O2micro International Ltd (OIIM) 2007 Q4 法說會逐字稿

Good day and thank you for joining us today to discuss O2 Micro's earnings for the fourth quarter of the fiscal year 2007. If you'd 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 O2 Micro's Web site at www.O2 Micro.com.

There will be a replay available through February 7, 2008, at 5 PM Pacific Time by calling 888-203-1112 or 719-457-0820 passcode 6778743. Following the presentation by management the conference call will be open for questions and answers as the time permits.

At this time I would like to turn the conference over to Mr. Gary Abbott. Please go ahead.

Good afternoon and thanks for dialing into O2 Micro's fourth quarter and fiscal year 2007 financial results ended December 31, 2007 conference call. This is Gary Abbott, Director of Investor Relations.

I would like to remind listeners that this discussion of business outlook for O2 Micro contains forward-looking statements. Statements made in this release that are not historical fact are forward-looking statements within the meanings 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.

Blisters are referred to the O2 Micro's earnings press release and the documents filed with SEC to understand these forward-looking statements and the associated risk factors. The statements made here in our dated information. The Company assumes no responsibility provide updates to disinformation.

With me today are Perry Kuo, CFO; our Head of Marketing and Sales and director Jim Keim; and Sterling Du O2's Founder, CEO, and Chairman.

After the report the floor will be open for questions as time permits. Mr. Kuo will highlight operating results and projections followed by Mr. Keim. Mr. Keim will provide market highlights and closing comments will be made by Mr. Du.

Now I would like to introduce Perry Kuo, CFO of O2 Micro, for a discussion of the revenue, income, and financial highlights for the fourth quarter and fiscal year end 2007 ending December 31st, 2007. Perry, please go ahead.

Thank you and good afternoon. This is O2 Micro's quarterly conference call. This call will cover our financial results for the fourth quarter of 2007.

We will now review our financial results for Q4 2007. Please note that financial results will be presented on a non GAAP basis unless we tell you otherwise. The non GAAP results is (inaudible) stock based compensation expense as well (inaudible) income and expense.

Our full GAAP results are available in our press release that was issued moments ago.

GAAP revenue in the fourth quarter of 2007 was $47.2 million, which represents an increase of 4.5% from the preceding quarter, and an increase of 29.9% from the comparable quarter of the prior year. GAAP net income in the fourth quarter of 2007 was $7 (inaudible) million. If we excluded (inaudible) expense and stock based compensation the non-GAAP income will be $9,875,000. This compares favorably with non-GAAP income of $9,378,000 in Q3 and $4,334,000 in the fourth quarter of last year.

GAAP earnings per ADS in the fourth quarter of 2007 was $0.20. Non GAAP earnings per ADS were $0.25. This compares -- this compares nicely with non-GAAP earnings per ADS of $0.24 in Q3 and $0.11 in Q4 2006.

Gross margin was 58.8% in Q4 compared to 57.5% in the preceding quarter and the 53.9% for the compatible quarter of the prior year. This was slightly better than we originally guided, due to a favorable product mix. R&D expense was $9.5 million or 20.2% of revenue. This amount excludes stock based compensation expense of $255,000 in the fourth quarter.

SG&A expense was $8.6 million or 18.2% of revenue. This amount excludes stock based compensation expense of $342,000 (inaudible) expense of $2 million and litigation income of $400,000 in the quarter.

Income tax was $191,000 in the fourth quarter, mainly based on the affected tax rate of each (inaudible) location for the prior year and at the normal annual tax [equivalent] adjustment.

In Q4 2007, we repurchased 100,000 ADS units at the cost of $1.3 million. Q4 review by end market breaks down into the following percentages -- consumer was approximately high 40% of revenue; computer was approximately mid 40% of revenue; industrial and communications were both very small percentages and accounted for the remaining revenue.

I would like to now turn my attention to the balance sheet. O2 Micro has over $81 million in cash and short-term investments. This represents cash and equivalents per ADS share of $2.12. In addition O2 Micro has no debt. Short-term investments are invested in comparables of at least AA ratings and a government (inaudible) of certain developed countries.

Accounts receivable at the end of Q4 was $24.6 million. Our DSO is 47 days. This is within our target range of 40 to 50 days.

