O2micro International Ltd (OIIM) 2003 Q2 法說會逐字稿

Good afternoon and thank you for joining us today to discuss O2Micro's Earnings for the Second Quarter of Fiscal Year 2003. If you would like a copy of the press release, please call Pamela Campbell (ph.) at area code 408-987-5920, extension 8095, and we will fax you a copy immediately. It is also posted on O2Micro's website at www.o2micro.com. There will be a replay available through August 5th at 1800-428-6051 and 1-973-709-2089 with a pass code ID number of 297-996. Following the presentation by management, the conference call will be opened for questions-and-answers as time permits. Gentlemen, you may begin.

Thank you. Good afternoon and welcome to the O2Micro's second quarter earnings report conference call. This is Gil Goodrich, Director of Investor Relations. I would like to remind listeners that this discussion of business outlook for 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 the Form F-1, Form F-3, and Form 20-F reports and other documents filed with SEC from time to time. Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. Statements made herein are dated information. With us today on today's conference call are Perry Kuo, CFO; Jim Keim, Director; and Sterling Du, CEO and Chairman. After the report, the floor will be opened for questions as time permits. Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the revenue, income, and financial highlights of the second quarter of fiscal year 2003.

Thank you and good afternoon everyone. This is O2Micro's earnings announcement covering the Q2 2003 ended June 30, 2003. I will highlight our operating results and projection, and Jim Keim, Director, will provide monthly highlight. Closing comments will be made by Sterling Du, CEO and Chairman of O2Micro, after which we will answer the question.

First I want to emphasize that O2Micro continues to grow and continues to be profitable. During our conference call on April 30, 2003, we projected Q2 revenue to be up in the range mid-single digit percentage from Q1 revenue of $90,341,000. O2Micro Q2 revenues are up quarter-over-quarter and year-over-year. Revenue for Q2 was $20,895,000, an increase of 8% from the preceding quarter and an increase of 18% from comparable quarter of the prior year. This is an all-time record high revenue quarter for O2Micro surpassing our previous record high revenue quarter of $19,341,000 in Q1 2003. Q2 is the ninth consecutive quarter of sequential revenue growth for O2Micro. Net income for Q2 was $2,439,000 compared to $1,687,000 of the preceding quarter and to [$3,008,000] for the comparable quarter of the prior year. Gross profit margin for Q2 was 55.9% compared to 56.7% for the preceding quarter within the company's financial model of 55-60%. This is mainly due to product mix. R&D expense for Q2 was $4,843,000, a decrease of $69,000 from the preceding quarter or 1% and an increase for the comparable quarter of the prior year of 5%. The expenses for [inaudible] generation in R&D was a little bit less in Q2. There is now a downturn -- downward trend in R&D investments. SG&A expense for Q2 was $4,319,000, flat with the preceding quarter of 0% and an increase from the comparable quarter of the prior year of 52%. This year-over-year increase in SG&A is due in great part to some increased expenses of our patent protection program. There was this cost in our conference calls on January 29 and April 30. SG&A is modeled in the range of 18-22% in our financial model.

We are meeting our guidelines and we continue to monitor and control expenses. Operating profit margin for Q2 was 12% compared to 8.9% for the preceding quarter and to 15.8% for the comparable quarter of the prior year. Income tax for Q2 was $401,000 compared to $270,000 in the preceding quarter and $469,000 for the comparable quarter of the prior year. Earnings per share fully diluted for Q2 ended June 30, 2003, was 6 cents per share compared to 4 cents per share for the preceding quarter and 8 cents per share for the comparable quarter of the prior year. O2Micro had over $110m in cash and short-term investments. In addition, O2Micro has no debt. Short-term investments were mainly invested in corporate bonds of [inaudible] AA rating and a government bond of certain developed countries. Accounts receivable for Q2 was $3,869,000 compared to $9,859,000 in the preceding quarter. This represents a DSO of 34 days for Q2 compared to 46 days for the preceding quarter. Our model is 55 days to 65 days. This is due to mix of customers shift to location, which should move to Taiwan and to China due to SARS. Inventory [turns] ratio for Q2 was 2.8 compared to 4.1 for the previous quarter and 3.7 for the comparable quarter of the prior year. In view of foundry capacity, we released more wafers and had more work-in-process. Cash flow operation -- cash flow from operation in the second quarter was $4,863,000. O2Micro now has 303 employees, 64% of which are engineers. This positions us well for new product development, and a continuous introduction of new products and more customer design wins in the future.

