O2micro International Ltd (OIIM) 2002 Q3 法說會逐字稿

Good afternoon and welcome to the O2Micro international earnings report conference call for the quarter 32002, ended September 30th September 30th, 2002. At this time, I would like to inform you that this conference is being recorded for a rebroadcast and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Mr. Gil Goodrich, Director of Investor Relations. Please go ahead, sir.

Thank you, Brian. Good afternoon, ladies and gentlemen, and thank you for joining the earnings report conference call for O2Micro's third quarter 2002. This is Gil Goodrich, Director of Investor Relations. I would like to review the forward-looking statement. Then we will, in order, hear from Perry Kuo, CFO for the report, then Jim Keim, director, for market highlights and for closing, Sterling Du, CEO and Chairman. After the report, the floor will be open for 30 minutes for questions.

Certain statements in this discussion are forward-looking statements within the meaning of the federal securities laws. Statements made in this release that are not historical including statements regarding O2Micro's or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future are forward-looking statements within the meaning of the private securities litigation reform act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Factors that could cause actual results to differ materially include risks and uncertainties such as reduced demand for products of electronic equipment manufacturers, which include O2Micro's products. Due to adverse economic conditions in general or specifically affecting O2Micro's products. Technical delays and difficulties in the development process and errors in the products. You are also referred to the documents filed by O2Micro with the SEC from time to time, including but not limited to the form F1 in connection with the company's initial public offering in August 2000, which identify important risks that could cause actual results to differ from those contained in the forward looking statements. The statements made herein are dated information. Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion on the revenue and the income and financial highlights from the third quarter of fiscal year 2002.

Thank you. Good afternoon, everyone. This is O2Micro's earnings announcements covering the third quarter for the year 2002 ended September 30, 2002. I will highlight our operating results and predictions, and Jim Keim the director will provide key highlights. Closing comments will be made by Sterling Du, after which we will answer questions.

First, I want to emphasize that O2Micro continues to grow and continues to be profitable. During our conference call on July 31, 2002, we projected to be flat to slightly up from $17,667,000. Recall that Q2 revenue was increased 10% from Q1. O2Micro's Q3 revenues are up quarter-over-quarter and year-over-year. I would like to now announce the earnings results for the third quarter 2002 ended September 30, 2002. Profit and loss. Revenue for the third quarter was $18,024,000, an increase of 2% from the preceding quarter, and an increase of 52% from compatible quarter of the prior year. This is an all-time record high quarter for O2Micro. Surprising our previous record high revenue quarter of $17,667,000 in Q2 2002. We are very pleased with the growth in revenue in Q3. As it comes on top of sequential revenue growth in Q2 of 10% and revenue growth in Q1 of 5%. These results have been obtained in a period that has been very difficult for the industry. O2Micro has (inaudible)in the third quarter of the sequential revenue both in Q2 and Q1. Q3 is the sixth consecutive quarter for revenue growth for O2 Micro.

Net income for the third quarter was $2,545,000 -- compared to $3,008,000 of the preceding quarter and $1,318,000 for the compatible quarter of the prior year. This net income of $2,545,000 represents a 15% decline from the previous quarter and a 93% increase over the compatible quarter of the previous year. Gross profit margin for the third quarter was 59.7%, compared to 58.2% for the preceding quarter and to 63.7% for the compatible quarter of the prior year. Q3 gross margin of 59.7% is in keeping with the predictions made in our conference call of July 31 of the high end of the range of our gross margin model of 55% to 60%. Gross margin improvement has come through year improvement programs and expenses and we are pleased to report that we are steadily improving and we expect that they will be a key partner in our product as we move forward.

R and D spent for the third quarter was $4,750,000, an increase of $124,000 from the preceding quarter of 3%, and an increase from the compatible quarter of the prior year of 26%. This investment in our research and development were met in keeping with the growth of O2Micro to continue its high growth company and the profitability was maintained. SG and A expenses for the third quarter were $3,284,000, an increase of $436,000 from the preceding quarter, or 15% and an increase from the compatible quarter of the prior year of 31%. This quarter, the quarter increase is due in great part to some increased expenses of our payment protection program. SG and A is modeled in the range of 18% to 22% in our financial model. We are well reaching our guidelines and we continue to monitor and control expenses. Operating profit margin for the third quarter was 15%, compared to 15.8% for the preceding quarter to 10.3% for the compatible quarter of the prior year. Income tax for the third quarter was $355,000, compared to $465,000 in the preceding quarter and $257,000 for the compatible quarter of the prior year. Earnings per share fully diluted for the third quarter ended September 30, 2002 were 7 cents per share, compared to 8 cents per share for the preceding quarter, and the earnings per share was below expectation for two reasons. First, there was an impairment charge on the -- in city -- genesis. The audit committee decided to revalue the shares to book value, which is the most conservative approach. The private company is a manufacturer of Xfab, an insulator for low power integrated circuit. They remain a viable company. We've been in business with respect to industry sources.

