O2Micro International Limited
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro’s Financial Results for the Third Quarter of Fiscal Year 2016. If you would like a copy of the press release we issued this morning, please call Daniel Milberg [ph] and also email Daniel Milberg [e-mail] or call 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 9, 2016 at 9

[Unidentified Company Representative:]

Thank you. This is this is Dan Milberg. Good morning and thank you all for dialing into our call and my apologies for the inconvenience and as we worked out the phone number this morning. Today, we’re going to be discussing the O2Micro financial results for the third quarter of fiscal year 2016 ending September 30, 2016. This is Daniel Milberg, Corporate Communication 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 are not historical facts -- 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, 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 updates to this information. With me today are Perry Kuo, our CFO and Director; Jim Keim, our Head of Marketing and Sales, and Director; and Sterling Du, O2's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be opened to your questions. At this point, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights for the third quarter fiscal year 2016 ending September 30, 2016. Perry?

[Perry Kuo:]

Thanks, Daniel. We will now review our financial results for Q3 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 losses from discontinued operations. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2016 was $14.4 million. GAAP net income in the third quarter of 2016 was $1.3 million. If we exclude stock-based compensation of $376,000 the non-GAAP net income will be $1.7 million. GAAP net income per ADS in the third quarter of 2016 was $0.05, non-GAAP net income per ADS was $0.07. Gross margin was 52.6% in Q3. The gross margin reflects the current revenue level and the product mix. R&D expense was $3.9 million or 27% of revenue. This amount excludes stock-based compensation expense of $54,000. SG&A expense was $4.4 million or 30.6% of revenue. This amount excludes stock-based compensation expense of $322,000. The non-operating gain was $2.7 million. Income tax was $282,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3 2016, we repurchased 53,200 ADS units at a cost of $84,000. Q3 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 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 $53.1 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.07 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q3 was $6.6 million. Our DSO is 42 days; it is in our target range of 40 to 60 days. Inventory was $8.5 million at the end of the third quarter. This represents 116 days of inventory and the inventory turnover was 3.1 times in Q3. Net cash provided by operating activities of $1.6 million. Capital expenditure was about $210,000 in the third quarter for R&D and IT equipment purchase. Depreciation and amortization was $430,000 in Q3. At the end of the third quarter of 2016 O2Micro had 365 employees, 56% of which are engineers. At this time I would like to provide our financial guidance for the fourth 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 Q4 revenue to be up 2% to 8% sequentially. We are guiding the Q4 gross margin will be in the range of 51% to 53% and is mainly from the product mix. R&D expense, excluding stock-based compensation should be $4 million to $4.5 million in Q4. SG&A should be $4.5 million in $5 million 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 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 regard to our share repurchase program, we have been active in this program historically, and we plan to continue going forward. Since 2002, we have repurchased over 19 million ADS share for approximately $100 million. As of the end of Q3, we had 9.5 million remaining in our share buyback authorization. Returns to shareholders are very much of 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 $15.5 million to $16.5 million in quarterly revenue and our profitability breakeven point is between $17 million to $18 million in quarterly revenue. Given the uncertain demand and macro environment, we are prepared to continue to manage cost as needed. Although we believe we have a nice current cost based on current and anticipated revenue levels. I 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. Last time we stated that we are pleased with ongoing design wins including battery management and LED lighting that will enable revenue growth as we move through 2016. We also stated that we expect design wins in our new power products to contribute to revenue growth in the second half of 2016. In fact our performance in Q3 and projected growth in Q4 continue to reflect this. Let’s review the progress in each of these areas. First, let's discuss our largest product line intelligent lighting. We had good growth in Q3 for our backlighting products. As previously announced our area backlighting product that focused on the rapidly growing 4K TV market has entered mass production for a major OEM and help drive Q3 revenue growth. We are pleased to announce that additional design wins that other major international OEMs will also ramp in the high volume production in coming quarters. These design wins should enable ongoing growth for our backlighting business in TV despite weak overall market projections for both the TV and monitor markets. We have also focused more of our backlighting R&D effort in industrial and automotive backlighting and have significant design wins in process that should keep our backlighting business healthy for years to come. As previously stated, 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. As projected we are seeing revenue growth in the second half of 2016 with our expanded design wins. This includes an increasing number of major brand OEMs whose LED lighting products go into well establish retail stores. This includes activity in Asia, Europe and the Americas. These customers include GE, LG, Lights of America, Orem, Panasonic, Philips, Samsung, TCP and Toshiba. Next let’s discuss our second largest product line, battery management. Our battery management product line continues to enjoy excellent year-over-year growth as our new product design activity remains robust and establish customers. To continue this growth going forward into 2017 and beyond we are focused on further expansion of our product offering into new market areas. This will include product expansion in the 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. We will expound on these products and opportunities as we move forward in future quarters. Our current market activity includes power tool, e-bike, e-vehicle and vacuum cleaners where our 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. Finally, let’s discuss power products for tablets and smartphones. We are seeing our first design wins for our power management products for the smartphone and tablet market begin to ramp into production. As stated last quarter increases in volume in these new products are expected to enable second half growth in power more than offsetting any revenue loss in legacy power products. In fact Q3 power product revenue did grow and our second half power revenues are now projected to end well above the first half revenue levels. We do have ongoing key design win activities however the major revenue growth contributions are not expected until the second half of 2017. I will now turn the call over to our CEO, Sterling for closing remarks.

