O2Micro International Limited
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's financial results for the second 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], at 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 August 10, 2016 at 9

[Scott Anderson:]

Good morning and thank you for dialing into O2Micro's financial results conference call for the second quarter of fiscal year 2016 ending June 30, 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 to your questions. Now, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the second quarter of fiscal year 2016 ending June 30, 2016. Perry?

[Perry Kuo:]

Thanks Scott. We will now review our financial results for Q2 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 second quarter of 2016 was $13.2 million. GAAP net loss in the second quarter of 2016 was $2 million. If we exclude stock-based compensation of $400,000, the non-GAAP net loss will be $1.5 million. GAAP net loss per ADS in the second quarter of 2016 was $0.08. Non-GAAP net loss per ADS was $0.06. Gross margin was 50.7% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $3.7 million or 28.1% of revenue. This amount excludes stock-based compensation expense of $60,000. SG&A expense was $4.7 million or 35.2% of revenue. This amount excludes stock-based compensation expense of $350,000. The non-operating gain was $365,000. Income tax was $237,000 in the second quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q2 2016, we repurchased 104,588 ADS units at a cost of $157,000. Q2 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. Communication 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 investments. This represents cash and cash equivalents of $1.85 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of the Q2 was $6.9 million. Our DSO is 42 days. It is in our target range of 40 to 60 days. Inventory was $9.2 million at the end of the second quarter. This represents 128 days of inventory, and the inventory turnover was 2.8 times in Q2. Net cash used in operating activities are $4.3 million. Capital expenditure was about $137,000 in the second quarter for R&D and IT equipment purchase. Depreciation and amortization was $420,000 in Q2. At the end of the second quarter of 2016, O2Micro had 350 employees, 56% of which are engineers. At this time I would like to provide our financial guidance for the third quarter of fiscal year 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 expects Q3 revenue to be up 4% to 12% sequentially. We are guiding the Q3 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 Q3. SG&A should be in the area of $4.5 million to $5 million in Q3, 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 $2 million to $2.5 million in the third quarter is mainly from disposal of a unit of our Shanghai office. The contract signed in April and the cash has been received in July. 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 Q3. The goal of this management team and the 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 sheet. Regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. Since 2002, we have repurchased over 19 million ADS shares for approximately $100 million. At the end of Q2, we had $9.6 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 break-even point is between $16.5 million to $17.5 million in quarterly revenue and our profitability break-even point is between $18.5 million to $19.5 million in quarterly revenue. Given the uncertain demand in the macro environment, we are prepared to continue to manage costs as needed. Although we believe we have a 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. We remain pleased with ongoing design wins, including battery management and LED lighting that will enable revenue growth as we move through 2016. Additionally, we expect design wins in our new power products to contribute to revenue growth in the second half of 2016. We will review progress in each of these areas. First, let’s discuss our lighting products. Last quarter we announced that our new area backlighting product focused on the rapidly growing 4K TV market has entered mass production for a major international OEM. This product did help drive revenue growth in Q2 and is expected to further enhance Q3 revenues. 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 business and TV despite weak overall market projections for both the TV and monitor markets. We have also focused more of our backlighting R&D efforts in industrial and automotive backlighting, and have significant design wins in process that should keep our backlighting business healthy for years to come. Our general lighting business remains focused on growth at the high-end of this market, specifically our proprietary and patented free dimming and high-power general lighting products where we can enjoy reasonable margins and profits. Following some in-customer inventory adjustments affecting Q2 revenues, our revenue in general lighting is expected to grow in the second half of the year with expanding design lengths. This 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. The customers include GE, LG, Lights of America, Orem, Panasonic, Philips, Samsung, TCP and Toshiba. Next, let’s 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 continue to grow as a percentage of our revenues, reaching 20% to 25% of projected revenues later this year. While Q2 growth was significant over Q2 of the prior year, Q2 is a slow season for power tool market, causing our battery management sales to be slightly down versus Q1 of this year. We do project both Q3 and Q4 to show good revenue growth and ongoing design win activity that should enable revenue expansion in all key sectors of this 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’s increasing design activity for our products and uninterrupted power supply applications, as we continue to see usage of our battery management products expand at major OEMs. Finally, let’s discuss power products for tablets and smartphones. We are seeing our first design wins for our power management product for the smartphone and tablet markets begin to ramp into production. Smartphone designs winds did contribute to modest revenue in Q2. Ongoing increases in volumes in these new products are expected to enable second half growth in power, more than offsetting any loss in legacy products. As we continue to expand our product offering and design wins in smartphones and tablets in the second half of this year, we will give more detail on both the products and the design wins. I will now turn the call over to our CEO, Sterling for closing remarks.

