O2Micro International Limited
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Good morning, and thank you for joining us today to discuss O2Micro's Financial Results for the Third Quarter of Fiscal Year 2019.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 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 10, 2019, at 9

[Daniel Meiberg:]

Thank you, Emma. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the third quarter of 2019 ending September 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 meanings 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. The 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 of fiscal year 2019 ending September 30, 2019. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q3 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, onetime 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 third quarter of 2019 was $16 million. GAAP net loss in the third quarter of 2019 was $200,000. If we exclude stock-based compensation of $373,000 and net gain recognized on long-term investment of 715,000, the non-GAAP net loss will be $542,000.GAAP net loss per ADS in the third quarter of 2019 was $0.01. Non-GAAP net loss per ADS was $0.02. Gross Margin was 51.4% in Q3. The gross margin reflects the current revenue label and the product mix. R&D expense was $4.7 million, or 29.1% of revenue. This amount excludes stock-based compensation expense of $68,000.SG&A expense was $4.3 million or 26.9% of revenue. This amount excludes stock-based compensation expense of $305,000. The non-operating income was $1.2 million. Income tax was $332,000 in the third quarter, and is mainly based on the estimated effective tax rate of each taxable location.In Q3 2019, we repurchased 37,994 ADS units at a cost of $52,000. Q3 2019 revenue by end market breaks down into the following percentage

[Jim Keim:]

