O2Micro International Limited
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's financial results for the first quarter of fiscal year 2016. If you would like a copy of the press release we issued this morning, please call Scott Anderson at [phone], 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 11, 2016 at 9

[Scott Anderson:]

Hi. Good morning and thank you for dialing in to O2Micro's financial results conference call for the first quarter of fiscal year 2016 ending March 31, 2016. This is Scott Anderson, Director of Investor Relations. 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. Listeners are referred to the O2Micro's earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. The statements made herein are dated information. The company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, our CFO and Director; our Head of Marketing and Sales, and Director, Jim Keim; and Sterling Du, O2's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be opened for your questions. Now, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the first quarter of fiscal year 2016 ending March 31, 2016. Perry?

[Perry Kuo:]

Thanks Scott, we will now review our financial result of Q1 2016. 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 the 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 2016 was $13 million. GAAP net loss in the first quarter of 2016 was $2.4 million. If we exclude stock-based compensation of $438,000, the non-GAAP net loss will be $1.9 million. GAAP net loss per ADS in the first quarter of 2016 was $0.09, non-GAAP net loss per ADS was $0.08. Gross margin was 48.8% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $3.7 million or 28.7% of revenue. This amount excludes stock-based compensation expense of $65,000. SG&A expense was $4.5 million or 34.3% of revenue. This amount excludes stock-based compensation expense of $373,000. The non-operating gain was $122,000. Income tax was $201,000 in the first quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q1 2016, we repurchased 231,235 ADS unit at a cost of $340,000. Q1 2016 revenue by end-market breaks down into the following percentages, consumer was 50% to 55% 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 $46.5 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $1.81 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q1 was $5.3 million. Our DSO is 37 days. It is close to our target range of 40 to 60 days. Inventory was $9.3 million at the end of the first quarter. This represents 129 days of inventory and the inventory turnover was 2.8 times in Q1. Net cash used in operating activities are $5.7 million in Q1 primarily consist of first, net loss of $2.4 million, second accrued expenses and other current liabilities decreasing of $2.0 million and third, income tax payable decrease by $1.8 million. Capital expenditure was about $235,000 in the first quarter of R&D equipment and the leasehold improvement. Depreciation and amortization was $427,000 in Q1. At the end of the first quarter of 2016, O2Micro had 348 employees, 54% of which are engineers. At this time I would like to provide our financial guidance for the second quarter of fiscal 2016. 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 expect Q2 revenue to flat to up 8% sequentially. We are guiding the Q2 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 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 $400,000 to $500,000 in the second quarter. Non-operating income should be in the range of 600,000 to 800,000 in the second quarter. Based on the service income of subsidiaries in different countries, we expect our tax amount to be in the range of $150,000 to $250,000 in the second quarter. Finally, I would like to update some items in the balance sheet. Disposal of long term investments, as a company, we received $5.4 million cash in April and the profit booked in Q2 will be $400,000. And the second disposal of one unit of our Shanghai office, the contract has been signed in April and the $3.6 million cash is expected to receive in Q3 timeframe and the profit of $1.6 million will be booked in Q3 time frame. The goal of this management team and board of directors is to maximize shareholders value and we are taking the necessary steps to do this, including reducing operating expenses and monetizing assets on the balance sheets. Regarding our share repurchase program we have been active in this program historically and we plant to be active going forward. Since 2002 we have repurchased over 19 million ADS shares for approximately $100 million. At the end of Q1, we had $9.7 million remaining in our share buyback authorization. Return to shareholders are very much on our mind and will continue to be a focus in the future. We will provide update to the additional measures to enhance shareholders value throughout this year. We believe our cash breakeven point is between $6.5 million to $17.5 million in quarterly revenue and our profitability breakeven point is between $18.5 million to $19.5 million in quarterly revenue. Given the uncertain demand and the macro environment, we are prepared to continue to manage cost as needed. Although we believe we have nice current cost based 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. Although we continue to see weak economies in key areas of the world we remain pleased with ongoing design wins including battery management, LED lighting and general lighting that we believe will enjoy revenue growth in 2016. We also expect our new power products to contribute to revenue growth in second half 2016. We will review progress in each of these areas. Let’s first discuss battery management. As previously stated, our battery management products exceeded our goal of reaching 15% of second half 2015 revenues and are expected to reach 20% to 25% of projected 2016 revenues, making it our second largest product line. In fact, battery management achieved the 20% level in Q1 2016 and is expected to enjoy additional growth in Q2 and the second half of the year based upon our expanding number of design wins and key customers. These battery management design wins are projected to enable revenue expansion in all key sectors of the market in which we participate. This includes power tool, e-bike, e-vehicle and vacuum cleaners as lithium ion battery technology continues to become more reliable and cost effective with the use of our battery management products. The number of major OEMs using our products continues to expand and now includes Black & Decker, Electrolux, LG, Mekita, Panasonic, Samsung and TTI. Additionally, there is increasing design activity for our products in uninterrupted power supply applications, as we continue to see usage of our battery management products expand at major OEMs. Next let’s discuss our lighting products. We are pleased to announce that our new area of backlighting products focused on the rapidly growing 4K TV market has entered mass production for major international OEMs. Similar designs are underway with other major OEMs, which are expected to go into production later this year and onward into 2017. These design wins should enable growth of our backlighting in TV despite lackluster overall market projections for the both the TV and monitor markets. We have also focused more of our backlighting R&D effort in industrial and automotive backlight and have significant design wins in process that should keep our backlighting business healthy for years to come. Our General Lighting business also remains healthy that is now 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 are seeing ongoing growth in this high-end market area that includes increasing number of major brand OEMs whose LED lighting products go into well-established retail stores. This includes activity in Asia, Europe and the Americas. Our customers include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP and Toshiba. Finally, let’s discuss power products for tablet and smartphone. While we have previously expected that revenues of our first power management product for the tablet and smartphone markets will become more significant by early 2016 as these new products launched. The difficult economic trends have resulted in slower revenue growth than anticipated. Key smartphone and tablet customers fail to meet their projected product sales where we have design wins. Nevertheless, we expect that our design wins should enable revenue growth as we continue to move forward in 2016. Sterling Du, our Chairman and CEO, will more fully discuss our position in smartphone and tablet. I will now turn the call over to our CEO Sterling for closing remarks. Thank you.

