O2micro International Ltd (OIIM) 2004 Q1 法說會逐字稿

Good afternoon and thank you for joining us today to discuss O2Micro's Earnings for the first quarter of fiscal year 2004. If you would like a copy of the press release, please call Pamela Campbell at 408-987-5920, extension 8095. And we will fax you a copy immediately. It is also posted on O2Micro's web site at www.o2micro.com. There will be a replay available through May 12, the number is 1-800-428-6051 or 973-709-2089, pass code 349247. On the conference call from O2Micro are Mr. Sterling Du, CEO and Chairman; Mr. Perry Kuo, CFO and Director; Mr. Jim Keim, Head of Marketing & Sales; and Director Mr. Gil Goodrich, Director of Investor Relations. Following the presentation by management the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Thank you. Good afternoon ladies and gentlemen, and welcome to the O2Micro first quarter earnings report conference call. 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 20-F reports and other documents filed with the 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 in today's conference call are Perry Kuo, Chief Financial Officer; James Keim, Director and Head of Marketing and Sales; and Sterling Du, CEO and Chairman. After the report the floor will be open for question as time permits. Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the revenue, income, and financial highlights for the first quarter of fiscal year 2004.

Thank you and good afternoon, everyone. This is O2Micro's earnings announcement covering the Q1 2004 ended March 31, 2004. I will highlight our operating results and predictions and Jim Keim, Director will provide market highlights. Closing comments 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. During our conference call on February 04, 2004 we guided for Q1 to be flat with Q4. On March 19, 2004 this guidance was revised total from Q4 by 11% to 14%. This guidance revision came as result of notebook unit declines positive by the major manufacturers in January and February. Probably announced for Q1, revenue for Q1 was $22m and $196,000, this represent a decrease of 12% from the preceding quarter and a increase of 15% from the comparable quarter of the prior year. Net income for Q1 was $4,206,000m compared to $5,116,000 of the preceding quarter and up to $1,687,000 for the comparable quarter of the prior year. This represent a decrease of 18% from the preceding quarter and an increase of 149% from the comparable quarter of the prior year. Gross profit margin for Q1 was 57.7% compared to 57.6% for the preceding quarter. This is we think the company's financial model of 55% to 60%. R&D expense for Q1 was $4,561,000, a decrease of $58,000 from the preceding quarter or 1% and a decrease from the comparable quarter of the prior year of 7%.

The Q4 R&D expense represented 20.5% of revenue, which we think the range of 18% t o23% of our financial model. SG&A expense for Q1 was $4,259,000, which is basically flat with the preceding quarter, and a decrease from the comparable quarter of the prior year of 1%. The Q1 SG&A represented 19.2% of revenue. We continued to carefully monitor and control expenses. Net operating income margin for Q1 was 17.9% compared to 22.3% for the preceding quarter, and 8.9% for the comparable quarter of the prior year. Income tax for Q1 was $566,000 compared to $653,000 in the preceding quarter, and $270,000 for the comparable quarter of the prior year. Earnings per share, fully diluted for Q1 ended December 31, 2003 -- for Q1 ended March 31, 2004 was $0.10 per share compared to $0.13 per share for the preceding quarter, and $0.04 per share for the comparable quarter of the prior year. Balance sheet, O2Micro has over a $124m in cash and short-term investments. In addition, O2Micro has no debt. Total investment or money invested in corporate bonds of at least AA rating and government bonds of certain developed countries. Account receivables at the end of Q1 were $11,522,000 or DSO of 47 days. This compares to DSO of 35 days for the preceding quarter and a DSO of 46 days for Q1of the prior year. Inventory turns ratio for Q1 was 4.6 compared to 4.4 for the previous quarter and a 4.1 for the comparable quarter of the prior year. Cash flow from operations in March quarter was $3,326,000.