Our Q4 inventory turnover ratio was 3.5 times.

From a cash flow perspective, we had a very solid quarter. We generated $7.3 million of cash flow from operations in Q4. Capital expenditure was $3.2 million in the fourth quarter and primarily driven by equipment purchases.

At the end of the year O2 Micro had 1170 employees, 37% of which are engineers. This positions us well for new product development and allows us to maintain our technological advantage which [leads us to] turn to you design wins and a high margin business.

At this time I would like to provide our financial guidance for the first quarter of fiscal year 2008. This guidance reflects our best estimate for the current environment and is subject to change. This is the only official guidance we will provide unless we (inaudible) with a public announcement in the future.

O2 Micro (inaudible) Q1 revenue should be in the range of $37 to $39 million. This represents a year to year increase of 6% to 11%. Revenue is expected to be down 17% to 22% from Q4 levels due to seasonality, economic conditions and some inventory build. We are guiding the Q1 gross margin to a range of 57% to 59%, based on our current expectations of product mix.

R&D spend, excluding stock based compensation, should be 23% to 25% of Q1 revenue, due to the seasonally low revenue base in the quarter. However we expect this percentage to decline if our revenue follows normal seasonal trends. SG&A should be in the range of 21.5% to 23.5% of Q1 revenue, excluding stock based compensation, litigation income and litigation expense. This percentage also declines if our revenue follows normal seasonal trends.

We expect litigation expense for Q1 to be as much as $3.5 million because we have a trial scheduled for late February 2008. It is important to note, however, that this trial represents our last scheduled court appearance; and as a result we expect our litigation expense to start to normalize in the second half of 2008.

Stock compensation should be in the range of $600,000 to $700,000 in the first quarter. We expect our tax rate to be in the range of 7% to 10% of non-GAAP (inaudible) income in the first quarter. CapEx is expected to be $1.5 million to $2.5 million in Q1.

In summary, we have a good business, but we are not immune to the consumer and the environment. We believe there may be an inventory correction going on right now and once this passes, we expect to see better growth from our core markets. Our relationship with key customers, remember, is strong and we expect to continue to follow the underlying growth strength in our key markets.

At this time I will turn the call over to Jim Keim to talk more about the business.

Thank you, Perry. The fourth quarter showed strong growth over Q4 2006. Our projected Q1 reflects normal seasonality as well as some inventory corrections in the supply chain, due to the effects of slowing consumer demand.

Let me address the market environment. We have seen the first signs of a softer economy. Some TV producers saw their business underperform their growth expectations in Q4, resulting in some inventory carrying into Q1. This was particularly evident at the higher end large screen end of the TV market where consumers have -- where customers have informed us that North American and European markets have slowed. The lower end of the TV market remains less affected and some TV manufacturers have adjusted both pricing and production mix based on this dynamic.

The notebook business has also seen some slowing, as evidenced by Compal's recent announcement of a 10% sequential drop in February notebook shipment. We believe Compal is gaining market share, based on their unit forecast. So overall industry unit declines are probably even lower.

Moreover, it wouldn't surprise us if revenue declines were steeper than units because low-end units have increased in the overall mix. For these reasons we have adjusted our thinking to reflect these factors, although we remain confident that this important market will see reasonable growth in 2008.

Since we are sensitive to the overall market by virtue of our extremely high market share in the core notebook, LCD-TV and LCD monitor segment, we have decided to be conservative in our expectation. However, we continue to believe the fundamental drivers of our markets remain intact and this also points to solid growth in both LCD-TV and LCD monitor units in 2008.

Fundamentally, market forces are driving the conversion of CRT-TVs and monitors to LCD; and we expect to continue to maintain a very high market share. Hence, this part of our business should also track those end markets closely. Keeping these market trends in mind in our broadening product portfolio we believe that calendar year 2008 will see increasing demand for our products despite recessionary trends.

At this time, I would like to comment briefly on our major product line. Intelligent Lighting. We see ongoing expansion of this business as we move beyond this inventory correction. Our industry leading product portfolio continues to expand and we continue to see new product design wins in all key markets and an expanding customer base. Our patent pending family of high-efficiency LED controllers continue to enjoy new design wins and increasing revenue. We are pleased that several key notebook suppliers have chosen our LED product for their next-generation notebook. We see the rapid expansion of LED lighting in markets like DVD players, GPS systems, and notebooks as offering significant growth opportunities for O2 Micro.

