O2Micro International Limited
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good day, everyone and thank you for joining us today to discuss O2Micro's Financial Results for the Second Quarter of Fiscal Year 2017. 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 email 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 May 24, 2017 at 9

[Daniel Meiberg:]

Thank you. Good morning, everyone and thank you for joining O2Micro's financial results conference call for the second quarter of fiscal year 2017 ending June 30, 2017. 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 the 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 filings, 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 released earlier, 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 update to this information. With me today are Perry Kuo, our CFO and Director; Jim Keim, our Head of Marketing & 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 second quarter of fiscal year 2017 ending June 30, 2017. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial result for Q2 2017. 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, non-recurring gains and the losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the second quarter of 2017 was $14.5 million. GAAP net loss in the second quarter of 2017 was $1.4 million. If we exclude stock-based compensation of $379,000, the non-GAAP net income will be $1.1 million. GAAP net loss per ADS in the second quarter of 2017 was $0.06. Non-GAAP net loss per ADS was $0.04. Gross margin was 50.9% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.4 million or 30.6% of revenue. This amount excludes stock-based compensation expense of $54,000. SG&A expense was $4.1 million or 28.4% of revenue. This amount excludes stock-based compensation expense of $325,000. The non-operating income was $350,000. Income tax was $230,000 in the second quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q2 2017, we repurchased 86,142 ADS units at a cost of $183,000. Q2 2017 revenue by end market breaks down into the following percentages. Consumer was 45% to 50% of revenue, computer was 15% to 20% 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 second quarter with $47.5 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.84 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q2 was $8.8 million. Our DSO of 49 days is in our target range of 40 to 60 days. Inventory was $10 million at the end of the second quarter. This represents 124 days of inventory and the inventory turnover was 2.9x in Q2. Net cash using operating activities of $2.7 million primarily consist of net loss of $1.4 million, account receivable increase of $2 million, inventory increase of $446,000. Capital expenditures were about $364,000 in the second quarter for R&D and operation equipment purchase. Depreciation and amortization was $393,000 in Q2. At the end of the second quarter of 2017, O2Micro had 359 employees, 55% of which are engineers. At this time, I would like to provide our financial guidance for the third 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 expect Q3 2017 revenue to be up 2% to up 8% sequentially. We are guiding the Q3 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 $4.3 million to $4.8 million in Q3. SG&A should be $4.5 million to $5 million in Q3, excluding stock-based compensation expense. Stock-based compensation should be in the range of $350,000 to $450,000 in the third quarter. Non-operating income should be in the range of $150,000 to $250,000 in the third 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 asset 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 Q2, we had $9.1 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 the quarterly revenue, given the wider range of gross margin from product mix. Given the uncertain demand and the macro environment, we're prepared to continue to manage cost as needed. Although, we believe we have aligned current cost base on current and anticipated revenue levels. However, with the increasing demand of the new product in high-performance area also in the new applications, we are prepared to enhance our development software, supply chains and also add more time to improve testing capacity effectively by upgrading our testers. I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business.

[Jim Keim:]