O2Micro now has 329 employees, 61% of which are engineers. This a way for new product development and continue the introduction of new products and more customer design wins in the future. Guidance for the second quarter 2004. O2Micro estimate Q2 revenue to be in the range of high-single digit percentage above that of Q1. The gross profit margin target range of the company's financial model is 55% to 60%, and we expect gross profit margin to be at or beyond the midpoint of the range of 55% to 60%. The R&D expense range of the company's financial model is 18% to 23%, and we expect R&D in Q2 to be above and in about of this range. The SG&A target range of the company's financial model is 13% to 18%. We expect SG&A for Q2 to be in the high-end of this range or slightly above. I will now pass the call to Jim Keim, Director and he will review the market and customers.

Thank you Perry. Q1 proved to be a challenging quarter for O2Micro. Unit production volumes of notebooks unexpectedly plummeted by more than 20% of the two largest manufacturers Quantum and who are two of our largest customers. Resulting downturn in business along with additional marketplace pressure caused an unexpected drop in our notebook revenues. Fortunately, O2Micro has been carefully focusing much of its R&D and marketing efforts in markets outside of notebook. Q1 sales reflecting success in this area with growing market strength and a rapidly increasing customer base. This helped factor our results in Q1 and enabled O2Micros to see our share of revenue in these new markets reach approximately one third of our total revenue.

The product focus going forward will continue to be on broadening market to make O2Micro more immune from the effects of adversity in long market. O2Micro remains committed to the notebook market and will continue product expansion in the notebook area. We expect to diversify our revenue with growth in other markets. I will review some of our product introduction that will fuel this growth in the future. IntelligentDJ. Sometime O2Micros enjoy the disposition as the innovator of the AudioDJ for notebooks. O2Micro has now developed new VideoDJ products for use in digital cameras and other video products that enhance video operation. O2Micro has already filed significant new intellectual property claims in this area and has began marketing product to selected major customers under NDA agreement. Halogen inverters. O2Micro has extended its product offering in this area to focus on high and low end consumer products as well as industrial application. Good products include light sensors, LAD drivers, and significant product extensions in our popular Phase Array family. O2Micro is now rapidly expanding our customer based to include more handheld consumer products as well as industrial applications. Indiscernible) retained strong focus in LCD Monitors and LCD TV. Halogen Power. O2Micro's DC to DC product is now on the evaluation stage for several key server applications. The product is designed to achieve industry leading high efficiency performance of high end servers in commercial and industrial application. These are promising opportunities..

O2Micro is continuing to expand its notebook offering in both as Magic Star charger family as well as DC to DC product. A sign win for Magic Star now includes a first major Japanese notebook OEM Additionally, a new DC to DC converter is rapidly achieving market acceptance for significant design wins. Halogen battery. A new battery gauge product launched itself well to applications wherever sophisticated battery management of Lithium ion cells are required. We are now in the qualification stage for a battery gauge product into a major industrial application. We expect to see our first production in the first half of next year. Cluster and intelligent e-commerce, we are now introducing our first 13/94 base product. While this product is being introduced into notebook application in conjunction with our CardBus product, O2Micro will focused on applications in the consumer space for 13/94 with some accepted standards. I will now conclude with some general market comments. O2Micr has been a leading provider of power management products for the notebook market. Past several years we have seen rapid changes in the notebook market. This does include rapid growth offset with a fierce battle over market share between OEMs. Overall result has been rapidly falling notebook prices, commoditization of the notebook market, and fewer suppliers as well as customers for O2Micro. O2Micro's ability to grow its business market position through this transition has placed us in a viable position to successfully enter new competitive market where we can enjoy both larger opportunities and much larger customer base. We view this as an excellent opportunity to propel growth and profitability as we move forward. I will now pass the call on Ster Du, CEO and Chairman for closing remarks.