[Sterling Du:]

Thanks, Jim. Good morning. Q1 revenue was in the range of guidance that we provided in January. We generated revenue of $13 million in the first quarter of 2016, a decrease of 3% sequentially and decrease of 1% from the same quarter prior year. The year-over-year revenue decline was mainly due to the overall weak macro environment witnessed in our target markets, and lower than anticipated revenue from our product for tablet and smartphones. We remain very optimistic that growth we are projecting in our new product line, including product for the backlighting market, battery management product or the power tool as well as household appliance markets and the product for the smartphone and tablet market will give further momentum this year and into 2017. Through a combination of operating expense reductions and implementation of certain initiatives to monetize asset of company, we believe we have transitioned the company to benefit from our next growth phase. We expect that the company will achieve a cash breakeven point in the near future as market condition do not worsen. In our backlighting business, we’re projecting renewed growth in this year, based on increasing this activity in TV and monitor. Although the TV market remains dynamic, we believe our backlighting business for the TV market continues to grow as our dollar content expands from the adoption of high end 4K TVs, which we have opportunity to design multiple LED driver ICs for higher-end TVs. We continue to be a worldwide leader in LED backlighting for TV and monitor. And our expanding customer in our backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, Skyworth, TCL, Hisense, among others. O2Micro's proprietary analog power management technology in our battery management segment provides a variety of end markets and continue to grow with our expanding customer base. The Korean and Japanese battery market are already adapting our battery products. Several products in the battery group have been launched, which will increase silicon content in the same customer base. We are making stable progress with smartphone tablet manufacturers. Although due to weak market and channel inventory buildup, adoption rate of this product is slower than we had anticipated. We have lowered our internal projection for the smartphone and tablet products. We expect to grow this business at an initial penetration base throughout the remaining quarters of this year and expect to further grow in 2017. Our strong engineering and customer service presence in the Chinese market enable O2Micro to penetrate this new market. Although we are disappointed in the weak global market in the first quarter, we remain optimistic that our core power management product lines, including, backlighting, battery management products, power ICs for the smartphone tablet will regain momentum in 2016. At this time, I'd like to thank you for listening our conference call and turn back over to Scott. Scott, please?