[Sterling Du:]

Thanks, Jim. O2Micro report Q3 2016 revenue of $14.4 million. Revenue was up 9.2% sequentially and up 5.7% from the prior year. The gross margin in the third quarter of 2016 was 52.6% this gross margin was up from 50.7% in the prior quarter and up from 52% in the third quarter of last year. We’re pleased to see our power management technology receive key customer acknowledgement with our design activity in past years and quarters result in growth driver despite an overall weak macro environment and weakness in the target markets. We remain optimistic that the growth we are projecting in our new product line including the product for the TV backlighting market, battery power management product or power tools, household appliance and the product for the smartphone, tablet will gain further momentum into 2017, which gives us both operating expense reduction and implementing the certain initiatives to monetize asset of company, we have enabled the company to be lean and cost effective to achieve the next milestone with full momentum. We expect that the company will achieve the cash breakeven point in the near future if the market conditions do not get worse. In our backlighting business, we’re projecting renewed growth this year, based on increasing design activities in the TV market. We understand that the TV market remains dynamic, our backlighting business strategy for the TV includes one, focus on expanding growth and penetrating key market leaders of high end 4K TV. Second, increase the signal content. There are two ways to achieve the content increase [indiscernible]. Market wise design in 4K local TV backlighting technology and the second these are higher integrate IC for next generation TV to meet higher standards such as the 0.25 watt for maximum standby power consumption for the TVs. And lastly we move beyond the Japanese market as Jim indicated, our current customer also include a market leader such as Sony, Toshiba, HP, Dell, Lenovo, Skyworth, TCL, Hisense, among others. We plan to leverage our technology elsewhere into the China and continue to be worldwide leader in LED lighting for TV and monitors. Our analog power technology is battery management sector supports variety of end markets from power tools, UPS, [indiscernible] e-bike, vacuum cleaners and [indiscernible]. Several new products in the battery group have been launched recently to open new generation battery safety protection and much faster AD converter; we also achieve high cost reduction and reliability enhancement. We believe the safety of battery operations continue to be the priority for mobile device. For the Smartphone and the table market, we make progress by releasing new charger IC which provide decent design, on the go charge booster, upgradable to plug charging and higher integrated solutions. Due to the longer than expected design cycle the adoption of product is slower than we have anticipated. We do have confidence in the new charger IC penetrating in the China second tier market in 2017. Overall the cell phone business right now is in initial stage and for the remaining 2016 like Jim indicated the second half 2017 will be growth. At this time, I would like to thank you for listening to our conference call. And I turn back over to Dan. Daniel please.

[Unidentified Company Representative:]

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

[Operator:]

Thank you. [Operator Instructions]. And we’ll take our first question from Tore Svanberg with Stifel. Your line is open, please go ahead.

[Tore Svanberg:]

Yes congratulations on good growth. My first question is relation to gross margin it looks like…

[Jim Keim:]

Tore, could you speak louder, we’re having trouble hearing you.

[Operator:]

Mr. Svanberg, we are not able to hear you very clearly, if you can come closer to your phone please.

[Tore Svanberg:]

Yes, sorry can you hear me now?

[Operator:]

Yes, we can.

[Jim Keim:]

Much better. Thank you.

[Tore Svanberg:]

I’ll try to question again. So, first of all congratulations on the return to year-over-year growth and my first question was in relation to gross margin, so the mix is continue to improve and Perry I was hoping you could comment on the ability to maintain gross margin here sort of maybe 52% range.

[Perry Kuo:]

Yes the gross margin, we continue to penetrate into further on the TV area this is the higher end corporate average. This will actually will help our average gross margin this is what we’ve mentioned about the product mix. But that also penetrate into the lower end market in some other area as we mention earlier. So for this area we’d like to keep in the balance that we would like to continue to grow in both the revenue and also gross margin, keep gross margin in the area of the 50% to 52% and sometime it could be over the earnings because of the product mix.

[Tore Svanberg:]

Okay. And Perry, on SG&A you’re guiding the midpoint to be about $4.75 million, which would be up quite a bit sequentially, are these just some catch up expenses since they were kind of down in Q3 or is there anything else going up?