Thank you, Jim. Our first quarter 2004 finished with a revenue of $22.2b. It was a decrease of 12% from preceding quarter and a growth of 15% growth over the comparable quarter of the prior year. The EPS for the first quarter of 2004 was valued at $0.10 per share compared to $0.13 per share in the preceding quarter and a $0.04 per share in the comparable quarter of the preceding year. As Gil mentioned, Q1 2004 was a difficult quarter for the local market. Asia Taiwanese notebook manufacturers, up significantly and did sequentially. All the time classifying into a different market such as consumer market or LCD TV, portable DVD, and so on, as . We will continue to emphasize our market and continue to use our win technology to correct new user from the operation into an area. As usual, we emphasize using our intellectual property portfolio. Competent clients increasing to 1431 from 1319 in the preceding quarter. But, at the same time, we also continue to be patented in our intellectual property for picking equivalent. We also expanded our activity in Asia. According to our plan, we have reached our first goal, which was to gear up sizeable anti-defense and stable engineering team.

In the past few years only China based engineering team had experienced very smart, an overate, which is the result of careful and multi-cultural centric management style. Next few years, our goal is to grow our education engineering came to serve more and more Asian customers. We see that our technical marketing team listen to our customer needs and quantify next generation product, and more and more major computers or consumer companies move to defense centers to Asia. We started partnership opportunity in Asia, which includes quite equivalent and technology or profession related to placement opportunities. We all understand how important it is to have a good local partner in China to develop market . Our problems with technology from the most complicated local design platform will continue to be applied to cater especially operation of consumer, industrial, and communication products with course effected protocols of ownership. O2Micros' leading a trend to the future. Thank you for listening to our conference call today. Operator to you, open the floor to some questions please.

Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you wish to withdraw you questions, please press star two. Your question will be taken in the order that is received. Please standby for your first question. Our first question comes from Tore Svanberg of Piper Jaffray. Please state your question.

Yes, good afternoon. A couple of questions. First of all, Jim, you talked a little bit about the end market. Could you perhaps give us an update on what you are seeing in the notebook market currently?

We do not see any significant pickup in the notebook market in Q2. We're expecting some slight trends up or however, we've not seen any significant upward trend at this point, and some of the majors are not indicating any significant upward trend in the notebook space in Q2.

So, should we then assume that your growth should be driven by other areas and if so, which of the areas that do you think will get most of the growth?

Sorry, we do expect to see some growth in number of customer design wins we have, however, you are correct the majority of the growth will come from other areas including most notably our increase and expansion in the similar area, which has been ongoing as well as our expansion in the industrial area.

Okay very well. Can you also just give us an update on where you stand on capacity at this point, when it comes to wafer pricing and how you see that playing out for the rest of the year?

I think we touched on that in our last conference call as well. We do not see any significant capacity issue for O2Micro. We worked over last year's position very strategically with wafer capacity and we worked closely with our wafers suppliers. In fact, we do not seek capacity issues for ourselves as we moved onward through the year. We have however seen some tendency and we do expect some slight increases from wafer prices, and having anticipated that, we have an aggressive cost reduction program in place to offset that.

Very well, and finally a question for Sterling. Sterling, it looks like the end markets are starting to diversify quite significantly for '02. Are there also any plans to diversify your technology roadmap? I guess I'm just thinking here, moving from power management into other areas?

Yes. As Jim just mentioned in his speech, the power management technology we have experienced in the past, we go into digital cameras, and we use speech. Not only that, we believe - go to the battery area also as a part of the technology we have been a leader in. So overall we will apply the power management architecture to the consumer from the casing and industrial gross market segments.

Okay, thank you.

Our next question comes from Andrew Huang. Please state your question.

Thank you. I think if you look at some of the forecasts from some of the consulting services, they suggest that local production for 2004 in terms of units should be up in the range of about 25% year-over-year, and that's for 2004. Would you expect to see similar type growth in your business from the notebook side?

We are aware of some of those projections. However, in discussions that we have had, where major producers as well as forecast that we get for major OEMs, we are yet to see that type of upside materialize for this year. And we do work very strongly off of the forecast information that we have from our sector. So, it remains to be seen from our perspective that type of growth in notebooks this year and at this point, we are not intending to depend on it.

