O2Micro International Limited
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good morning and thank you for joining us today to discuss O2Micro's Financial Results for the Third Quarter of Fiscal Year 2015. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at [phone], extension 8095 and we will fax you a copy immediately. It is also posted on the O2Micro website at www.o2micro.com under the heading Investors. There will be a replay available through November 11, 2015 at 9

[Scott Anderson:]

Good morning and thank you for dialing into O2Micro's financial results conference call for the third quarter of fiscal year 2015 ending September 30, 2015. 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 Reports, 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, 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 and making the company more efficient, aimed at increasing shareholder value. To further aid in 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 have suggestions to make such proposals in writing, so that the Board of Directors can give such advice that are proper due and review such at our regular Board meetings. This will 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 third quarter of fiscal year 2015 ending September 30, 2015. Perry.

[Perry Kuo:]

Thanks Scott. We will now review our financial results for Q3 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 the losses from discontinued operations. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2015 was $13.7 million. GAAP net loss in the third quarter of 2015 was $2.4 million. If we exclude stock-based compensation of $450,000, the non-GAAP net loss will be $1.9 million. GAAP net loss per ADS in the third quarter of 2015 was $0.09. Non-GAAP net loss per ADS was $0.07. Gross margin was 52% in Q3. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.6 million or 33.9% of revenue. This amount excludes stock-based compensation expense of $76,000. SG&A expense was $5.5 million or 39.9% of revenue. This amount excludes stock-based compensation expense of $374,000. The non-operating income was $1.3 million. Income tax was $287,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3, 2015 we repurchased 220,381 ADS units at a cost of $530,000. Q3 2015 revenue by end market breaks down into the following percentages

[Jim Keim:]

Thank you, Perry. Good morning everyone. Although Q3 results were adversely affected by a weak economy and key areas of the world that impacted our TV and monitor lighting revenue, we are pleased with ongoing design wins in LED Lighting, General Lighting, and Battery Management. Our Battery Management products have enjoyed excellent growth in 2015 with good year-over-year growth expected in the second half of 2015 and continuing growth in 2016. We had previously stated that Battery Management products were expected to reach 15% of our revenue in the second half of 2015. We expect to not only reach this goal, but exceed it in Q4. Ongoing design wins and revenue expansion is expected in all key market sectors, power tool, e-bike, e-vehicle, appliances and vacuum cleaners as lithium ion battery technology continues to become more reliable and cost effective with the use of our battery management products. Major OEMs using our products continues to expand and now includes Black & Decker, Electrolux, LG, Mekita, Panasonic, and TTI. Additionally there is increasing design activity for our products in uninterrupted power supply applications and we continue to see the usage of our battery management products expand at major OEMs. Our revenue weakness in the TV and monitor business follows the general economic softness that has been widely discussed in recent weeks. This includes the announcement from Corning about week last sales for these key market areas. The weaker than expected TV sales affected virtually all of our major TV customers whose sales in China, Europe and South America were particularly weak, due to the general economic weakness exacerbated by the strength of the U.S. dollar versus their respective monitory currencies. Although the TV market was weaker than expected in Q3, we do see ongoing strength in our design win efforts as our new area lighting product has achieved major design wins at leading industry OEMs. Despite ongoing economic headwinds, we expect growth in 2016 revenues as a result of these design wins. Similarly despite a general slowdown in the expansion of the LED based General Lighting, we expect our patented free dimming products continue their revenue expansion in 2016. In General Lighting we remain focused on the higher end of this market, where we continue to gain new design wins worldwide and expand into 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. While we have previously stated that the impact of our first power management product for the tablet and Smartphone would start to become significant as these new products ramp into higher volumes and increase our company revenues in Q4 and 2016, we are disappointed by slower than expected revenue growth in both Smartphone and tablet due to key customers failing to meet their projected product sales where we have design wins. Sterling Du, our Chairman and CEO, will more fully discuss our position in smartphone and tablet. I will now turn the call over to Sterling for closing remarks. Thank you.

