O2Micro International Limited
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Perry Kuo:]

Thank you, Dan. We will now review our financial result for Q1 2017. 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 from discontinued operations. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2017 was 15 million, GAAP net loss in the first quarter of 2017 was 1.5 million if we exclude stock based compensation of 432,000 the non-GAAP net income will be 1 million. GAAP net loss per ADS in the first quarter of 2017 was $0.06, non-GAAP net loss per ADS was $0.04, gross margin was 52.7% in Q1. The gross margin reflects the current revenue label and the product mixed. R&D expense was 4 million or 26.7% of revenue, this amount excludes stock based compensation expense of 60,000. SG&A expense was 4.7 million or 31.3% of revenue. This amount excludes stock based compensation expense of 372,000. The non-operating loss was 35,000, income tax was 222,000 in the first quarter and it is mainly based on the estimated effective tax rate of each taxable location. In Q1 2017 we repurchased 81,766 ADS units at a cost of 174,000. Q1 2017, the revenue by end market break down into the following percentages. Consumer was 45% to 50% of revenue, computer was 10% to 15% of revenue, industrial was 35% to 40% of revenue. Communications was less than 5% of revenue. At this time I would like to provide some additional information. O2Micro finished the first quarter with 50.5 million in unrestricted cash and short term equivalent. This represents cash on cash equivalent of $1.95 per ADS. In addition, O2Micro has no debt. Account receivable at the end of Q1 was 6.9 million our DSO is 42 days, is in our target range of 40 to 60 days. Inventory was 9.6 million at the end of the first quarter, this represents 120 days of inventory and the inventory turnover was 3.0 times in Q1. Net cash using operating activities of 2.5 million, primarily consists of net loss of 1.5 million, loss in accountable -- and a comparable decrease 385,000 and accrued expense decreases of 726,000. Capital expenditures were about 157,000 in the first quarter for R&D and IT premium purchase. Depreciation and amortization was 394,000 in Q1. At the end of the first quarter of 2017, O2Micro had 366 employees, 56% of which are engineers. At this time I would like to provide our financial guidance for the second quarter of fiscal year 2017. This guidance reflects our best estimate for the current environment and is subject to change. This is the only official guidance, we will provide unless we update with a public announcement in the future. O2Micro expects Q2 2017 revenue to be down 4% to up 4% sequentially. We are guiding the Q2 gross margin will be in the range of 48% to 51% and is mainly from the product mix. R&D expense excluding stock-based compensation should be 4 million to 4.5 million in Q2. SG&A should be 4.5 million to 5 million in Q2 excluding stock-based compensation expense. Stock-based compensation should be in the range of 350,000 to 450,000 in the second quarter. Non-operating income should be in the range of 150,000 to 250,000 in the second quarter. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of 200,000 to 300,000. The goal of our management team and the Board of Directors is to maximize shareholders value. We have accomplished this by taking the necessary steps which included reducing operating expenses, and monetizing assets on the balance sheet. In regards to our share repurchase program, we have been active in this program historically and we plan to continue going forward. Since 2002, we have repurchased over 19 million ADS shares for approximately $100 million. As of the end of Q1, we had 9.3 million remaining in our share buyback authorization. Returns to shareholders are very much on our mind and will continue to be a focus in the future. We will provide updates to the additional measures to enhance shareholders value throughout this year. We believe our cash breakeven point is between 15.5 million to 17 million in quarterly revenue and our profitability breakeven point is between 17 million to 19 million in quarterly revenue, given the wider range of growth margin from product mix. Given the uncertain demand and the micro environment we're prepared to continue to manage cost as needed. Although we believe we have a nice current cost base on current and anticipated revenue levels. I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim?

[Jim Keim:]