[Scott Anderson:]

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

[Operator:]

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

[Evan Wang:]

Yes. Hi. This is Evan Wang calling for Tore Svanberg. Thank you for taking my questions. I’d just like to maybe start with your guidance for the second quarter, can you talk a little bit about your confidence level and perhaps visibility that gives rise to this guidance?

[Perry Kuo:]

Confidence level. Yes. Currently, Evan, revenue we have pretty strong backlog to support and we do receive the bucket from our key customers. So the confidence level of the revenue, I do think that’s a strong current projection. We will reach the level we provided. For the gross margin, we have done the cost reduction, key cost reduction and also we improved some – year-over-year improvement on the new product, ramping in some backlighting and also in some general lighting and also as well in battery management. So we have confidence that our gross margin will be in the area of the mid-range of the 49% to 51%. OpEx, as we have done so, the cost reduction, OpEx area will be in the range of the guidance. And other income, that’s 100,000 to 200,000 stronger, interest income. And 400,000, we already [indiscernible] So 400,000 already in the bank. Thank you.

[Evan Wang:]

Okay, great. And with the cost reduction, is the OpEx level a new baseline for you? Is that likely to be the ongoing level?

[Perry Kuo:]

Yeah. For the rest of the year, I think our R&D and SG&A levels will be in the area of 4 million to 4.5 million for R&D and 4.5 million to 5 million area for SG&A excluding stock-based compensation.

[Evan Wang:]

Okay. And for your gross margin, do you see that returning to your higher 50-50 production level in near future?

[Perry Kuo:]

I think it also depends on the new product as Perry mentioned that it's probably in the second half we have a more new product shipped to a smartphone and also tablet, so that area may probably impact one or two quarter by 1% to 2%. But it's still too early.

[Evan Wang:]

Regarding your Q1 results, I was just wondering if you were still seeing any headwinds from your legacy product or is the challenge basically from the tablet smartphone area.

[Perry Kuo:]

The smartphone tablet has been - the general market of the smartphone tablet has been slower than anticipated since last year, if I can see some recent news and that affected the new play phone development schedule and also as our new business market, we are in a play phone sometime have a service, so called a dynamic change. The changing of the internal priority and that give us a postpone as anticipated penetration realized as a revenue schedule.

[Evan Wang:]

My last question is, in your prepared remarks you talked growth in the coming quarters, sounds like you might be reaching the inflection point. Without giving actual guidance, I'm just wondering if you think that it is possible that you're revenue will grow in 2016 at this point?

[Perry Kuo:]

He is asking, I think Evan you're asking the breakeven point like -

[Jim Keim:]

Year-over-year growth.

[Perry Kuo:]

Year-over-year growth, so Jim do you care about --

[Jim Keim:]

Well, I think you are right we have reached what we feel is an inflection point where our legacy product particularly in the notebook area has very much flatten at the bottom, we do not see more downside risk in that area and at the same time some of our new product we mentioned the area lighting for 4K TV that area we expect to begin to see good ramps starting in Q2 and then ramping further as we bring on different customers in Q3, Q4 timeframe. We also see the battery management continuing to ramp, Q2 and some of the battery management area tends to be somewhat slow in the power tool area, nevertheless, we do expect some moderate growth in Q2 but then accelerating growth in the second half. So we think we could see appreciably higher revenues in the second half, we will wait and see after we get through Q2 first.

[Operator:]

[Operator Instructions] We will now take our next question from Tom Sepenzis from Northland. Please go ahead.

[Tom Sepenzis:]

Hi everyone thanks for taking my question and congrats on the results and guidance. I guess the first question is when do you think given the inflection - potential inflection here, I think you said that you are targeting breakeven results at about 15.5 million, so I guess my question is when do you think you can reach that?