Guidance for our third quarter 2003; O2Micro estimates Q3 revenues to grow sequentially from Q2 in the range of mid-single percentages. The gross profit margin target range of the company's financial model is 55-60%, and we expect gross profit margin to be in the area of the range of 55-60% in Q3. The R&D expense target range of the company's financial model is 25-30%, and that we expect R&D to be in the range of 23-25% or slightly below 25% as it was in Q2. SG&A target range of the company's financial model is 18-22%. As we mentioned in the conference call on January 29 and April 30, there will be some extra legal expenses due to a litigation involving patent protection in Q3, Q4, and Q1. We expect SG&A for Q3 to be in the low end of this 18-22% range. The trend in [inaudible] expense does not change in total for the next three quarters. It simply will be slightly lower in Q3 than we previously thought. I will now pass the call to Jim Keim, Director, and he will review the market and customers.

Thank you, Perry. Q2 continued a significant trend that we've seen in the markets. As low performance has grown, we have seen the market share battle among OEMs continue to grow. It has resulted in several key events occurring in the market. First, there has been an increased emphasis on quickening the design cycles, bringing new innovative notebooks to the market. This has been evidenced by such companies as Dell and HP placing design centers in Taiwan where they can be closer to their manufacturing supply chain. We have even witnessed once conservative Japanese companies to start new product designs before the product is produced in final form. The OEMs have placed an increasing emphasis on bringing new cost reduced versions of products to the market from the supply chain. Supply chain itself has become more concentrated as two manufacturers now account for approximately 40% of our notebook manufacturing worldwide. Despite ongoing cost down implications, this trend has several significant benefits for O2Micro. We are already very well positioned in both Taiwan and China, and we feel more and more designing will occur. The more concentrated supply chain enables us to focus more design resources into other key markets. We are already seeing the benefit of more design activity in other markets as we leverage our power management expertise in notebooks into these other markets. We believe we have already made major strides in positioning ourselves for broader markets including communications, battery management, lighting and servers and expect to see the reward of this effort as we move forward through 2003 and 2004.

Let's briefly review each of our four major product areas. Q2 saw the continuing expansion of our Intelligent Inverter leadership in both technology and key design activity. Armed with our strong patent position in inverter technology including two-switch, four-switch, and [phase way] products, O2Micro continues to focus on penetrating new market areas. While maintaining a strong focus on LCD monitor and LCD TV, we are continuing to expand our product offering to cover other markets, including areas beyond LCD backlighting. Our patent portfolio continues to expand as two more key patents were awarded during the quarter. The patent protection strategy in this technology was reaffirmed in late April. The Taiwan court upheld the existing preliminary injunction in marketing and sales of key products from [YTech]. In May, the Taiwan court also upheld the existing preliminary injunction against MPS. In the United States, we are pleased with the overall progress in patent infringement lawsuits both in California and Texas.

Our Intelligent Power continues to strengthen its patent position including the recently announced fast transient response power. We are using our IT base to continue to expand our successful MagicStar line of chargers. From DC-to-DC, design activity is ongoing with products to support both Intel and AMD applications accommodating system applications well beyond the notebook market. We have significant design activity ongoing and have limited our engagement to market leaders in both of these product areas. Intelligent E-Commerce Group continues achieve significant milestones and market leadership. Our SmartCardBus and Form-1 memory card products continue to ramp in volume at leading suppliers. We are strategically pulling back from older [lowing] products that offer minimal profitability. O2Micro will continue to focus its efforts on the higher-end of the notebook market while broadening its focus in other key security areas, and we enjoy IT protection in higher margins. Effect of this strategy is already evident as we are ramping production of our newest security products that can serve market outside of notebooks. Simultaneously, we are pleased to announce that our strategic software partner 360 Degree Web, which O2Micro has approximately 30% interest now successfully shipping its security software in two leading manufactures effects further strategic alignment in the second half of 2003.

