O2Micro International Limited
Q2 2014 Earnings Call Transcript

Published: 23 Jul 2014

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro’s Financial Results for the Second Quarter of Fiscal Year 2014. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 408-987-5920, extension 8095, and we will fax you a copy immediately. It is also posted on O2Micro's website at www.o2micro.com under the heading Investors. There will be a replay available through July 30, 2014 at 9

[Scott Anderson:]

Good morning and thank you for dialing into O2Micro's financial results conference call for the second quarter of 2014 ending June 30th, 2014. 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 Report 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, Chairman and CEO. After the prepared remarks from these gentlemen, the floor will be open to your questions. Now I'd like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the second quarter ending June 30, 2014. Perry?

[Perry Kuo:]

Thanks Scott. We will now review our financial results for Q2 2014. Please note that financial results will be presented on a GAAP basis, unless we tell otherwise. The non-GAAP results excludes stock-based compensation expenses, 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 second quarter of 2014 was $17.4million. GAAP net loss in the second quarter of 2014 was $3.2 million. If we exclude stock-based compensation of $504,000, the non-GAAP net loss will be $2.7 million. GAAP net loss per ADS in the second quarter of 2-14 was $0.12; non-GAAP net loss per ADS was $0.10. Gross margin was 51.5% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $5.6 million or 32.4% of revenue. This amount excludes stock-based compensation expense of $227,000. SG&A expense was $5.9 million or 34.2% of revenues. This amount excludes stock-based compensation expense of $377,000. Income tax was $229,000 in the second quarter; is mainly based on the estimated effective tax rate on taxable locations. In Q2 2014, we repurchased 396,147 ADS units at a cost of $1.35 million. Q2 2014 revenue by end market breaks down into the following percentages; consumer was 50% to 60% of revenue; computer was 15% to 25% of revenue; Industrial was 20% to 30% of revenue; Communications was less than 5% of revenue. At this time, I would like to provide some additional information. O2Micro finished the second quarter with $56.2 million in unrestricted cash and short term investments. This represent cash and cash equivalent of $2.42 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q2 was $10.2 million. Our DSO is 47 days, which is in our target range of 40 to 60 days. Inventory was $9.6 million at the end of the second quarter. This represents 95 days of inventory and inventory turnover was 3.8 times in Q2. From a cash flow perspective, we generated $4.3 million cash outflow from operating activities in Q2. Capital expenditure was $338,000 in the second quarter, for digital equipment and software license. Depreciation and amortization was $1 million in Q2. At the end of the second quarter of 2014, O2Micro had 475 employees, 59% of which are engineers. At this time, I would like to provide our financial guidance for the third quarter of fiscal year 2014. 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 flat, plus or minus 5%. We are guiding the Q3 gross margin to be in the range of 50% to 52%. R&D expense, excluding stock-based compensation should be at the lower end of $5 million to $6 million range in Q3. SG&A should be $5.5 million to $6.5 million in Q3, excluding stock-based compensation expense. Stock-based compensation should be in the range of $500,000 to $600,000 in the third quarter. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $200,000 to $300,000 in the third quarter. In summary, our top line results in the second quarter were within the guidance range that we provided in April. In Q2, we continue to focus on our ongoing cost saving measures and we believe that we have aligned our operating expense structure to more effectively manage our business in the current environment, with the goal to reach a breakeven point in 2015. We believe our cash breakeven point is now between $19 million to $20 million in quarterly revenue and our profitability breakeven point is between $22 million to $23 million in quarterly revenue. Our guidance for the third quarter of 2014 reflects the ongoing [indiscernible] in our general lighting and the battery product lines, offset by continued weakness in our power management business for notebooks. Our goal and the focus for the remainder of 2014, is to grow our core mixed signal business from year ago levels. We will continue to invest in our carefully chosen growth drivers; general lighting, intelligent battery, intelligent power and backlighting, and we remain confident that the innovation and the investment we were making in these product segments, combined with strong design win activities and the market share gains will lead to consistent growth and the return to profitability in the future. We are now well underway in our supply chain management review and we expect to realize additional improvement to our cost structure profile in future quarters. Given the uncertain demand and the macro environment, we are prepared to continue to manage costs as needed. Although, we believe we have aligned current cost base on current and anticipated revenue levels, we remain very confident in our ability to support current and future customer demands and the progress [ph]. Finally, regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. At the end of the Q2, we had 15.5 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. 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. In the last two quarters, we began to share more information, including product sales information related to new products. We will now start that process in this call, and expect to further expand the information, as we move into the second half of the year, when run rates of our two fastest growing product lines, which are general lighting and battery management, should be at significantly higher and more predictable run rates. We are pleased to inform you that our general lighting revenues continued to grow in Q2, and remain on track to reach our goal of 15% of our 2014 total revenue as stated in January of this year. We continue to grow our sales at major customers through ODM and/or OEM design wins. Key customers like GE, Panasonic, Toshiba, IRIS OHYAMA and Samsung are utilizing our product technologies. In addition to the growth of sales of non-dimmable products, we are seeing a broader acceptance of our proprietary free dimming products and more and more during applications have a widening international customer base. Further, we are bringing out the traditional TRIA [ph] controller products for the legacy dimmable fixtures, and believe that this will be an excellent product to provide to the industry and consumers based on our years of experience in lighting activities. The second rapid growing area we have highlighted in our last call was battery management. Our battery management products continue to expand into new designs and applications and power tool, E-Bike, E-Vehicle, and more recently appliance markets. We are also seeing increasing design activity for our products and uninterrupted power supply applications, and remain confident that our battery management products will exceed 10% of company revenues in the second half. Despite our ongoing weak TV market, LED backlighting did experience growth in Q2, based on our strong position in TV and the beginning of shipments of key new novel design for smartphone lighting that began ramping into production in Q2, and is expected to boost revenues, as this product moves into high volume in the second half of the year. One disappointing area that has been dampening our growth, has been our power products, where a combination of weak notebook sales and dynamic shifts in OEM market shares have affected our revenue growth, and will impact our Q3 growth. Nevertheless, our new charger in DC-to-DC products are gaining acceptance in additional OEMs and in new tablet designs. We expect renewed growth in this area by year end. Finally, we would again mention that sales of legacy CCFL products that were less than 1% of sales, are expected to remain below this level going forward. I will now turn the call over to our CEO, Sterling Du, for closing remarks.

