O2micro International Ltd (OIIM) 2005 Q1 法說會逐字稿

Thank you for joining us to discuss 02Micro's earnings for the first quarter of the fiscal year 2005. 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 02Micro's Website at www.02Micro.com. There will be a replay available through May 11 by calling 1-888-203-1112, or 1-719-457-0820. The passcode you will need is 8904280. Following the presentation by management, the conference call will have an open -- will be open for questions and answers. Gentlemen, please begin.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the 02Micro Q1 fiscal year 2005 earnings report conference call. I would like to remind listeners that the discussion of business outlook for 02Micro contains forward-looking statements. Statements made in this release that are not historical 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 02Micro earnings press release and the 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 on today's conference call are Perry Quo, Jim Keim, Director, and Sterling Du, CEO and Chairman of 02Micro. After the report, the floor will be open for questions as time permits.

Now I would like to introduce Perry Kuo, Chief Financial Officer of 02Micro, for a discussion of the revenue, income and financial highlights of the first quarter of fiscal year 2005 ended March 31, 2005.

Thank you and good afternoon, everyone. This is 02Micro's earnings announcement covering Q1 2005 ended March 31, 2005. I will highlight our operating results and projections; then Jim Keim, Director, will provide market highlights. Closing comments will be made by Sterling Du, CEO and Chairman of 02Micro, after which we will answer questions.

Starting with this earnings report conference call, I will be more brief in my overall reporting part because everyone has a copy of the earnings report press release. I will report highlights only.

During our conference call on February 2, 2005, we projected Q1 revenue to be down from Q4 in the range of 2% to 5%, from Q4 revenue of 33,842,000 (ph). Revenue for Q1 was 23,277,000, a decrease of 2% from the preceding quarter and an increase of 5% from comparable quarter of the prior year. Net income for Q1 was 2,085,000 compared to 2,651,000 of the preceding quarter and (indiscernible) 4,206,000 for the comparable quarter of the prior year.

Earnings per share fully diluted for Q1 ended March 31, 2005 was $0.05 per share compared to $0.07 per share for the preceding quarter and $0.10 per share for the comparable quarter of the prior year. Earnings per share fully diluted exclusive of litigation in the amount of 2,536,000 (ph) for Q1 were $0.12 per share.

Gross profit margin for Q1 was 61.6%. R&D expense for Q1 was 5,330,000 and represented 22.9% of revenue. This is raising the range of 18% to 20% of the long-term financial model. SG&A expense for Q1 was 4,664,000 not including the (indiscernible) expense of 2,536,000. The total SG&A expense, including litigation, is 7,200,000. This represents 20% of revenue. This is above the range of 13% to 18% of the long-term financial model. While we were above the guidelines of our financial long-term model for SG&A, we continue to carefully monitor and control the expenses.

Operating profit margin for Q1 was 7.8% compared to 6.3% for the preceding quarter and to 17.9% for the comparable quarter of the prior year. Operating profit margin exclusive of litigation expense for Q1 was 18.7%.

Income tax for Q1 was 314,000. This represents a tax rate of 13.1%, which is in keeping with our financial model. Share repurchases in Q1 was 70,000 shares for a total of 693,862. Revenue as a percentage of total revenue by end markets for Q1 was consumer in the range of mid 50%, computer in the range of about 40%, and the industrial and the communications each had a small single digit percent of the revenue.

Balance sheet. 02Micro has over 116 million in cash and short-term investments. This represents cash and the equivalents per share of 2.95. In addition, 02Micro has no debt. Short-term investments or money invested in corporate bonds of at least (indiscernible) rating and a government bond of certain developed countries.

Accounts receivable at the end of Q1 was 9,533,000 for a DSO of 37 days. Inventory turns ratio for Q1 was 3.8 compared to 3.4 for the previous quarter and the 4.6 for the comparable quarter of the prior year. Cash flow from operations for Q1 was 3,090,000.

Human resources. 02Micro now has 470 employees, 82% of which are engineers. This positions us well for new product development, the continuous introduction of new products, and more customer design wins in the future.

Guidance for Q2 2005. O2Micro estimates Q2 revenue compared to Q1 to be up in the range of 10%. The gross profit margin (indiscernible) the Company's financial model is 55% to 60%. And we expect gross profit margin in Q2 to be in the high-end of the range of the model or slightly higher.

The R&D expense range of the Company's financial model is 18% to 23%, and we expect R&D in Q2 to be in the high-end of this range or slightly higher as continued investment in R&D is vital to the future growth of the Company.