Secondly, there were additional legal expenses in our pay down protection program. O2Micro has received major U.S. and foreign patent grant that have resulted in the need for significant international legal expenditure, as we prepare to defend the intellectual property against companies that may violate the scope of the patent. O2Micro had over $105 million in cash and short-term investments. In addition, O2Micro has no debt. Short-term investments or money invested in corporate bonds originating out of certain developed countries. Accounts receivable were $10,370,000 compared to $7,101,000 in the preceding quarter. This represents a DSO of 52 days for Q3 and 36 days for the preceding quarter. Our model is 55 days to 65 days. Account receivable day sales outstanding has arrived from 78 days gone to 22 days over the last several quarters. This is due to the fix that over the last several quarter, the major OEM customers have moved more of their manufacturing to China. As this began DSO delayed because of the extra time consumed in customs and local business practices. DSO short term as we began to ship on short terms. Shorter terms while we were in the process of establishing credit trends with some of these new customers. As relations with the China customers improve and these credit terms are becoming established, DSOs will move into the 55 days to 65 days of our business model. Investment in shares of stock as of September 30, 2002 is $5,485,000. The change in investment in shares of stock for Q3 is due to a new major investment in access in the amount of $5 million. Access is our strategic partner. Inventory turns rash ratio for the third quarter was 3.5 compared to 3.7 for the previous quarter and 3.2 for the compatible quarter of the past year. Cash flow from operating activities in the third quarter was a negative $3,711,000, due mainly to increased account receivable, decreased accounts payable. Cash flow from operating activities year-to-date is positive.

Human resources. O2Micro now has 264 employees. 65% of which are engineers. These positions are for new product development that continues introduction of new product and more customer wins in the future. O2Micro estimates Q4 revenues to be flat to slightly up. While we do expect some improvement in Q4 margins to the high end of the range of our model, we will remind our investors that our long-term target markets are in the 55% to 60% area. I will now pass the call to Jim Keim, Director, and he will review the market and customers.

Thank you, Perry. In Q3 our profits were made on growing our -- market penetration and increasing our available market. Although Q3 remained economically challenging, O2Micro's focus on R and D resulted in some very strategic patents being granted, and new products being introduced into the market. We will highlight some of these key patents and product introductions as we review each major product group.

Intelligent E commerce group. Last quarter we mentioned O2Micro was achieving a number of significant design wins and was the recognized leader in PCMCIA product with the SmartCard bus as well as our 4 in 1 memory CardBus controllers that support four widely used flash memory formats, Smart media, memory stick, multimedia card, and SD memory card. We are pleased to announce that we have received both United States and Taiwan patents protecting key implementation features of this technology. These patents are very critical to protection of this technology, while also allowing us to expand our technological lead with future products based on these patents.

Intelligent invert a group. At our last conference call we highlighted our new Royer Raptor family of products that will enable us to compete with the traditional two-stage Royer inverters in the low end of the LCD monitor backlighting market. We have now started sampling this product and are working with key customers to bring this product into high volume production in the first half of 2003. We believe the market for LCD backlighting will continue to grow rapidly over the next several years.

The intelligent power group. Our focus with the intelligent power group is to rapidly expand our customer base by bringing out a leading family of charges called magic star and a DC to DC converter family called Gemini. Having completed development of the first products in these families, we will rapidly start expanding these families to focus on becoming a market leader with our industry leading technology. We are very pleased to announce that we've been awarded a key patent that enables us to do trimming on analog and mixed signal products after packaging of the parts. Competitors use trimming methodology at the wafer level before packaging. This technology gives O2Micro key advantages over a competition in both cost and packaging.

Finally, our intelligent DJ group. Already we are the recognized leader extending battery operating life with our family of audio DJ products. We are pleased to announce that we've developed a new cost-effective battery management product that we'll be introducing this quarter. We believe this family of products will significantly expand our leadership role in battery management.

I will conclude with some general market comments. For the past few quarters, we have stated that we remain cautious and are prepared for market conditions to remain difficult. We see no reason to change that perspective. Our focus as a company will continue to focus on R and D development that will lead to more and more power management products based on our already patented technologies and new intellectual property filings. We strongly believe that power management will continue to be an expanding market that will allow for growth of our company and good profitability. I will now pass the call on to Sterling Du, CEO and Chairman for closing remarks.

