O2Micro International Limited
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Third 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 November 15, 2017 at 9

[Daniel Meiberg:]

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

[Perry Kuo:]

Thank you, Dan. We will now review our financial result for Q3 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 or losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2017 was $15.5 million. GAAP net loss in the third quarter of 2017 was $1.4 million. If we exclude stock-based compensation of $390,000, the non-GAAP net income will be $985,000. GAAP net loss per ADS in the third quarter of 2017 was $0.05. Non-GAAP net loss per ADS was $0.04. Gross margin was 50.3% in Q3. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.6 million or 29.7% of revenue. This amount excludes stock-based compensation expense of $54,000. SG&A expense was $4.5 million or 29.3% of revenue. This amount excludes stock-based compensation expense of $336,000. The non-operating income was $583,000. The income tax was $229,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3 2017, we repurchased 164,953 ADS units at a cost of $295,000. Q3 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 30% to 35% of revenue, communications was less than 5% of revenue. At this time, I would like to provide some additional information. O2Micro finished the third quarter with $46.3 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.80 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q3 was $9 million. Our DSO of 52 days is in our target range of 40 to 60 days. Inventory was $10.5 million at the end of the third quarter. This represents 120 days of inventory and the inventory turnover was three times in Q3. Net cash using operating activities of $810,000 million primarily consist of net loss of $1.4 million, account receivable increase of $155,000, inventory increase of $515,000. Capital expenditures were about $65,000 in the third quarter for R&D and ID purchase. Depreciation and amortization was $447,000 in Q3. At the end of the third quarter of 2017, O2Micro had 352 employees, 50% of which are engineers. At this time, I would like to provide our financial guidance for the fourth 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 Q4 2017 revenue to be down 5% to up 5% sequentially. We are guiding the Q4 gross margin will be in the range of 49% to 51% and is mainly from the product mix. R&D expense excluding stock-based compensation should be $4.5 million to $5 million in Q4. SG&A should be $4.3 million to $4.7million in Q4, excluding stock-based compensation expense. Stock-based compensation should be in the range of $350,000 to $450,000 in the fourth quarter. Non-operating income should be in the range of $150,000 to $250,000 in the fourth 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 19.6 million ADS shares for $100.1 million. As of the end of Q3, we had $8.8 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 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 gross margin from product mix and also other income. 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. 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. Q3 2017 continues to trend a revenue growth since our company revenues bottomed down in 2015. Growth in Q3 2017 over Q3 of the prior year was the result of the growth in battery management along with increasing revenues in smartphone products. Our high end area backlighting business also continue to expand, although overall lighting business showed only modest growth versus the prior year due to ongoing IC and panel product shortages that some of our major customers continue to experience. As stated in last quarter's call, the IC shortages are impart due to high demand for fingerprint ICs in smartphones that have taken up significant supply chain capacity in both wafer fab and testing. These supply issues are particularly frustrating as of impacts our growth in high end TV, where our new area backlighting are sold. Nevertheless, despite the market headwinds, we do see ongoing company revenue growth as we head into 2018 and we will highlight key product areas where we expect to see this growth. The first of these is battery management which is our second largest product line that is continue to grow at an excellent pace year-over-year. We would remind everyone that our patterned battery management products for critical cell balancing and lithium ion batteries. Besides the rapid expansion of lithium ion battery technology into mobile products due to their small size and high energy density, we are now seeing ongoing reduction from the cost of lithium ion batteries that accelerate their expansion into more markets and products. At the same time, lithium ion batteries for replacing lead acid batteries as this technology becomes more expensive for rapidly increasing government regulation of their use. As a result, we continue to see major market growth opportunities in power tool, e-bike, e-vehicle, vacuum cleaners, garden tools, and uninterrupted power supplies where lithium battery technologies continues 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, Merida, Panasonic, Samsung and TTI. Our product plans in battery management 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. We would also note that we have filed key patent claims for our new products to protect both our company and end customers' market position. Next, let's discuss our largest product line, intelligent lighting. Although key customers for intelligent lighting continue to be affected by notable allocation issues, this situation is 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 of our backlighting business, despite lackluster market projections for both the TV and monitor markets. We have focused more of our backlighting R&D effort in the industrial and automotive markets 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. With our strength and design wins, we expect ongoing growth in general lighting, although revenues are not expected to exceed 10% of our overall revenue in the foreseeable future. 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 smartphone and tablet. While older notebook products have continued to decline in revenue, we did see smartphone revenues help our overall Q3 revenue growth. More importantly based on increase in design wins, we are now projecting revenue growth in the smartphone and tablet markets to enable our current revenues to reverse the multi-year downward trend and began to grow in 2018.These design wins for our smartphone and tablet products include our new charger IC, on-the-go charger booster and accurate gas gauge as they gain market acceptance. I will now turn the call over to our CEO, Sterling Du for closing remarks.

