O2Micro International Limited
Q4 2017 Earnings Call Transcript

Published: 31 Jan 2018

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Fourth 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, x8888 and we will email you a copy immediately. It is also posted on the O2Micro Web site at www.o2micro.com under the heading, Investors. There will be a replay available through February 15, 2017 at 9.00 am Pacific Time or by visiting the O2Micro Web site under the heading, Investors. Following the presentation by management, the conference will be open for question and answers as time permits. Gentlemen, you may begin.

[Daniel Meiberg:]

Thank you. Good morning everyone and thank you for joining O2Micro's financial results conference call for the fourth quarter of fiscal year 2017 ending December 31, 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 annual filings, our annual reports and other documents filed with the SEC from time-to-time.

[Operator:]

Please standby.

[Daniel Meiberg:]

Sorry. Cynthia?

[Operator:]

Please go ahead. Please continue.

[Daniel Meiberg:]

Hi, Cynthia. At what point did – okay. With me today are Perry Kuo, CFO and Director; Jim Keim, 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’d like to introduce Perry Kuo, CFO of O2Micro for a discussion on the financial highlights of the fourth quarter of fiscal year 2017 ending December 31, 2017. Perry?

[Perry Kuo:]

Thank you, Dan. We will now review our financial results for Q4 2017 and fiscal 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, one-time 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 fourth quarter of 2017 was 15.2 million and 60.2 million in 2017. This is an increase of 6.4% over fiscal 2016. GAAP net loss in the fourth quarter of 2017 was 1.9 million. If we exclude stock-based compensation of 388,000, the non-GAAP net loss will be 1.5 million. GAAP net loss in 2017 was 6.1 million. The non-GAAP net loss will be 4.6 million. GAAP net loss per ADS in the fourth quarter of 2017 was $0.07. Non-GAAP net loss per ADS was $0.06. GAAP net loss per ADS in 2017 was $0.24. Non-GAAP net loss per ADS in 2016 was $0.18. Gross margin was 50.5% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was 4.7 million or 31% of revenue. This amount excludes stock-based compensation expense of 53,000. R&D increases in 2017 were mainly for battery and the power for smartphone. We remain optimistic about our growth drivers including backlighting, battery management and power products in 2018. SG&A expense was 4.3 million or 28.5% of revenue. This amount excludes stock-based compensation expense of 335,000. The non-operating income was 205,000. Income tax was 329,000 in the fourth quarter and is mainly based on the income tax provision for our tax entities. In Q4 2017, we repurchased 33,602 ADS units at a cost of 56,000. Q4 2017 revenue by end market breaks down into the following percentages. Consumer was 40% to 45% of revenue; computer was 10% to 15% of revenue; industrial was 40% to 45% of revenue; communications was less than 5% of revenue. At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with 46.1 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of --

[Operator:]

Please standby. Please continue.

[Perry Kuo:]

Okay. Accounts receivable at the end of Q4 was 9.2 million. Our DSOs of 54 days is in our target range of 40 to 60 days. Net cash using operating activities of 1.2 million primarily consist of net loss of 1.9 million, accounts payable increase of 1.6 million and offset by an inventory decrease of 1.2 million. Capital expenditures were about 118,000 in the fourth quarter for R&D and IT purchase. Depreciation and amortization was 433,000 in Q4. At the end of the fourth quarter of 2017, O2Micro had 372 employees, 61% of which are engineers. At this time, I would like to provide our financial guidance for the first quarter of fiscal 2018. 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 it with a public announcement in the future. O2Micro expects Q1 2018 revenue to be down 2% to down 8% sequentially. We are guiding the Q1 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 Q1. SG&A should be 4.3 million to 4.7 million in Q1, excluding stock-based compensation expense. Stock-based compensation should be in the range of 350,000 to 450,000 in the first quarter. Non-operating income should be in the range of 150,000 to 250,000 in the first 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 in the first quarter. The goal of our management team and Board of Directors is to maximize shareholders value. We have accomplished this by taking the necessary steps which included managing operating expenses and monetizing assets on the balance sheet. In Q4 2017, 1.1 million was received back due to share buyback from one of our investees, Phil Kayman [ph]. 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 more than $100 million. As of the end of Q4, we had 8.7 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 the 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 other income. Given the uncertain demand and the macro environment, we are prepared to continue to manage costs 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 Keim:]

