O2micro International Ltd (OIIM) 2003 Q1 法說會逐字稿

Please stand by. Your conference will begin momentarily. Good afternoon and thank you for joining us today to discuss O2Micro earnings for the first quarter of fiscal year 2003. If you would like a copy of the press release please call [Pamo Tambo] at (408)987-5920 extension 8095, and we will fax you a copy immediately. There is also posted on O2Micro's website at www.02micro.com. There will be a replay available through May 5th,at 800-428-6051 or at (973)709-2089 with a pass code of 287985. Following the presentation by management the conference call will be open for question answer as time permits. Gentlemen, you may begin.

Good afternoon and welcome to the O2Micro first quarter earnings report conference call. I would like to remind listeners that this discussion for business outlook of O2Micro contains forward-looking statements. Statements made in this release that are not historical in fact 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 form F1, form F3 and 20F reports and other documents filed with the SEC from time to time. Listeners are referred to the O2Micro's earnings press release dated April 30th, 2003 and documents filed with the SEC to understand these forward-looking statements and the associated risk factors. Statements made here in are dated information. With us today on the conference call are Perry Kuo Chief Financial Officer, Jim Keim director and Mr. Sterling Du CEO and Chairman. After the report it forum will be open for questions as time permits. I would like to introduce Perry Kuo CFO of O2Micro. For a discussion of the revenue, income and financial highlights of the first quarter of fiscal year 2003.

Thank you Gil and good afternoon everyone. This is O2Micro's earnings announcements covering the Q1 2003, ending March 31st, 2003. I will highlight operating results and the projections and Jim Keim, director, will provide market highlight, closing comment will be made by Sterling Du, CEO and Chairman of O2Micro. After which we will answer questions.

First I want to emphasize that O2Micro continues to grow and continues to be profitable. Given our conference call on January 29th,2003 we projected Q1 revenue to be up in the range of low single digit to mid-single digit percentage. From Q4 revenue up $80,393,000. O2Micro Q1 revenues are up quarter-over-quarter and year-over-year.

Profit and loss. Revenue for Q1 was $19.3 million, an increase of 5% from the preceding quarter and an increase of 20% from comparable quarter of the prior year. This is an all time record high revenue quarter for O2Micro. Surpassing our previous break high revenue of quarter of $80,393,000 in Q4 last year. Q1 is the 8th consecutive quarter of sequential revenue growth for O2Micro. These results have been obtained in a period that has been very difficult for the industry. Net income for Q1 was $1,687,000 compared to $2,147,000 of the preceding quarter and $3,029,000 for the comparable quarter for the prior year. Gross profit margin for the Q1 was 56.7% compared to 57.9% for the preceding quarter. We are raising the company's financial model of 55% to 60%.

R&D expense for Q1 was $4,912,000, a decrease of $75,000 for the preceding quarter or 2%. And increase for the comparable quarter of the prior year of 7%. This investment in research and development were met in keeping with the goal of O2Micro to continue as a high growth company and the profitability was maintained. SG&A expense for Q1 was $4,319,000, an increase of $790,000 from the preceding quarter or 22% and an increase for the comparable quarter of the prior year of 62%. The quarter to quarter increase is due in great part to some increase in expenses of our intellectual property that was discussed in our conference call on January 29th. The SG&A is modeled in the range of 18% to 22% in our financial model. We are meeting our guidelines and we continue to monitor and control expenses.

Operating profit margin for Q1 was 8.9% compared to 11.6% for preceding quarter and 19.3% for the comparable quarter of the prior year. Income tax for Q1 was $270,000 compared to $366,000 in the preceding quarter and $487,000 for the comparable quarter of the prior year. Earnings per share for the diluted for Q1 ended March 31, 2003 were 4 cents per share compared to 6 cents per share for preceding quarter and 8 cents per share for the comparable quarter of the prior year. O2Micro had over $108m in cash in short term investment. In addition O2Micro had no debt. Total investment where money invested in corporate bonds of a list double rating and government bonds of certain developed countries. Economy [inaudible] for Q1 were $9,859,000m compared to $7,595,000m, in the preceding quarter. This represents a DSO of 46 days for Q1 and 37 days for the preceding quarter. Our model is 55 days to 65 days.