The SG&A (indiscernible) of the Company's financial model is 13% to 18%. We expect SG&A without litigation expense for Q2 to be in the high-end of this range or slightly higher. We expect litigation expense for Q2 to be in the range of 3 million to 4 million as we go through the expensive (indiscernible) trial phase of litigation. This will bring the total SG&A expense for Q2 to be above the range of the long-term financial model.

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

Thank you, Perry. Overall, markets were relatively stable in Q1 and we see excellent growth opportunities in our focus markets as we enter Q2. Additionally, Q1 saw a continuation of our expansion in consumer markets with numerous design wins that will further lessen our dependence on the notebook market going forward. We expect this trend to continue through the balance of 2005 as we continue to expand our presence in LCD TV and other key consumer markets. This does not mean that we will lose focus on the notebook market.

Although revenues from notebook ICs have been under heavy pressure due to the ongoing modernization of notebooks, we do expect a slowing of price declines in this market. Additionally, we see our next generation of cost-effective notebook products gaining market acceptance. Specifically, our new line of cost effective intelligent power and intelligently e-commerce products are experiencing an increasing number of design wins in the notebook market.

Additionally, we are working with selected customers on our cool charge IC, derived from our patented remote control adapter technology, that enables lower power dissipation in notebooks. That is now attracting good market attention.

In the consumer market, our design win activity has continued to accelerate, led by our intelligent lighting group, where we are the industry leader and have built both a strong product position and a strong intellectual property position. We are seeing a wide diversity of design wins coupled with an ever increasing customer base. We remain very optimistic in this area as we see rapid market expansion and expect LCD TV to experience very strong growth in 2005 and onward.

While our intelligent power products are continuing to enjoy numerous design wins in the notebook market, as noted above, we have broadened this product offering to also focus on other markets and now have key design wins in the consumer market. Ongoing market and customer expansion will remain a focus area for the intelligent power group.

We remain pleased with the progress of our intelligent battery product line that now has silicon in the latter stages of evaluation at key customers. We expect to begin generating revenue later this year or early next year in both computing and industrial applications from this new product area. Our VPN firewall activity continues to expand, but as we mentioned in prior conference calls, this market will take time to develop and we do not expect major revenue contribution in 2005. I will conclude with some general market comments.

02Micro began as a leading provider of power management products for the notebook market. 02Micro is continuing to focus its efforts into power management but to ever-broadening markets. We have now evolved into a leader in the power management for consumer as well as notebook markets. We will continue to focus on profitable product line expansion in major computer, consumer, industrial, and communication markets where we can take full advantage of both our system and integrated circuit intellectual property.

Finally, I will mention a few words about our supply chain. As we see both our product offering and customer base broadening, we will need to make sure we have the resources in place to properly service our rapidly growing unit volumes. We are continuing to strategically invest in our supply chain with increasing emphasis on China as we see a greater percentage of our products shipping into this country.

I will now pass the call on to Sterling Du, CEO and Chairman, for closing remarks.

Thank you, Jim. Our first quarter 2005 finished with a revenue of 23.3 million. It was a decrease of 2% from the preceding quarter and an increase of 5% from the comparable quarter of the prior year. The EPS for the first quarter 2005 fully diluted was $0.05 per share compared to $0.07 per share in the preceding quarter and $0.10 per share in the comparable quarter of the preceding year.

As Jim mentioned, our revenue stream from the consumer segment continues to be strong. And on the other hand, we do not know the notebook computer market. We came up with many new products to address the power management needs of the notebook computer space, and it generates additional revenue streams.

There are many good niche markets for our technologies, such as our battery DJ, providing further integrated ICs and higher accuracy in the notebook computer battery pack. Our cool charge technology, previously known as RCA (ph), got momentum in consumer design wins as it will eliminate up to 2.88 watt from conventional notebook system designs.

We also came out with a new (indiscernible) unit ICs for the PMP, which is portable media player. We expect some design win activities even initial revenue (indiscernible) in the second half of 2005, and it will diversify our consumer market.

Our VPN firewall Internet security system solution, Matrix9, (indiscernible) protocol is in a beta phase (indiscernible). We also have new family members to Internet security product line which (indiscernible) SSL protocol. SSL means secure socket layer, and it will be released to the beta customers as well.

SSL-based VPN firewall product targets small and the medium business, while our Matrix9 targets larger enterprise. Our new power (indiscernible) for flashlights (ph) of camera phone applications is in sampling stage. We hope it will enable our cellphone segment of business as part of our effort to diversify our end-markets.