Thank you, Perry. Good morning, everyone. 2017 revenues exceeded 2016 revenues and continue the trend of growth since our company revenues bottomed in 2015. The revenue increases in both 2016 and 2017 resulted from growth in lighting and battery management that more than offset declines in revenue and our legacy power products. This trend of year-over-year revenue growth should continue and may accelerate in 2018 as our power products finally return to growth after years of revenue decline in legacy notebook products. Let’s discuss general business highlights in 2017 followed by a more in-depth review of our three product lines. In 2017, we were very pleased with our revenue growth in battery management products where we extended design wins into more markets and more major OEMs. Growth in our largest product line intelligent lighting is ongoing despite allocation issues at many of our customers. Although panel allocations eased in the second half of the year, key TV and monitored customers placed a growing array of other component shortages, including ICs, capacitors and resistors that caused cutbacks in their production plans. Nevertheless, we project ongoing growth in 2018 as we continue to make headway in high-end design wins at key customers. Our power products revenue in 2017 was lower than plan as some new products were delayed going into production. This resulted in revenue in new market areas failing to offset reduced revenues in legacy notebook products. However, we do see a reversal of this trend occurring. Let’s now review more specific activity of our three product lines. Our patented battery management products supporting critical cell balancing and lithium ion batteries continue to expand with more and more key design wins at major OEMs. This has resulted from the rapid expansion of lithium ion battery technology into more mobile products due to their small size, high-energy density and increasing cost effectiveness versus older technology lead acid batteries. As a result, we continue to see major market growth opportunities in all key market areas including power tool, e-bike, e-vehicle, vacuum cleaners, garden tools, and uninterrupted power supplies where lithium ion battery technology continues to become more reliable and cost effective with the use of our battery management products. As previously mentioned, we have also engaged with key new customers having significant positions in the rapidly growing drone and solar markets. 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 soon-to-be-introduced arm-based highly integrated microcontroller-based products. We would also note that we have filed key patent claims for our new products to protect both our company and customers' market positions. Our major customer list continues to grow and includes Black & Decker, Dyson, Electrolux, LG, Mekita, Merida, Panasonic, Samsung and TTI. In our largest product line, intelligent lighting, our new product design wins have accelerated in several areas. As the shortage of MOSFETs impacted our customers, many customers are quickly adopting our new line of backlighting products with integrated MOSFETs. We also see key OEMs desiring to differentiate their higher end TV and monitors with more highly integrated application-specific devices. We are pleased to be delivering some of these in volume while expanding our design activity with both existing and new customers. Finally, 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 and includes GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba. Finally, let's discuss power products. As stated earlier, we are finally seeing our power product revenues in new markets growing rapidly enough to more than offset any lost revenue in legacy notebook products. We project 2018 revenue growth in the smartphone and tablet markets to enable our power revenues to reverse the multi-year downward trend. These design wins for our smartphone and tablet products include our new charger IC, on-the-go charger booster and accurate gas gauge gain market acceptance. Additionally, we are working on key design wins in other market areas, including high-volume industrial opportunities. I will now turn the call over to our CEO, Sterling, for closing remarks.

[Sterling Du:]

Thanks, Jim. Good morning. O2Micro reported the fourth quarter 2017 revenue of 15.2 million. Revenue was down 2% from the previous quarter and down 4.4% from the same quarter prior year. The gross margin in the fourth quarter of 2017 was 50.6%. The gross margin was up from 50.3% in the previous quarter and down from 51.7% in the same quarter of last year 2016. We are pleased to see our revenue was in the guided range and gross margin improved from the previous quarter, despite a very dynamic market and a market shift. We observed the high-end TV continues to define what the new visual experience is and advanced color image contrast backlighting technology through the new era of the advanced display products. We have worked with top tier worldwide customers who support the high-end 4K and advanced 8K panel local dimming backlighting. Therefore, our local dimming technology obtained strong user activity in the high-end TV market which will result in growth potential in both volume shipment and ASP incremental. In order to meet the different size ensuring demands of backlighting, we offer various flavors of ICs, including integrating higher voltage MOSFET to one chip with cost effective or we support external MOSFET which helps the flexibility. Furthermore, we extend our product portfolio into AC/DC areas of TV applications. This new product has been shipped to TV makers in China. For industrial applications, our industrial rated product over the high-performance local dimming for automotive applications. The battery technology continued to meet the new design challenges by offering the mixed-signal product to support new generation power tools. Our new generation IC contains multiple system functions at SOC and the protection battery functionality. We continue to be the market leader by offering high integration with reliable industrial rating solutions as IC plays a vital role in battery services. We remain optimistic for our battery product growth momentum. Our new year 2018 growth driver clearly is our product for the TV backlighting market and battery management. Now let us discuss the full market, which we shift our focus from the notebook, computer, the legacy power product. In order to meet different market requirements, our product portfolio contains two type of fast charges and one type of regular charge and a battery gas gauge. All of these products have been designed in MP [ph] stage. We expect that these activities to grow further activity in 2018 with more products into MP. We expect 2018 with good growth from 2017 and continue to drive the growth through 2019 while the design cycle to a multiple platform marketable is at least one year. We watch the expense carefully by improving operation effectiveness, optimize operating cycle times and monetize the assets of company. We have to moderately increase new engineer headcount which will focus on new technology hiring and carefully for the revenue upward curve. At this time, I'd like to thank you for listening to our conference call, and turn it back to Dan. Dan, please?