Thank you, Jim. As Jim mentioned, O2Micro is now operating in market penetration increasing target available market. We believe it is the best strategy for the company to continue its growth in spite of a weak economy. The -- we will focus on our IP protection in order to reach the -- legal activities in the future and -- strategy to protect the company's best interests. Our present clients increased to 764, up from last quarter's 600. In addition to the new product announcements such as new battery management ICs, we continue to expand our activities in Asia, where our customers and the market are. We grew our head count to 171 from the last quarter's 143 engineers. While we closely managed the R and D expense we also have to remember the economic situation may not recover soon, given a soft market, O2Micro's strategy is to sell to top major manufacturers, develop power management technologies, and continue to develop our global infrastructure. The market growth of the coming years will be quantified by portable computing, wireless communication and LCD technologies that as you know O2Micro's leading power management technologies serve those markets well. Thank you very much for attending our conference call today.

Ladies and gentlemen, I'd like to open the floor for 30 minutes or so for questions and answers. Brian, can we proceed with some questions?

Ladies and gentlemen, the question and answer session will now begin. If you are using a speakerphone, please pick up your hand set before pressing any numbers. Should you wish to ask a question, you may do so by pressing 1, 4, on your pushbutton phone at this time. Should you wish to withdraw your question, you may do so by pressing 1, 3. Your questions will be taken in the order they are received. Please stand by for your first question. Your first question comes from Mr. Svanberg.

U.S. Bancorp Piper Jaffrey. A couple of questions. First of all, Perry, you mentioned you still expect to be at the high end of your gross profit target of 55-60% margin. Does that mean that you expect gross margins to be very similar next quarter as it was this quarter?

Yes, we also extend that to we will increase the market share in the E-Commerce area while we continue to improve our year end stock so at this moment, I expect that our gross margin in last quarter will be similar to the last quarter.

Very good. And could you also give us a little bit more guidance, perhaps, on your legal expenses and your SG and A? How should we model that going forward?

Yes, first of all, I would like to say as Sterling mentioned, that we had many expenses in the last quarter, and these are the major ones. We are very happy with the status of the patent status. So also as we identified some of our key competitors, they offer the product, which might be in the scope of the patent. So we take aggressive patent protection programs. However, also we monitor expense control, so in the past, our financial model, we offer to the market is in the range of 18 to 20%, so we like to maintain our SG and A in the area of 18 to 20%, and at our best effort in the 18%.

Okay. Very good. And a question for Jim. Jim, you'd mentioned a new battery management product coming out of the intelligent DJ group. Could you talk a little bit more about that? What specific applications will those products be targeting?

This product family will target the gauge in the battery area. We have some new technology that we think we bring to this area. This product is very compatible with her leadership position with some of our high-end chargers that we have introduced into the marketplace, so we think that by melding the technology that we already have and leading position in chargers with new battery gauge product that we can take a major role in this market.

Very good. And perhaps a question for Sterling. Sterling, your Gemini as you now call it product line, when should we expect to see some revenue from that product line, and what specific applications are you now sampling some of those products to?

That's a good question. We participate in market couple quarters before. In portable computing application, the AC/DC Gemini product we provide is targeted for the high end and so far we still are in the processing of trying to win the design win. We see this opportunity ahead for this particular Gemini target for server application. Some of the so-called light server type application with slight modification of particular type of the server application design and that's the next area we'll target. I would like to follow with the DC/DC is not an area very easy to get into the mainstream custom base in a short time frame. I'd like to predict this is going to be happening, should be still in the second half of 2003 going to have some revenue generation and we are still in the stage to try to win the design win and find a leash to maintain our leading edge technologies without compromising our margin.

Very good. Thank you.

Thank you.

Your next question comes from Shawn Slayton. Please state your affiliation followed by your question.

Hi. Shawn Slayton with Ferris, Baker Watts. Can you talk a little bit about pricing and if there is pricing pressure among your competitors and also could you remind us who your top customers were, maybe your 10% customers?

In terms of pricing, let me again indicate that the vast majority of our product that ship is proprietary in nature, therefore, it is less subject to immediate price pressure. There's nevertheless always competition in the marketplace, and that does create some cost pressure over time. However, we've been very aggressive in cost reduction programs so that we've been able to maintain our margin base. We have seen some cost pressure certainly in areas where competitors have taken a position that can violate some of our patent positions, and that's one of the reasons we have taken on a major patent protection program, and we will continue to develop products with significant intellectual property because that is very key to the margin in long-term maintenance of our overall price structure in the market.