Inventory returns ratio for Q1 was 4.1 compared to 4.4 for the previous quarter and a 3.8 for the comparable quarter of the previous year. Cash flow from operations in the first quarter was $1,013,000. O2Micro now has 295 employees. 55% of which are engineers. This positions us for new product development and continuous introduction of new products and the more customers desirous in the future. By this for the second quarter year 2003, O2Micro estimates Q2 revenues to grow sequentially from Q1 in the range of 5%. The gross profit margin [inaudible] range of the company's financial model is 55% to 60% and we expect that our gross margin will be in the range. The R&D is target range of company's financial model is 25% to 30% and we expect R&D to be in the low end of the range of 25% to 30%. The SG&A target range of a company's financial model is 18% to 22%. As we mentioned in the earlier, there will be some extra legal expense involving intellectual property, protection print in Q2,Q3,and Q4. We expect SG&A for Q2 to be in the high end of this range. I will now pass the call to Jim Keim, director; and he will review the markets and customers.

Thank you Perry. We are encouraged about by the current market, and expect to see continued growth. Particularly in LCD monitors and LCD TV. While notebook volumes are growing, we are continuing to see that growth come from the consumer model rather than the corporate models. This trend has caused us to accelerate the development of additional standard products of proprietary technology to services market. The focus for 2003 is to introduce more Analog families of ASSP which is applications specific standard products and power management products that enable us to broaden our market penetration.

We believe we have made major strides in positioning ourselves with a broader portfolio of products and expect to see the reward of this effort as we move forward through 2003 and 2004. Let's briefly review each of the four product areas. Q1 saw the continuing expansion of our intelligent converter leadership in book technology and key design activity. Armed with our strong patent position in Inverter technology including two switch, four switch and [phazer way] products. O2Micro continues to penetrate new market areas. This includes LCD TV, O2Micro is now shipping product to both industry leaders, sharp and Sony. Our Lawyer Raptor product has found wide acceptance in low end LCD monitors and we will be shipping increasing volumes of this product in Q2 in the second half of this year. Our patent strategy in this technology was affirmed in March in the Taiwan district courts placed a preliminary injunction on the marketing and sales of key Inverter products from Vitec and we affirmed a preliminary injunction against MPS.

In the United States we are pleased with progress and patented infringement lawsuits both in California and Texas. Unlike invertors, our Intelligent Power product line had historically been based on custom designed for high end notebook solutions. Following our successful Inverter model we have refocused our resources on standard products that broaden our customer base and allow us to enter additional market segments. The first successful consumer charger, the magic star, continues to enjoy new design wins and is now being expanded into a family of standard charger products. The Second member of this family, a dual battery charger called Magic Star Dual is expected to achieve key design wins and be in production in the second half of 2003. Armed with a growing portfolio of intellectual property, our DC to DC product family is being rapidly expanded to include support for both Intel and AMD processors. We have successfully completed qualifications with new AMD opteron. And are proceeding to ship samples of this product. We are encouraged to see IBM's support of the opteron and expect the opteron to gain market acceptance with its ability around both 32 and 64 bit software. We are now growing confident that this family of standard DC/DC products can challenge the market leadership with both Intel and AMD processors as we move forward.

Our intelligence ecommerce group continues to achieve significant milestones in market leadership. Our Smart Card Bus product was adopted into Dell’s new latitude serious of notebooks. We feel this entry by Dell amplifies the broadening acceptance of the smart card technology into the market. O2Micro;s leadership in this area has further extenuated our License agreement with RECO completed during the quarter. We believe that this license agreement will help expand technology into other areas and broaden the market for this product. Our intelligent DJ family continues to be expanded with focus into desktop DVD applications. This group also continues to focus effort in new technology introducing the standard family of battery management products. We have filed additional patent applications that are sampling our battery gage product based on proprietary intellectual property.

