, between I guess, the high-end TVs, the new mainstream TVs or the slightly lower-end segment and then also the industrial monitors, between those three, which are you maybe most excited about, maybe which ones have the largest opportunity in terms of the growth potential for you?

[Jim Keim:]

Well, we, I would say, are most excited about the high-end TV, but we've been pleasantly surprised by the HDR monitor business coming on very quickly. We have seen one OEM really started that trend and now we've seen other companies scramble to catch up is the way I would describe it. So we have seen excellent penetration into the monitor market over the last two quarters. And to be honest with you, we're very pleased with both the TV and the high-end monitor business at this point.

[Jeremy Kwan:]

Great, thank you very much.

[Operator:]

Thank you very much. Ladies and gentlemen, at this time, there are no further questions in the queue. So I would 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 my office at [phone], extension 8888 or at [e-mail] with any follow-up questions. Have a great day, everyone, and thank you again for your time and attention. Goodbye.

[Operator:]

Thank you very much. Ladies and gentlemen, thank you for joining us today. You may disconnect your phone lines and have a great rest of the week. Thank you.