O2micro International Ltd (OIIM) 2004 Q3 法說會逐字稿

Good day and welcome to the O2Micro International third quarter earnings conference call.

This call is being recorded. A replay of this call will be available for one week, through 11:59 p.m. Eastern time, November 10, by calling 1-888-203-1112. or 1-719-457-0820. The pass code is 982175.

If you would like a copy of the Press Release, please call Pamela Campbell at 408-987-5920, ext. 8095, and we will fax you a copy immediately.

If is also posted on O2Micro's Web site at www.02micro.com.

Following the presentation by management, the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Good afternoon. And welcome to the O2Micro earnings report conference call for Q3, 2004. 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 20-F reports in other documents filed with the SEC from time to time.

Listeners are referred to the O2Micro earnings Press Release and documents filed with the SEC to understand these forward-looking statements and the associated risk factors. The statements made herein are dated information.

With us today on the conference call are Perry Kuo, CFO; Jim Keim, Director; and Sterling Du, CEO and Chairman.

After the report, the floor will be open for questions as time permits

Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the revenue, the income, and the financial highlights of Q3 of fiscal year 2004.

Thank you. And good afternoon, everyone. This is O2Micro's earnings announcement covering Q3, 2004, ending September 30, 2004.

I will highlight our operating results and projections, and Jim Keim, Director, will provide market highlights. Closing comment will be made by Sterling Du, CEO and Chairman of 02Micro, after which we will answers questions.

First, I want to emphasize that O2Micro continues to grow and continues to be profitable. During our conference call on August 4th, 2004, O2Micro guided for Q3 revenue to be up to more single-digit range from Q2.

Our September 22 02Micro revised defines your guidance for Q3 revenue to be in the range of 6% to 9% less than Q2 revenue. The revised revenue projection was due to weakness in the computer and consumer markets that comprised the majority of the revenue of the company.

Profit and loss for Q3: Revenue for Q3 was 22,093,000. This represents a decrease of 8% from the preceding quarter and a decrease of 5% from the comparable quarter of the prior year.

Net income for Q3 was 3,069,000 compared to 4,148,000 of the preceding quarter and to the 3,959,000 for the comparable quarter of the prior year. This represents a decrease of 26% from the preceding quarter and a decrease of 22% from the comparable quarter of the prior year.

Gross profit margin for Q3 was 60.2%, compared to 59.6% for the preceding quarter. This is in keeping with the Company's long-term financial model of 55% to 60%.

R&D expense for Q3 was 4,915,000 compared to 4,681,000 for the preceding quarter and to the 4,845,000 for the comparable quarter of the prior year. This represents an increase of 234,000 from the preceding quarter of 5%, and an increase for the comparable quarter of the prior year of 1%.

The Q3 R&D expense represented 22.2% of revenue. This is in the range of our long-term financial model.

SG&A expense for Q3 was 5,684,000 compared to 4,983,000 of the preceding quarter and to 4,555,000 for the comparable quarter of the prior year. This represents an increase of 701,000, or an increase of 14% from the preceding quarter and an increase of 24% from the comparable quarter of the prior year.

The Q3 SG&A expense represented 25.7% of revenue. SG&A is above the range of our long-term financial model. However, we believe that it is in the best interest of the Company to make this expenditure as a long-term growth company.

We are committed to continuing to carefully monitor and control expenses. Income tax for Q3 was 12,000, compared to 537,000 in the preceding quarter, and the 502,000 for the comparable quarter of the prior year.

The lower amount of income tax paid is mainly due to a one-time income tax credit in the amount of 375,000 from a local tax filing. I reiterate that this was a one-time credit.

Net operating income margin for Q3 was 12.2%, compared to 19.4% for the preceding quarter and to 16.2% for the comparable quarter of the prior year.

Earnings per share: 40 diluted for Q3 ended September 30, 2004, were $0.8 per share compared to $0.10 per share for the preceding quarter and a $0.10 per share for the comparable quarter of the prior year.

Earlier, it was announced that O2Micro will report the share of revenue by each of its four major end-market categories of computer, consumer, industrial, and communications for Q3 was as follows: Computer was in the mid-50% range of revenue. Consumer at about 40% of revenue. Industrial and the communications were each, small, single-digit percentage of revenue, this out of four end-market categories, in which O2Micro will participate and grow in the future.

The balance sheet: O2Micro has over 180 million in cash and short-term investment. This represents about $3 .00 per shared in cash and equivalents. In addition, O2Micro has no debt.