Thank you, Perry, good morning everyone. Despite technical Q1 seasonality and some inventory issues at key customers we did see reasonable growth in Q1 2017 versus Q1 2016. Not surprisingly this growth was driven by two key product areas, battery management and high-end area backlighting for large screen TV. General lighting revenues did increase compared to year earlier Q1 revenues while notebook powered products continued their decline. Although smartphone and tablet products remain a small revenue generator, prototype production volumes are growing and giving us confidence that we will see revenue growth in the second half of 2017. I would note that the typical seasonal weakness we see in Q1 and Q2 has been exacerbated by supply chain issues. The demand from some of our major TV and monitor customers has been adversely affected by product shortages and ongoing allocation issues these customers faced in key areas, including panel supply and digital control ICs. The panel shortages are largely due to cutbacks in supply from Foxconn as well as Samsung closing one of its LCD production facilities. IC shortages are primarily due to high end demand for fingerprint ICs and smartphones have taken up significant supply chain capacity in wafer fab and testing. The panel supply issues is particularly frustrating as it impacts growth in high end TV where our new area backlighting products are sold. Same product shortages that impacted customers production plans and moderated our Q1 growth will also impact Q2 revenue growth. While our major customers expect ongoing panel allocations in TV we nevertheless continue to expect to see good growth in the second half of the year from products that we will highlight. The first of these is battery management, which is less affected by allocation issues. Battery management which is our second largest and fastest growing product line has continued to grow at an excellent pace year-over-year. This is the result of ongoing expansion of both our products and customer base. We continue to see major market growth opportunities in power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and uninterrupted power supply where lithium ion battery technology continues to become more reliable and cost effective in use of our battery management products. More recently we've engaged with key new customers having significant position in the rapidly growing drone and solar markets. Our major customer list continues to grow and now includes Black & Decker, Dyson, Electrolux, LG, Mekita, Panasonic, Samsung and TTI. Our product plans include expansion into more cost-effective products for existing markets and customers as well as expansion into more complex product for new market application for more sophisticated battery management is needed. This will include both higher cell cap [ph] battery management product and micro controller based products which we'll discuss in more detail in ensuing quarters. We would also note that we have filed key patent claims for our new products to protect both our company and our high-end customers market positions. Next, let's discuss our largest product line, Intelligent Lighting. While Q1 showed growth over Q1 of the prior year Intelligent Lighting was weaker than Q4 for two reasons; allocations and inventory. Allocation of panels in other products became a significant problem towards the end of 2016 forcing major high-end customers in miss Q4 revenue target and cut back Q1 production plan. Additionally, the unexpected cuts in customer productions resulted in some customers have excess inventory of our product at the end of Q4. Unfortunately, the allocation issues will carry into Q2 as customers continue to adjust their product plans. The good news is that this situation has not affected our lighting design wins. We have seen an increasing number of design wins for area backlighting product not only in TV but high-end consumer and industrial monitor applications. These design wins should enable ongoing growth for a backlighting business despite lackluster market projections for both the TV and monitor markets. We have also focused more of our backlighting R&D efforts in industrial and automotive backlighting, and have significant design wins in process that should keep our backlighting business healthy for years to come. Our general lighting business remains focused on growth 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 margins and profits. We do see a good backlog of design wins and expect ongoing growth in 2017 although general lighting revenues are not expected to exceed 10% of our overall revenue in 2017. Our product and customer base does continue to expand and include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba. Finally, let's discuss power products for tablets and smartphone. Our older notebook products have continued to decline in revenue, Q1 did see good design win activity in the smartphone and tablet markets with more design moving into prototype production. We expect this trend to continue as our new charger IC, on-the-go charger booster and accurate [indiscernible] gauge gained markets acceptance. We do expect revenue flow from this product areas to return the power product area to growth in the second half of 2017. I will now turn the call over to our CEO, Sterling for closing remarks.

[Sterling Du:]

Thank you, Jim. O2Micro reported first quarter of 2017, revenue of 15 million. Revenue was down 6% sequentially and up 15.2% from a comparable year ago quarter. The gross margins in the first quarter of 2017 was 52.7%, the gross margin was down from the 54.1% in the prior quarter, but up from the 48.8% in the first quarter of last year. We're pleased to see the continuing strong design wins in the past quarters, which have translated the topline in our power management technology continues to get good customers reception. In addition to the revenue growth, our high gross margin indicates strong core competence in the propriety product feature. We understand the dynamic market reduced the visibility ahead, yet we remain optimistic for the goals, momentum including the product with TV technology market, battery management product for the power tools, house hold appliance market and the product for the smart phone and tablets. We continue to do expense reduction and [indiscernible] management. We optimized the operational cycle time and keep on monetizing the asset of company in past year and quarters. The company not only become linked and cost effective, but shortened to responding time and in time support to local customers. We expect our company will achieve the cash breakeven point in the near future in the market could further stabilize. In our backlighting business we're seeing strong activities in the TV market and especially high end, including high definition TV with local dimming technologies. The consumers apatite moves up to the larger TV, so does the panel makers make more large size across [ph] than smaller ones. We also see the market shifting, probably due to the result of the recent M&A in panel industry via the new panel supplier established all the plane tool to the new establish manufacturer. TV might become the center of IT in household, which offer more functioning then just entertainment. Meanwhile we also add backlighting to the TV market, such as ACDC in the DCDC applications. For the automotive telemetric market is another potential growth area for our local TV technologies. Our battery management product supports a variety of end market from power tools, UPS, e-bike, vacuum cleaners and other IoTs. Our product [indiscernible] battery market come with, first we have faster AC converter, advance accuracy, the level and also enhanced reliability. Second, our high accurate battery gas gauge. And thirdly, we have a scalable methodology support high number of the sales by cascading the chips. We saw both the same customer cost rate increasing and expanding the customer base as well. We make progress in a smartphone market, our product provide good quality on-the-go charger, booster and accuracy of the gas gauge, in addition we come out with a smartphone fast charging methodology from our noble PC technology. It supports smartphone fast charge with optimized cost structure, we call it Express Charge, we expect these kinds of design activity will grow in 2017 and contribute to top line in 2018 next year. At this time, I would like to thank you for listening to our conference call and turn back to Dan, please.

