O2Micro International Limited
Q4 2014 Earnings Call Transcript

Published: 4 Feb 2015

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro’s Financial Results for the Fourth 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 the 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 February 11, 2015 at 9

[Scott Anderson:]

Good morning and thank you for dialing into O2Micro’s financial results conference call for the fourth quarter and fiscal year 2014 ending December 31, 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 such 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 open to your questions. Lastly, management is very focused on continuing our recovery efforts in making the company more efficient, aimed at increasing shareholders value. To further aiding the process O2Mrico welcomes any input from its shareholders on how to obtain such. However in an effort to make sure the company properly addresses those concerns, we encourage any shareholders who has suggestions to make such proposals in writing, so that the Board of Directors can give such advice their proper due and review such at our regular Board meetings. Just want to ensure that there is no miscommunication from shareholders and that everyone is operating on the same information. Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the fourth quarter and fiscal year 2014 ending December 31, 2014. Perry?

[Perry Kuo:]

Thank you, Scott. We will now review our financial results for Q4 2014. Please note that the financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results exclude 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 fourth quarter of 2014 was $14.3 million. GAAP net loss in the fourth quarter of 2014 was $6 million. If we exclude stock-based compensation of $498,000 and onetime expense of $3 million, the non-GAAP net loss will be $2.5 million. GAAP net loss per ADS in the fourth quarter of 2014 was $0.23, non-GAAP net loss per ADS was $0.09. Gross margin was 51% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was $5.5 million, or 38.1% of revenue. This amount excludes stock-based compensation expense of $99,000 and onetime expense of $2.7 million. SG&A expense was $5.4 million or 37.7% of revenue. This amount excludes stock-based compensation expense of $399,000 and onetime expense of $255,000. The non-operating income was $1.5 million, a $643,000 increase over the preceding quarter of $850,000. The increase of $643,000 was mainly due to the gain on the sale of real estate properties of $558,000 and the gain on foreign exchange of $415,000. Income tax was $450,000 in the fourth quarter, a $200,000 increase over the preceding quarter of $250,000. The increase on income tax mainly reflects the actual tax provision calculated in our global taxable locations. In Q4 2014, we repurchased $505,169 ADS units at a cost of $1.2 million. Q4 2014 the 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 fourth quarter with $62.6 million in unrestricted cash and short-term investments. This represents cash and equivalent of $2.36 per ADS. IN addition O2Mirco has no debt. Accounts receivable at the end of the Q4 was $6.8 million our DSO is 47 days, is in our target range of 40 to 60 days. Inventory was $8.6 million at the end of the fourth quarter. This represents 121 days inventory and inventory turnover was 3 times in Q4. From a cash flow perspective we generated $3 million cash outflow from operating activities in Q4. Capital expenditure was about $412,000 in the fourth quarter, for R&D equipment and the leasehold improvement. Depreciation and amortization was $900,000 in Q4. At the end of the fourth quarter of 2014, O2Micro had 408 employees, 51% of which are engineers. At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2015. 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 revenue to be flat to down 10% sequentially. We are guiding the Q1 gross margin to be in the range of 50% to 52%. R&D expense excluding stock-based compensation should be $4.8 million to $5.8 million in Q1. SG&A should be $4.8 million to $5.8 million in Q1, excluding stock-based compensations. Stock-based compensation should be in the range of $450,000 to $550,000 in the first quarter. Now operating income should be in the range of $300,000 to $400,000 in the first 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 first quarter. As we mentioned last quarter, in order to maximize shareholders value, we are in the process of making decision in order to monetize some of the company’s real estate and the long-term investment. In Q4 of this year, we saw a portion of the real-estate in Hsinchu, Taiwan and we recognize a gain of approximately $500,000 of non-operating income. We plan to monetize another portion of the real estate in Hsinchu this year. And we will provide additional details when and if this transaction is closed. Also during Q4, we sold the remainder of our shares in one of our long-term investment and we are in the process of evaluating of our remaining long-term investment. While we wait for our anticipated next significant product cycles to materialize, 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. We will provide update to the additional measures to enhance shareholders value on our next quarterly conference call reporting our first quarter of 2015. In summary, our revenue levels proceed below of where we expect them to be, we are taking the necessary steps to enhance shareholders value in the forms of our repurchase program, operating expense reductions and monetizing our real estate and the long-term investments. In Q4, we continue to focus of 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. As a result of our previously announced workforce reduction in January, we expect to reduce operating expenses throughout 2015 by approximately $4 million. We believe our cash breakeven point is now between $17 million to $18 million in quarterly revenue and our profitability breakeven point is between $20 million to $21 million in quarterly revenue. Our guidance for the first quarter of the 2015 reflect ongoing ramp in our General Lighting, Battery product lines and Power Management products for tablet and smartphones offset by continued weakness in our Power Management business for notebook as well as typical seasonal weakness. Given the uncertain demand and the macro environment, we are prepared to continue to manage costs if needed. Although, we believe that we have aligned current cost base on current and anticipated revenue levels. Finally, regarding our share repurchase program we have been active in this program historically and we plan to be active on going forward. At the end Q4 we had a $13.3 million remaining in our share buyback authorization, returns to shareholders are very much on our mind and will continuing 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.