[Daniel Meiberg:]

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

[Operator:]

Thank you. [Operator Instructions]. We’ll hear first from Jeremy Kwan with Stifel, Nicolaus.

[Jeremy Kwan:]

Thank you for taking my question. Just talking about the smartphone market, can you just give us an idea of your expectations for a ramp? Do you expect this to begin in the first half or is it something that’s more towards the latter half? And can you talk about maybe the geographies that you expect growth to come more from?

[Sterling Du:]

Yes. We focus on the smartphone makers in China mainly and our product portfolio we have two categories. One is existing we offer two type of the fast charging and the regular charges. So those have been introduced to the market since year 2016, almost Q3, Q4 timeframe; so right now in the market for more than one year. And we already have seen the MP in at least half dozen of the smartphone makers. So we are happy to see that. So this is how it is. My colleague Jim has mentioned, we’ve finally to see the rapid growth. That’s all talk about existing product. And then the second way is our new high-performance charges. That’s also including fast charging and the regular charging. What I mean of fast charging is more likely 3M or 3.5M and above with all fast charging. So the new wave of the next generation charger will be introduced to the market second half of this year. So that’s – in my speech I mentioned that we had a plan all the way go to the 2019, and that will be even providing higher performance to existing customers and that we expect will get another first tier customers in China. So that is our description of smartphone.

[Jeremy Kwan:]

Great. And in light of that and given your comments on the notebook market and the TV, how do you see your year-end end market breakout I guess falling out? Do you see consumer growing a little faster, is industrial going to keep up? Can you give us an idea for that?

[Sterling Du:]

Yes. I think maybe for both our – the high-performance TV and also power for the smartphone, these are in the consumer area. We also expect growth in 2018 as well as the battery management; this is in the industry sector with also growth in 2018. I expect these two sectors, consumer and the industry area, will continue to grow and maybe in the same pace or some impacted by the shortage, as Jim just discussed. But I think that will be in the area of the 40% to 45% for some period of time.

[Jeremy Kwan:]

Great. Thank you very much.

[Operator:]

Our next question will come from Tore Svanberg with Stifel.

[Tore Svanberg:]

Thank you. So I had a follow up to Jeremy’s question on the smartphone segment. So I understand now – better now the timing, but as far as going from the first wave to the second wave, are we talking about a significant increase in content and can you may be put some numbers around that, or at least approximate numbers?

[Sterling Du:]

No. It doesn’t mean that ASP bottoming as the opportunity because our second generation of charger they have been greatly improved for certain performance. Majorly is in high end of the trailing of the charging, so we intend to be worldwide in the first year of performance so that can help out – reduce the charge cycle and also can provide more content, more percentage of the battery being charge. So that’s what I mean for that. And the reason – the difference between the first wave with second wave is we use in a different process. The second wave we have redesigned the whole thing in the new process. That content will have higher voltage. So that’s why we can go to the end of this charging cycle and we can continue to the more rapid and more high current charging. So that’s the difference. So we endure the whole redesign for the new process. I hope I answered your question.

[Tore Svanberg:]

Yes, that’s very helpful. Thank you. And a question for Perry. Perry, you were pretty close to cash flow breakeven this last quarter. Should we expect the company to get to cash flow breakeven at some point in the first half, or are we still targeting the second half for that?

[Perry Kuo:]

I will say maybe between Q2, Q3 2018, yes. That’s a critical timing. That’s mainly depending on actually the gross margin, depending on the product mix as I reported and also the dynamics in the other income.

[Tore Svanberg:]

Sounds good. Thank you very much.

[Operator:]

Our next question will come from Lisa Thompson with Zacks Investment Research.