Okay. Then maybe another way to ask a question is - I guess historically, if you look back over the past two years - two or three years, has notebook production generally been much stronger in the second half of the year compared to the first half of the year? Maybe perhaps that's why you haven't seen these forecasts yet?

That is entirely possible. Although the anomaly that we saw in Q1 was significantly larger than had been anticipated by anyone, I believe, and it remains to be seen any significant pickup at this point in Q2. Obviously, that has to be some concern and that's why we are focused on our growth in other areas. If the growth happens in notebook, then certainly, the second half of the year tends to be pretty better. We certainly expect some pickup in the second half that will be very beneficial.

Okay. And then if you could maybe give us some kind of update as to the LCD exposure in terms of percentage of sales? Can you give us a sense of how that's been trending maybe over the past 3 or 4 quarters?

Yes. Our consumer activity as well as some of our industrial activity has been focused strongly in the LCD area, and that market is a very good market for us. It's not only growing, but we are also gaining very significant market share in that area. So that is driving much of our growth as we move forward.

So would you say that the growth in the consumer and industrial is outpacing that of the notebook growth?

Certainly.

Okay. Thank you.

Our next question comes from Tom Leech of Bennett Lawrence Management. Please state your questions.

Yes, one of the questions was asked up in notebooks, you have not really seen it pick up there. Is it in demand or inventory or is there any insight on notebooks?

We certainly know that there was some inventory as we entered the year and that was an issue certainly in January and perhaps current February. But as you approach the March-April timeframe, obviously there is some demand to pick this as well. So at this point we think that there is some demand weakness, and we will certainly hope to see pickup in the market and as would normally occur as you would .

Thank you and could you review some of the margin expectations, gross margin expectation and operating margin when you go from Q1 to Q2?

For the Q2, the revenue to be in the range of high single digits percentage.

Right.

And the gross profit margin was beyond the mid-point of the range of 55% to 60%.

Okay.

The expenses of the Q2 will be in the middle of the range, 18% to 23%.

And then SG&R operating --

SG&R will be -- will be in the high end of this range or slightly above 18%.

And then -- some operating margin to what to what?

We have not made projections for operating margins, though there was a little growth in revenue. You should have similar operating margins in what we have in Q1.

Any change in tax-rate?

Tax rate, no.

Thank you.

Our next question come Andrew Huang. Please state your question.

Thanks for the quick follow-up. You mentioned in you earlier -- one of your earlier responses that your participation in the consumer and industrial -- you are growing rapidly, more rapidly than in the notebook segment, and you suggested that you are taking share. I was wondering if you could comment on what competitors you might be taking share from?

Certainly. As we have indicated in the past, one of the major product areas for us is that product area in the space, and we in fact have been very successful with products like our Royal Raptor Series and taking market share away from traditional wire type design that exists in the space, and this has been a very significant ongoing production for us, as we have replaced this design as well as LCD market as well as LCD type of applications throughout the market space.

And just one more follow on question. If you look at your revenues, they actually declined 12% sequentially. Yet R&D and SG&A remained fixed in absolute dollars. So, I was wondering if they had a $30m revenue level, would you expect the SG&A and R&D to remain kind of flat at these levels?

Can you ask again the last question?

Oh sure. I guess the question is your R&D and SG&A remained flat sequentially in absolute dollars, you know at $4.6m and $4.3m, but your revenues were down 12% sequentially. So, my question is, are those numbers kind of stable even under $30m revenue run rate?

The R&D area, as you may be aware, we continue to increase our R&D manpower in China. Also we increased our head count in the engineering area. So, actually we do see the threat in the R&D transit. We continue to invest in this area. However, due to some project timing and also we start to do some co-developing in China or cost saving progress in China. So, we have niche in all the R&D area through the year. In the SG&A, SG&A area, this is what you would call as a percentage when the sales goes up, however, I think this year we continue to implement our worldwide patent protection program, and also this year we need to meet some accounting principles like , so we do expect some accounting fees or some professional fees will be increased in this area. However, we would like to control, When we go up to certain limits, which is beyond the $100m annual rate, I do think that our SG&A will be controlled in the 13% to 18% area.