I will conclude with general market comments. We have previously stated that we remain cautious and are prepared for market conditions to remain difficult. With various issues effecting world economies as we enter Q2 we see no reason to change that perspective. Some people have expressed concerns over SARS. capability of our global support and logistics was already well-tested as well as one of our primary warehouses was in Hong Kong. Our strategic positioning of product with back up capability enabled O2Micro to not only meet customer requirements but maintain our strong record of excellent on time delivery. Our focus of the company would be to continue to move forward with strong development that will lead to more and more power management products based on already patented technology and new intellectual property (inaudible). We strongly believe power management continues to be expanding market that will allow the growth of our company and good profitability. We will now pass the call on to Sterling Du, CEO and Chairman for closing remarks

Thank you Jim. Let me highlight what we achieved during the first quarter 2003. We finished the first quarter 2003 with a revenue of #$19.3 million, with a growth of 5% from preceding quarters and a 20% over year to year. The earnings per share for the first quarter 2003 fully diluted 4 cents per share compared to 6 cents per share in the preceding quarter and 8 cents per share in a comparable quarter of last year. This is due to active intellectual property protection points by which, as Jim mentioned we are pleased with the progressive status in Taiwan, California and Texas. O2Micro will continue to commit intellectual property protection plan to insure our long-term interest. As a result of our of effort in intellectual property, our present clients increased to 1,079 clients from last quarter, 863. The economy remains to be face many challenges including recent SARS and market demands. We believe our strategy to sell to top tier customers will play a key factor to grow the company. As our proprietary technology is (inaudible) for our ASAP product of global R&D infrastructure enables us to have the effective supplies, talent, engineering, design centers worldwide and close to the market. With wireless communication on the verge of expanse O2Micro's power management technology and CD inverter will continue to have continuous growth in the leadership in mobile and LCD monitor and TV markets. Thank you.

Operator can we take some questions please.

Yes sir, thank you. Ladies and gentlemen, if you are using speaker phone please pick up the hand set before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw that question press star 2. Gentlemen please stand by for our first question. Our first question comes from Tore Svanberg from U.S. Bancorp Piper Jaffray, Please State your question.

Yes, good afternoon. First of all a question for Sterling. Sterling, at this quarter you had an announcement about a licensing partnership with Reco, could you give us a little more color there and how this impacts the company's strategy going forward?

Yes. I am happy to. On April 7, O2Micro announced we had (inaudible) a limited, not exclusive license to Reco company. Reco is one of the basic significant [semicon] company, also has other products in Japan. This pattern for copy traction technologies under the U.S. patent. This technology (inaudible) the regular PCMPIA/Covers Controller to perform the smart card functionality as well as digital had you been, functionality for order different various specs for fresh media cards such as memory stick, SB, security device, compare flash, smart media. This is going to be solution to eliminate the external controller and utilize existing PCMPIA slot to use a dummy adapter to expanding the interface to all above devices I mentioned. So the license agreement O2Micro reached with Rico expands O2Micro's customer base market opportunity in the Smart area. Also underscores the strength of O2Micro present portfolio as the leading edge position in the smart card technologies. We are happy to announce Reco will expect Japanese semi conduct company has recognized O2Micro outstanding technology's leadership and have this agreement with us. Thank you.

Great, thanks and a question for Jim. Jim, you mentioned early shipments here already to the LCD TV market and some of the majors there. Can you talk a little bit more about the market opportunity, when does this becomes substantial revenue for the company and maybe some prospects for next year?

Tore, we see the LCD marketplace in the TV area beginning to, what I would call, gear up for a very significant production, we think starting in the second half of this year. We go back to last year, we began to see many advertisements regarding LCD TV in the second half of the year as we moved toward the holiday season. We expect to see significantly more of that activity this year. We see virtually all of the majors at this point developing TVs in the LCD area. And the projections currently in the market are for the orders of 3 million TVs. We expect the market may actually grow quicker than that but one thing to remember on the marketplace is that TV requires a significant amount of lighting. For instance in a notebook there may be and typically is 1CCFL light in a notebook. In TV for instance in 30-inch it is not uncommon to see 16 backlights. So this requires significantly lower lighting, requires significantly more complexity and consequently the market is mobile times in terms of unit volume for us. We see the second half of this year beginning to really emerge as a very significant market for us.