[Lisa Thompson:]

Hello. Can we go back to the TV? I keep reading that the shortages are lessening and that rather than TVs being down 4% last year, they’re going to be up 4% this year. But now you’re talking about other component shortages. Could you just get a little bit more granular on what’s going on with your customers?

[Jim Keim:]

Yes. Last year we talked about some panel shortages and as we moved through the second half, the panel shortage issue cleared up. So at this point there’s really no significant panel issue as we move into Q1. However, some of the major OEMs that we do business with are having difficulty getting other products, including ICs as basic as MOSFETs, also master ICs for the TV. They’re also having problems getting very basic components, including capacitors. So this has curtailed some of their production plans that they had in Q4 and we saw that very directly because we do have some proprietary products with these OEMs. So that has caused them to back their production plans down. Now you are right. We do expect TV volumes to increase next year, except that increase is not going to be as big as it could be if in fact there were not component shortages.

[Lisa Thompson:]

And is this something that can be alleviated quickly because it doesn’t sound like these are anything special, it’s not like panels, right, if you talk about ICs?

[Jim Keim:]

Yes, except generally speaking in the market there is a shortage even of silicon in the marketplace. So there is – many of the wafer fabs at this point are on allocation. We have not been affected. However, that has affected more and more product areas including the consumer area. It’s included the smartphone area. So we do not expect the silicon issues to clear up perhaps in this year, perhaps not at all this year. So we do expect some ongoing allocations of these basic products where there’s not been much investment over the past few years to affect some of our customer base and the volumes that they could produce.

[Lisa Thompson:]

Okay. And so is this what’s affecting your revenue growth or will you be able to grow revenues in the June quarter even with this problem?

[Jim Keim:]

We expect to grow revenues despite the problem, but it is hindering production volumes at some of our major customers. But the TV business will be up. We expect the power tool business to be up. So we expect both our battery management and TV business to increase. At the same time, as Sterling had covered earlier, we do expect to see our smartphone type business begin to ramp up as we move through the year.

[Lisa Thompson:]

Great. Thank you. That’s my only questions.

[Operator:]

We’ll hear next from Tom Sepenzis with Northland Capital Markets.

[Tom Sepenzis:]

Hi. Thank you for taking my question. Can you talk a little bit more about the power products returning to growth and what kind of growth should we be expecting for the total company in 2018? If that’s going to hit double digits, how we should be thinking about that? Thank you.

[Sterling Du:]

We shifted our focus to the smartphone, so we – our first wave of the product has been in the market more than one year and we see it’s finally getting to the production for multiple platform and we are waiting for the second wave. So what we mean by that is the legacy notebook, power IC continues to decline and offset by the new smartphone of power IC. So we expect to see that offset happening, balance out in this year 2018. And as towards the second half, we think that the direction will be to the upward. And in 2019, we even have more confidence that is we assume the previous growth in the power IC area. So this is roughly about this stage.

[Tom Sepenzis:]

What differentiates the second wave from the first wave in terms of your smartphone products? And do you have actual purchase orders or are you just seeing increased interest in your products for the ramps starting in Q2, Q3, or do you actually have orders on hand?

[Sterling Du:]

Yes, we have orders on hand since last year. We are in the production for the smartphone already in different geography area across the world. And that is second tier, most of the second tier smartphone markers in China. Probably it’s like number 5 and so on. So in this year 2018 with our new higher voltage charger coming out and available in second half, and then we try to target for the first tier smartphone makers in China. So yes, we are in production for the first wave right now.

[Tom Sepenzis:]

Okay. Thank you. And for the total company, it sounds like you’re expecting a pretty good revenue ramp in June and then potential breakeven by September. So would that put you at double-digit revenue growth for all of – for 2018?

[Jim Keim:]

Well, we have a potential to get there. We have the design wins to get there. That’s where we’re at. We do see some customers being limited, as we mentioned earlier, in their production volumes. That could hurt us in terms of how quickly we’re able to grow. But nevertheless, we’re very optimistic about growing all three product lines this year. But I don’t think at this point we’re able to put a percentage on that, but we do expect good growth.

[Tom Sepenzis:]

Great. Thanks very much.

[Operator:]

Thank you. There are no further questions in the queue. I’d like to turn the call back over to Dan for any closing remarks.

[Daniel Meiberg:]

Thank you. I'd like to thank everyone for your time and attention this morning. Please feel free to contact me at [e-mail] or by phone at area code 408-987-5920, x8888 with any follow-up questions. I’d like to thank everyone for joining us. Have a great day and thank you for your attention.