As noted last quarter, our IntelligentDJ family continues to be expanding and focusing the desktop and video DJ application. We are now working with several strategic partners and expect to be in volume production of this product late in the year. This group also continues its focus efforts in new battery-related technology, building a family of battery management products that can extend beyond the notebook market. We are now working with a strategic battery-manufacturing partner and expect to have our first production in first half of next year. We will conclude with some general market comments. We had previously stated that we remain cautiously optimistic but are prepared for market conditions, which remain difficult. Our focus as a company will continue to move forward with strong development programs that lead to more and more power management products based on our patent technologies and new property filings in [one term record filing]. We strongly believe that Power management will continue to be an expanding market for growth of our company and good profitability. I will now pass the call over to Sterling Du, CEO and Chairman for closing remarks.

Thank you, Jim. Let me highlight what we have achieved during the second quarter of 2003. We finished the second quarter 2003 with revenue of $20.9m that was [quote] of 8% from the preceding quarter and 18% over year-to-year. Our EPS for the second quarter 2003 fully diluted was 6 cents per share compared to 4 cents per share in the preceding quarter and 8 cents for this year in the comparable quarter of the last year. This is due to our market share expansion in notebook PCs. As a result of our effort in the intellectual property, our patent claims increased to 1,144 claims for 1,079 claims in the last quarter. Our intellectual property protection program remains very strong to defend our intellectual property. So we have observed business trends including the following; the business visibility remains short as customer's ordering cycles continue to decrease, more notebook manufacturers move to China where O2Micro has significant organizations. The low-end notebook PC continues to grow and this brings products mix effect to us. The next generation microprocessors come with more complicated power supply requirements that we'll continue to create. This is opportunity for us. The LCD TV, which has multiple CCFL tubes give us fast growing opportunities. The rapid wireless technologies deployment, Window XP, [inaudible], flash memory enables storage sharing between video devices, better battery technologies and other portable technologies to penetrate the notebook PC will remain one of the fastest growing segments in the PC industry. O2Micro's Power management technologies, LCD Inverters, MemoryCardBus, SmartCardBus and the IntelligentDJ will enable us the continuous growth and a leadership in mobile and the LCD monitor TV markets. Thank you.

Operator, could we open the floor for questions?

Surely. Ladies and gentlemen, the floor is open for questions-and-answers as time permits. If you would like to ask a question, please press "*" "1" on your pushbutton telephone at this time. If you wish to withdraw your question, please press "*" "2". Your questions will be taken in the order they are received. Please stand by for your first question. Our first question comes from Tore Svanberg from U.S. Bancorp Piper Jaffray. Please state your question.

Yes, good afternoon. A good quarter; a couple of questions; first of all revenue was up 8% sequentially here in the June quarter, which is typically not the strongest period for the notebook market. Your guidance is for a slightly less growth than that in September, which is typically a better period. Is this just a reflection of pure conservatism or are you actually seeing any changes in the end markets?

Well, Tore to answer that question, there certainly is some conservative posture which there typically is with the timing here because July tends to be a softer month before we move into the fall. I would also point out, however, that there were significant SARS issues in Q2 that did lead to some inventory building, which wasn't necessarily great, but nevertheless it was difficult to track. But we do feel that the market now has returned to more normalized level with shorter lead times, and we do feel that there was some inventory build that went on during Q2.

Now, maybe a follow-up to that, could you give us an indication on how business has been so far in the month of July?

The month of July has been very reasonable given the typical nature of the business cycle during this time of year. So far, we've been encouraged with the July month.