Great thank you. Just one final question for Perry. Perry on the balance sheet there is restricted assets area under assets. Am I correct in assuming that is the restricted shares related to 360?

Tore it is restricted assets. It is our money put in the bond for the pre injunction.

Okay. I understood. Thank you very much.

Gentlemen next question from Shawn Slayton of Ferris, Baker Watts.

High guys good afternoon.

High.

Jim or I guess anyone, you talk about the trends of your four product segments, on a sequential basis as a percentage of sales? I am assuming that Inverter and E-commerce are up and Intelligent Power and intelligent battery are down sequentially

As we indicated last time we are seeing the fastest growth in the product line in the intelligent Inverter and intelligent E-commerce. That is primarily due to the R&D cycles are on the product development. So as we go forward through 2003 we do expect those to become a larger percentage of our sales. in 2004 we will be introducing products that we think will also make the Intelligent Power as well as the intelligent DJ product line to also grow more quickly.

So before we used to say no segment is greater than 30 no segments less than 20 but one of the segments has fallen off the 20% list at least for this quarter and you are saying that is going to change exiting the year. Is that correct?

Yes that's what we indicated previously, yes.

Let me ask you, Perry, you said your cash flow from operations, can you repeat that? was it a million dollars or so?

Right, right. The cash inflow for the operation activity, yes

$1,013,000.

Okay. Can you just talk a little bit about the magic star, magic star dual again? You said the target market there is more consumer centric lower end notebook. When are we going to see that this year, when are we going to see those products in contraction?

We are already shipping the magic star charger. We are also introducing dual charger and we expect the dual charger will also be shipping in the second half of this year.

Okay. All you have before for now and circle back to you guys, thank you.

As a reminder ladies and gentlemen, Should you have a question press star one on your touch tone telephones. Our next question comes from Tore Svanberg from U.S. Bancorp Piper Jaffray.

Yes, just a couple of follow ups. Can you first talk a little more about the DC/DC computer opportunity here? I think you mentioned in the past that you are moving closer to the server market. Maybe you can update on when you expect some material revenue from that end market.

yes, Tore, this is Sterling. Regarding DC/DC for server market as you mentioned we have worked with two microprocessor companies, let me explain a little bit about MD activity. MD has a new CPU series coming out. Those series of CPU was targeted for server and much more power than desktop solution, the range of 70M or minus plus. Those high current consumption CPU, you know in a traditional conventional way using market face to boost all of the current or provide microprocessor. O2Micro has been worked with the new way, methodology utilize the transformal as one of the device of boosting this current. The transformal base, topology is different from traditional model face one.

So far we don't claim we have designed one yet but we are in the phase close to where we have some prototype coming out and we feel pleased to see today's performance in the qualification we have ever done with our partner and the possibility of this new topology in a phase because of viable solution is the potential is higher and higher every day goes by. And you may be asking that is the advantage of using a transformal base topology could save the (inaudible) including expensive can cast us. The final POM the seven dollar is still remain to be clear for study. It's not final number but what we gave should be in the range of a couple of dollars which I think is between three dollars or beyond. As quite significant savings. Of course it depends on the assistants of requirements and how many CPUs the customer would like to design.

So at this moment we feel encouraged that we have come up with this new technology is can extend one, our product portfolio, second, diversify our marketplace. So we feel very pleased with that. And going back to the Intel mobile CPU IVP4 series, as last time we mentioned our first generation DCTC for the mobile CPU of the Intel family got delayed to the second wave and we retuned the topology and come out of the more adjusted modified topology. Hopefully that can come out second half of this year as prototyping. In both of these products we are not expect immediate revenue after recent coming quarters. We figure there will be slightly revenue coming out maybe toward the end of this year and next year will be the major marketplace potential rising for these two product waves. Thank you

Second question back to Jim. Jim this last quarter looking at new products, I think you filed a couple of new Inverter patents including I-Dimmer and Inverter for PDA. This mean that you actually have now these products sampling and you know can you maybe talk a little more about when you expect products to penetrate both the PDA and maybe the lighting markets?