[Sterling Du:]

Thanks Jim. Our Q3 revenue was in the range of the guidance that we provided in October. We generated revenue of $13.7 million in the third quarter of 2015, a decrease of 7% sequentially and a decrease of 11% from a year ago. The year-over-year revenue decline was mainly due to overall weak macro environment and weakness in our target markets. While we are disappointed in a slower than anticipated adoption of growth driver, we remain optimistic that the growth we are projecting in our new product lines including product for the smartphone and tablet in General Lighting and the Battery Management products for the power tools will gain further momentum in 2016. In the past through a combination of operation expense reductions and the implementation of certain initiatives to monetize assets of the company, we believe we have transitioned the company to benefit from our next growth phase. We are in the process of implementing additional cost saving measures and we plan to call the additional details of operation expense reductions when we report Q3 results in early 2016. We believe this additional expense reductions will position the company to achieve a cash even level in the near future. We are making significant progress in the design win in smartphone and tablet since the first launch 18 months ago for the new product, although adoption or ramp of this product is much slower than we had anticipated. The combination of weak end markets and ongoing inventory buildup has caused us to lower our internal projection for the smartphone and the tablet products. We are engaged with several Tier 2 smartphone and tablet manufactures and have commenced volume [ph] shipping to the global Tier 2 smartphone manufactures. The milestone is proving that our products for the market are in the process of manufacturer adoption and we expect to grow this business throughout the quarters of next year. In order to maximize efficiency with our tablet and smartphone customer, we have actively engaged in distribution channel and a partner in this market, while our customers receive direct technical support from O2Micro. Our strong engineering and customer service present in China markets enables O2Micro to expand our custom base in this region. In our Backlighting business, we are projecting renewed growth in the product area as we move into 2016, based on increasing this activity in the TV and monitor. Although our revenue from Backlighting was slightly weaker than we expect in this quarter, we believe our Backlighting business for the TV market will continue to grow as our product expands from the adoption of high end TVs where we have the opportunity to design multiple LED driver ICs for the high end TV which require high resolution. We continue to be the worldwide leader in LED backlighting for TV and monitor and are expanding concentration in the Backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, Sky Walk, TCL, Hisense among others. O2Micro proprietary analog Power Management technology in our Battery Management solution supports a variety of end market and continues to grow with our expanding growing customer base. Our Battery Management products to achieve many new design wins and we continue to be very optimistic for the continued growth in many end markets going forward. Our LED general lighting business continues to grow in this competitive market. Our strategy on providing growth spectrum product lines from the high end like MR-8 sealers [ph], [Indiscernible] dimming, conventional dimming to set power course effective commodity type solution, pocketing leading LED manufacturer in the U.S., Japan and their OEM and ODM in China is working. They bring customers our interest in both high end and the low end solution we offer and our companion is our product. Although we are disappointed in the length of growth in the third quarter, we remain optimistic about our core or major product lines including General Lighting, Backlighting, Power IC's for Smartphone and Tablet, and the Battery Power Management, for the Power Tool will regain a momentum in 2016. With this I’d like to thank you for listening to our conference call and I'll like to turn it 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] Our first question will come from the line of Tore Svanberg of Stifel Nicolas. Please go ahead.

[Tore Svanberg:]

Yes, thank you. My first question is, so your cash flow breakeven is about $17 million, $18 million. I’m just wondering from a sort of new product perspective if you have enough engagements to get to the level, quarterly revenue next year, even in a tough economy.

[Perry Kuo:]

Yes Tore, due to the macro economic situation and also the slower than our expected momentum growth in the Smartphone and Tablet area. So as we mentioned, we are evaluating the cost saving measure, so we are trying to reduce the breakeven point in next year. So we hope that we can provide additional details on the Q4 ’15 conference call and actually we are working on all the possible, available options on the cost saving measures and then to bring down the breakeven point for 2016. But before this point, it’s still too early to tell the details.

[Tore Svanberg:]

Okay, very good. And as a follow-up, Sterling you sounded confident that the Backlighting business could actually grow in 2016. So could you maybe elaborate a little bit on the dollar content increase, just because I assume you’re expecting TV and monitor units to just go down year-over-year right?

[Sterling Du:]

Well yes, and the union number is going down, but the size is going up and also resolution is also going up. So the technology we are developing is served in the high end TV and we have a reason to believe it is quite a potential market. The new high end TV, the customer we work with require a so called independent backlighting area for one panel. So that can give us some opportunity to sell the multiple IC’s and also can increase the silicon contact. And how many IC’s is rather used and how much the silicon content goes will depend on the size and also depends on the contracts and brightness of the speck of the particular TV. But what we can – is safe to say that is its going to be more silicon content for our O2Micro to serve the high-end TV in the next year.

[Tore Svanberg:]

And Sterling, is this a first half event or a second half event or is it sort of a gradual penetration?