[Sterling Du:]

Thanks Jim. Q2 revenue was in the range of guidance we provided in April. We generated revenue of $17.4 million in the second quarter of 2014, an increase of 6% sequentially and down 7% from the year prior. In terms of end markets, general lighting remains a high growth story and our battery management continued its solid growth trajectory. Backlighting, especially for TVs, monitor, remain waiting for recovery from softness. We still expect our backlighting business to show moderate growth for the year. Our notebook business remains very challenging, and several of our large notebook customers have announced plan to reduce development in the notebook space. This decision directly impacts our guidance for the third quarter and for the remainder of the 2014. While there are some signs of renewed consumer interest and activities, the overall market for notebooks and PCs remain challenging, primarily in the emerging markets. We report a GAAP loss of $3.2 million in the second quarter of 2014 compared to a GAAP net loss of $4.4 million a year prior. We reported gross margin of 51% in Q2, an increase from 51.2% gross margin we reported last quarter, Q2 of 2013. During this challenging environment, we are able to increase our gross margin by 30 basis points from the year prior, attributable to our proprietary technologies, performance, priority, high quality as a result of our ongoing effort, streamline our cost structure profile. We mentioned several quarters ago, that [indiscernible] with a capable resource from a notebook market to fast growing smartphone and tablet markets. I'd like to highlight our progress and our goal of targeting smartphone and tablet manufacturers. We are recognizing revenue from a major smartphone manufacturer, who has a tough [ph] and O2Micro solution, and we expect to recognize additional revenue from this customer throughout 2014 and into 2015. We are also engaged with several tier-2 smartphone tablet manufacturer, and we expect to realize additional revenue from those customers in 2015. As a reminder, we are focused on not only providing solution for the moment, but also leverage the power technology, which applies to the notebook PC, to the tablet PC and the smartphone, in which most of them are one battery cell applications. I'd like to highlight the considerable progress that we have made in key growth drivers. Our LED general lighting business continues to grow rapidly based on two key factors. First, the old bulb replacement, light bulb marketing, is entering a significant growth phase and becoming well established, as the leader in LED general lighting. We continue to take advantage of global shift to LED lighting, and our strategy to use new product innovations, such as our free dimming to drive our growth. We are well positioned for the continued growing of the business into 2014. Secondly, our strategy to engage both worldwide OEM and ODM in [indiscernible], and both type of customers have relied on innovation reliability of O2 products for many years. Following successful penetration in Japan and in U.S., we are now engaged with some of the largest LED general lighting manufacturer in Chinese market. We believe that the industry of LED is in early inning of the LED lighting revolution, and we are well positioned as the industry leader, to benefit as the import [ph] industry grows. Our intelligent battery products for power tools, household appliance and power products, are also showing significant growth and is gaining momentum, which will translate to meaningful revenue upcoming quarters and years. We are gaining share in this market, we expect to be the market leader for battery management solution in near future; depend on the type of tool and appliance will generate between $0.50 to $1 [indiscernible] in a high margin business. While many of the world's top tier power tool vendors have top O2 solutions, we remain focused on product innovation to expand our product offering, and develop safer and a more reliable parts, to extend battery operating efficiency and time. Similar to last quarter, we saw a meaningful number of recent design wins, new startup ramps [ph] and significant market share gains in the quarter. I’m very pleased with the progress that we have been making in many of long-term growth drivers including general lighting, backlighting and intelligent battery. At this time, I'd like to thank you for listening to our conference call, and turn it back 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 take our first question from Vernon Essi with Needham and Company.