[Sterling Du:]

Thanks, Jim. O2Micro reported the third quarter 2017 revenue of $15.5 million. Revenue was up 6.9% sequentially and up 7.4% from a same quarter year. The gross margin in third quarter of 2017 was 50.3%. The gross margin was down from 50.9% in the prior quarter, down from 52.6% in the same quarter prior year. We're pleased to see the revenue improved from the same quarter prior year and the previous quarter, despite the TV market remains weak, low visibility which resulted from M&A in the market, and also market shifting, panel supply under capacity and some component allocations. Our battery technology continue to expand to, one, the new applications, two, new customers and three, the new generation product to be released. Lithium ion batteries sales cost continue to be effective and performance enhanced. We absorb new applications and a new market sector ideally for meeting applications all conversion from lead acid battery including lot limited to IoT, logistic management and et cetera. We remain optimistic for the growth momentum given that most of batter customers on the first tier and a good quality customers. We continue to do expense control, improve operational effectiveness, we view major operation specular times for time-to-time. Meanwhile, we monetize the assets of the company. The company has enhanced by ERP effectiveness logistic management which is critical in this under capacity situation and communication with supplier and customers. To build a support China local customer where we opt customer support group locally by putting more technical personal and improve respond cycle time. In our TV backlighting business, we continued see the panel size going as well as high-end display technology receiving more popular. Our local TV technology has being a top by major TV maker and furthermore enquiry for the future product needs. We also see the variety applications of automotive and industrial growths. We designed new different IC with additional new functioning to meet the new customers demand. Our battery management product support a variety of end markets from power towards UPS GPRS, e-bike, vacuum cleaners and other IoTs. We support the first level protection, second level protections battery gas gauge. And a new future product MEF mixed single design for easy to use and a support variety of industrial or regulations. Meanwhile, we support scalable design concepts by opening combinations of sale number IC. We have three different series for the smartphone market, one, we have one amp to three amp on-the-go charger. Two, we have a fast charger which support direct mode and the USB D mode. Three, we have précising gas gauge. We expect that these activities we have in 2017, we will have a way to grow mostly revenue for 2018. At this time, I like to thank you for listening to our conference call and come back to Dan. Dan, please.

[Daniel Meiberg:]

Thank you, Sterling. I'd like to take the opportunity to make one correction. Earlier today, an item which restated and I wanted to verify that we have the right numbers are spoken by Perry and like to restate that section just to be sure. Net cash used in operating activities of 810,000, primarily consist of net loss of 1.4 million. Two, accounts receivable increased 151,000 and inventory increase of 516,000. All right. Thank you, Sterling and everyone. At this point here, I'd like to open it to a questions. Operator? Are you there?

[Operator:]

Thank you [Operator Instructions] Our first question will come from Tore Svanberg, Stifel.

[Tore Svanberg:]

Yes. Thank you. Could you maybe comment a little bit more on the TV market. I understand the shortage situation has been around for a while now and just to try to understand if you're seeing sort of any visibility there or any easing at all over the next few quarters?

[Jim Keim:]

The easing has gotten significantly better in the panel supply although there do remain some panel supply issues. The biggest issue remains of some of the IC supply area which varies a lot from customer to customer depends on which IC and which supplier that they are using. Unfortunately we have seen some push outs from some key customers in the past see much directly related to them having to take revenue projections down, due to some of the IC shortages. It's hard for us to have absolute visibility on that. We do expect some ongoing improvement. We have seen improvement I would say over the last six months, but there's still some shortages out there and it is creating problems particularly at the high end of the market. So it's been somewhat frustrating for us.