[Sterling Du:]

Thanks, Jim. Q2 revenue was in the range of guidance that we provided in May. We generated revenue of $13.2 million in the second quarter of 2016, an increase of 2% sequentially and a decrease of 10% from the prior year. The year-over-year revenue decline was mainly due to overall weak macro environment witnessed in our target markets, and slower than anticipated revenue growth from our new products such as for the tablet and smartphones. We remain very optimistic that the growth we are projecting in our new product lines, including product for the TV backlighting market, battery management product for the power tool and household appliance 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 the implementation of certain initiatives to monetize assets of the company, we believe we have transitioned the company to benefit from our next growth phase. We expect that the company will achieve a cash break-even point in the near future if market conditions do not worsen. In our backlighting business, we’re projecting renewed growth this year, based on increasing design activities in the TV market. Although the TV market remains dynamic, our backlighting business for the TV market continues to grow as our dollar content expands from the adoption of high end 4K TVs, where we have opportunity to design multiple LED driver ICs for high-end TVs. I’m pleased to announce that a major Tier1 TV manufacture has selected O2Micro path in their current flag ship 4K HD ultra-high definition models and these advanced local area TV technology is likely expected elsewhere. We continue to be the leader in LED backlighting for both TV and monitors, expanding the customer base in or backlighting business, including the market leaders such as Sony, Toshiba, HP, Dell, Lenovo, Skyworth, TCL, Hisense, among others. O2Micro's proprietary analog power management technology in battery management sector supports a variety of the end markets continue to grow with our expanding customer base. A Korean and A Japanese battery makers are adopting our battery products. Several products in the battery group have been launched, which increase silicon content in the same customer base. We are making stable progress with smartphone and tablet manufacturers. Although due to the weak market and the designing complexity, the adoption rate of this product is slower than we had anticipated. We do have a chargeable step order from multiple second tier Chinese phone makers. We expect to grow this business at initial penetration base throughout the remaining quarters of 2016 and expect further growth in 2017 next year. We remain optimistic that our core power management product line including backlighting, management products, power ICs for smartphone and tablet, continue its growth momentum from this year to the next. At this time, I'd like to thank you for listening to our conference call and turn the call back to the 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 take our first question from Tore Svanberg of Stifel. Please go ahead. Your line is open.

[Tore Svanberg:]

Yes, thank you. A few questions. First of all, Perry could you just add a little bit more color on the sale of the building in Taiwan and maybe repeat again what you said about the non-operating income for the September quarter?

[Perry Kuo:]

Yes. For September we expect the other income will be in the area of $2 million to $2.5 million. This is mainly from the income that we sell. We sold them some portion of the Shanghai office basically in China that we sold it in April this year and we received the money in July. We expect the proceeds from the sale will be in the area of $1.8 to $1.9 million.

[Tore Svanberg:]

Okay, very good. Thank you. And then as far as the gross margin is concerned, could you talk a little bit more about where the mix dynamics stand today? So just give us an update on what part of your business drives a higher versus lower gross margin?

[Perry Kuo:]

The higher potion of the growth margin stick to the higher performance backlighting for the 4K TV, LCD TV and also battery management higher, and moderate is the power area and also some high performance backlighting. For the lower one, will be the new products that we launched in the new areas which may require some more quarters to ship. And of course some of the general lighting which shared some lower gross margin of the lower and the corporate gross margin.

[Tore Svanberg:]

Very good. And just a general question for Sterling. What percentage of the revenue now comes from newer products versus more legacy type businesses?

[Sterling Du:]

I assume that you meant the power product for the smartphone template. That’s still small for the new product. It’s not properly -- we just received multiple orders and we expect that could be a multiple customer and it could be a foundation to grow for the next Q1 next year. Probably see people to expand to other platforms. If we want to combine other our new product including the battery for the power, and that for the batteries of power tool and that is the new product we have mentioned in the past conference and that all together we have achieved about 30% minus, plus.

[Tore Svanberg:]

Very good. Just one last question. You talk about some better content in backlighting for K4 TVs. Can you just give us a rough estimate of what we're talking about here? Is it 2X, 3X? Just trying to get a better sense for the size of the opportunity.

[Sterling Du:]

Could you say it again, 2X? I didn’t catch you.

[Tore Svanberg:]

Yes. The dollar content for backlighting in 4K TV, is that 2X or 3X or just a rough estimate of how much more content you get?

[Jim Keim:]

Tore, that’s a fairly complex question because of the complexity of the TV, but let me answer it as best we can. First of all, it’s a high end product, so it does carry higher ASP, in some cases significantly higher ASP. Also there tends to be multiple chips in each -- we're talking about very large class sizes. And in the one that was launched for instance first, there are 4 chips per. If you go to larger class sizes from that, that can be even more chips. So it's a significant ASP per TV increase, but it does go into the very high end TVs.

[Tore Svanberg:]

Thank you very much.

[Operator:]

And we'll take our next question from Tom Sepenzis of Northland. Please go ahead. Your line is open.

[Tom Sepenzis:]

Good morning. Thanks for taking my question. Just curious as to what impact the shift from LCD to OLED will have both in the television market and the smartphone and tablet market, in terms of your backlighting business.

