O2Micro International Limited
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Please standby, we are about to begin. Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the First Quarter of Fiscal Year 2015. 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 Web site at www.o2micro.com under the heading Investors. There will be a replay available through May 6, 2015 at 9

[Perry Kuo:]

Thanks, Scott. We will now review our financial results for Q1 2015. Please note that 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 first quarter of 2015 was 13.1 million. GAAP net loss in the first quarter of 2015 was 3.2 million. If we exclude stock-based compensation of 551,000, the non-GAAP net loss will be 2.6 million. GAAP net loss per ADS in the first quarter of 2015 was $0.12. Non-GAAP net loss per ADS was $0.10. Gross margin was 50% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was 4.4 million, or 33.3% of revenue. This amount excludes stock-based compensation expense of 94,000. SG&A expense was 5.2 million, or 39.8% of revenue. This amount excludes stock-based compensation expense of 457,000. The non-operating income was 618,000. This amount includes the gain on sales of real estate properties for 298,000, and the interest income on current deposits were 237,000. Income tax was 241,000 in the first quarter, and is mainly based on the estimated effective tax rate of each taxable location. In Q1, we repurchased 387,847 ADS units at a cost of $1 million. As of March 31, 2014, there was 12.32 million remaining in our authorization. Q1 2015 revenue by end market breaks down into the following percentages. Consumer was 42% to 47% of revenue. Computer was 23% to 28% of revenue. Industrial was 28% to 33% of revenue. Communication was less than 5% of revenue. At this time, I would like to provide some additional information. O2Micro finished the first quarter with 59.7 million in unrestricted cash and short-term investments. This represent cash and cash equivalent of $2.25 [ph] per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q1 was $6.3 million. Our DSO is 45 days. It is in our target range of 40 to 60 days. Inventory was 8.2 million at the end of the first quarter. This represents 116 [ph] days of inventory, and the inventory turnover was 3.1 times in Q1. From a cash flow perspective, we generated 3 million cash outflow from operating activities in Q1. Capital expenditure was about 124,000 in the first quarter for R&D equipment and computer. Depreciation and amortization was 700,000 in Q1. At the end of the first quarter of 2015, O2Micro had 382 employees, 50% of which are engineers. At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2015. This guidance reflects our best estimates for the current environment, and is subject to change. This is the only one official guidance we will provide unless we update with a public announcement in the future. O2Micro expect Q2 revenue to be up 10% to 16% sequentially. We are guiding the Q2 gross margin will be around 48%. R&D expense excluding stock-based compensation should be 4.2 million to 4.7 million in Q2. SG&A should be 5 [ph] to 5.5 million in Q2, excluding stock-based compensation expense. Stock-based compensation expense should be in the range of 450,000 to 550,000 in the second quarter. Now, operating income should be in the range of 500,000 to 600,000 in the second 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 second quarter. As we mentioned last quarter, in order to maximize shareholders value, we are in the process of making decisions in order to monetize some of the company's real estate assets and the long-term investment. In Q1 of this year, we saw another portion of the real estate in Hsinchu, Taiwan, and we recognized a gain of approximately 300,000 of non-operating income. We plan to monetize another portion of the real estate asset in Hsinchu this year, and we will provide additional details when and if this transaction is closed. We have also leased a portion of the building that we own in Santa Clara, California. While we wait for our anticipated next significant product cycle to materialize, the goal of the 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 throughout this year. In Q1, 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. As a result of our previously announced workforce reduction in January, we expect to reduce operating expense throughout 2015 by approximately $4 million. We believe our cash breakeven point is 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 second quarter of 2015 reflects this ongoing ramps [ph] in our big lighting, general lighting, battery product lines, and the power management products for tablets and smartphones. 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. 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 Q1, we had 12.3 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. While Q1 revenues dropped as expected due to seasonality in the Chinese New Year, the revenue expansion in general lighting and battery management products continued. And our first power management product for the tablet and smartphone markets began shipping. We expect the areas of general lighting, battery management, and power management for tablet and smartphone to help drive our Q2 growth, with their combined revenue contributing approximately 25% of our projected Q2 revenue. These products are expected to see ongoing expansion through the balance of 2015, and we will give more detail of the revenue contribution of these products as our revenues grow, in 2015. Our largest product line, backlighting for TV and monitor markets, is also expected to experience improved revenues in Q2, and the remained of the year. The growth in backlighting will result from a modest market growth, coupled with additional silicon content that key TV manufacturers will utilize our new DC to DC and AC to DC products. In battery management, we see additional expansion of revenues going forward from our new designs, including applications in power tool, 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 products expand at major OEMs. While battery management product revenue 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. General Lighting revenue continues to expand as we enter Q2. We remain focused on the higher end of this market, where we continue to gain new design wins worldwide, and expanded more applications with our patented products. Our 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. We expect General Lighting revenues to contribute approximately 15% of our expanding 2015 revenue. Finally, we are pleased to report that our power management products for tablet and smartphone began their initial shipments in Q1, and will ramp into higher volumes in Q2, and reach significant volumes in the second half of 2015. At the same time, our traditional notebook customers expect that the notebook market is stabilizing, which may allow our notebook products to reverse their downward trend of the past few years. While we are working on key design wins in tablet and smartphone platforms for leading Chinese CPU manufactures, whose programs are expected to go into mass production in Q3, 2015, we will continue to work on new charger in DC to DC product wins in notebooks. We will be announcing more regarding the specific power management customers as we move forward, in 2015. I will now turn the call over to our CEO, Sterling Du, for closing remarks.