[Sterling Du:]

It is going to the certain sector and then maybe expand to the same customer. It goes to the different platform and also can go to the multiple customer, which we are engaging. Maybe Jim you want to add some color to some question which Tore asked.

[Jim Keim:]

Yes, to accentuate a little bit further on Sterling’s point, we do have a major design win that is already beginning to ramp through the prototypes stage that is being launched in Q1. We will probably be able to name the customers at the time of the launch, that’s a significant program and we have similar products in the design win stage with several other majors. So those programs will launch more towards the second half of next year. So we do expect additional revenue to start in the Q1 and continue to ramp in Q2 and then there will be additional customers come on in the Q3, Q4 timeframe.

[Tore Svanberg:]

That’s very helpful. Last question on the Smartphone and table wins you’ve had. It sounds like there maybe some of your customers that didn’t see enough demand for their products. But as we look at 2016, is there an opportunity with some new customers here? Is some of the design wins that you already have expected to ramp more materially. I’m just trying to gauge your excitement around this opportunity for 2016. Thanks.

[Sterling Du:]

Yes, that’s what we want to do, yes. The firm is very consumer driven. There is going to be acquired variables in predicting. So what we predict in 2015 is not seeing that the inventory has been kind of slow to moving and that is making our target customer slow their pace facing to the multiple, well course if you. And the other one, it’s a so called fast charging, quick charging. The production rate is also slower. You can look at the – we have taken the core comp and not too many so called original expected penetration rate is happening is because of the current, the phone has been a weakness right now. So we have to remember our solution, it really has advantages is because we can provide into multiple and also high current driving charging is 3M or above. And these activities are quite active in our target customer, but those trying to materialize has been slowed down due to the environment and also the new technology adoption rate. So we are going to see this going to happen in 2016, but how much we’re going to gauge that, we also would like to gauge that and I think probably its towards the second half of 2016, but really the change to the more powerful Smartphone and also have the Christmas season, so that’s what we probably think that’s going to happen here.

[Tore Svanberg:]

Okay, thank you.

[Operator:]

Your next question will come from the line of Lisa Thompson of Zacks Investment Research. Please go ahead.

[Lisa Thompson:]

Thank you. I was wondering, could just go do a recap on the real-estate. What’s the transaction you did this quarter and what do you have left?

[Perry Kuo:]

Yes, this is Perry. We sold one portion of the Shinjū area, less above the one-seventh of the Shinjū, the big offices and we are again on the sales above the $268,000. We still have two-seventh of the Shinjū area in this building and also we have one stand alone Shinjū building. This could be sold out in 2016, its on a timeline. And also in Shanghai area we engage in selling one floor in Shanghai office and we hope that we can complete the transaction in Q4, we believe we speculate we have some cash in Q4 by the end of Q4 hopefully, and other than this we still have real-estate in the U.S. office and also two floors in China Shanghai area. This is all about the offices, our real-estate.

[Lisa Thompson:]

Okay, great. Let me just ask you a kind of philosophical question. Two possibilities, one is why don’t you just take some cuts to get to cash flow breakeven and just estimate the worst and do whatever you have to do. It seems like you could easily just add back resources when you needed them, because it’s not like you are producing product. It seems like a simple variable cost more type thing. And the second is, what have you done as far as the possibility of maybe going private transaction or anything like that. Have you considered other ways of structure in the company?

[Sterling Du:]

So yes, as I just stated that we are looking for additional operation expense reduction cost saving plan and that could lead us to achieve the breakeven point in the near future. We are doing that; that’s the process we are doing and more detail will be in the Q4 conference call as our CFO stated. For the productization, that’s always one of the option and our board member is always open for any possibility improvement in the future and that’s what we can comment right now. Thank you, Lisa.

[Lisa Thompson:]

Okay, great. Thank you so much. And the Smartphone horizon, have you been incorporated into any new product or have any new customers been added on since last quarter?

[Perry Kuo:]

We have worked with the majority type customers in China and Taiwan. We are engaged with some global Tier 2 manufactures, several ones, multiple ones and their machines right now are difficult for us to track, because they go to everywhere. But we do know some of them go to the big countries, which is like Russia, India, so that’s what we know. But for the U.S. we really doesn’t know.

[Lisa Thompson:]

All right, great. Thank you very much.

[Operator:]

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

[Scott Anderson:]

Thank you, operator and 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:]

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.