Okay, very good. And a question on the balance sheet. The inventories came up quite a bit sequentially and Perry, you mentioned an increase in work-in-process. Is there anything going on here specifically? Are you taking advantage of low wafer pricing or are you actually just building more for a seasonally stronger second half?

Yeah, I think that we [inaudible] the North East from the foundry parts. The lead-time for production is getting longer and longer, and also we expect some second half -- some [inaudible] up. So we do release some wafer to stock to start some wafer. And also due to the SARS issue, we build more work-in-process to support our customer's [depend].

Very well and the last question for Sterling. Sterling you mentioned in new markets on several occasions including the server market, could you just elaborate a little bit more O2Micro's positioning in the server market?

Yes. The server market, we have been making in the conference call. We have a manifold group working on solution for just those needs, including a notebook microprocessor DC/DC, and also then in the server you mentioned we have the solution for Intel microprocessor for the next generation and also we have the solution DC/DC target for the AMD microprocessor. And the unique feature for the topology we target for AMD microprocessor is based on the transformer. It's a nontraditional way to do it, traditional [inaudible] issue of solution implemented by [inaudible], and we are using their transformer, try to bring the minimal course of ownership to our customer [inaudible].

Great, thank you very much.

Thank you. Our next question comes from Shawn Slayton from Ferris Baker Watts. Please state your question.

Hi gentlemen good afternoon. Can you give us a rundown on your various business segments? I know you normally don't -- you don't want to break out the exact percentage contribution by business segment, but can you at least remind us what the largest business segment is may be order of -- I am assuming inverters is still the largest segment of the business and that it's power management or may be e-commerce is the second largest and then Intelligent Power the third. Am I correct in that order?

Last time during the last quarter call, we indicated inverter and CardBus what we call e-commerce product lines were larger than the other two. And again we don't [inaudible] give out the percentage detail but that very much remain.

Okay, is the inverter business the largest segment of your business?

The answer to that is the inverter business and the CardBus business are percentage wise relatively close.

Okay, about equal. Okay that's appreciated. And also Perry, for the guidance I haven't had chance to crunch the numbers from a percentage revenue basis. Total operating spending is it going to be flattish from Q2 aggregate operating spending?

[inaudible] operating expense.

Yes sir.

For Q3.

Yes for Q3 relative to Q2. Is it--?

Yes, it will be great.

It is going to be about flattish in total dollar perspective?

Yes.

Okay. Can you give us little bit of update, you talked about the ongoing patent litigation activity in Taiwan, can you give an update in the United States at least from a time line prospective? It's going to court in California, I am assuming when is that supposed to happen? What are those proceedings supposed to occur?

That's difficult to project due to the complexity of this case. These cases are extremely complex, particularly in United States [court] system and if you would like to have some data of relative activities there, I would simply roughly reference to our [inaudible] who is our General Counsel.

Okay that's fine. And also -- you guys -- you mentioned that you are taking share, can you speak little bit about what product lines you think you are taking share?

I [will put on nine], the e-commerce group we taking share in the [inaudible] area, and so is our [inverter] area. And in the power group, we continue taking in the shares in the ASSP area. In a [positive] area, we exclusive have done solution for such as Dell Computers; those are actually vision to [phase] into the ASSP at this moment. But in overall power group is not dramatic or taking share at this moment because they have to [inaudible] in our proprietary area. Intelligent DJ remain quite flat due to the -- Intelligent DJ is transiting to a next generation [as genius as measuring part] of Video DJ. So people right now focus on to play the music and operate with a video and the technology we have is prototyping right now is in the [inaudible] demonstrates with the customer.

Okay. And also a last question may be for Jim. You guys mentioned you are cautiously optimistic and can you just characterize what you guys seem to have -- certainly have great exposure to some growing in markets, can you highlights for us what makes you cautious other than, I guess, it's a very -- it's a returns base business all you work you guys work from kind of demand pool model where you have may be more visibility then some your periods, but can you tell us why you are cautious? Other than I guess the leads time are shortening but can you characterize that you know visibility perspective?