[James Keim:]

Thank you, Perry and good morning, everyone. Q4 continued our trend of increasing design win activity in lighting, battery management, power management for tablets and smartphones. Based on these design wins all these product areas are expected to have revenue growth as we move forward in 2015. Specifically in battery management, we reached our stated goal of exceeding 10% of revenues in the second half of 2014 as our battery management products continue to expand into new designs, including applications in power tools, e-bike, e-vehicle, appliances and vacuum cleaners. Major OEMs using our products include, Black & Decker, Electrolux, LG, Panasonic and TTI. Additionally we’re seeing increasing design activity for our products in uninterrupted power supply applications and continue to see the usage of our battery management product expand at major OEMs. While battery management product revenues generally tends to grow slowly due to the nature of this business, we expect product sales in battery management to grow to approximately 15% of our 2015 sales revenue by the second half of this year. In General Lighting our 2014 stated goal was to reach 15% of total product sales. We finished just below this goal as we focused on our high margin proprietary free dimming products. However, our revenue in this area continues to expand as we enter Q1 and we expect our general lighting products to exceed 15% of our first half 2015 sales and continue to grow rapidly in the second half of the year. We remained very pleased that more and more key customers were utilizing our general lighting product technologies. This customer list now includes GE, IKEA, Iris Ohyama, Lights of America, Osram, Panasonic, Samsung, TCP and Toshiba as we continue to see a broader based acceptance of our proprietary free dimming and two color dimming products in more and more applications and a widening international customer base, including a growing number of Asian countries. We have also successfully introduced our TRIAC controller lightening products for legacy dimmable fixtures and see these products gaining revenue momentum in 2015. In addition to General Lighting, we expect our LED backlighting designs to enjoy revenue growth in 2015, based not only on our strong position in TV, but expansion of revenue in new smartphone, tablet and industrial lighting applications. Finally we expect to see renewed growth in our power products where a combination of weak notebook sales and charger product issues adversely affected our revenue growth in recent quarters. Our new charger and DC to DC products are gaining acceptance in new tablet and notebook designs. We are now working on key design wins, on tablet and smartphone platforms for leading Chinese CPU manufacturers. These programs are expected to go in production in Q3 2015. We will be announcing more regarding the specific customers for these products as we move forward in Q2 and Q3. We expect renewed growth in this area by the second half of this year. I will now turn the call over to our CEO Sterling Du for closing remarks.

[Sterling Du:]