Tore I think as we indicated last time we are actually changing the name of the group as we look forward to intelligent lighting which does reflect some of the recent patent activity that has occurred. As far as the PDA as well-well as the I-Dimmer is concerned, these products will be moving into the sampling activity in the second half of the year. We will expect the revenue generation to be next year on these products.

Great, thank you.

Gentlemen next question comes from Shawn Slayton of Ferris Baker watts. Please state your question, sir.

I don't know who wants to take this question but you have discussed in the past that you have maybe slightly more of amiable position relative to some of your peers from a visibility perspective because of your forecast relationships with your customers? I think you mentioned that you have a six month type of forecast relationship that allow your customers. So we are exiting April, if we add six months from now that gives us visibility almost to the end of the year minus a couple of months. Can you talk about without getting too specific what kind of confidence that gives you in your top line growth for this year or at a minimum of maybe where we are this year relative to this time last year from a demand perspective? Also can you tell us how much your sales were notebooks versus stand alone type of LCD applications LCD applications?

I think the best way to answer the first part of your question is to say that we are encouraged by the forecast that we are seeing from our (). The forecast at this point appear to be more in a growth mode than they have been a year ago. If you go back a year, I think customers in general are more optimistic regarding some of the key product areas and that includes the one I mentioned earlier, the LCD monitor, TV's coming on board as well as in the notebook. Customers continue to remain somewhat conservative because there are many concerns, I think including be even the recent SARS activity. At this point I think it's safe to say we are more encouraged and perhaps somewhat more bullish I am not sure if that is the right term, than a year ago. As far as notebook versus other applications is concerned, I think we indicated last time that the notebooks still is 75% of our revenue base. That does not change significantly. But you will gradually see notebook become less and less of our revenue over time, not that we don't intend to grow notebooks, we do, but we will diversify into other market areas

Okay. Also from margin perspective, you guys, as you migrate more to a ASSP product offering, can you talk about the impact that that is going to have on margins or how you are going to sustain your margins?

Perry Kuo We reported earlier that our financial model of the gross margin is in the area of 55 to 60% and there this is mainly due to product mix. We continue to grow in certain area and we have very good sales and also the gross margin is a product mix.

Let me also add that if you listen to what Sterling said in the DC/DC area, what he was saying I think carries some very significant activity with it in terms of margin because basically we are not designing the traditional topologies. We are designing new topologies that do carry some potentially significant cost savings to the customer and with that we do have the ability to, I think, retain very attractive margins on these products

OK. Thanks guys.

Next question from John Lopez of Pilgrim Baxter (ph). Please state your question.

High guys, thanks. I have two if I can. First, you spoke a little about SARS as it impacts your business. I think you were talking specifically about your business as it affects you with your customers. Can you speak of demand side, whether you have picked anything up that could potentially impact you as we move through the next couple of weeks here?

I think there are several aspects of the SARS that you have to look at and fortunately at some of the latest news it looks like it's getting under control in some areas but basically I think there is both some short term as well as long-term applications of this. The short term applications, there has certainly been concern over everything from deliveries. We think some people may, some companies may even try to get a little bit of inventory in Q2. We are monitoring that closely to try to keep that in control.

Over the long-term I would like to point out that this has very positive implications for a company like O2Micro and I hate to use the world disease to talk about positive implications but we are seeing situations where a lot of companies are gearing up to have their employees work at home. You can't do that without a computer and a lot of cases these are notebooks or rather desktops with LCD monitors. As we see that become a trend to do communications through the internet, we think that this will just help drive power management products, which are into many others. So we think that the longer term implications of this are very positive for our markets.

Okay great. So, it sounds like in the sort term you haven't picked up material disruption insofar as you can tell in the end market as well as no disruption in your own supply chain.