Our intellectual property portfolio continues to grow. With (indiscernible) increasing to 94 as of March 31, 2005 from 78 in the preceding quarter. Our (indiscernible) increasing to 2478 from 1943 in the preceding quarter. We continue to invest heavily in our patent portfolio and the intellectual property protection plan. We grew our engineers in China from 137 in the fourth quarter 2004 to 176 in the first quarter 2005. These 39 new engineers in China support all the new technologies and the new product development activity and some logistics support.

Thank you for listening to our conference call today.

Operator, can we go into question-and-answer phase, please?

(OPERATOR INSTRUCTIONS). Shawn Slayton, SG Cowen.

Can you remind us what the breakout was consumer and computer in Q4?

Q4 we said that consumer was about 50%, computer was in the low 40% range, and industrial and communications were each low single digits.

So, the mix is approximately flat from Q4 then? Is that the right interpretation?

Yes. It is up a little bit in consumer to the mid 50% range, and notebook is about 40-ish, and the industrial and communications are each still small single-digit.

Understood. Can you walk us through -- obviously, the legal spending is becoming more meaningful. I know you can't get into the details of the litigation, but can you help us understand the likely spending trends at least in the near-term? And maybe you can highlight some of the milestones that you guys are waiting for as far as this litigation goes.

Shawn, this is Perry. As we have two key trials (indiscernible) this quarter. So, if the trial date has not been pushed out (indiscernible) this quarter. And I think this quarter will be the pickup year litigation in the year. So, the trend will be down. However, the trial date may be pushed out from this quarter to another quarter, so I may update you on a quarterly basis.

Basically you're saying the 3 to 4 million if it hits -- if this event occurs in the current quarter, we're going to see that hit the P&L this quarter, or that 3 to 4 million may hit the P&L in Q3?

This 3 to 4 million is hitting Q2.

Okay. So, it's definitely going to hit in Q2. And then, do you have any idea of Q3 legal spending, what that might be? Is it half of the Q2 rate? Directionally it's down, but can you help us out more there?

No, no. (indiscernible) after the Q2.

Tore Svanberg, Piper Jaffray.

A couple of questions. First of all, looking at your guidance. Can you give us a little bit of an indication on your visibility into that number?

Basically -- Tore, this is Jim -- we have seen very good revenue flow as we've moved into Q2 with April being a strong month. We continued to see good strong backlogs. The key markets in which we are seeing some of the growth -- we have very good visibility into these markets, which include, obviously, markets like LCD TV, some key new design wins in the notebook marketplace, and also some good intelligent power design wins in other markets. So, we have very good visibility into this. And at this point, we see Q2 being very strong with our design wins positioned in some of our focus markets.

Very well. It looks like your consumer business is finally really starting to grow quite significantly. Is this the result of new products finally moving into production or are you actually also seeing a re-acceleration in the end markets you serve?

It is some of both. Certainly, in some of the high end of the LCD markets, which include the TV end as well as LCD monitors, there is very good expected growth. And we have seen good growth as we've moved into Q2. But, we also have now our new products which have had good design wins starting to go into production, so many of the new products are now beginning to contribute to our revenue growth.

A question for Sterling. Sterling, you talked about your engineering investments in China. And it looks like you have been to China very early on. Could you maybe put that into perspective on what some of your analog competitors have done so far?

We are not -- we heard some of the Street news, but we don't know the detail of our competitors of analog at this moment.

I guess I'm just trying to understand what the larger picture -- as you continue to build in China, are you seeing your competitors aggressively investing there as well?

I see there is a lot of interest generated either from the USA base, or even Taiwan or China, local base. (indiscernible) like to be build at our analog (indiscernible) in China. But, one thing I also heard which I agree on, the comment is the good engineer of analog, even many years, maybe more than 10 years training up. And the (indiscernible) China base analog engineer is not that (indiscernible). And so we have built up our analog team over their almost four years. And we work with the people which (indiscernible) or they have already had some experience. But, after four years, our junior people begin to (indiscernible) experience. And I do believe our advantage is for the -- ahead of most of the people over in China can give O2Micro some capabilities in terms of technologies developing, capability, and the management team in China.

Thank you. Final question for Perry. Perry, your tax rate last quarter was 13%. Going forward, should we assume it to be 13, or do you think it will go back down to 11?

We have more shipment now; it's because of the mix of the shipped to destination. In lieu of the Q2, I think it will be down to 11%.

Quinn Bolton, Needham & Co.