Thank you.

Our next question comes from Tore Svanberg. Please state your question.

Yes. Just some follow-ups. First of all, from what I gather you'll seek some growth in notebooks, but further more growth in other areas. Could you just maybe explain a little bit more where the growth is going to come from? Is this going to be primarily in the LCD monitors? Is it going to be new design wins for LCD model? I am just trying to get a little bit of better gauge of what's going to drive that growth?

As I told you, the LCD TV and LCD monitor market are of course, is one of the key momentum for the growth of the company in the future and our DC/DC portfolio of this product, we are seeing a very close relationship with the major CPU manufacturer, and in there we expect some revenue momentum going to pick up by the end of this year. And we also see our DC/DC product for the device, namely like for the memory portion or for the PC advanced portion. DC/DC will also see acceptance from the customer. That is going to cause a platform including the Noble or even go to the server platform, and that will also contribute momentum to the future growth of the company. We are seeing a leadership in the charging area. The family, which is we've just added the new member, Majesta, we will begin introduction of this product to the market, and following the two successful Majesta family previous member have been successful in penetrating more and more markets. And the plus is the newly added Majesta provided much more single design. Topology total cost of ownership, and we expect this family of Majesta proprietary charger family will also contribute to the momentum of the company in the future. By saying so, we also look at the return - future like our video DJ like product go into the consumer device. happen in 2005. The first half and the second half there will be some momentum and pickup. So, those areas, the company is going to be driving to the future.

Okay. So, if I understand it correctly then your guidance for Q2 assumes a flat notebook market with the rest coming from other areas?

Tore, it assume a network market that is flat just slightly upwards in increased design wins that we have coming into the notebook's place, but there will be some revenue growth in November. Although we do expect more accelerated revenue growth continuing in consumer industrial area, and that'll be driven by LCD like products.

Okay, very well. Then finally you had mentioned a couple of quarters ago that your starting to phase out your CardBus Controller business? Could you give us an update on where we stand on that today?

Yes. First of all let me say that we're not facing another CardBus Controller business. We've faced back on the lower end of that business, which was the very lower end single flat type product that really was at very low margins. So we have continued to face back in that area. However, we have no intentional phasing out of CardBus. As a matter of fact we did mention we'll be having capability into our advanced CardBus to enhance our smart CardBus to all its four memory, four in one memory CardBus type products. So we're focused on the high-end support of that marketplace.

Great. Thank you.

As a reminder, should you have a question please press star one at this time. As a final reminder, should you have a question please press star one at this time.

Okay, operator we have no further questions, let us conclude the call until next quarter, we may call for questions once again.

Okay. We have one more question from Andrew Huang. If you would like to take that.

Certainly.

Okay, one moment.

Since you are talking about kind of the consumer versus the notebook versus the industrial, can you give us a sense of the revenue breakdown during the March quarter between those three segments?

Yes, we certainly would be willing to give you some break out of that the computers space for us for the first time were slightly less than two-thirds of business. What we have seen is the industrial portion of our business continue to approach the 5% tight area as it is grown. We have indications business that's in the low-single digit area with the balance coming out of the consumer sector, which is roughly 30% tight market area.

So, when you say the consumer as about 30% that would include LCD TVs and not LCD monitors?

That includes both the LCD TV as well as monitor.

Okay. And are there any other major kind of products aside from those two in consumer?

Well, we certainly shift significant amount of products into other spaces that includes other handheld type LCD applications.

Okay.

That includes the whole phase of LCDs that does not fall into industrial type application.

Would that then imply that roughly this 30% that you are talking about goes to consumer, basically all that would be inverter product or not necessarily?

Not necessarily.

Because there could be some charger product in there as well?

Yes, certainly other types of products that we have.

Okay, thank you.

Hi, operator we have no further questions will you wrap-up the call.

Sure. If there are no further questions, this concludes '02 Micro International first quarter earnings report conference call. If you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 349247. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.