[Perry Kuo:]

As Jim just indicated that at this point I think we are getting closer to this, as we have done the cost reduction on the OpEx, improve the gross margin and we have several not a single product line to grow in the future, so we have backlighting, backlighting dollar content, increase in the existing account, very qualified growth in the high performance General Lighting and multiple applications in Battery Management area [indiscernible] high gross margin for O2Micro. So after Q2, I think we can update the growth the situation if the market continues to improvement.

[Jim Keim:]

Hey Tom, did you have a follow up? Operator, why don’t you the next.

[Operator:]

We will take our next question from Lisa Thompson from Zacks Research. Please go ahead.

[Lisa Thompson:]

Good morning. Could you talk a bit more about the battery management business? There seems to be a lot of activity more portable appliances and tools, but I really haven’t seen any data. What’s your feel for how is that market growing?

[Jim Keim:]

Well, the market is expanding very nicely, because the lithium ion technology, as it matures and gets bigger in all areas, including automotive that has lowered cost production, at the same more governments are putting limitations into some of the lead area for batteries that includes China by the way. So this has a major impact on the industry switching over to the battery management with lithium ion. So we are seeing some of the traditional lead acids go into lithium ion, but at the same time, there is very significant growth as you mentioned at some of the portables, for instance vacuum cleaner. We are seeing virtually all the leaders in vacuum cleaners at this point begin the ramp into the lightweight cordless vacuum cleaners, and that market has just begun its ramp and we expect to see accelerating volumes in that area. And I think at some point, you will reach that market getting to be to the point where probably over half of the vacuum cleaners no longer have a cord attached to them. At the same time, the power tool market across a broad variety of power tools with the advances in lithium ion technology are getting better and better and we continue to see the volumes in those areas from the some of the leaders that we mentioned, including like Black & Decker, TTI, to accelerate more and more of their product line into portable cordless power tools. So we see this market as being able to grow very quickly. It has traditionally been a fairly slow growth market, but at this point we are beginning to see an acceleration. At the same time, you will see more and more, I mentioned, uninterrupted power supplies, you will see this expand into the solar area, for instance with home solar systems. Many people would like to go to lithium ion backup so they can actually go up the grid so to speak. And so we believe that there is a huge amount of opportunity here and then also over time, we want to move further up in the e-vehicle area, including automotive. So we see this as a very, very large market and one that is continuing to grow and one in which we feel that initially we are well positioned and we simply have been able to engage with some of the major companies we mentioned and we believe that there is a lot of room to continue to grow this area. That’s a fairly lengthy answer, but I hope it covered some of your question areas.

[Lisa Thompson:]

Right. That’s great. So given that you work with so many different manufacturers, do you feel that your growth will be proportional for the industry growth?

[Jim Keim:]

Yes, we feel that we are positioned with some of the right companies and I think not only can we keep up with their growth, but as we get the initial design wins, we can also move into new product areas with them. So on many cases, we can grow faster than they are growing simply because as we engage with them we engage not just in a growth product area they are in, but then also can expand into additional product areas that they are already engaged in.

[Lisa Thompson:]

Sounds great. As far as LED goes, there is a lot of – I don’t know chaos in the LED business with prices coming down like on a daily basis. Can you talk about where you fit in in the whole ecosystem and how your pricing and volumes are affected?

[Jim Keim:]

I believe chaos was a good description and we kind of decided some time back we discussed this a little bit in our last call, last quarter to step aside from what we call the chaos and so we have focused as we mentioned on the high end of this business. We have some very strong patent positions worldwide in what we call Free Dimming and we have customers who are engaged with Free Dimming and due to patent position, we are able to maintain a strong pricing and good margin position. There is also some high performance areas of the market including some of the industrial area where high quality and performance are very critical and we are also able to maintain margins there. So we have sized up from the chaos, if you please, of the low end of the mass market and really focused on those areas where we have good technology, good patent positions and these areas are growing at a reasonable pace, not necessarily exponential in terms of volumes, but at a reasonable pace we think we will grow our business this year and then next year.

[Lisa Thompson:]

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

[Jim Keim:]

Okay.

[Operator:]

As there are no further questions in the queue, I would like to turn the call back over to Scott for any closing remarks at this time.

[Scott Anderson:]

Thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888 with any follow-up questions. So, have a good day, and thank you again for your attention. Goodbye.

[Operator:]

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.