[Dan Meiberg:]

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

[Operator:]

[Operator Instructions] We will take our first quarter from Tore Svanberg. Please go ahead.

[Tore Svanberg:]

Thank you, few questions, first of all did you talk about the gross margin dynamics in Q2, I assume the low gross margin is due to the revenue mix if you could just elaborate on that just, that will be great, thanks.

[Perry Kuo:]

This is Perry, due to some prime issue as Du [ph] indicated and also some surging our customer for the high performance [indiscernible]. We currently expect the revenue, the product mix will be the low-end model for the monitor and also TV and also some lower gross margin and recovery average via the smartphone area, a powerful smartphone and also lighting for the general lighting area. These four areas we are increasing the product mix so that's why we give the guidance from 48% to 51%.

[Tore Svanberg:]

Very good and a question for Jim. Jim there seems to be you know shortages in various different areas, any sense for when these shortages would alleviate based on what you can tell?

[Jim Keim:]

Well we're hoping some of the panel shortage will alleviate itself as we move into the second half of the year. Although some customers have been more effective than others due to the supply chain issues. But we would see I think some lessening of the issue in the second half. I think the IC issue is more difficult to project. This is not necessarily affect our wafer fabs, but there still are significant test issues and it remains to be seen how much test capacity will be a problem as we go into the second half of the year. We do hope that can expand quickly. So there will be some lessening, I think there will be less of a shortage issue as we move on into Q3 and Q4.

[Tore Svanberg:]

Very good, last question for Sterling, Sterling you mentioned express charge you know design activity and this is ramping in H. But could you maybe elaborate a little bit more on that, is this market going to be targeting Chinese Smartphone OEMs or are you know perhaps after more the global market there, thanks.

[Sterling Du:]

Yes, I think probably for the Chinese smartphone maker you go to target global, right. Because you see the top ten, the smartphone company many of them right now is a Chinese brand right now including Oppo, Huawei, Vivo. So yes, so what we are providing is -- many years ago we developed the quick chargers for notebook and the express charge for the smartphone was derived from this quick charge. Basically, we're providing the direct charge from ACDC to the battery, and the charging method is straightforward however very skillful to design using one of the [indiscernible] of the console signal back to the ACDC. And that providing the people could be achieved the high voltage at the same time also can reduce the heat dissipation inside a smartphone set as we all know that issue in a smartphone could be very annoying. So one is we provide very optimized cost structure for providing this because we don’t do any AD convertor to convert those such as the two players in the market, they have to do some coding and encoding and we don’t do that and easy to design and then number two is, we can reduce the heat inside the smartphone set itself. So this is something we are promoting and we are optimistic although probably with a small unit to trying to do production in the second half of this year, but we're for marketing right now.

[Operator:]

We will take our next question from Tom Sepenzis. Please go ahead.

[Tom Sepenzis:]

I just wanted to -- I was wondering what the mix between the old and the new smartphone tablet products are? You mentioned that the older products are still weakening. So I'm just trying to get a sense of what kind of impact that'll have going forward?

[Sterling Du:]

Well the old legacy, which are primarily notebook and tablet product, is well over 90% of the revenue base Tom. [Multiple speakers].

[Tom Sepenzis:]

In terms of automotive, that's obviously a pretty new market, when do you think that you'll actually see designs go into product, is that a 2018 or 2019 type.

[Perry Kuo:]

We actually historically have had some automotive products for instance in the GPS area Tom, so we have had position there. What we do see is an expansion of particularly some of our lighting products we also have some power product that may go into the 2018 model, and by 2019 we think would be substantial revenue.

[Tom Sepenzis:]

And then lastly you mentioned in the call and your prepared remarks that you can return to profitability in the near term, does that mean you think you can get there this year or it is near term mean 2018?

[Sterling Du:]

Actually with our momentum of the design win and also with the -- given the market gets stabilized and we expect to get the cash flowing even by the end of this year.