[Vernon Essi:]

Thank you very much, good morning. I have a lot of questions here, but first off, Perry, just a couple of housekeeping questions on the financial side; could you go over to the stock repurchase numbers that you discussed? I think you said you had $15.5 million remaining in your buyback and how much did you repurchase in the current quarter, or the second quarter rather?

[Perry Kuo:]

In the second quarter, 396,147 ADS units.

[Vernon Essi:]

And how much that total dollar was?

[Perry Kuo:]

$1,350,000.

[Vernon Essi:]

Okay great. And then cash flow from operations, what was that in the quarter?

[Perry Kuo:]

Cash flow from operations, we generation 4.7, cash outflow.

[Vernon Essi:]

Okay. All right. Thanks for the housekeeping stuff. To start off the back, congrats on this consumer -- I guess, I assume this is a consumer driven bucket from your revenue perspective on the mobility side. Wondering about this ramp, and how much of that was experienced in the second quarter? Your consumer revenue went up nicely, was that driven mostly by this mobility product, or were there other pieces to that?

[Jim Keim:]

There were other pieces to that.

[Vernon Essi:]

Do you mind elaborating it a little bit? Was it more in other mobility products, or was it more on the flat panel side?

[Jim Keim:]

Its more on the flat panel, and specifically TV side.

[Vernon Essi:]

Okay. And while we are on that, this is a question just to completely -- I saw a news event recently about sharp moving LCD production to Taiwan, I don't know if that was about a month ago or couple of months back. Wondering how the environment is in Taiwan, if things are sort of firming up on the consumer side, or is it still relative -- I mean seems like from your commentary, things are kind of flattish to down, but it seems like if you're growing some revenues second quarter for flat panel, maybe there is more to come in the back half of the year. How is the environment shaping up?

[Jim Keim:]

Vernon, you're talking specifically Taiwan? You mentioned Taiwan and Sharp.

[Vernon Essi:]

Well yes, I mean there was a news announcement a while -- I don't even know if its accurate or not, but I guess the point I am getting at is, you're talking about -- on your prepared comments, you said that -- maybe I misheard that, but sounded as if the flat panel environment was sort of spottier, at least on the TV front for backlighting, and you seem to drive some good revenue growth in the second quarter in that area. How is the environment going into the back half? I mean, do you think its going to be a decent year-over-year growth or is it going to be flattish to down?

[Jim Keim:]

Its really difficult to say based upon the visibility end of the market. Its very much dependent, more on the China situation as we see the whole economic environment developing. Sharp is not a major player in terms of market share at this point, but others are; and fundamentally, right now the overall economic scenario is not one where we see a lot of optimism coming out of the TV business, and we do hope to see some upsides, we'd like to see that. But at this point, that's really hard to project, Vern.

[Vernon Essi:]

Okay. Moving to the computer side, you obviously have had some challenges on the notebook area, and you know, I mean, from the outside perspective, everyone seems to be -- this is probably one of the best year's computing has had in recent memory. Wondering what specifically happened behind the scenes, as to how you lost traction in that market? You talked about how your ODMs sound like they ate going with a different design approach. Can you elaborate on that little bit further?