Thank you, Perry. Good morning, everyone. We are pleased to report that are Q3 revenue continue to expand in all key market areas resulting in our revenues reaching the high end of our guidance. We also expect to see expanded revenue in key areas in Q4 followed by normal seasonality affects in Q1.Let's review each of these product areas in more detail. Revenues in our largest product line intelligent lighting continue to be driven upward in Q3 by our many design wins that include both 4K and 8K TV and expansion of HDR monitors and the gaming, medical and industrial applications. While continuing to expand our product offering and position in high-end TVs and monitors, we're not ignoring our strong overall market share and continue to expand design activity and lower MTV and monitor products using our new line of backlighting products with integrated MOSFETs.As mentioned previously, we also continue to focus significant backlighting R&D efforts in the industrial and automotive markets, where we are introducing key new products. This includes advanced products for robotics and autonomous driving applications where we are seeing good acceptance of these new products.Our general lighting business has been a small portion of our total lighting revenue, and is comprised of both Free Dimming and other specialized products. We have had partners using our general lighting products, including our patented Free Dimming technology in Greater Asia, where virtually all of our Free Dimming revenue has come from. What has been lacking for us in Free Dimming has been a good U.S. based partner. This void has been filled as indicated in our recent press release for an agreement with Feit Electric. Feit Electric is a privately held company that has a growing footprint in the lighting business as evidenced by their increasing presence on Home Depot lighting shelves. Through this agreement with Feit Electric, we are hopeful of expanding our German lighting sales revenues, not only in Greater Asia, but in North America and Europe as well.Our patented battery management product offering has had excellent growth over the past three years with ongoing growth in 2019. This growth continued to be driven in Q3 by the rapid expansion of lithium-ion batteries in the more and more product areas as lithium-ion batteries have become more cost effective with 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 energy storage system. We believe each of these market areas will continue to expand for the foreseeable future.Our battery management products now include more complex, ARM-based microcontroller products for market applications, where our existing customers need more sophisticated battery management. This is enabling us to engage with additional higher end customers. In fact, customers have successfully evaluated our first ARM-based battery management products and are moving forward to design our products into their next generation high performance systems. 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 key patent claims for our new products to protect both our company and 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. Our power product revenue did expand in Q3 with our new power products continuing to make progress towards achieving long awaited significant revenue growth in smartphones and tablets as well as other products.While these efforts have been hampered by major shuts in this market, including recent trade war issues, significant progress is continuing to be made. As stated last quarter, we are moving forward for production with eight key customers, including product that is going into smartphones for brand name customers. Although, production volumes are not yet great, we expect these customers to contribute to our ongoing revenue growth. We will give more detail on these design wins going forward, but we'll indicate that they involve charges for applications, including high power two-cell charging, IoT product, 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 reports the third quarter 2019 revenue of $16 million. The revenue was up 12.3% from the previous quarter, and down 4.7% from the same quarter prior year. The gross margin in the third quarter of 2019 was 51.4%, and gross margin was up from 50.1% after previous quarter, and up from 50.5% of the same quarter prior year. Our revenue and gross margin were in the high sides of the guided range, as a result of product mix, which include the strong growth in the consumer product and in many new products ramping up.The global lithium-ion battery market had compound growth rate annually 10% plus and will reach $100 billion plus in 2025, which is not far from today. Our monolithium battery application in the global power tools market, which is where our target expects to generate around $30 billion by 2025. The power tool markets likely to grow rapidly over the estimated time frame due to the furnishing, construction industry sector many in emerging countries. So our battery product line offers the solution for other type lithium batteries. Our product including the digital front end, analog front end, battery management unit [Indiscernible] the battery management unit, second-level protection or we have digital front end integrate with MCU gas gauge or we have MCU-based gas gauge. EMS product line reliability has been very critical. Our years experience met most of EMS product support key advanced features such as the two [Indiscernible] battery cell connections, the battery cell place reversely. This current compensation from the plug and play operation, 10k ohm or resistor, which is very strong resistor with a maximum battery voltage control and etcetera.We have won the trust from customer by sustaining high quality product delivery and very low defect PPM, way below industry 100 defect PPM standard and we reached 5 defect PPM range. Today the consumer electronics dominate the lithium battery market involved where automotive is the fastest growing sector, which is our mixed available market. The cordless vacuum cleaner and a robot type vacuum cleaner powered by lithium battery continue to change the way most of households to the floor cleaning.We are seeing that three major quarters, vacuum cleaner Bissell, Dyson and Phillips continue to rely on our technology in their advanced machines. Previous quarter, battery product revenue came with a strong growth indicating the market has been upward and further stabilized while the relocation of many such as sites continues in order to handle the trade war issue. It results into a little visibility in a dynamic market.For the high-end applications, our 10-cell ARM-core based MCU [Indiscernible] integrated gas gauge has many design win activities. It provides high performance, high reliability and easy for value-added development solution to enable customers high performance, high precision products. We also providing the 6-cell ARM-core based solution to serve high performance vacuum cleaner customers. We secure many active design wins for this product line. Over all our battery DMS product has been designing for pre production, the top tier customer over the Japan, Europe, North America and in China.As Jim mentioned that our local area backlighting solution expand to the HDTV and HDR monitor strongly. We are pleased to see not only the number of the ICs used for each TV monitor increased by the HDR in 4K, 8K HDTV because most affordable and that will be stay in that feature in the coming years. The latest Sony MASTER Series 85-inch, the HDR has 64 chips of ours is an example. Our customers prefer to utilize our precision timing control driver IC for their each LED screen, which made of more than 5,000 LEDs. Our ICs will synchronize each LED in very precise timing control, which made of two -- total more than 1,000 tiny local area LED per one TV. Meanwhile our pattern parallel driving at architecture with the multiple SBI [ph] bus, which is synchronized to interface channels support fast, frame refresh rate where conventional [Indiscernible] chain architecture fell short to support beyond the 30 megahertz frequency, which limit the conventional the frame refresh rate and the number of ED streams to be deployed. So theoretically both the frame refresh rate and a number of streams are essential to the HDR.The China TV market has been improved as we mentioned in previous quarter about their signs of China market recovery. We expect a positive market momentum for the year-end. On the other hand, while high performance area local TV technology continues to expand through China and Korea market branch opened.For the better support of variety LED technology as well as customer requirements, we are also developing a lithium-ion solution for those customers who care more for cost structure, while maintaining performance. With our successful story in high-end switching mode, we believe we could add value and produce higher than conventional performance for this lithium-ion to this market. The monitor market also grew nicely as many monitor applications go for industrial, gaming, medical device, bulletin board and etcetera. Our new mini-LED backlighting driver offer high-performance brightness monitor market like TV markets will drive the cost momentum to the year-end.Our charger product for the phone and tablet are at good cost pace in the design wins. Yet, the revenue arriving remains longer than original anticipation. The front customer try to do first few projects we were escalating to the mainstream, but meanwhile we have the charger product, mix production in accessory devices such as power bank, smart speakers, core device and shell bike and etcetera. With the good results in previous quarter we are optimistic to continue to go through the year-end, we’ll continue to monitor our business operation to optimize the operating cycle time across our operations, expense and monetizing the assets of the company.At this time, I'd like to thank you for listening to our conference call. And I turn back to the Dan. Dan, please.

[Daniel Meiberg:]

Thank you, Sterling. Emma, at this time I'd like to open the call up to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes. Thank you. First of all, could you elaborate a little bit on the arrangement with the Feit Electric? Just trying to understand is this an exclusive arrangement? Can you still be selling your technology to other U.S. based companies? Yes, anything you could share on that that would be great?