[Tom Sepenzis:]

Still confident then these bottlenecks or the allocation issues will be over then in Q3?

[Jim Keim:]

I don't think so it'll be over but there'll be a lessening factor.

[Operator:]

[Operator Instructions] We will take our next question from Lisa Thompson. Please go ahead.

[Lisa Thompson:]

So, I'm just trying to understand that shortage of panels and chips, how is this going to work out, is there -- the company is just adding capacity and if there is going to be this big pent up demand, so that when we finally get the panels, so it's going to be a big bump in one of your quarters because then they can finally order again? How does that work?

[Sterling Du:]

So, let me talk about the IC area, yes you're right, the IC quite overloaded is [indiscernible] process, and then we do know there's a lot of new [indiscernible] expensing for each foundry and we expect that the [indiscernible] probably will be starting quite -- providing a lot of capacity will be 2018; at the same time they will also increase the utilization of existing for the lights. That’s for the wafer, each wafer. So which is the -- Jim mentioned that right now is prioritized single operating IC, that take a lot of the card space. In the second quarter, testing, testing is this, the different packaging and different characteristics of the IC probably have a different tester. So tester itself due to overload and then the testing company will be spending more capital to increase their bandwidth because everyone like you get the business and also like to get into the fully utilize type of the products. So this is a good timing for the testing company to add the tester, which is right now the overloaded one. So for the panel maybe Jim has some color.

[Jim Keim:]

The panel will be somewhat more complex because there's also some intercompany politics involved in the panel area for instance after Foxxcon also known as Hon Hai bought out Sharp, their intention is to move more into the TV area using Sharp's name. They literally cut off some of supply to potential long-term competitors, and that was the very significant issue for some TV suppliers. And those suppliers then have had the scramble to find other sources of supplies, but significantly affected their production. Also you have the mix changing, there has been a predominant of move to higher end TVs, very large size TVs, so 60 to 100 inch type display as well as many of the monitors have been getting bigger. So there is fewer TV shipping in some areas due to the large size because it's harder to manufacture the larger display sizes. So the panel size will be more complex and will depend a lot on customer to customer. We do see that alleviating as we move through the year, but it will be customer dependent and will also just have to monitor the situation very closely. That’s really all we can say.

[Lisa Thompson:]

Okay, so it's seems to me that if you plan to buy a big TV, you are not going to not buy your TV just going to shift it, right. So you should not actually lose business, but just get in a lumpy fashion, is that correct?

[Jim Keim:]

Right, but it also depends on who's TV you buy and whether not our products in it.

[Lisa Thompson:]

Okay. So who should we -- so we just take keep watching Foxxcon and what they are doing to see when this might be alleviated?

[Jim Keim:]

Well, Foxxcon will definitely and already are making a major movement to try to ramp more product into the sharp name. And Foxxcon will stay I think very much focused in that area and we will probably deliver when you hold back supply to potential long term competitors in some areas, they can simply take market share. So that adds a complicated factor to this. So customers that did get hurt with this are going out and will obviously try to ramp up supply with other supply base which is tight. So again, somewhat complex least, but we do see higher volume projection out of customers as we move on through the year. So we definitely see some volume increase.

[Lisa Thompson:]

And when do they make most of the TVs and tablet available for Christmas and New Year?

[Jim Keim:]

Usually the Christmas ramp begins in the Q3 time frame. So you will begin to see some pick up for Christmas ramp starting in the June, July, August time frame and then that moves on through typically the latest October and then its start to ramp out. That will be also little bit complicated due to allocations and also there is extended lead times now and some of the IC test period. And that will be a little bit more complicated but we do see customers on the positive side giving us increased forecast as we move through the year.

[Lisa Thompson:]

And as far the smartphone front, are there any products out on the market using any of your chips or and which ones, which of the products do you think that will be out there first in the market place?

[Sterling Du:]

Smartphones, difficult to track, but we do know is overseas or inside the local market in China there is quite a different smartphone utilize, different IC from us, although we're doing the charger with OTG and booster inside, we have several different flavors. So I think we have a currently we have many I think three type different charger right now shipping in the production right now that will be, so that'll be probably go to different countries. I do know some of it is India, some is in Europe, some that is in other area.

[Operator:]

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

[Dan Meiberg:]

I would like to thank everyone for your time and attention this morning. Please feel free to contact me at area code (408)-987-5920, extension 8888 with any follow-up questions and I will get back to you as soon as I can. Have a great day and thank you again for your attention. Have a great day. Good bye everyone and thank you Lisa.

[Operator:]

Thank you all so much for your participation. You may disconnect at any time.