Okay. And your 10% or greater customers?

Our 10% customers among the top -- the first tier -- manufacturer which is conclusive of -- Fujitsu.

Perry, can you go over again purchase of your stock in Q3, how much that amounted to and how much you acquired? And an average price if you have it?

In the Q3 quarter, we repurchased 621,200 shares at the total amount of $5,654,000.

Great. I'll yield the floor for now. Thanks.

Ladies and gentlemen, should you wish to ask a question, you may do so by pressing 1, 4 on your pushbutton telephone at this time. Your next question comes again from Tore Svanberg.

Just a follow-up. You mentioned another important investment in one of your strategic partners here, Xfab. Can you give us a little more color on the importance of Xfab as a partner? What does it really do for you as far as your technology road map and so on? Just want to have a little more clarity on that.

Yes, this is Jim. I will attempt to answer that question. Xfab is a well-established supplier of product to the automotive industry in Europe. They have very well established and very stable analog processes that yield themselves well to mixed signal. They also have high voltage capability, which we see as very important to our future as we move forward in key areas. With this situation, we decided to make a strategic investment with Xfab, become a strategic partner. We feel that this is very important as we do move forward in additional mixed signal products for power management. It enables us to have leading access to processes in this area and also will allow us to have access to capacity which we think can become an issue at some point as we move forward into the future. So that's my general comment on Xfab.

Thanks again.

Ladies and gentlemen, a final reminder. Should you wish to ask a question, you may do so by pressing 1, 4 on your pushbutton telephone at this time. Your next question comes again from Shawn Slayton.

I think we had spoken in the past or you had mentioned in the past about the rough percentage breakout of your four major product lines, and I think it was mentioned that they're approximately equal. Was that the case in Q3, and do you expect that to be the case going forward, or where is -- your year over year growth for 03, what product segments do you think are going to contribute to the preponderance of that growth year over year? Thanks.

Shawn, this is Gil Goodrich. What we've said in the past still remains true, and that is that each of the product lines are greater than 20% of revenue, and not one of them is greater than 30% of revenue.

So do the math there, okay.

Albeit that the Ecommerce and inverter product lines have been the faster-growing and are now the larger of the product lines.

And you think going forward into 03, you think that that's going to be the case as well, those are going to drive the growth?

Well, I think you can see from our patent positions that have been granted very recently that those two product areas have been given some very strong patents, and that has pushed the growth of those two product lines significantly, and we think will help fuel growth in 2003. That having been said, if you listen to our power area, we're very rapidly moving forward in new products in both charger and DC to DC in our intelligent power product offering, and we're ready to launch a very significant new product in our DJ product line. So our intent is to continue to fuel all four product lines with significant growth through more and more R and D development and more and more product introduction, so it is our intent to maintain four very strong product lines as we move forward.

Okay. And also I'm new to your story so can you just speak a little bit about you guys it's you don't have a business model that exactly lends itself to discussing backlog or turns business within the quarter. Can you just tell me from a building to forecast perspective, how does that give you a different visibility or either better or neutral or less visibility relative to the other companies within your industry, seeing as your building forecast is a little different than some of the other participants'?

We think it gives us better visibility from the simple point of view that we are not dependent, for instance, on distribution orders coming from many, many miscellaneous customers are driven by particular unknown market segments. We work off of forecasts from major customers where our business is focused. Most of those major customers give us forecasts typically of six months in duration that are usually reasonably accurate, and we do proceed to build product to those forecasts. And that's how we run our business.

Great. Okay. Thanks very much. I appreciate it.

Your next question comes again from Tore Svanberg.

I'm sorry I forgot this earlier. I'm just wondering with your SmartCard bus controllers, are they shipping now in volume? If so, to whom? If you can't disclose whom, to how many OEMs?

For the SmartCard bus controller, we've been shipping to more than one year to Europe, which is under the Fujitsu and Siemens, and also under the Asia -- also Fujitsu in Asia. And we also have a significant top USA company that's going to be utilizing the SmartCard bus to target for the commercial enterprise in some instance for the government, government business. So that's the way it's going for more than one year, and the volume we're shipping so far is on top of the -- I think it's between 1.5 to 2 million units right now. And looking forward, we do see the market of this CardBus going to be two direction. One is security for some segment of the market. Second is the CardBus we have integrates the four different fresh memory reader inside as Jim mentioned, and does go into a so-called digital hub and that is one of the major attraction for the consumer market. The consumer segment in upcoming PC markets is going to be more and more percentage in terms of the traditional high percentage of commercial segment. So this too is momentum for our Ecommerce group.