Short-term investment or money investigated in corporate bonds of elite A-rating and of government bonds of certain developed countries. [Inaudible] at the end of the Q3 were 12,594,000 for DSO of 51 days. This compares to DSO of 46 days for the preceding quarter and a DSO of 41 days for Q3 of the prior year.

Inventory trans-ratio for Q3 was 3.1 compared to 5.2 for the previous quarter and 3.7 for the comparable quarter of the prior year. The end market was somewhat soft in Q3.

Cash flow from operations in Q3 was 3,299,000.

Share repurchases for Q3 '04, on the share repurchase program were 109,200 shares or $1,179,962.

Human resources: O2Micro now has 392 employees, 51% of which are engineers. This positions us well for new product development and continue introduction of new products and the more customer design wins in the future.

Now I will give the guidance for quarter four, 2004. O2Micro estimates Q4 revenues to be in the range of up 5% to 8% from Q3.

The gross profit margin target range of the Company's long-term model is 55% to 60%, and we expect those profit margins to be in the the higher end of this range.

The R&D space range of the Company's long-term financial model is 18% to 23% and we expect R&D in Q4 to be in the high end of this range, due to some new [inaudible].

The SG&A target range of the Company's financial model is 13% to 18%. We expect SG&A for Q4 to be above this range, similar to the range lately was in Q3.

Tax rate is expected to be in the area of 10%, based on the current model.

I will now pass the call to Jim Keim, Director, and he will review the market and customers.

Thank you, Perry.

Q3 was a difficult quarter in the semiconductor industry, as evidenced by weak loading in wafer fabs and announcements by semiconductor companies that inventory or market issues impacted Q3 and Q4 sales revenue.

We evidenced this early in Q3 as sales for July, August, and early September remained lower than expected, as sales of LCD monitors and LCD TV remained disappointing.

Sales in the second half of September strengthened and remained good through October. O2Micro remains bullish on the outlook for LCD TV and LCD monitors, where we have both an industry-leading product position and industry-leading patent position.

While this market suffered some setback in demand in Q3, we have now seen significant price declines in panel pricing, enabling flat screen products to reach more attractive price points in the market.

However, we also see ongoing growth in this market somewhat dampened by economic factors, including high energy prices, that impact the ability of consumers to make discretionary consumer electronic purchases.

Despite this competitive market atmosphere, O2Micro has been expanding margins. As mentioned in our previous call, one major focus of our company will be receiving value for intellectual property.

Continuing a trend from earlier in the year, O2Micro had an exceptional quarter in continuing to rapidly expand our patent portfolio. Since the start of Q3, we have received 11 U.S. patents, including four in Intelligent inverter, two each in Intelligent E-commerce, Intelligent Power, and Intelligent DJ. Additionally , we have received two patents in communications.

Of particular note is that many of the patents are system-level patents, applying not to just to our IC competitors, but extending to significant consumer products such as LCD monitors, LCD TVs, and notebooks.

We will continue to expand our product offering to take full advantage of these patents and will pursue license agreements, where appropriate, from system manufacturers. At the same time, O2Micro continues to invest in high-volume, low-cost production capability in Asia to support our ongoing production needs.

This includes a recent investment in wafer fab capability at CSMC, based in China, for analog and mixed-signal product. This fab will increase our capacity while enabling high volume, low cost, production to support our expanding customer base in China.

I will review some of our product introductions that will fuel our future growth. In Intellectual Lighting, we continue to see major design wins in all areas, as we extend our leadership and our popular phase array family, where we've received additional patent coverage, including system level patents that apply to key aspects of system operation.

Our [inaudible] series of product has now also received U.S. patent coverage and continues to enjoy rapid acceleration of design wins.

Our continued IP expansion will enable us to retain market leadership as we focus on expanding our product offering to include higher level system applications.

In IntelligentDJ, O2Micro has previously announced that it's developing VideoDJ products for use in consumer video products that enhance video operation.

Following our first IC development, O2Micro is working closely with several manufacturers and we now expect contribution from this product area in the first half of next year. We are continuing to file IP in this area.

In the Intelligent power area, we have quickly moved forward to introduce operational samples, our newly patented remote controlled adaptor topology. This methodology will help solve heat issues and increase power efficiency with simplified charger power topology in notebooks that can quickly advance thin and light notebook technology. We're already working with several key customers that have leadership in this area.