[Sterling Du:]

For the last screen 4K, the OLED remained very expensive compared to the LCD technologies, but OLED could be, which has already happened for the small screen projects that are formed, we are now participated the OLED for the phone driver. We do watch closely for the OLED in case the size go up, but currently our local area, advanced local area teaming is for the high-end and also for the large screen LCD panel TV and that sector in the near future is not impacted by the OLED per se.

[Tom Sepenzis:]

Okay, but do you have any opportunity to play in OLED for either large or small panel displays as they start to take more market share next year and then the following or is that something that potentially concerns you?

[Jim Keim:]

We are doing our work in the OLED areas specifically related to TV. However, it remains to be seen who's going to adopt OLED for TV. Obviously, LG claims to be a leader in that area, and I believe they are. Samsung has made the opposite statement, that they will move away from OLED, keep it just for small displays because there is some concern over life and performance issues relative to OLED. So yes, we are doing work. We are focused very much on understanding what's going on, but some of the companies we work with do not really have plans to move forward at this point in time with OLED. Certainly at the lower end of the market, it is a goal of ours to penetrate into the lower end products, including the smartphone areas we mentioned before.

[Tom Sepenzis:]

Great and then on that note, the smartphone biz, you said you just started shipping in the June quarter and that is now expected to ramp as we go through the rest of this year and into next?

[Sterling Du:]

Yes, that’s correct.

[Tom Sepenzis:]

Do you have any kind of color in terms of how many wins you have or what the ASP is that you’re working with there or what kind of potential units you might be able to expect next year?

[Jim Keim:]

It's really too early for us to project that. We indicated that as we move forward, we will give you more color on that. We think it's just a little premature at this point, but it is multiple design wins.

[Tom Sepenzis:]

Fair enough. And I'm sorry, I missed the break down of the 4 different markets so you gave earlier?

[Jim Keim:]

Yeah, so consumer was approximately 50% to 55% of revenue. Industrial was 35% to 40% of revenue. Computer was 10% to 15% of revenue, and communications was less than 5% of revenue.

[Tom Sepenzis:]

Great. Thank you.

[Operator:]

And we'll take our next question from Lisa Thompson of Zacks Investment. Please go ahead. Your line is open.

[Lisa Thompson:]

Hello. So let's just go back a little bit to what you're thinking is on the next, going forward. So have we reached bottom on quarterly revenues? You think that you're going to have sequential growth from here on?

[Sterling Du:]

Yes.

[Lisa Thompson:]

Okay then, that's good.

[Sterling Du:]

Good.

[Lisa Thompson:]

I'm a little confused about the expense guidance for Q3.

[Perry Kuo:]

Q3 guidance, R&D $4 million to $4.5 million. SG&A $4.5 million to $5 million. Both are exclusive of stock-based compensation expenses.

[Lisa Thompson:]

Right. So that means it's going to be higher than the $8.8 million that you had this quarter?

[Perry Kuo:]

Q quarter R&D some lines will push out from Q2 to Q3. So actually for the headcount expenses and others are more or less like Q2, except it could be a little bit higher in Q2. But this is good for our future growth momentum. SG&A will be in the area of the Q2 area plus minus.

[Lisa Thompson:]

Okay. And as far as gross margin goes, is there a trend? It seems to be bouncing around a certain area. Do you think that that’s going to continue to improve? Is that going to continue to improve?

[Perry Kuo:]

This is the more product mix and also kind of the number of the new product launch and the readying of the new product. Normally one to two quarter for the new product launch. We may probably experience some unexpected loss from the period.

[Lisa Thompson:]

Okay, so you think it’ll change each quarter?

[Perry Kuo:]

Yes, because of the number of the new product, but normally our yield can be improved in one to 2 quarters with the rate.

[Lisa Thompson:]

All right. Good. So as far as next year goes, where do we look for the greatest growth? Is it going to be smartphones or battery management?

[Sterling Du:]

On the backlight it will be the first driver to grow next year and then power tool is two driver.

[Lisa Thompson:]

Okay. All right. And is there any other plans for selling property or long term investments?

[Perry Kuo:]

Long term investment for the shares, there's one company listing in Taiwan. We may probably sell some portion of the shares. And also for some portion of the two Bay pay, the Bay. We are also looking for the opportunity to sell some portion of the two Bay Area. So we tend to continue to improve our cash level.

[Lisa Thompson:]

Is that something that’s going to happen this year?

[Perry Kuo:]

It depends on the pricing. The sales of the long-term shares of the company may happen by this year. And the sales of the two Bay office we probably will look for a good opportunity for the company.

[Lisa Thompson:]

Okay, great. Thank you so much.

[Operator:]

Thank you. And there are no further questions in the queue. I’d 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 follow-up questions. So, have a good day, and thank you again for your attention. Goodbye.

[Operator:]

This now concludes today’s program. Thank you for your participation. You may disconnect at any time.