[Jim Keim:]

Well basically, the notebook market has not been strong as we know, but fundamentally, there has been some significant shifts in some of the market share and some of the areas in which we had good market position with some of the OEMs that have lost share. And then also, there has been some very dynamic shifts go on, where OEMs use different ODMs and we have different positions at some of the ODMs. And one of the key ODMs that we have worked with through the years has very much downscaled their whole notebook activity in favor of tablet. Now the positive of that is, we will get some tablet traction, as we move on towards the end of this year, and early next year, but we lose on the notebook end.

[Vernon Essi:]

So its fair to say, when you say with tablet traction, you are talking more on the non -- well effectively non-Apple business, it would be potentially Android or Microsoft based tablets next year?

[Jim Keim:]

Right, right. It is.

[Vernon Essi:]

Okay. And then two sort of final numbers question, just to revisit your results; inventory was up pretty -- well, on at least a days basis, up pretty big sequentially, was that related to this program you are discussing or were there other pieces to it?

[Perry Kuo:]

Yes. Inventory, we increased by $1.4 million and most of them are still in process. I think we added 300,000 of finished goods at the end of June 30. But I think that at least it will be good for the -- [indiscernible] for the Q3, and coming month, as the pricing is getting tough, as also we observe.

[Vernon Essi:]

Okay. And then also, on the R&D side that was up sharply on a sequential basis and sort of your revenue per headcount, or your costs, excuse me, per headcount seem to be going up. What is the reasoning behind that?

[Perry Kuo:]

R&D, actually the Q1 was lower by 500,000, that's due to the annual adjustment. And I think the reasonable would be nearly 5.5 million, as I guided earlier. But however, the Q3, I guided lower end, because in Q3, that's a sum of the R&D spend in the Q2. So the Q3 probably, we can save several hundred dollars, so in Q3, I think the R&D will be down again to the low end of the 5 million to 6 million.

[Vernon Essi:]

Okay. That's reasonable. Thanks very much guys.

[Jim Keim:]

Thanks Vern.

[Operator:]

We will take our next question from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes, thank you. Few questions, first of all, could you talk a little bit about your relative visibility for Q3? Obviously, there is a lot of moving parts there, but I just want to get a sense if this is sort of a conservative estimate, or your best guess?

[Jim Keim:]

Visibility is generally not good. What we see in many sectors, customers coming in for very short term orders. Literally, needing products like the next week. So they are very hesitant to take inventory, to place orders based upon the current market situations; and we see that across a number of markets, that include the battery management area, all the way over to the TV area, and also even in the notebook area. So many of them are receiving very close end orders, and it makes the visibility difficult, and I think many of them, if you talk to them, have difficulty again wanting to take inventory based upon an economic situation that they do not feel good about and do not have good visibility into. So its not good visibility going into the quarter.

[Tore Svanberg:]

Sounds fair. Just so I get a sense of growth of your new products for Q3. PC is now down to 15%, 20%, is that going to take another major step down in the second quarter as a percentage of revenue?

[Perry Kuo:]

Maybe.

[Tore Svanberg:]

Okay. And you mentioned that -- yeah, go ahead.

[Jim Keim:]

It would go down, I am not sure we'd say major, but it will go down.

[Tore Svanberg:]

Okay. So with that in mind, you mentioned, especially one ODM customer that's transitioning into tablets and smartphones. Do you have any other customers within PC, this could potentially happen. I am just trying to understand the sort of headwinds or these tailwinds you have beyond the September quarter?

[Jim Keim:]

Not so much. We were surprised by one ODM who was chosen to focus primarily in others, not notebook, some of those various will be favorable to us, but we don't see shifts going on beyond that, Tore, to answer your question.

[Tore Svanberg:]

Okay. Sounds good. And as PC as a percentage of your revenue continues to come down, does that have any impact at all on the gross margin mix or the sort of consumer percentage being high, still the main reason why you would operate in the low 50s?

[Perry Kuo:]

Can you repeat the question again, Tore?

[Tore Svanberg:]

Yeah, I am just trying to understand if the percentage of revenue coming from PC becoming smaller and smaller, will eventually have a positive impact on your gross margin?

[Perry Kuo:]

In general, yes. So Tore that also depends on with PC -- several customers from PC, but then they maybe have transitioned to smartphones and tablet, and it then depends on the gross margin product mix from the new area, which we are going in, which is tablet and smartphone.

[Tore Svanberg:]

Okay. Understood. And I know you typically don't give guidance to the fourth quarter, but the fourth quarter is usually a down quarter for you. This year, it does seem that the margin that you have, some new business is ramping. So is it fair to say that you feel a little bit better about Q4 this year than what you typically would?