We're also moving forward with Magic Star chargers and DC/DC product offerings. Our DC/DC products are now being widely accepted and we will continue to rapidly expand this product offering.

Our Intelligent Battery product activity remains focused on our battery gauge product that lends itself well to applications, wherever sophisticated battery management of lithium IM cells are required. We're now in the qualification stage for our battery gauge product into consumer and industrial application.

And standard CardBus product has continued to drop in price and will be removed from many systems in the next few years. Our Intelligent eCommerce group has been refocusing more of our efforts in security and also expanding the product line into a new area, including VPN firewall.

We have operational VPN firewall systems under evaluation at several customers. It is our intention to continue to diversify this product offering as we move forward.

I will conclude with some general market comments.

O2Micro began as the leading provider of power management products for the notebook market. O2Micro's continuing to focus its efforts into power management, but in ever-broadening markets. We have now evolved into a leader in the lighting market and are continuing to focus on profitable product line expansions and other markets where we can take full advantage of both our system and integrated circuit intellectual property. I will now pass the call on to Sterling Du, CEO and Chairman, for closing remarks.

Thank you, Jim. Our third quarter 2004 finished with revenue of 22.1 million. It was a decrease of 8% from preceding quarter, and a decrease of 5% from comparable quarter of the prior year.

The EPS for the third quarter, 2004, fully diluted were $0.8 per share compared to $0.10 per share in the preceding quarter and $0.10 per share in the comparable quarter of the preceding year.

As Jim mentioned, Q3 2004 was a difficult quarter for the market. There was soft demand in the LCD TV market. The consumers waited for penult price drop, which created inventory issues. Plus, increasing [inaudible] price continued to weaken the purchase power in LCD and in notebook market. We have seen [inaudible] from these service companies.

Utilization rates dropped sharply from over 100% to about 80%. This indicates, the market not yet to recover and we hold the conservative view to the near future.

Our leader [inaudible] for digital still camera is sampling prototypes now. The next generation [inaudible] to support our current battery is under developing and [inaudible] process with the proprietary design method for technology.

These products are the most integrated HMLDO power matrix unit for the digital camera.

As mentioned in the last conference, our remote control adapter, battery charger for the notebook computer, continues to see more and more interest from the customer, as these issues are getting more serious in the notebook computer systems. On the other hand, our ASSP battery chargeable notebook [inaudible] continues to accelerate in design wins and shipments.

Our [inaudible]of VPN firewall boxes will be shipped to the paid off-site customer this quarter with a [inaudible] release of [inaudible].

[Inaudible] such as [inaudible] are under negotiations and we display our light performance machine in last week's Beijing [inaudible] Expo exhibition. Our performance is one of the [inaudible] in the industry in equivalent environment.

We grew our engineer in China on a 75 of the ast quarter -- um -- from 88 in second quarter to 120 in the third quarter. Along with building our operation team, supply chain management, quality assurance, product engineer groups in China. We also make an investment in [inaudible], as Jim mentioned, to expand our strategy relationship with a major supplier in China.

Thank you for listening to our conference call.

Operator, may we take some questions, please?

Certainly, sir. At this time, if you would like to ask a question, you may do so by pressing the Star key, followed by the digit 1 on your touchtone telephone. If you're using a speaker phone on today's call, please make sure the mute button is turned off to allow your signal to reach our equipment.

Once again, that's Star, 1, if you would like to ask a question. And we'll pause for just a moment to allow everyone a chance to signal.

And we'll take our first question from Tore Svanberg of Piper Jaffrey. Your line is open.

Yes, good afternoon. A couple of questions. First of all, Sterling, you mentioned VPN Firewall. Going to beta customers here this quarter, could you give us an indication on when you expect to see some revenue from that product line?

The VPN Firewall normally will go through certification and testing beta customer side and that will be -- last about -- six months or so. So, the earlier [inaudible] maybe occur the next June timeframe. And the more revenue would be generated for second half 2005.

Okay. Very well. And, Jim, you mentioned that investment in CSMC. Could you update us or just remind us who your major foundry suppliers are at this point?

Yes. Our major foundry suppliers in the analog mixed signal area are X-Fab, which has fabrication capability, both in Europe as well as in Texas and we're now adding CSMC. In the digital area, we use companies that include UMC, TSMC, and SMIC.

Okay. And, finally, back to Sterling. Sterling, you mentioned an alkaline battery management product. Could you add, maybe, a little bit more color on that and when you expect to see some revenue from that product?

the product for the alkaline, that one is under developing and we believe it should be also the second half of 2005. But our first generation, which is targeted for the recent [inaudible] and that should be revenue in the next year, the first half.