Thank you, Jim. Q4 revenue was in the range of guidance that we provided in October. With generated revenue of $14.3 million in the fourth quarter of 2014, a decrease of 7% sequentially quarter-over-quarter and decreased 25% from the same quarter last year. The year-over-year revenue decline was mainly due to weakness in our notebook computer power management business. We plan to improve the revenue stream by targeting the smartphone and tablet PC markets. Currently we are able to leverage our notebook PC and the industrial battery management technologies. Meanwhile, for the fiscal year-end of 2012 to fiscal year-end of 2014, we have lowered operating expense from $81.6 million to $50 million, which is about 40% successfully. As smartphone, tablet PC market trend move to more to four core, CPU as mainstream and high-end for eight core CPU, which is equipment to the notebook PC CPU power consumption. So our CPU DC/DC previous design for the notebook PC and our industrial level cascade [ph] could address this high power consumption as well as larger battery management needs. This business could become one of growth driver in coming years. We reported a GAAP loss of $6 million in the fourth quarter of 2014, including one-time charge $3 million associated with a workforce reduction. GAAP net loss was $5.1 million in the same quarter last year. We report gross margin 51% in Q4, an increase from 51% gross margin same quarter last year. We announced a strategic workforce reduction in January and that will allow us to focus the team resources on higher gross margin business, it will facilitate us more quickly return to the profitability. I would now like to highlight the considerable progress that we have made in key growth drivers. Our LED general lighting business continued to grow rapidly based on the two key factors. First, the overall replacement light bulb market entering into significant growth phase. Second, we are increasing our general and distributor in addition to our direct sales force. The better phase to the China markets our strategy to engage both worldwide OEM and ODMs in this market has payout and both type of customer had relay on the innovation and reliability of O2Micro products. Following successful penetration in Japan and U.S., we are now engaged with some of largest LED general lighting manufactures in Chinese market. Our intelligent battery product for power tool, household appliance and other product are also showing significant growth in design win momentum, it will translate into meaningful revenue in upcoming quarters while gaining share in this market, we expect to be the market leader for batter management solutions. We remain focused on product innovation to expand our product offering and develop safer, more reliable power to extend battery operating efficiency. We provide customers specific design IC for the power tools such as protection and the secondary protection IC. This product optimized price performance ratio and which can gain market share. We continue to make progress in our goal of targeting smartphone and tablet PC manufactures. We are engaged with several Tier 2 smartphone, tablet manufacturer and we expect to realize additional revenue from those customers in 2015. In order to maximize the efficiency with our tablet, smartphone customers we have been actively engaged with distributors in this market and acquire our customer receive direct technical support from O2Micro. Our strong engineering and customer service presence in Chinese market enable O2Mirco expand our customer base in this region. In LED backlighting for TV and monitor we have increased our certain campaign in those by offering new DC/DC and AC/DC product to customer. We’re expecting modest growth in our LED backlighting business throughout this year. I’m excited about our demonstrated successful across all our core power management product including general lighting, backlighting, power IC for smartphone and tablet and the battery management. We look forward to providing you more update for our progress throughout the remainder of this. At this time, thank you for listening to our conference call and turn back to Scott. Scott, please.

[Scott Anderson:]

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

[Operator:]

Thank you. [Operator Instructions]. We’ll take our first question from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes, thank you, a few questions. First of all, could you talk a little bit more your notebook power management business, how big as a percentage of revenue is it now? I am just trying to understand because it seems like that is still a headwind for you. It has already come down quite a bit, I am just trying to get understanding whether it is bottoming or about to bottom?

[Sterling Du:]

Yes, currently our power in the notebook is above 25% of the revenue I think this is a stable level for our current estimation compared to the Q4 last year it was only 50% of the revenue.

[Tore Svanberg:]

Okay, very good. And as a follow-up to that, as you start to see the ramps in smartphones and tablet power, would that be at a higher gross margin than the notebook power management business?

[Sterling Du:]

We see in the same range, similar range.

[Tore Svanberg:]

Okay, very good. And you said you expect your back lightening business to actually grow this year, I assume that it potentially declined in 2014. So is this based on new design wins more stable pricing please help me understand what’s going on there?

[Scott Anderson:]

It’s based upon more design wins Tore. We are taking a broader based position in the whole product area in TV and gaining additional penetration into some additional customers in which we have not been involved in the past year.

[Tore Svanberg:]

Okay, very good. And then, I know you typically don’t give guidance more than a quarter out, are you still a few million dollars below your cash flow breakeven rate, so should we expect that you will get there potentially sometime in the first half or will this be more of a second half?

[Sterling Du:]

I would say probably in the middle of the year, Q2-Q3 timeframe it’s our target to reach.

[Tore Svanberg:]

Okay, very good. Thank you very much.

