O2Micro International Limited
Q4 2016 Earnings Call Transcript

Published: 25 Jan 2017

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Fourth Quarter of Fiscal Year 2016. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg 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 February 17, 2017, at 9

[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 2016 ending December 31, 2016. This is Daniel Meiberg, Corporate Communications for O2Micro. I'd like to remind listeners that the discussions 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 material due to numerous Risk Factors. Such 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 open for your questions. At this point, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the fourth quarter of fiscal year 2016 ending December 31, 2016. Perry?

[Perry Kuo:]

Thanks, Daniel. We will now review our financial results for Q4 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 fourth quarter of 2016 was $15.9 million. GAAP net income in the fourth quarter of 2016 was $12,000. If we exclude stock-based compensation of $372,000 the non-GAAP net income will be $384,000. GAAP net income per ADS in the fourth quarter of 2016 was $0.00. Non-GAAP net income per ADS was $0.01. Gross margin was 54.1% in Q4. The gross margin reflect the current revenue level and the product mix. R&D expense was $4.1 million or 25.6% of revenue. This amount excludes stock-based compensation expense of $52,000. SG&A expense was $4.5 million or 28.6% of revenue. This amount excludes stock-based compensation expense of $320,000. The non-operating gain was $727,000. Income tax was $338,000 in the fourth quarter and is mainly based on income tax provisions from each taxable location. In Q4 2016, we repurchased 22,160 ADS units at a cost of $41,000. Q4 2016 revenue by end market breaks down into the following percentage. Consumer was 45% to 50% 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 fourth quarter with $52.9 million in unrestricted cash and short-term investment. This represents cash and cash equivalents of $2.07 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q4 was $7.2 million. Our DSO is 39 days is slightly less than our target range of 40 to 60 days. Inventory was $9.3 million at the end of the fourth quarter. This represents 110 days of inventory and the inventory turnover was 3.3 times in Q4. Net cash provided by operating activities of $551,000. Capital expenditures were about $91,000 in the fourth quarter for R&D and IT premium purchase. Depreciation and amortization was $397,000 in Q4. At the end of the fourth quarter of 2016, O2Micro had 363 employees, 56% of which are engineers. At this time I would like to provide our financial guidance for the first quarter of fiscal year 2017. This guidance reflects our best estimate for the current environment and is subject to change. This is the only official guidance, we will provide unless we update with a public announcement in the future. O2Micro expects Q1 2017 revenue to be 5% to 10% lower than Q4 2016. We are guiding the Q1 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 Q1. SG&A should be $4.5 million to $5 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 subsidiaries in different countries, we expect our tax amount to be in the range of $200,000 to $300,000. The goal of our management team and the board of directors is to maximize shareholders value. We have accomplished this by taking the necessary steps which included reducing operating expenses, and monetizing assets on the balance sheet. In regards to our share repurchase program, we have been active in this program historically and we plan to continue going forward. Since 2002, we have repurchased over 19 million ADS shares for approximately $100 million. As of the end of Q4, we had 9.4 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 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 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 Keim:]