Good quarter and even better outlook. A couple of questions for you. One, it sounds like you guys are getting more excited about some of these new products in the notebook side, the power management side for industrial markets. Any way you can kind of quantify what kind of revenue contribution you may be getting from these new products? I think the market for your stock has really been focused on your backlighting applications over the last few quarters, and if you can kind of expand that, give us a little bit more color on the other products, I think that would certainly help.

Aside from backlighting which has, obviously, been a major contributor as we have moved into the consumer market, we have strategically positioned and developed products for the intelligent power. If we go back several years in time, our intelligent power activity was aimed at more application-specific products for specific large customers in chargers for notebooks.

What we have done is developed a beginning of a broad product offering that will include more standard products that can go not only into notebook but also into the consumer area. So, these products are beginning to contribute revenue in areas, all the way from the DVD type marketplace on up into the notebook marketplace. So, the whole intelligent power product offering is now beginning to expand. We also have some specific products we have not talked about that we will talk about in future conference calls that were targeted with some specific customers in key consumer marketing areas, and those will also begin to contribute some revenue in Q2 and more revenue as we moved forward.

On the intelligent power products, can you give us a sense as to could these be 5% of revenues, 10% of revenues say exiting '05? I know there's probably some timeframe that you need to ramp and get the design wins, but it sounds like you have had good design win penetration. So again, any kind of quantification of contribution from the revenue perspective we could expect from these products would be great.

We really don't like to comment on that for competitive reasons.

Looking at the consumer mix, it looks like it grew quarter over quarter. Is that still predominantly monitored-based, or can you give us a sense on the LCD TV contribution?

We will say in general that the LCD TV market now is beginning to move forward very quickly. We believe that LCD TV will have a strong year. Certainly monitors, we think, will also have a good year but very specifically the TV market now is coming into some maturity with fewer glass production problems. And we do expect major expansion in that marketplace. But again, we have not previously had products for some of the other consumer markets, even some of the lower-end markets. And we are now moving into those areas as well.

So, like monitors are doing well, the LCD is really starting to accelerate, and new consumer activity -- really all driving that consumer revenue growth through 2005.

That is correct.

On the trials, I know NPS (ph) is one. What is the other trial -- sorry -- or the other lawsuit that goes to trial this quarter?

We have a lawsuit scheduled for early June in Texas that is against Taiwan Sumida.

Finally, just on the question about visibility. What are your lead times generally? I know they tend to be fairly stable, but if you could just remind us where they are on a weeks basis?

We have maintained our lead times are currently in the four to eight week area.

Jeremy Kwan, Piper Jaffray.

Just one question. I noticed in your -- some of your recent press releases and the (indiscernible) description you mentioned a new product called PCI Express Switch. I was wondering if you could provide a little more color on this, maybe what applications or end-markets that this might go into.

Intel uses PCI Express estimate to -- as a next generation expansion bus. (indiscernible). But, during this (indiscernible) years (indiscernible) time, some of the (indiscernible) migrated to the PCI Express, but they still maintain an original PCI-based interface. In our CardBus segment, as you know, CardBus will interface with original PCI interface. But then you have PCI Express (indiscernible) which is -- they have a different kind of bandwidth. And in between, when you have a core existing, then that's our PCI Express card; we call it Express Switch (indiscernible).

(indiscernible) functionality to using programmable control commands to switch the power to between PCI Express, socket and traditional PCI interface cover controller socket when they enable to plug and play. Because when you plug in over there, (indiscernible) one of them you plug in; another one you need to shut down the power. So, does have some arbitration and very careful design for those. So, that's our product (indiscernible)

Thank you. Maybe just another question on -- just looking at the converter side of the business, can you just give us an update on the (indiscernible) and how that is going, targeting the low end part lower screen size segment of the monitor business?

Yes. That product has been extremely successful in that market area and now is in very high-volume production and is a significant contributor to (indiscernible) revenues.

Sean Connor (ph), Waterstone Capital.

Good quarter. I was wondering if you could first talk a little bit about what amount of your business this quarter you need from turns versus last quarter?

Basically, we normally don't look at the word turn so much because we deal with major customers. Our focus is very, very much with major customers and forecasts that they give us. So, basically, what we focus on is the forecasts that we receive from these customers, which in some cases go out as far as six months. So, we have a very good idea of the builder rates from the major customers and we build product to suit those forecasts. So, basically, we have what we think is a very good handle on the volumes of products that will be required for those customers as we move through the balance of the quarter. And based upon those forecasts, that is where we give our guidance.