[Operator:]

And we’ll take our next question from Tom Sepenzis with Northland Capital Markets.

[Tom Sepenzis:]

Hi, thanks for taking my question. Can you -- in the very beginning of your prepared remarks you went through the segments, can you just go through those again real quick?

[Scott Anderson:]

Yeah, so Q4 revenue broke down consumer was about 50% to 60% of revenue, computer was about 15% to 25% of revenue, industrial was about 20% to 30% of revenue and communications was less than 5% of revenue.

[Tom Sepenzis:]

Thank you. And then in terms of the -- you had a benefit sale of assets, can you just tell us a little bit more about what that was and what you have left?

[Sterling Du:]

In the [indiscernible] area we have some extra flow through to sell, currently in last Q4 we sold 2/7th and we left almost more than 50% left and we are going to our sell continuously in Q1, Q2 and Q3 depending on the market situation.

[Tom Sepenzis:]

Great, thank you. And then just a follow-up on the last question, you do think that you can get to revenue run rate where you would be cash flow break even in the second half of the current year?

[Perry Kuo:]

In the Q3, Q2-Q3 time frame of this year.

[Tom Sepenzis:]

Okay. So things should pick up pretty quickly in June.

[Perry Kuo:]

Yes.

[Tom Sepenzis:]

Okay. Great, thanks very much.

[Scott Anderson:]

Thanks, Tom.

[Operator:]

And we’ll go next to Lisa Thomson with Zacks Investment.

[Lisa Thompson:]

Hi, good morning.

[Scott Anderson:]

Good morning.

[Lisa Thompson:]

I want to just clarify a little bit the sale of the building, first you said what the profit was, how much was it sold for?

[Perry Kuo:]

The sales, the gains of the sales properties in Q4 the gains is 458,000.

[Lisa Thompson:]

Right.

[Perry Kuo:]

The cost is 1.4 million.

[Lisa Thompson:]

Okay, so the cost was your cost or was that what it sold for?

[Perry Kuo:]

Our purchase cost, original cost in the books.

[Lisa Thompson:]

Okay, good. And you talked about continued layoffs in Q1, has that been reserved for in Q4?

[Perry Kuo:]

The workforce reduction is happening in Q4 by the press release we issue in Q1, so we refer those you know into January.

[Lisa Thompson:]

Okay, so that is done.

[Perry Kuo:]

Yes, it is done, it is just a little bit workforce reduction still will be happening in Q1, but just like less than 10%, some projects have to some we have to be trailing as we do a wrap off here.

[Lisa Thompson:]

Okay. And then to get to the Loan Star letter have you had a conversation with them?

[Scott Anderson:]

Well, Lisa, we prefer not to comment on the calls we have had with any specific shareholders at this time.

[Lisa Thompson:]

Okay, so there is no action or thoughts about what might happen in the future?

[Scott Anderson:]

We can’t comment on that, sorry, Lisa.

[Lisa Thompson:]

Okay, I had to ask. Okay, that’s all my questions for now, thanks.

[Scott Anderson:]

Okay, thank you.

[Operator:]

And we will take up a follow up question from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes, thank you. I may have missed this but the R&D was up quite a bit sequentially, how should we think about the R&D line specifically going forward?

[Perry Kuo:]

R&D I think in 2015, we are quite flat in the area of the $5 million area.

[Scott Anderson:]

Yeah, just as a reminder, Troy, we guided Q1 R&D to be between $4.8 million to $5.8 million.

[Tore Svanberg:]

Okay. And then it will still remain flat throughout the year is what you are saying?

[Scott Anderson:]

Yeah.

[Tore Svanberg:]

Okay, great. Thank you.

[Operator:]

And we will take a follow-up question from Tom Sepenzis with Northland Capital Markets.

[Tom Sepenzis:]

Hi, sorry I was going to ask the same thing, but I think it’s a bump in the December quarter was severance?

[Scott Anderson:]

Yes.

[Tom Sepenzis:]

Okay, thank you.

[Operator:]

And that concludes our question-and-answer session. I would like to turn the call over back to closing remarks at this time.

[Scott Anderson:]

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

[Operator:]

Thank you, everyone. That concludes today’s conference. We thank you for your participation.