Actually, I had one final question for Perry. Perry, it looks like inventories were up quite a bit this quarter. Should we just assume that that was ahead of your growth here in the fourth quarter? Given that you're lead times are so short?

I think it's because of the slowness in the September quarter. I believe that the inventory will drop in the December quarter.

Great. Thank you.

Once again, that's Star, 1, if you would like like to ask a question today. Star, 1. And it appears we have no further questions at this time. I'll turn it back to you, Mr. Goodrich, for any closing comments.

Ladies and Gentlemen, thank you for listening to the Q3 2004 O2Micro conference call. If there are no further questions, Operator, will you poll for questions one more time and then close the call?

Sure. Once again, that's Star, 1, if you would like to ask a question. Star, 1, again. And we do have a question from Shawn Slayton with S.G. Cowen

Your mic is open.

Hi, guys. This is Deepak Sitaraman for Shawn. I guess, looking at your SG&A guidance, is that mainly a function of increased legal expenses? And how do you see it trending over the next couple of quarters?

Oh -- This is Perry. Hi, Shawn.

That's -- it's actually a resulted from two factors: One is, of course, the litigation expenses for -- it's a part of our patent implementation programs. And as Jim mentioned, we got more and more patent covering the system level area so we have some actions on this area. For the long term interest of the company, we're continuing to work on this.

The second factor, because of that, we are the [inaudible]-based company to U.S. company that we need to comply with the [inaudible] of 404 [inaudible] by year 2005, so we also need to increase -- we also have some extra expenses for the altering and consulting fee on this area.

So it's kind of combination. I do see, for the coming two quarters, that we may probably go up to 25% labor SG&A.

Great. Thank you. Also, just a follow-up question on the inventories. Are you expecting them to sort of trend back to more normalized levels in Q1?

Yes, I think in Q4/Q1 timeframe we will going back to 04, [inaudible] labor.

Great, thank you very much.

We'll go next to Rob Adams of Adams, Hartness, Hill.

Thanks, gentlemen. Good afternoon. I think you guys -- let me just confirm here. You guided that the tax rate as of for this last quarter was a one-time issue and then you guided for Q4 to be 10%, if I heard that correctly. What -- should we model on a 10% kind of a number going out, or would you assume more in line with the 12%?

Yes. I think for the year 2004, I think 10% is a comfortable label.

And, then, for '05? Would we assume a more conservative rate back at your 12% kind of a rate?

For the year 2005, 10. 10%.

10%?

Yes.

Excellent. Thanks very much.

Okay.

And we'll go next to Kurt Ludwick with Mason Street Advisors.

I had a question regarding your guidance of up 5 to 8%. Is that indicative of what in-demand kind of looks like, or are you still -- I guess you're still going to be working inventory down, so does that imply in-demand actually looks better than that at this point?

That's really based on what we see as end customer demand. We basically deal with most of our business direct. We have very little product that we maintain in the channel.

So inventories pretty lean at this point?

Yes. Customers have quite lean inventories at this point.

And just -- and, then, the flat panel business, you talked about the price declines, leading to better price points, I guess, for consumers. Are you actually seeing now, demand response from them? Or is it kind of more of your expectation that that should happen?

Well, we have seen increased demand starting in in the mid September timeframe and that's continued on through October and there has been increasing demand in that area.

Okay. Thank you.

And as a final reminder, that's Star, 1, if you would like to ask a question. Star, 1. And Mr. Goodrich, it appears that we have no further questions at this time.

Okay. Then, wrap up.

We do have a follow-up that just queued up from Tore Svanberg.

Yes, just coming back to the guidance for growth, what's going to be driving that growth? Is it your PC business or Consumer or both?

Primarily coming from the consumer area.

So would that mean that the notebook business would be more flattish?

Yes. Yes, the notebook business would be more flat.

Great. Thank you very much.

As we have no further comments from our speakers today, I'll remind everyone that a replay of the call will be available, beginning 8:00 p.m. Eastern Standard time tonight. And again the replay number is 1-888-203-1112. Or you may dial 1-719-457-0820. The pass code is 982175. And again that will be available beginning 8:00 p.m. Eastern Time tonight, for one week.

And Mr. Goodrich, if you have no further comments, that concludes today's conference and we that you for your participation and you may now disconnect your lines.

Thank you.