[Sterling Du:]

Thanks, Jim. Q1 revenue was in the range of the guidance that we provided in February, reflecting normal seasonality. We generate revenue of 13.1 million in the first quarter of 2015, a decrease of 9% sequentially, and decreased 20% from the same quarter last year. The year-over-year revenue decline was mainly due to a weakness in our notebook computer power management business. We currently believe our first quarter revenue performance reflects a trough in our business, and we expect revenue growth going forward. Through a combination of operational expense reductions, and the implementation of certain initiatives to monetize assets of company, we believe we have transition the company to benefit from our next growth phase. Our high priority initiatives to deliver superior custom solution result in design win momentum in our new tablet and smartphone products, and expanding our customer base in our backlighting, battery management, power management, and the general lighting markets. We reported a GAAP loss of 3.2 million in the first quarter of 2015, and the GAAP net loss was 6 million in the first quarter last year. We report the gross margin 50% in Q1, and mainly reflect a product mix. I would like to highlight considerable progress that we make in a key growth drivers. In our backlighting business we are projecting renewed growth in our product area as we move throughout 2015, based on increasing these activities in TV monitor, tablet, and smartphone markets. We continue to be worldwide leader in LED backlighting for TV's and monitors, and are expanding custom base in our backlighting business, including such market leader as Sony, Toshiba, HP, Dell, Lenovo [indiscernible] TCL, Hisense, and others. O2micro proprietary analog [ph] power management technology in our battery management segment supports a variety of end markets, continue to grow with our rapid expanding customer base. Our battery management product are continue to achieve many new design wins, and we continue to be very optimistic for continued growth in the many end market going forward. We continue to make significant progress in our goal targeting smartphone and tablet manufacturers. We're engaged with several Tier 2 smartphone, tablet manufactures, and we expect to realize additional revenue from those new customer, in 2015. In order to maximize the efficiency with our tablet, smartphone customers we have actively engaged distribution partner and channel in this market, where our customer receive direct technical support for O2Micro. Our strong engineering and customer service present in China market is enabling O2Micro expand our custom base in this region. Finally, our LED general lighting business continue to grow regularly [ph] in a competitive market. Our strategy of targeting leading LED manufacturer in China, the U.S., and Japan is working. We are very pleased to see [technical difficulty] market leaders are using our general lighting product technologies. The general lighting market continue to involve in a field where our product and technology are well positioned to serve the market for the years to come. I'm excited about our demonstrated success across all our core power management product lines, including general lighting, backlighting, power IC's for smartphone/tablet, and the battery management. We look forward to providing you updates on our progress throughout the remainder of the year. At this time, thank you for listening to our conference call. And I'll turn back to Scott.