I'd like to expand on that, if I could. This is Gil Goodrich. This turns number that is asked of every semiconductor company in every quarterly earnings call is based on the law of large numbers. And it is a valid and good parameter of measurement for a company that has thousands of products and thousands of customers in numerous channels of sale, because the only visibility they have to work with is the backlog. So, the turns number becomes a good figure of merit.

O2Micro, as Jim just said, does not build to backlog. We build to a forecast that we get from our customers. And the forecast is valid, because we have been doing it for a long time, and O2Micro has a single channel of sale. So, as a matter of fact, the percentage of our revenue that is turns is high but it is insignificant from the standpoint of good that we're going to make the number.

The second question would be on the pricing for the consumer side. Can you give a little bit more color as far as expectations for pricing in that area going forward?

Pricing in the consumer segment?

When you say expectations --

As far as is it better than you were expecting, not as good as you were expecting this last quarter? And then we're kind of going forward.

Generally speaking from our visibility, I would say that has been better than expected as we relate it particularly to Princeton's (ph) notebook market, where there has been extreme price pressure. We have not seen that level of price pressure in the consumer market segment.

Andrew Huang, American Technical Research.

I was wondering if you could kind of explain a little but why your gross margin this quarter kind of went beyond the multi-turn targeted range?

Two things -- it's because of the -- first of all it's because of the product mix. So, we improved our product mix more to the (indiscernible) by shipping more product to the consumer area. The second one is that we continued to invest our engineering and also logistics system in China. We start to see some (indiscernible) in our cost structure.

And then, were there any 10% customers in the quarter?

We don't announce 10% customers during the quarter. We do so for the year. And we announced that there were two 10% customers for 2004, and they'll be described in the 20-F report that is due out towards the end of this month.

Great. Going back to your answer on the gross margins. So, are we to assume that the gross margins for the consumer business are maybe slightly higher than, say, the corporate average?

That is dependent on mix. Perry mentioned mix previously. Specifically, in the notebook market place we did have some digitally-oriented products and some very low-end CardBus products that were lower margin. We have actually been phasing out of those products that we've been phasing into some of the new product areas. So, that is really a mix-oriented question. In the analog as well as in the analog mixed-signal area, the margins aren't quite consistent for us.

Last question. In terms of the SG&A spend in dollars, would you expect it to be flat compared to the March quarter, up or down?

For the SG&A?

Exclusive of litigation, do you mean, Andrew?

That's right.

I think we (indiscernible) percent that's related to some increase in the sales. So, I think the percentage of the SG&A will be in the high-end or slightly higher (indiscernible).

Shawn Slayton, SG Cowen.

I know you don't like to get too granular within the segments that you're breaking out, but can you help us understand in the computer segment how much sales contribution exists from non intelligent lighting ICs? That would be helpful. Thanks.

You're asking in the notebook sector, how much is non lighting?

Yes. How much is non lighting?

Certainly the majority of it, because basically the other products have higher ASPs to begin with. We have good penetration. The inverter products that tend to go into the notebooks are tending to be lower-end products at lower ASPs. So, it's really an ASP situation. So, it really -- to answer the question -- in general, certainly, the majority of our revenue contribution is from other product lines.

Quinn Bolton, Needham & Co.

Two quick follow-ups. The first one is for Jim. You guys have had a single channel of sale to the OEMs for some time. I'm just wondering, with the focus now on more standard product offerings, multi-market offerings, intelligent power, does it make sense at some point to start to include a larger network of (indiscernible) and sales reps to seize on some of the opportunity offered by those products?

The answer to that is yes, we are expanding the customer base, and yes, we are beginning to expand our sales activity. And we will continue to do that in what we think is a logical fashion. But, as we move through 2005 you will see more sales activity of different types from 02Micro.

Great. The second question was just -- I don't know if you can quantify, but I know you have been walking away from some of the standard -- sorry -- the lower margin standard CardBus stuff. Just wondering how much of that business is still in the mix of the notebook revenue? Is that mostly gone now or does that still continue to trail off through the rest of the calendar year?

It will continue to trail off through the rest of the calendar year. We have certain strategic customers that we're committed to support through their light notebook cycles.

That does conclude our question-and-answer session for today's conference. Just a reminder to everyone, there will be a replay available beginning May 11 by calling 1-888-203-1112 or by calling 1-719-457-0820 and using the passcode 8904280. That does conclude today's 02Micro earnings for the first quarter of the fiscal year 2005. You may disconnect at this time. We do appreciate your participation.

Thank you.