[Sterling Du:]

Well, basically, Tore, as you may be aware, they are a private company. They are sensitive about information, too much information going out relative to this. What I can say if this does not interfere in any way with any of our major customers that we do have -- basically there is some licensing involved in the agreement. And we do anticipate being able to continue to expand our business with other entities.

[Tore Svanberg:]

That's very helpful. And just like to get some clarity on the -- so obviously, you can’t give official guidance but you did say that you expect some growth in Q4. Do you have a timing of when you can update us on the actual revenue guidance?

[Perry Kuo:]

Yes, Tore, this is Perry. I think we try to update you by the end of the November or early December time frame.

[Tore Svanberg:]

Very good. Last question is, if indeed, you are expecting revenues to be up in the quarter. Could you elaborate a little bit on which segments do you expect to be up or down in the December quarter?

[Sterling Du:]

Tore, as I think, TV can be rather dynamic in the fourth quarter. So we'll wait and see where the TV and monitor business ends up. We do see, however, the battery management business continuing to be very strong. Our design win activity there continues to be very good across the broader maximum systems. So we do anticipate, certainly, the battery management activity continue to expand. We're also remaining very optimistic about our products in the smartphone tablet area.

[Operator:]

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

[Lisa Thompson:]

So I just want to clarify a little bit more of what Tore was asking. So for one – when you used the term you expected revenue growth in the fourth quarter, do you mean sequentially or year-over-year?

[Sterling Du:]

Sequentially.

[Lisa Thompson:]

And then on the Feit agreement, you specifically called that a strategic agreement, which is not the same as a licensing deal. So here I'm assuming this deal did infringing on your patents, because you seem to have them all in free dimming. Is there some sort of retroactive amount you charge them for licensing based on infringing in the past? Are you going to be paid a licensing fee, is it a one time? Would it be like ongoing based on their sales? And also does this mean that you're going to sit down with them and work together to develop new products?

[Sterling Du:]

Again, I hate to say this, Lisa, but it’s a private agreement by some private company. We do really look forward to what I mentioned the word partner, partnering with them as we do move forward. There are licensing aspects of this covering some of the items you mentioned. We can't go into specifics, but, basically as Perry indicated, we will probably be giving some updates later this quarter in terms of Q4 that could result from the agreement.

[Lisa Thompson:]

Okay. So there could be like a lump sum payment involved in this licensing?

[Sterling Du:]

We don’t comment

[Lisa Thompson:]

In which case you have to give us – you have to give us and they came you, right?

[Sterling Du:]

Yeah, basically, this is more up to the accounting firm that we have to -- I will say, characterize the agreement. It is, Lisa, not just a very simple straight forward agreement. It's really quite a complex agreement that we have with them. As you may be aware, they -- if you go look at a Home Depot for instance, I looked at one in Silicon Valley this past week on the way over here. It looked to me like they have a much shelf space as Phillips, GE, Kree all combined. They are taking significant market share at this point. And they're also moving into other picture type areas, industrial areas, they’re not public so they don’t put out a lot of the information, but if you go take a look, I think, you will be quite impressed what they are doing. And this fits well with our product line. I'll simply put it that way.

[Lisa Thompson:]

Oh, yeah, they're huge. I mean, I probably have some of them in the house. So they move in the right away when you made the announcement. That’s not a small company. Okay, so that's pretty exciting. Now, I noticed that -- I look back and you haven't had this small an operating loss since 2016. So and I guess, you've done a very good job on cost control. Do you think that you're going to keep narrowing the operating loss until you get to profitability like going forward now?

[Perry Kuo:]

Yes, we do monitor the operating expenses very carefully. But however, we will continue to invest in the necessarily tester to support new IC in the testing -- in the new testing capacity, and also we will invest [Indiscernible] for the new project to continue to give the momentum on the gross of the different IC in the different sectors. Quite powerful at least two, and we will monitor and manage the operating expense very tightly. So I do think that our R&D and SG&A will be controlled in a good way. And the portion of the SG&A will be related to the revenue, which are the sales – the application people to support the spending account and also some logistic expenses to be part of the function of the revenue.

[Lisa Thompson:]

That’s great. So as Perry said, I’m excited to hear what happens as they. Thank you.

[Operator:]

Thank you. And there are no further questions in the queue. I'd like to turn the call back over to Daniel for any closing remarks.

[Daniel Meiberg:]

One moment. 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 great day. And thank you again for your time and attention. Good bye.

[Operator:]

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