[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.

[Evan Wang:]

Yes, hi. This is Evan Wang calling in for Tore. My first question is regarding your confidence level on your guidance. I understand that you have some new design wins and expanding customer base, but could you give us a little more color on what gives you confidence for this double-digit growth?

[Scott Anderson:]

Well, at this point we're pleased to say that we've seen very good backlog for the quarter. So we are in a strong position from a backlog point of view. And the design wins -- our design wins that have already ramped into production in most cases, so we expect that production will simply carry on, and the backlog will continue to build. So we're sitting here very confident at this point of time of our projection.

[Evan Wang:]

That's great to hear. And could you also talk a little bit about maybe what kind of visibility you might have looking to Q3? I'm not actually looking for actual guidance obviously, but any color you can give there would be great.

[Scott Anderson:]

Well, I think what we can safely say for Q3, of course, we all know there's economic situations out there, but we have gained some very significant design wins, and we see enhanced position. We mentioned in the TV area we've gained new design wins, and customers that are now ramping run rates. We have new design wins that are going into tablets smartphone in the power of management area. The battery management products achieved some very nice design wins including some of the areas we mentioned like vacuum cleaners that are continuing to ramp. So we are very confident at least of gaining market share in these areas, and if the economy remains in good, stable condition, we think we can see a good growth ongoing into Q3.

[Evan Wang:]

Okay. And regarding your gross margin and this question may be for Perry, it's 50% this quarter, and you are guiding to 48%. Is this a new level -- a new range? Are you finding this a new sweet spot, or is it purely a function of your current revenue level of mix?

[Perry Kuo:]

Yes, this is due to the new product mix. We have [indiscernible] gestated that we have lots of the new products or new applications. It's for Q2.

[Evan Wang:]

So, for the past few quarters, you've pretty consistently guided for 50% to 52% for your gross margin. Going forward, is there a new range that we should be thinking about?

[Perry Kuo:]

We hope that we can improve, so the new product -- yield [ph] improvement, but however for the Q3 I'll update in the next quarter. A - Scott Anderson When we are ramping new products, in many cases there is yield issues that create it, and we mentioned a significant part of our revenue growth will come out of new products. So it will take a quarter or two to get those stabilized in terms of yield improvement.

[Evan Wang:]

Okay. My last question before going back into queue is, is the new gross margin level that you are guiding to for this quarter, is that in the breakeven analysis that you provided, the 17 million to 18 million for cash flow breakeven and 20 million to 21 million for profitability breakeven, or are those based on the 50% to 52% gross margin?

[Perry Kuo:]

Based on 48%, yes.

[Evan Wang:]

Yes, okay. Thank you very much.

[Operator:]

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

[Tom Sepenzis:]

Good morning, thanks for taking my question. I was just curious, last year in the September timeframe, you lost a pretty big customer on the power side, and the expectation was you might be able to get that back a year later. So I am just curious as to if you have an update there, or if you think that is still something that you might see in the near future as a return customer? A - Scott Anderson Yes. That was due to a product specific issue at a significant customer, and we actually have regained some of that position, and we are optimistic as we move into the second half of the year that we can fully regain that.

[Tom Sepenzis:]

Okay, thank you. And then in terms of the general lighting business, I think you said you expect that to be 15% of revenue by the end of 2015. Did I hear you correctly? A - Scott Anderson Yes, that was correct.

[Jim Keim:]

Yes, actually what we said was that it would be -- we estimate it to be 15% of our revenue this year. So we expect -- last year, our goal was to be in the 10% to 15% area. We are basically there as we move forward into Q2, and we sustain that level. So we would expect for 2015 our general lighting to be approximately 15% of our total business.