Thank you, Perry. Good morning, everyone. Despite typical Q2 seasonality, we saw a reasonable growth in Q2 2017 versus Q2 of 2016. This growth was driven by two key product areas, battery management and high-end area backlighting for large screen TVs. General lighting revenues had a modest increase compared to the year earlier revenues, while notebook power products continued their general decline. Although, smartphone and tablet products remain a small revenue generator, prototype production volumes continue to grow and should enable our power products to begin to show growth by Q4 of this year reversing a long decline in power product revenues. I would like to note that the typical seasonality weakness we saw in Q1 and Q2 continues to be exacerbated by supply chain issues. The demand from some of our major TV and monitor customers have been adversely affected by product shortages and ongoing allocation issues our customers face in key areas, including panel supply and digital control ICs. The panel shortages are largely due to cutbacks in supplies from Foxconn as well as Samsung closing one of its facilities. IC shortages are primarily due to high-end demand for fingerprint ICs in smartphones that have taken up significant supply chain capacity in wafer fab and testing. Panel supply issue is particularly frustrating as it impacts growth in high-end TV where our new area backlighting products are sold. The same product shortages that impacted customer production lines and moderated our first half 2017 growth will also impact Q3 revenue growth. While our major customers expect ongoing panel allocations in TV, we nevertheless continue to expect good growth in the second half of the year from products that we will highlight. 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, uninterrupted power supplies where lithium battery technologies continue to become more reliable and cost effective with the use of our battery management products. More recently, we've engaged with key new customers having significant positions in the rapidly growing drone and solar markets. Our major customer list continues to grow and includes Black & Decker, Dyson, Electrolux, LG, Mekita [ph], 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 products for new market applications, where more sophisticated battery management is needed. This will include both higher cell count battery management products and micro controller-based products, which we will 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 position. Next, let's talk about our largest product line, intelligent lighting. Although earlier inventory issues have been cleared, intelligent lighting continues to be affected by notable allocation issues affecting our customers. Allocation of panels became a significant problem towards the end of 2016 forcing major high-end customers miss revenue targets, cutback 2017 production plan. Additionally, some customers have continued to be adversely affected by allocations of other components including ICs, they have also limited their production plans. The good news is that this situation has not affected our lighting design wins. We continue to see an increasing number of design wins for area backlighting product, not only in TV, but high-end consumer and industrial monitor applications. These design win should enable ongoing growth for our backlighting business, despite lackluster market projections for both the TV and monitor markets. We have also focused more of our backlighting R&D effort 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 includes GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba. Finally, let's discuss power products for tablet and smartphone. While older notebook products have continued to decline in revenue, the first half of 2017 did see good design win activity in the smartphone and tablet markets with more designs moving into prototype production. We expect this trend to continue as our new charger IC, on-the-go charger booster and accurate gas gauge gained market acceptance. We do expect revenue flow from this product area to return our power product area to growth in the second half of 2017. I will now turn the call over to our CEO, Sterling Du for closing remarks.

[Sterling Du:]

Thanks, Jim. Good morning. O2Micro reported second quarter 2017 revenue of $14.5 million. Revenue was down 2.9% sequentially and up 9.8% from a comparable quarter year ago. The gross margin in second quarter of 2017 was 50.9%. The gross margin was down from 52.7% in the prior quarter, however up from 50.7% in the second quarter of last year. We're pleased to see both revenue and gross margin improve from the second quarter in last year despite a weak TV market in terms of units shipped, TV panel factory closures, market shifting and M&A. Our battery technology continue to earn good customers' reception, could generate design-wins. The battery higher gross margin business help us for both top and bottom line. We remain optimistic for the growth momentum given that the dynamic market reduced the visibility ahead. Our next quarter's growth driver clearly are for products, for the TV backlighting market, battery management product for the power tool, plus we have a great potential for the smartphone tablet market. We continue to do expense reductions and improve operational effectiveness, optimized operation cycle times and monetize the assets of company. The company has not only has become lean, but also cost-effective and expedite the response time to customer and provide in-time support to local customers. In our TV backlighting business, we are seeing large panels replace smaller panels. Our area backlighting technology obtained strong design activities in the high-end TV market, which will result in growth potential when the market stabilized. In order to meet the different demand of the area backlighting specs, our main product line derived to various flavor of ICs. For example, we have integrated a higher voltage MOSFET to support higher LED number count backlighting. On other hand, we also offer other AC/DC or DC/DECREASE [ph] applications in additional to the backlighting product to the same customer sales increasing customer revenue. For industrial applications, we have automotive-rated product that serve the telematic market, which is growing nicely as vehicle becomes more intelligent and equipped with an array and multiple sensors. Our battery management products support a variety of end-market from power tool, UPS, GPRS, e-bike, vacuum cleaners and other IoTs. Our product target different battery sale number applications and it is scalable to higher sales number applications as higher voltage products were used. New device applications and new UL regulations also provide us new business opportunities and we are seeing increasing interest from European customers, some of which are key customers was mentioned by my colleague. We are making progress in smartphone, tablet market. Our products come with OTG, charge booster, gas gauge and also express charge. There are half a dozen customers right now in production, with many more in design-win stage. We expect that these activities will grow strong in 2017 second half, continue in the top line in 2018. At this time, I'd like to thank you for listening to our conference call, and turn it back to Daniel. Daniel please?

[Daniel Meiberg:]

Thank you, Sterling. April [ph], at this point, I'd like to open the call for questions.

[Operator:]

Sure. [Operator Instructions] And we'll first hear from Tore Svanberg of Stifel Nicolaus.