[Perry Kuo:]

Expense I think the major is still that we have some NIE [p] like not yet completed in Q3. So we will push this line, the fundable expenses from Q3 to Q4. So, Q4 could be a little bit over than $3.9 million in Q3.

[Tore Svanberg:]

Okay. And maybe a question for Jim or Sterling, so it sounds like the penetration or further penetration to smartphone and tablet is delayed, how should I think about total revenue growth in light of that do you still kind of have the bridge between now and the second half of next year and enough momentum in the light -- in the intelligent lightening and battery management to sort of continue to grow until the second half of next year?

[Sterling Du:]

Yes, so we do see our quality design activity turning to the revenue right now, just the revenue growth is slower than we anticipated because some shortage in the current supply chain smartphone area, especially for the China, Chinese maker second tier, so that’s one of the factor. Another factor is due to the -- some of the market is not grow as original expect. But as you just mentioned we have engaged and we try to put more resource to the fast charging and thus additional opportunity for us for 2017. So we believe that we grow 2017 especially second half of next year.

[Tore Svanberg:]

Very good. Just one last question Sterling for you, could you just update us on corporate governance specially in relation to the Board composition please?

[Sterling Du:]

Yes, yes. We have new Board member call Dan Lenehan, Mr. Lenehan and he has been 35 plus years in semiconductor has been a key positioning in Intel and also Xilinx, he has been manage the independent group inside a big company and then very familiar with the architecture to the IPGA technology and also the foundry integration and management. So with his addition to our Board, we believe we have more the view of the future trend and also can increase and enhance our leadership with the foundry and the supplier. In the meanwhile we can maintain the good leadership and enhance that with Intel and other partner in the U.S.

[Tore Svanberg:]

That’s very helpful. Thank you very much.

[Sterling Du:]

Thank you.

[Operator:]

[Operator Instructions]. We will go next to Lisa Thomson with Zacks Investment Research.

[Lisa Thomson:]

Hello and congratulations from revenue growth. Very nice to see after all this time.

[Jim Keim:]

We agree.

[Lisa Thomson:]

Well I am going to talk a little bit about the things below the operating income. Can you just describe what exactly was sold in real estate this quarter and what you have left?

[Perry Kuo:]

Non-operating income.

[Lisa Thomson:]

Yes.

[Perry Kuo:]

Okay. Okay, so the non-operating income inclusive of again from the sales of the real estate and it’s our Shanghai building mentioned earlier, but again of the real estate was $1.7 million and some interest income $71,000 we have some rental income it’s about $110,000, we have some -- we also sold some one of the long term investment. But again was a $523,000 and realized exchange gain $211,000 and also we received a cash dividend from through our investee in total, $76,000.

[Lisa Thomson:]

Okay. So what was the real estate that was sold and is there anymore left of that property?

[Perry Kuo:]

Can you ask again? I cannot hear it clearly.

[Lisa Thomson:]

What was the real estate that was sold this quarter?

[Perry Kuo:]

In the Q3 quarter we sold our Shanghai office.

[Lisa Thomson:]

Okay. Is there anything left, what’s left as far as real estate that you own, beside California?

[Perry Kuo:]

We still have two floors in Shanghai, is for our current self-use. And we don’t intend to sell in the short-term and also we have some floor space in two Bay, some for rental and some we are open to sell into Taiwan. And also we have one office in Santa Clara, United States.

[Lisa Thomson:]

Okay, great. And is there anything planned for the fourth quarter?

[Perry Kuo:]

We opened a portion of the Taiwan we open to sale, but we need to wait for some opportunities. Currently there are some government policy market fluctuation. So we are open and we will look for good opportunity.

[Lisa Thomson:]

Okay. What was the cash burn for Q3?

[Perry Kuo:]

For Q3 we have the positive from the operation $1.3 million. Cash operation from the -- cash in from the operations.

[Lisa Thomson:]

Okay, great. So it looks like you're going to have another up quarter in the fourth quarter. And looking at last year's numbers do you think that it could possibly be up from now on revenue growth?

[Perry Kuo:]

For Q4 yes, beyond Q4 we probably need to wait and see and update you in next coming quarter and Jim can probably comment on that.

[Jim Keim:]

Well traditionally there is some softness in Q1 in some areas like TV. So we will update that, but certainly we do have expectation of continuing to overall grow our revenue through 2017.

[Lisa Thomson:]

Okay good. Alright, this thing look great. I hope things will continue this good. Thank you very much.

[Perry Kuo:]

Thank you.

[Operator:]

And that concludes our question-and-answer session. And I'd like to turn the call back over to Dan for any closing remarks.

[Unidentified Company Representative:]

Thank you. And again everyone thank you for all your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888 with follow-up questions. This recording and any press releases will be on our O2Micro website. And thank you very much and have a great day. Good bye.

[Operator:]

Thank you everyone. That does conclude today's conference. So we thank you for your participation.