Very good. Thank you.

Your next question comes again from Shawn Slayton

Can you talk a little bit about the linearity in your quarter? We heard negative commentary from Intel and maxim regarding bookings for the notebook market. Can you talk about the linearity and where you see the notebook industry right now snapshot in time? Thanks.

Shawn, this is Perry. For the linearity, I will cover and probably for notebook market, Jim will cover. I don't think we ship our product in 30, 30 and 40 -- quarter.

So that's an inherent strength of your model, you have generally linearity with slightly back-end loading. Again can you just maybe touch on the commentary we heard from Intel and from maxim over this past month or so regarding the notebook market, your industry perspective or your unique perspective? Thanks.

We've actually seen the build rates be quite uniform. The manufacturing rates in China were a good portion of the notebooks are now being built are running very smoothly with very good yields, and we have not seen a significant amount of deviation in our order path from week to week or month to month, so actually our linearity has been quite good. Again, we do not have distribution channels, I would point out, and as a result of that, we ship the vast of majority of our products directly to the manufacturers who are building this, so we have not seen any significant changes or fluctuations in orders.

Just to get me up to speed on your business model a little bit, you're a lot less exposed to maybe an inventory glut or overbuild in that regard? Can we say that safely?

Yes. We do not normally see inventory gluts.

Thanks very much.

Your next question comes from Robert Gardner. Please state your affiliation followed by your question.

You mentioned on Xfab that part of the piece of the puzzle was high voltage capability. Is this a new fifth area or does that technology fit into one of your four segments?

Quick question. When we mentioned high voltage and Xfab capability is a wide range. They provide from 30-volt all the way to the model 600-volt, but to answer your question, we have utilized a 30-volt, 40-volt extensively in our power area. We have already shipping in mass in terms of the 30 to 40-volt. We do see high voltage capability in a 30 to 40-volt does present a very good year rate, it does present great consistency between the processing different batch in the four corner duration. I personally think they are one of the best capability to deliver the consistency between the technology of the different design, which is very important for high voltage design. And so because of that, we have moved production in new design from some of our Asian-based foundry to Xfab. That already happened, we continue doing so.

Looking forward, second project is new technologies which is something like greater than 600-volt, and that is something we work with them as a partnership because we have an investment ratio so we can early on participate in the upcoming high voltage processing and to fine-tune the needs to customize for O2Micro and we can enjoy it when they have the first batch of production parts and we can put our design over there. And for those greater than 600-volt processing, in the whole available opportunity in the worldwide, there's not many, so Xfab is one of few, and that is future opportunity is very critical to O2Micro.

Who else would you list as having that capability? Who would be your competitors?

Are you talking about future ones?

Yeah.

The future generation, we are competing with the traditional solution, which is passive component. Again, we try to implement that by power IC and that's architecture traditional was not done by power IC but passive power component.

And so if you didn't partner with Xfab, who else is there to partner with on that kind of a product?

By -- different processing, just to give an example, like a traditional design for the inverter, so prior to we come out of the first stage conversion, people are just using traditional components such as the indoctrinate capacitors resistance, and some of larger transformer to view the same functionality block, then that is more constantly or more larger scale. That's the same thing we're looking at for the next generation.

Okay. Thanks.

Sure.

At this time, I am showing no further questions. I will now turn the call back to Mr. Goodrich to conclude.

Thank you, Brian. Sterling Du, our chairman and CEO, would like to close with some closing comments.

Yes. O2Micro, we continue to invest in the power management technologies even in a tough environment, so the way we do that, we closely monitor our expense. We extend our activities into Asia and some new architectures, new technology partner, and we are in some ways in the market coming back in the future, maybe the long-term future and we are in the right position to go with that. Second, we catch the consumer needs. Consumer is going to have wireless communication. We are not the wireless solution directly. We provide technologies we believe that will benefit from the 802.11 or blue tooth technology prevail in the future. So battery going to enable the freedom of computing. So that's the closing comments I would like to make. Thank you.

Ladies and gentlemen, thank you for attending the O2Micro third quarter conference call.

Ladies and gentlemen, that concludes your conference call for today. Should you wish to access a rebroadcast of this call, you may do so by dialing 1(800)428-6051, with a pass code ID of 262984. Thank you all for participating, and have a nice day. All parties may now disconnect.