[Tore Svanberg:]

Hi, thank you for taking the question. Can you help us understand a little bit more what's going on in the TV market? Do you see some of the allocation issues being cleared up second half of this year or is this going to be kind of an ongoing situation here?

[Jim Keim:]

We see this as a ongoing situation. As matter of fact, if one looks at the recent comments from Corning, they actually expect their display business to be down in Q3 compared to Q3 of last year. But they see this as a ongoing situation. So the good news in the TV is the large size TVs do have very good demand. We continue to command very strong position in that market and that has led to higher revenues, despite the fact that the lower end of the market including sales in China are very weak at this point in time, which does hurt the volumes at the lower end of the market. So that has hurt our overall revenue growth, but nevertheless we have grown our TV revenue.

[Tore Svanberg:]

Thank you. And now regards to the battery management business, can you talk especially in terms of the upcoming larger cell count plus MCU application, can you help us understand which key end applications might be targeted initially?

[Sterling Du:]

We [indiscernible] 2-cell, all the way go to 20 plus cell. So the strategy we provided in our product is scalable. And most of the – our customer – key customer applications is in 5-cell to 12-cells and that depends on the customer. We can provide either two ICs scalable together or three ICs, it depends on the customer preference. And the application is just basically, we just discussed. Yes.

[Tore Svanberg:]

Great, thank you. And last question in terms of the OpEx, it came down quite a bit this quarter, it's moving up again next quarter. Is there a certain steady state or can you just give us a little bit more color – kind of the dynamics behind there please?

[Perry Kuo:]

Q2 was down a little bit – the part of the reason is from the reverse of some accrual on the SG&A. And I think Q3 will be in the area of the $9 million area for the total OpEx is true of the stock-based compensation strategy.

[Tore Svanberg:]

Great, thank you.

[Jim Keim:]

Thank you, Tore.

[Operator:]

Next we'll hear from Lisa Thompson of Zacks Investment Research.

[Lisa Thompson:]

Hi. I want to talk a little bit about more, I guess long-term, apparently, you reported in the fourth quarter, you had huge great revenue growth and then I guess the feeling is that, then the TV panel issue hit which kind of dampened growth this year. So do you believe that by next year, this will be all sorted out and then you can return to higher revenue growth, just based on the fact that people will be able to make more TVs?

[Jim Keim:]

The brief answer is, yes. Yes, we do see this turning up. Again, we would comment that there was also some inventory situation, which we had mentioned going into the Q4, Q1 time frame. But we do see these issues clearing up, they're gradually clearing up we think as we get into Q4, we will actually see some relief in some of these areas which will help. And then on into the first half of next year, we see this further levitating. So the answer is, yes.

[Lisa Thompson:]

Okay. So do you believe then you're going to have revenue growth in the fourth quarter?

[Jim Keim:]

Yes.

[Lisa Thompson:]

Okay. So would that be though an accurate statement to say that the TV panel issue really was the biggest impact for this year or not?

[Jim Keim:]

The biggest impact to us, yes that is the biggest impact. And again, actually the biggest impact to us has been at the low-end of the market, because panels have been very difficult at the low-end.

[Lisa Thompson:]

And could you just talk a little bit about what your expectations might be for next year as far as smartphones? Is that really going to start to be meaningful by then?

[Sterling Du:]

We hope so. So it depends though our definition of the meaningful. If this is up 10% of the company probably is somewhat target we'd like to achieve. Yes. So definitely we like to see that happen before the end of next year, it's going to be more than 10%.

[Jim Keim:]

Right. And let me punctuate a comment I made, Lisa, which may or may not been that clear on the call. Our revenues have actually still been going down in the notebook area. So the overall power revenue has been going down for the company. We see that basically bottoming out in the Q3 timeframe and we actually expect growth in the power products in Q4 that will be driven by some of the product sales into the smartphone, tablet area.

[Lisa Thompson:]

Okay, great. Thank you. That’s all my question.

[Jim Keim:]

Thank you, Lisa.

[Operator:]

[Operator Instructions] And it appears there are no further questions at this time.

[Daniel Meiberg:]

Okay. Super. Thanks everyone for joining us. And if you have any questions, please contact, this is Dan Meiberg with O2Micro Corporate Communications. Thank you.

[Operator:]

Thank you. That does conclude today's conference. Thank you all for your participation, you may now disconnect.