Thank you, Perry. Good morning everyone. Q4 revenue was stronger than expected due to strength in both battery management and LED lighting. This was largely due to our design wins earlier in 2016. We expect ongoing growth in both product lines in 2017 although Q1 may be down somewhat in LED lighting due to normal seasonality due to market conditions in TV and monitor as well as the impact of Chinese New Year. Our products met our plans in Q4 and we expect ongoing growth in new product areas in 2017. Let's review the progress in each of these areas. First let's discuss our largest product line, intelligent lighting. We had outstanding growth in Q4 for backlighting products. As previously announced, our new area backlighting products that is focused on the rapidly growing 4K TV market continued to ramp into higher volumes to help drive Q4 revenue growth. We are pleased to announce that additional design wins at other major international OEMs ramp into high volume production this year. These design wins should enable ongoing growth of our backlighting business and TV despite lackluster 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. As stated previously, our general lighting business remains focused on growth at the high-end of this market, specifically our proprietary and patented free dimming and the high-power general lighting products where we can enjoy reasonable margins and profits. As projected, Q4 did enjoy revenue growth, we remain optimistic that steady growth will continue in 2017, with our expanding design wins in the free dimming area. This includes an 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. Customers include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba. Next, let's discuss our second largest product line, battery management. Our battery management product line continue to experience excellent growth in Q4 versus Q3 2016 as well as Q4 of 2015, as our new product design activity remains robust at both established and with new customers. We expect to continue this growth going forward in 2017 and beyond as we achieve a growing number of design wins in those markets where we are strongly established as well as expansion into newer market areas such as drone and solar battery management. Our product expansion plans include expansion into more cost effective products for our 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 expand on those products and opportunities as we move forward in future quarters. Our current market activity now includes power tool, e-bike, e-vehicle, drones, and vacuum cleaners where 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 product continues to expand 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 that includes solar systems as we continue to see usage of our battery management products expand at major OEMs. Finally, let's discuss power products for tablets and smartphone. We have a growing number of design wins for our new power management products for the smartphone and tablet markets. As stated last quarter, increases in volume in these new products did enable second half growth in power that more than offset any revenue loss in legacy products. We expect this trend to continue in the first half of 2017 with our ongoing key design win activities. As previously stated, the major revenue growth contributions in this area are not expected until the second half of 2017. I will now turn the call over to our CEO, Sterling Du for closing remarks.

[Sterling Du:]

Thanks you. Good morning everyone. O2Micro report Q4 2016 revenue of $15.9 million. The revenue was up 10.1% sequentially and up 18.9% from a comparable quarter of the prior year. The gross margins in the fourth quarter of 2016 was 54.1%, the gross margin was up from the 52.6% in the prior quarter and up from the 50.4% in the fourth quarter of 2015. We're pleased to see the significant design wins in the past quarters have translated to the meaningful revenue and our power management technologies received the market popularity. Along with the revenue growth, our high gross margin indicates strong core competence. We have been optimistic for the growth momentum including the products for the TV backlighting market, battery management product for the power tool household appliance market, and the product for the smartphone market. We conduct expense reductions, improve operation cycle time, as well as effectiveness and also took initiatives to monetize assets of the company in past years and quarters. The company now not only becomes lean and cost effective to operate but focus on the key sectors and the key customers. In our backlighting business, we are seeing increasing design activities in our TV markets including the high definition TV with local dimming technologies. We believe the local dimming will soon be deployed at mainstream TV products. We understand that the TV market remains dynamic, yet a superior technology with high voltage power solution can support large and a more advanced local dimming. We're happy to see our product opening extended beyond advertising to other AC/DC and DC/DC application for the TV customers as we mentioned before. In addition to customer, consumer market we have a new opportunity of the local dimming enter the automotive telematic market which will incrementally increase the silicon content. Our analog power management technology in our battery management sector support variety of end markets from power tools, UPS, li-ion, battery, and the e-bike, vacuum cleaner and other IoT. Our recent promoted product to the battery tools market come with a faster AD converter. Advanced accuracy level and enhanced reliability, there are more activities in these current design wins. Furthermore, the demand for our existing power management products or power tools which was designed many years ago remains very strong. The long life span of our IC indicates our management, power management IC have high entry failure and otherwise core competence. We made progress in the smartphone by releasing new charger IC which provides good quality, on the go charger booster, actually [indiscernible]. The smartphone is an additional target market to us and our focus in the coming years for the smartphone. Our cell phone business is expanding the design win phase right now and with initial mixed production of few customers, we expect it to grow in 2017 second half. At this time, I would like to thank you for listening to our conference call and turn back to Daniel, please.

[Daniel Meiberg:]

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

[Operator:]

[Operator Instructions]. And we'll take our first question today from Tore Svanberg with Stifel. Your line is open.