[Tore Svanberg:]

Very good. And then a question on the smartphone revenue, so you said communications is still less than 5%, I assume that is the number that's going to increase quite a bit next year. Could you elaborate a little bit on where some of the revenues are coming from and should we expect continues penetration into that market in 2018?

[Perry Kuo:]

Hi, Tore. Let me answer to you. In smartphone, we were booked this in the consumer sector, this is more consumer oriented purchase so in the future. And smartphone currency is still single digit.

[Tore Svanberg:]

Very good and then any comment on the prospects for 2018, some of the dynamics with the smartphone business?

[Jim Keim:]

Well, we are expecting ongoing growth our projections so reasonable quarter-to-quarter growth. We have a number of good design wins at this point as we've said in past reviews, they were in prototype stage that beginning to go now into small volume production programs and then as that successful move into larger volume production programs. So we do expect quarter-to-quarter ramping as we began to move through the next year. And as we mentioned we think we've seen the bottom of our power products those as a result. So even though the traditional power product in notebook is still dropping and that will continue to drop next year. We expect the smartphone tablet activity to more than offset.

[Tore Svanberg:]

That's very helpful. Last question on power tools, my understanding is that there is a lot of changes happening in that market you know including more connected power tools and so on and so forth. Could you help us understand how that's impacting your opportunities there, please?

[Jim Keim:]

We think there is positive impact because we are able to work very directly with some of the best customers in power tools and yeah lot of connectivity, so they can just simply keep track of their product in the field with major construction activities growing on. Just tracking all the tools becomes major issue. So the tracing of those connectivity is very, very key and we work directly with those customers and are working with them on next generation in our products. So we're very optimistic about continuing to growth this product line.

[Tore Svanberg:]

And just to clarify that also mean potential higher dollar content, I guess this is what I am afraid to?

[Jim Keim:]

Yes.

[Tore Svanberg:]

Great, thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question will come from Tom Sepenzis, Northland.

[Tom Sepenzis:]

Hey, thanks for taking my questions. First one is just in terms of gross margins, the mix obviously, was it the expensive margin in the quarter, so just wondering if you could give us some color on that and what you see moving forward here?

[Sterling Du:]

Yes, the gross margin is mainly from the product mix from the - we have more weight in the consumer area and also we releasing some new product to the smartphone area and also to the pillar area. For the new product area that we probably need three to six months to improve the rate. So I think our gross margin in the future will be in the 49% to 51% for several quarters. That's we have lot of new products to be released in the coming quarters as well.

[Tom Sepenzis:]

Okay. But then towards the second half of next year, you would expect to start the move back?

[Sterling Du:]

We can move back to the 51-52 also depends on the product mix that it's between the battery and also the consumer area and it will be the product mix between the battery and also the consumer area. So let me comment on the second half, yeah when times approaching.

[Tom Sepenzis:]

And then just in terms of OpEx increased pretty significantly in the September quarter over June and over March. So I am just curious because it seems like incremental revenue is coming at the full price with gross margins and OpEx is almost wiping out the incremental revenue on the top line. So just curious is to why we are seeing OpEx increased dramatically and if you plan on taking it back down here or what are the levers there?

[Perry Kuo:]

I think our OpEx now, it's - for the labor will remain almost the same and up and down, it is more up to the nonrefundable expenses related for the new product IC. So I think it's all in the area of the 5 million plus or minus exclude the stock based compensation area.

[Tom Sepenzis:]

Okay. And then lastly, if you could just talk a little bit about some of the new wins that you have had on the smartphone side and the timing of those ramps one we should expect to see revenue from those?

[Sterling Du:]

We have probably more than 1,000 customers currently production ready for our smartphone ICs. We expect some of them will move to the larger amount of revenue platform, larger amount of volume platform. In the meanwhile our target 2018 try to also growth up to the first tier customer in China. We do have some activity with the first tier customer in China in this year, I now realize as people approaching and that's probably towards next year. It is safe to look at will be second half of next year, we are going to see today our activity and will be realize as more significant revenue which in second half of 2018.

[Tom Sepenzis:]

Thank you. So you think you can hit cash flow breakeven by the end of 2018?

[Sterling Du:]

Yes.

[Perry Kuo:]

Yeah, it's that the market and also shortage can be less little bit in that. We support that, yeah.

[Tom Sepenzis:]

Great, thank you.