[Tom Sepenzis:]

You exited the year closer to 20%, though, last year, so is that then now kind of flat?

[Jim Keim:]

We exited the year at about 15%.

[Tom Sepenzis:]

Okay.

[Jim Keim:]

Yes.

[Tom Sepenzis:]

Great, thank you very much.

[Jim Keim:]

We are saying just to clarify we are going to stay toward the high-end of that business for the time being. So we're going to continue to focus in those areas where we have strong intellectual property and can retain reasonable margin.

[Tom Sepenzis:]

Got you, thank you. A - Scott Anderson Thanks, Tom. Operator, next question please.

[Operator:]

We will take our next question from Lisa Thompson with Zacks Investment Research.

[Lisa Thompson:]

Good morning.

[Sterling Du:]

Good morning.

[Lisa Thompson:]

So can we talk a little bit more about smartphones? You said you started shipping, and you might be adding more customers as the year progressed?

[Sterling Du:]

Right. So, first of all, our strategy and its target for the Q2 smartphone/tablet customer, and mostly they are located in China. So as we have leveraged our mobile technology, so nationally, right now our most mix is the first ramping now is the tablet. And we also have smartphone ramping up. Now, generally speaking, after the design win for production, it will probably take you about six months, then than that will be from one major customer, [indiscernible] then that also needs another six months to another year. So you're going to see our very good starting point, and then ramping up maybe take more than one year. So we are very happy to see today we have production inbuilt tablet, and a smartphone. And like Jim indicated that we're going to see the same customer growth rate is going to be continue to prevail to other play phone [ph], and then we also has capacity to add more new customer to it. And because of the smartphone tablet is the relative large market to our original focus notebook, so we are excited for the potential, and we are going to see our technology and product going to bring our revenue -- good revenue scale in upcoming years.

[Lisa Thompson:]

Right. So you have one customer with two products right now?

[Sterling Du:]

No, we have production in multiple customer right now for both smartphone and the tablet, multiple, yes.

[Lisa Thompson:]

Okay. And it will start showing volumes at the end of this year?

[Sterling Du:]

They have already [indiscernible] already have initial reproduction and we're going to see a very good cost rate quarter-by-quarter, yes.

[Lisa Thompson:]

Okay. I look at the first quarter -- revenues are down 20%, expenses were down 13%. Is there some point where you're going to get the revenues and the expenses to match?

[Scott Anderson:]

Yes.

[Sterling Du:]

Yes. We have -- I would say -- I have provided 17 million as cash flow breakeven point. That's the point we're looking at. We're approaching, hopefully. Yes, hopefully [indiscernible] new product, yes.

[Lisa Thompson:]

Okay, all right. I think that's what everyone is waiting for.

[Sterling Du:]

Right, does. So, yes.

[Lisa Thompson:]

Okay, all right. And thank you. That's all I have right now.

[Sterling Du:]

Okay, thanks, Lisa.

[Operator:]

[Operator Instructions] There are no further questions in the queue. I would like to turn the call back over to Scott for any closing -- oh, we do have a question from Tore Svanberg.

[Sterling Du:]

Hi, Tore.

[Evan Wang:]

Hey. Actually, this is still Evan. I just wanted to follow-up on your asset sales. Can you tell us about how much assets you have left that you think it would be -- you would consider divesting and turning to cash?

[Sterling Du:]

Could you repeat the last sentence?

[Evan Wang:]

How much assets do you consider available for you to convert into cash -- to monetize?

[Sterling Du:]

Oh, we actually at -- in this year we target to sell 4 million in the asset value, beyond the year Q1. We're still in this year. But for the fixed assets we're totaling a 20 to 30 market value.

[Evan Wang:]

Okay. Okay, that's all. Thank you very much.

[Operator:]

[Operator Instructions] And there are no further questions in the queue. I would like to turn the call back over to Scott for any closing remarks.

[Scott Anderson:]

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

[Operator:]

This does conclude today's conference. Thank you for your participation.