[Tore Svanberg:]

Yes, thank you and congratulations on the results. So my first question is on gross margins. So I recognized you're guiding it to be down in Q1 because of seasonality and the mix. But if we think about the $16 million you did in Q4, how would you classify new revenue versus legacy revenue and I don't know if you can put a certain percentage of that but obviously the new revenue seems to be increasing as a percentage of your total sales.

[Perry Kuo:]

For the legacy product which is actually very minimum I think on the 1 million area less than 10% and for the new product, what we call the new product actually each category we have the new product. The reason why we have high growth margins product mix in Q4 which resulted from the result of the high-end TV and also for the power tool which we also have higher share mix in the industry product which I reported earlier.

[Tore Svanberg:]

Okay, very good. And Sterling, you mentioned your lighting technology can find a home in automotive telematics. I was hoping you could expand a little bit more on that, what type of an opportunity is this for you and when should we start to expect some potential revenue in that area?

[Sterling Du:]

We are in automotive telematics, backlighting business for many years and that is a categorizing industry, the mix and but the most recent developing trend for the automotive due to electrical vehicle or due to the autonomous vehicle or due to so-called level one, level two. So then this numerous camera add to the automotive itself as a trend. Now when there is multiple camera putting, installing design to the automotive including the front rail and the side and sometimes even more and try to some of the Chinese talk about the 360 degree surrounding visual. So then that inevitably that you need to display inside of the car. So we are not saying to take just one jump going to a huge telematic display but however the display for the telematic is going to be increasing their size. So when they're increasing the size and we're currently in there and plus we have been in the leadership in the local dimming, so this two factor combined together, we are seeing in the future power opportunity we can increase our second content for the automotive telematics backlighting.

[Tore Svanberg:]

Very good and last question, and I'll go back in queue, you talked about your design wins in smartphones and expecting perhaps a ramp in the second half. Can you maybe just talk a bit about what gives you that confidence because obviously the smartphone market is very dynamic and sometimes who knows what platform accelerates. So maybe you could just give us some confidence that you do expect smartphones to actually ramp in the second half of this year.

[Perry Kuo:]

We are looking at the landscape of the smarphone with a very large number of this opportunity, the TAM and also the SAM, because TAM is target available market, SAM is sellable available market. Both is relative quite high compared to the previous conventional market we target for our consumer like PC, notebook or even TV. So we're being promote our product for more than one year and we're just seeing our ICs has been adopt and we will see the early production multiple print, multiple customers and go to multiple geographic areas and then we continue to seeing this more activity, sometimes this activity takes longer cycle than we expected due to various shortage in our customer base, sometimes they have shortage of this component, that component but virtually they will have say more and more misprotection due to the relative increasing the design activity, so this give us confidence that's number one. And number two as I mentioned although the initial redesign and the production, the project, the volume may not be significant. However as the smartphone manufacturer, they are quite large volume in terms relative to compared to our conventional. So given the time and also we're improving in the production and we are confident start once we're getting and that could generate the revenue, the sequential revenue will be faster than the conventional notebook market. So we feel encouraged and also we think that second half of 2017 should we see something coming up.

[Tore Svanberg:]

Very good and congratulations on returning to growth in 2016. Thank you.

[Sterling Du:]

Thank you.

[Operator:]

Thank you. We will go next to Tom Sepenzis with Northland. Your line is open.

[Tom Sepenzis:]

Hi thank you for taking my questions and I will echo my congratulations. Let me just ask you mentioned in your prepared or in your press release that there were inventory issues that we are going to combine with seasonality in Q1 in terms of the revenue being down sequentially. So I was just wondering, if you could highlight what inventory issues you were actually seeing?

[Jim Keim:]

Well particularly in the TV area, you may or may not be aware there were some panel shortages that that did occur in the TV area. Nevertheless we did deliver the requested quantities of our products to some of those OEMs and ODMs that were involved, so they were not able to clear out all of their TVs due to panel shortages or in some cases other product issues where they had shortages. So some of them did move them to Q1 with some inventory in hand and they will take little while to clear out that inventory, so that's where the inventory situation came at the top.

[Tom Sepenzis:]

Great, thank you. And how long do you expect that to persist?