[Jim Keim:]

Yes.

[Tore Svanberg:]

Okay. Very good. And then the last question that I had, so I am coming back to Vern's question on R&D; is it safe to say that you will be sort of operating in this $5.5 million level for a n extended period going forward?

[Perry Kuo:]

Yes.

[Tore Svanberg:]

Okay. All right. That's all the questions that I had. Thank you very much.

[Perry Kuo:]

Thank you.

[Operator:]

We will take our next question from Andrew Huang with Sterne Agee.

[Andrew Huang:]

Good morning. Can you hear me okay?

[Jim Keim:]

Yeah, hi Andrew. Good morning.

[Andrew Huang:]

Hi. So my first question is related to your mobile phone design win. I guess the first question is, it would seem like that's a pretty crowded space, so I am kind of curious, how you are able to manage to secure design win in that end market?

[Sterling Du:]

Well the competition is always there, Andrew, so we -- our proprietary technology does provide us some leadership, and we believe that we have some headstart, and we will continue to increase our performance in providing the best quality parts to secure future business.

[Andrew Huang:]

Can you may be a little bit more specific as to what kind of features or what orders of strengths that could have enabled you to win?

[Sterling Du:]

This is power management products. So power management, you relate to power efficiency, and also when you want to switch the trending of your current and without any noise and without any undertake, overshoot or undershoot, that's the performance customer wants to see. And we -- our proprietary technology topology, and we can deliver that, and we believe we continue to enhance, and also when the new [indiscernible] come out, and we are the first one to provide that, so that best ensures our future business there.

[Andrew Huang:]

Okay. Have you kind of given some color as to what kind of OEM we are talking about with? Is it like -- considered a tier-1, or is it more a tier-2, tier-3 OEM?

[Sterling Du:]

You men, the mobility/

[Andrew Huang:]

Yes.

[Jim Keim:]

We said it was a top tier smartphone manufacturer is all we have said.

[Andrew Huang:]

Okay. I mean, I guess the follow-on question is, there are lots of smartphone makes in Taiwan and China who are growing very quickly. Are you targeting those OEMs as well?

[Sterling Du:]

Well, we target both. We target U.S. markets and we also target some in China. We are not so targeted for Taiwan, because we see the smartphone activity, we see China is very -- its going to become essentially more in China, and also shift to China. So I believe, U.S. and China will remain our top two territories, we target the smartphone, the tablet, the PC.

[Andrew Huang:]

Okay. Got it. And then may be switching gears to the general lighting part of your business. I guess your target is, that there should be 15% of total sales for 2014?

[Perry Kuo:]

Yes.

[Andrew Huang:]

Can you comment on where you expect to get the majority of the growth this year? Is it in bulbs or lumineers or is it in a particular geography?

[Jim Keim:]

We named some of the customers, Andrew, that I think you can tell its pretty broadly matched. We have products shipping at this point worldwide. We also see growth coming in a very broad mix of products, so that basically, its not any one area, its very broad for us, which we think is good.

[Andrew Huang:]

Do you assume whether or not the gross margin profile of your general lighting business is above, in line, or below the corporate average?

[Sterling Du:]

Close to company average. It depends on the -- also general lighting product mix, like the free dimming have very high gross margin. And for the general competing product, we also need more, so this is probably a little bit -- below company average. But in general, its in line with the company average.

[Andrew Huang:]

Okay. and I guess the last question on general lighting is, over the past let's say five years, LAV component prices have come down very-very significantly. So my question for you is, are you seeing kind of more ASP pressure in -- for your general lighting ships today, versus let's say last year?

[Jim Keim:]

Well the pressure has been there since day one, because this is really a new market, where many low end suppliers, including Chinese, came into the market very early on. So our position was to move to more novel technology, which we did with the free dimming. So as Perry just indicated, what we have done is, taken a position with free dimming, where we have good margins, and then we also certainly do supply some to the low end. So that's where we get the corporate average. So what we have tried to do, is to be able to approach a major entity in the market, and be able to deliver a broad variety of product to them, but keep the margins in the corporate average area, due to some of our intellectual property. So I hope that answers your question.

[Andrew Huang:]

It did. Thanks very much.

[Operator:]

We will take our next question from Tom Sepenzis with Northland Capital Markets.