[Operator:]

Thank you very much. Our next question will come with Lisa Thompson, Zacks Investment Research.

[Lisa Thompson:]

Good morning.

[Sterling Du:]

Good morning, yeah.

[Lisa Thompson:]

So I am interested in you are talking about a power tool and the next generation of tools that have Internet-of-Things and what you trace where they are, I think that sounds like a really huge future particularly in construction where things walk off to job sites. Can you - where are customers in that, are those products out or whether they are coming out or what's your feeling of that?

[Jim Keim:]

Right, we watch to Lisa, you said walk off the job site which is I guess you by the way they literally walk off the job site. So I don't know we have lost the connectivity from that.

[Lisa Thompson:]

Operator, you with us?

[Operator:]

Yes, I am. Can you hear me?

[Lisa Thompson:]

I can.

[Jim Keim:]

I think we dropped. Time is still going.

[Operator:]

Ladies and gentlemen, just a moment, we are going to see if we can reconnection with our speakers.

[Jim Keim:]

Okay, thank you.

[Lisa Thompson:]

I can hear you.

[Operator:]

Ladies and gentlemen, thank you for your patience. It looks like we reestablished connection with that line. Lisa, if you would like, would you please repeat your question.

[Lisa Thompson:]

Oh, hi, can you hear my now?

[Sterling Du:]

Yeah, we can hear you.

[Jim Keim:]

So our power tools walking off the job and you said literally happened.

[Lisa Thompson:]

Right, so where are customers with rolling up of product, so they end the market yet or they coming?

[Jim Keim:]

They have some already in the market. The developing trend is when power tool support this Wi-Fi or other IoT wireless communication, they need to comfort their CPU and their software upgradable to certain level of operation, real time operation. So when they do that they keep the window of opportunity to us which is the people is looking at new generation of the digital design and they prefer that new generation of the digital design which is aiming for the CPU, try to combine with certain mixing to get. So as you are equating, this is going to be gradually penetrate and then they will give us opportunity to increase our certain content because we will be have providing a product from pure analog to the mixing in order to support some standard the power tool, can communication come connect to the Wi-Fi.

[Lisa Thompson:]

So, how does increase, what revenue get per unit say per tool compared to what you've been getting now?

[Perry Kuo:]

It's two areas to tell because this product is not really to production and conceptualize that should be have increase certain double-digit percentage and they also so called a penetration time probably gradually to connect.

[Jim Keim:]

Let me also say that as we redesign for these tools, they are looking at more proprietary technology in the past they want to take. So they have some more advantages over there competitors and so it's like a complete redesign and we are in a fortunate position with some of the majors in the market to be a part of that activity. So that is we're on the ground floor working with them with some of the new battery management products which are becoming somewhat more sophisticated and also this whole market helps grow the whole market Lisa, because that's now can be used at major construction sites across the whole city and they can track these tools. So it makes the products that are portable, traceable and it enables better and better sales for this type of products. So many of the customers are very enthusiastic about this technology and it will help grow the overall base and we think we'll be in a proprietary situation with some of the majors. I hope that answer your question.

[Lisa Thompson:]

Yes, I am just little confused, you said that they are already in the market or they are not in the market?

[Jim Keim:]

Some are already in the market.

[Lisa Thompson:]

And they are using your product?

[Jim Keim:]

Yes, but they will be bringing out newer generations of this I think even more sophisticated in terms of traceability of the product. Also there is always a need by the customers, the majors to get more and more life out of the products. So that is better and better badly management's capability. So the products that are going to become more sophisticated. So yes, some are already in the market and we are going to just see more and more of this.

[Lisa Thompson:]

Great, that sounds pretty exciting. Thank you.

[Jim Keim:]

Yes.

[Operator:]

Thank you very much. [Operator Instructions] Thank you very much. At this time we have no further questions in the queue. So I would like to turn the conference back over to Dan for any closing remarks.

[Daniel Meiberg:]

Thank you operator. Everyone, I'd like to thank you for your time and attention this morning. Please feel free to contact me at [e-mail] or at area code 408-987-5920 extension 8888 with any follow-up questions. Have a great day and thank you again for your attention. Good bye.

[Operator:]

Thank you. Ladies and gentlemen, this conference is now concluded. You may disconnect your phone line and have a great rest of the week. Thank you.