[Jim Keim:]

It will be all flushed out by the end of Q1, it's in our production Q1.

[Tom Sepenzis:]

Okay. Thank you. And then in terms of the general lighting business, could you just expand upon what your opportunities are there in terms of returning to growth and any new markets that you might be targeting?

[Jim Keim:]

Well we did grow in Q4 and we do see a lot of design win activity. We see more and more of the major OEMs beginning to pick up free dimming technology, it has not grown as quickly as we have liked but there has been ongoing growth. So we do see this, we see the projections from them; we see the run rate that they expect. So there is not going to be an explosion of growth but we expect a slow and steady growth as we move through 2017.

[Operator:]

[Operator Instructions]. We will go now to Lisa Thompson with Zacks. Your line is open.

[Lisa Thompson:]

Hi great quarter, nice to see it and I hope that pertains up quarters for the rest of the year which we used to come. Let me just ask you a question about the high-end TVs, you said that they are adding local dimming technology, can you explain what that means on a TV set?

[Jim Keim:]

Well as you move to higher definition TVs particularly on the very large TV sectors, we announced one OEM for instance it goes into their 60 plus inch all went to 100 inch TVs, the backlighting technology requires more complex lighting to get very high definition in the 4K area. So as these get larger, the chips not only the silicon chips not only get more sophisticated but in many cases, we deliver more products per TV right now many of the TVs are taking four of our chips at the high-end per one TV.

[Lisa Thompson:]

Okay. So the free dimming part is not something new right?

[Jim Keim:]

No, free dimming goes into our general lighting.

[Lisa Thompson:]

No, I'm sorry, I meant local dimming.

[Sterling Du:]

Local dimming for TV.

[Jim Keim:]

It's not new, we have been working in this area for some time, we ramped in production in the second half of 2016 and then we did achieve additional design wins that will be coming into volume as we move through 2017.

[Lisa Thompson:]

Okay, great. And as far as 2016, what was kind of the breakdown of your geographic locations of where you sell products?

[Jim Keim:]

Well geographically we ship most of our products into China, we ship some into other areas including Japan, some goes into Korea, some goes into Taiwan, but much of that goes into ODMs that then ship worldwide. So most of the production is actually now done here in China but nevertheless that product moves worldwide from U.S. anywhere in North America, South America, Australia on into even places like Turkey. So the product goes from China worldwide. So we actually ship most of our products into China at this point in time.

[Lisa Thompson:]

Okay. Do you see that changing this year or is it still going to be pretty much the same?

[Jim Keim:]

Pretty much the same, over the past few years it's become more and more dominant actually in China because there really set up to do the production. So more and more of the OEMs have moved into China. Good example of that is actually the lighting market itself for the replacement of the traditional light bulbs, as they want LED; most of that production came up in China. So more and more of the thermal lighting products comes out of China, the vast majority of it at this point.

[Operator:]

Thank you. And we will take a follow-up question from Tore Svanberg with Stifel. Your line is open.

[Tore Svanberg:]

Yes thank you. I have two follow-up questions. First of all as we start looking at the smartphone opportunity especially as it relates to dollar content with battery management, should we think about the constant opportunity being sort in the $0.20, $0.30 or could this potentially be sort of more in the $1 range.

[Sterling Du:]

Yes I think $0.20 to $0.30 yes that's good rate.

[Tore Svanberg:]

Very good and then last question is a follow-up for Perry, Perry the other income line moves around quite a bit, how should we think about other income for the Q1?

[Perry Kuo:]

Q1 I think it will be in the area of $200,000 to $250,000.

[Tore Svanberg:]

Great. Thank you very much.

[Operator:]

Thank you. And there are no further questions in the queue. I would like to turn the call back over to Dan for any closing remarks today.

[Daniel Meiberg:]

Thank you and everyone thank you for your attention this morning. Please feel free to contact me at area code [phone], extension 8888 with any follow-up questions and I will get right back to you. Have a great day and thank you again for your attention. Good bye.

[Operator:]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.