No we have not really seen that

And the second if I can just poke at guidance a second. I understand the uncertainties in the market is choppy but you guys grew 10% sequentially in Q2 last year and you did the same in Q2 in 2001. I realize the numbers are bigger now but why the 5% growth. Can you walk me through the build up because it seems like you have more products more customers but the sequential growth rate is decelerating a bit.

As we mentioned earlier, 75% of our revenue is still into the notebook area and actually the growth in the notebook has come from the consumer rather than the corporate machine and that does have some impact on us because the consumer machines tend to be the lower end of notebooks and consequently they tend to have less product in them from our perspective. So that is one of the reasons we are not quite as bullish on the growth

Have you guys revised or given -- I know you said before in terms of guidance, you guys sort of predicated things on a flat notebook market, am I remembering that right, No. 1 and number two, have you adjusted your estimate on what the notebook market would do in the 2003.

We had said during the last several quarter conference calls we were comfortable with our projections even if the notebook market had remained fairly flat because there were concerns last year about the notebook market growth. This year the best projections that we have seen so far from the forecasting services have been notebook somewhere in the 34 million to 35.5 range in 2003, fairly significant growth over 2002 and that has us being comfortable with the projections that we are making quarter by quarter.

Okay. Thanks guys. Nice quarter.

Next question from Paul Shute (ph) of Paul J. Shute and Associates, please state your question.

The key concern in investment community seems to be inventory issues in the PC and service base. I was wondering if you could possibly comment on your views about the inventories of PCs, whether they be name brands or white boxes. I see that comes up over and over again with conference calls with various Wall Street firms.

Inventory is in the sense of what?

Box inventories or inventories of components at box companies. There is this constant -- I don't -- the companies I talk to don't see it but I listen to J.P. Morgan and a bunch of other firms who have conference calls on a daily basis and all they talk about is inventories of components and inventories of boxes. I was wondering if you saw either of those two.

We have heard of some inventory, particularly in the desktop area. Let me talk a little bit about some of our markets. First of all, we ship certainly a lot of Inverter product into LCD areas because that's what we do, is LCD backlighting. The LCD glass itself has been on allocation. That has really stopped many companies from wanting to build up inventory because their first concern is getting hold of the glass so they can move forward to build product. And as you may be aware there is actually a shortage of 15-inch glass right now for the monitor space of 15-inch. In the notebook area, we are able to monitor our inventory very closely and we do that because we do get six month forecast from most of our majors and some of them give us full year forecasts so we are able to monitor the building carefully that goes on at the intermediary in inventory building and we try to prevent inventory building. Another area where we do not have some of the exposure in inventory that other companies do is we do not have a large distributor chain. As a matter of fact we only have one distributor in the world and that is in Japan who does currency transactions for us and fundamentally we do not have any inventory building that occurs in a distribution channel. Consequently we do not have a big concern about inventories at this point.

You don't have a concern that there is so much box inventory, finished product inventory that is going to keep sales from growing as much as in demand?

No.

Okay. Thank you.

Our next question comes from John Lopez of Pilgrim Baxter. Please state your question.

Hi Sorry for this follow up. Can you guys just remind us what the spending on the legal expense pattern is going to be. I know it was pretty heavy in this quarter. What is the trend going to be the next couple and where do you think you will exit the year. Thanks

This is Perry. The litigation expenses, as we indicated in the last quarter, January 29th, 2003, we have deposit on $3.7 million for the year 2003. At this moment it is under strict control and it's very -- we are strong in all cases and we do comment on the individual cases due to competition and we still think that this is a -- where we think is budget control.

Ladies and gentlemen, as a reminder if you have a question press star one on your touch phone telephones at this time.

Frank are there any further questions?

No, sir if there is no further questions this conclude is O2Micro International first quarter earnings report conference call. If you would like to access a replay for this call. You may do so by dialing 1-800-428-6051 or (973)709-2091 with a pass code number of 287985. Thank you all for participating and have a good day. All participants may now disconnect.