We think it still very difficult to project the total worldwide economic situation, obviously, we are glad to see much of the SARS situation behind us. But nevertheless, I think there remains a lot of caution in most economies of the world, including the United States economy, as far as overall growth is concerned. It is very difficult for us to project macroeconomic issues, so that's the primary reason we remain cautious.

Okay, I'll make this the last question. Are we going to see any seasonality? I guess Tore kind of touched on it a little bit. We are not seeing a -- we are seeing a good growth in September, but is the seasonality a little out of whack here? What should we expect for the second half of the year? And is December -- what kind of -- given this -- given what you know now, what kind of December are you guys going to have, do you think? Obviously, you are not giving guidance, but from a seasonal trend perspective, you guys have been in this business for quite something, so what would you expect from what you know right now?

On a normal seasonal basis, we would expect a relatively strong second half of the year, and that would [move] on into Q4. As I mentioned earlier, we did see what we thought was some inventory building in Q2 that made it a little bit stronger than normal which comes back out of Q3 that was primarily due to the SARS issue. But we would expect to see other than that pretty much a normal trend with reasonably strong seasonality in the second half of the year.

So, last year your December quarter was -- it was only up a couple of percentage points sequentially and you don't see any reason why that should be very different from this year.

Well that depends a lot on December itself, whether or not there is sell-through in the market place. Usually what you see is October and November are very strong and if there is not good sell-through, quite obvious cut backs in December. So December tends to be somewhat of what I would call a slowing month. If December remains strong, it can be a very strong second half.

Okay, thank you I appreciate.

Thank you. Our next question comes from Paul Shute (ph.) from Paul J. Shute (ph.) Associates.

Very nice quarter, thank you. My question goes back to Tore's questions, which if I understood correctly what you are saying is that your sales in the June quarter were somewhat higher than they would have been normally because of SARS, i.e., you made sales that went into -- products that were inventoried. Is that correct?

Yes, we saw a trend which Perry also referred to that there was concern on the part of some manufacturers, as you might expect not knowing how long the SARS situation was going to last, as they began to worry about potential manufacturing. So they began to build some inventory in various locations because remember a lot of the building for this product is done in Taiwan and in China where there were significant SARS issues. On a reaction to that, we did some major OEMs get in to build some inventories through their manufacturers. Much of that ended prior to the end of the quarter fortunately, so this inventory was not a horrendous build but nevertheless there was some during the quarter.

I also thought I heard you say that that inventory had now been liquidated. Is that correct?

In fact, most of it has here.

So, there should be no negative impact in third quarter owing to excess inventories if inventory has been liquidated. You are back to selling based on end demand, right?

Yes, but part of that inventory gets liquidated during July, right. So you'll see a carryover from June till the next gets carried--

Okay. So your guidance reflects then normal, seasonal sequential growth less than inventory carry forward. Is that correct? And some conservatism?

Yeah, that's a fair statement.

Okay. What was your guidance for the June quarter relative to the March quarter, sequentially?

We had guided up-to-mid single digit.

Okay, so you beat that guidance by a couple of percentage points.

Yeah.

Okay. So your third quarter guidance is -- relative to second is the same as second relative to the first. I mean you beat it by several percentage points in the second quarter, right?

Yes.

Would that have been SARS related or is that -- or that was only part of that -- part of that demand was stronger than -- the end-demand was stronger than expected? Or your market share gains for example.

Well, it's really a combination of both, and it's really difficult to break out exact amount of inventory build for a [inaudible] situation.

I understand. I was just trying to recognize what percentage of your third quarter guidance is conservatism and what part -- because based on your argumentation that you are gaining market share, and we know that end-demand for your notebooks is very strong, it would seem that -- is it fair to give conservative in your Q3 over Q2 guidance. Anyway great quarter, thank you very much. I appreciate it.

You're welcome.