[Tom Sepenzis:]

Hi good morning and thanks for taking my question. You mentioned in your prepared remarks, that you have a couple other potential smartphone wins that should hit the model in 2015, and I was wondering if you could characterize what type of tier-1, tier-2, tier-3, what type of customer those might be?

[Sterling Du:]

That mostly is tier-2, we mentioned that, and also its more into the China-based.

[Tom Sepenzis:]

Great. Are they 4G plans or 3G?

[Sterling Du:]

Oh, they have both. Most customers right now, either they design -- everything is 4G, or majority is 4G right now.

[Tom Sepenzis:]

Okay, great. Thank you. And I apologize, but could you give the revenue breakdown again that you stated at the beginning of the call, I didn't like get all the numbers there. Consumer was 50% to 60%?

[Jim Keim:]

Yeah, that's right. Consumer was 50% to 60%, computer was 15% to 25% of revenue, industrial was 20% to 30%, and communications is less than 5% of revenue.

[Tom Sepenzis:]

Great. Thank you very much.

[Operator:]

(Operator Instructions). And we will take our next question from Vernon Essi with Needham and Company.

[Vernon Essi:]

Just a technical question Sterling; wondering you were talking about participating in the smartphone battery management side, most of those in tablets as well, most of those batteries are one cell as you stated, what are the unique advantages you would bring to the table, relative to other solutions that are out there? I mean, I think traditionally, your approach was having more success on the load management of a multi-cell battery. What makes or what gives you confidence that you can penetrate that market in one cell?

[Sterling Du:]

I probably can explain for the two; one is the system architecture point of view, because right now as Tom was asking, is 4G -- is mostly 4G, and also the 3G, because eight core, the new MTK and then Qualcomm providing very high powerful CPU, they have supported all this other [indiscernible]. So the CPU current or [indiscernible], you just are using the previous generation is called the PMIC, to providing the CPU power. So the CPU TC will become steady gate, for those upcoming 4G LTE or its multiple core CPU smartphone or tablet PC, that's number one. This is an architecture, its very different from three years ago or the first generation iPad or iPhone. Secondly, the environment for the smartphone, because battery operating time is limited, so there you have lot of the different accessory, which is a way to communication with the battery. For example, you want to change battery of the power [indiscernible] backup battery, then you may be also want to power the battery up from your micro-USB then that's for the OTG, on the go. That's the peripheral accessory for the smartphone, that also changed their requirement. Number three is our expertise, we are using accurate gas gauge, which is a current counter [ph] for sale and also other power management, and because as I mentioned is two architecture, one is the CPU, 4G LTE and other one is external accessory they changed. So the battery becomes more light, it becomes bigger. Two, the battery becomes, the fast charged battery, maybe you heard that. The fast charged battery, normally, what you do is, they give you more voltage, because they want to limit the current. Now when you talk about the voltage going high, then you have a lot of the power battery management, the requirement, they require much more sophisticated gas gauge. So even though you look at today, smartphone and tablet is one cell battery. But the one cell is very different from couple of years ago; for say, like three or four years ago, and that [indiscernible]. You can even go to 12-volt. Sometimes you want to go to [indiscernible] design. So then your whole component rating, component topology, and the performance are different. That's all about trying to solve the battery problem to supply to a much powerful smartphone battery, and the tablet. So in other words, very simple, to answer your question. We do see the smartphone, tablet, PC, when the time is moving on, is more like mini notebook computer.

[Vernon Essi:]

I appreciate that answer, its very helpful. Just so I understand though, you're talking about three separate power initiatives if you will going on in this sort of transition to more power hungry devices. Could you sort of help us understand from a ranking perspective? I mean, I would assume the gas gauge sort of battery management aspects that you mentioned lastly are probably your higher probability of success, whereas maybe the apps processor, power management or sort of like mini V-Core. Sounds like something you haven't really had a lot of success with in the past? I mean, is it fair to say that the battery area is probably where you will have the best look at success -- the best chances rather?

[Sterling Du:]

CPU and the battery, both. We have opportunities for these two needs.

[Vernon Essi:]

Okay. All right. Thanks for elaborating.

[Sterling Du:]

Thank you.

[Operator:]

There are no further questions at this time. I'd like to turn the call back to Scott for any closing remarks.

[Scott Anderson:]

Well thanks everyone for listening today. For follow-up questions you can reach me at area code 408-987-5920, extension 8888. So thank you and have a good day.