Thank you. Our next question comes from JD Pageant (ph.) from Founders Asset Management. Please state your question.

Yeah, I had a couple of questions just relative to the CardBus business compared to inverter in terms of which one might be growing faster as you look forward where you see the most opportunity?

Well, we indicated in case you didn't [inaudible]. We did indicate that on the low end of the CardBus business that as we move forward we would back away from some of the very old products that has basically no intellectual property protection. And as result of that, we would expect -- probably see some increased percentage growth or inventory partly in inverter relative to e-commerce. However, we also indicated that we are moving forward in web security-base type products that will go into other markets, which come out of e-commerce. And if that goes well, we should also continue to see reasonable growth from our e-commerce product line.

Okay. And I thought part of the strategy on low-end card solutions was the kind of -- see the market whereas you could circle back around and sell a SmartCard solution at some point?

Yes. And we think we've successfully accomplished that as a matter of fact. And that's one of the reasons at this point we want to phase back on some of the very low-end products. And you need to remember is that much of the notebook market is similar and a portion of that is very low-end consumer where they put in very normal cost -- for each of the orientations as far as product is concerned -- [like] the portion we're going to phase back.

So do you think the combination of those couple of things you may be walking away from some lower margin card business and higher margin inverter products maybe growing faster to lead to a gross margin drop? We didn't already see it in the June quarter or at some points soon?

Yes.

Do you think June quarter was the low point for gross margin?

Well in order to take some time to fall back in some of those products, so that may take a couple more quarters?

Okay. And the final question was just MagicStar. Is there anything different there with your penetration ado looking at MagicStar and the express charge combined? Do you still feel like your penetration there is stable or growing?

As I stated the MagicStar, which is our target for [AASP] market. We do take a market share, which is we never have a deserving for those customer, such as [Univac], [FIC], and [inaudible] legend. Another segment, we have been doing our business for the past year is for proprietary [excluded] product [inaudible] as you mentioned. We have a surprising [extrapolating] charge exclusive for Compact. Those areas have waiting for the time, taken of four quarters or sometime, you know, to a transition to AASP. So, it may be just position to sell back to proprietary slot, which we usually have. Some take some time, and this will mean ongoing process. In a regular common market place, the AASP of major stock to differentiate ourselves from our competitors is our solution has one compensation rule to modify us to replace the three additional compensation rule. As a result, our special technology, which you've paired in for can come out with a less income package and also have a less system component cut and with decreased total cost of ownership. So that's why we get a stable, progressive designing, and revenue in the -- among standard charger marketplace.

Do you think Sterling within Dell -- that you are maintaining share of their unit shipments with the proprietary solution until they can qualify MagicStar?

That's an ongoing process and it is no specific customer information we want to give out for the particular MagicStar going to be at this moment. But what the strategy is we will sell the MagicStar to the general market including the Dell computer and HP/Compaq because both companies paid viewer-ship with the most [end] component than for proprietary product.

When would you expect to have some more customer announcements for MagicStar say among the top eight OEMs?

MagicStar -- our policy is we don't disclose especially customer for particular product line that is not our intention to do. We particularly mention of AASP customer base because that was transitioning from our previous proprietary strategy. So looking forward, there is always a possibility -- [Magic Star] sell through the original proprietary customer, but as a whole we are pretty satisfied that our will Magic Star take a steady development and also shipment for the market, but we can sell it.

Okay. Great good quarter. Thank you.

Thank you. Just a reminder, ladies and gentlemen if you do have a question, please press "*" "1" on your pushbutton telephones at this time. Gentlemen, I am showing no further questions in queue.

Okay.

Thank you ladies and gentlemen for joining the second quarter earnings release of O2Micro. And we look forward to talking with you again next quarter.

Thank you. There is a rebroadcast scheduled for this call and it will be running through August 5th. For access of that broadcast, you may dial 1-800-428-6051 or 973-709-2089, with a pass code ID number 297-996. This concludes the O2Micro International second quarter earnings report. Thank you for your attendance and have a good day.