Our Intelligent Battery product offering continues to gain recognition and applications where safety and accuracy are required. Our design wins continue to expand in key markets; and we are now shipping product into notebook, power tool, ebike, and automotive applications, utilizing our advanced technology. We see ourselves well positioned for ongoing growth in this dynamic market.

Intelligent Power. Our system and processor DC to DC products continue to win new notebook design wins with increasing market penetration. We see significant opportunities for our advanced charger products and expect these products to contribute to our ongoing growth in notebooks. As our product and power offering continues to broaden we will focus on growing both our business in notebooks and other growth markets.

Intelligent E-Commerce continues to win new designs and market share gains at leading notebook OEMs. We continue to expand this product line with new and more cost-effective products and we will also start focusing on other markets as we move forward.

Our VPN Security products are growing both in terms of capability and market recognition. We now are shipping product to an increasing number of countries, and expect to see increasing contribution from this product line in 2008.

To summarize, we expect to achieve reasonable growth in our markets in 2008. Additionally we expect new products to enable us to expand both our market focus and customer base.

I will now turn the call over to Sterling Du, CEO and Chairman, for his remarks.

Thank you, Jim. Our fourth quarter of 2007 [mix] sales were $47.2 million, an increase of 4.5% from the preceding quarter and up 30% from the fourth quarter of the prior years. We are very happy with these performances because it clearly illustrated the strength of the O2 Micro franchise.

The GAAP gross margin on May sales was 58.7% in the fourth quarter, up from 57.5% from the preceding quarter and up from the 53.9% of the fourth quarter of the prior year. It shows the value of our technologies. It is important to highlight that we are being able to maintain good pricing in parallel with our plan to reduce costs.

May sales for the fiscal year ended December 31, 2007 were $165.5 million, an increase of 32.5% from the prior year. (inaudible) margin on [May] sales was 57.1% in fiscal year 2007, up from 54.6% in the fiscal year 2006. These results clearly showed us we are in the top tier of [old chip] company whose primary supplies similar end markets serving notebook computer, LCD-TV and LCD monitor.

This impressive accomplishment is even greater and one can see that (inaudible) we're improving our GAAP operating margin from a loss of 3.7% in 2006 to a profit of 14.3% in 2007. (inaudible) success is due to our superior technology, good customer support and increasing base of top tier customers and started executing our plan (inaudible).

2007 was a great year and drove O2 Micro to a higher level. As we look ahead we continue to have high expectations for the ongoing success of consumer and computer businesses; but we also expect our battery management and the security business to ramping up in 2008.

On the consumer side of business, we are seeing especially strong growth on LCD-TV units and we are very excited about this opportunity. We are also seeing continued strength in LCD monitors.

On the computer side of our business, notebooks continue to replace desktops. This megatrend is generally good for O2 Micro and we expect it to continue for some time. Our DC/DC product for the notebook GPU and AMD microprocessors are important contributors to our business and represent key growth areas in 2008 and beyond.

At the same time our PC express business has confirmed its technology leadership with a new design win for 3094 (inaudible). In addition our [wireless] ED driver has been adopted by several of the top tier notebook OEMs and continue to penetrate new models. We would like to emphasize that we are shipping our LED server in large volume today where many of our traditional and (inaudible) competitors are not. Our battery-powered management business continues to build momentum. We have many design wins in U.S.A., China, and Taiwan. This revenue is ramping up along with (inaudible) power for industrial markets where lead times are typically longer and our traditional markets. We have initially our focus on a wide range of applications for our technologies.

(Technical Difficulties)

That's a good question. For the 2008, we target -- like to grow at least double the revenue for last year. At least, yes. And we expected our channel partner which is major in Southeast Asia should begin to generate some revenue momentum. Security is we provide very high speed platform. And we leverage to other software (inaudible) for example, the new thread. And we bundle the new thread the entire span, the entire (inaudible) and we also can bundle those like contact filtering and also entire spend for those (inaudible).

So the leverage point, the result is going to be happen like ASP is going up. For example, our (inaudible) machine, the ASP is up from original $8000. Right now, it's close to US$10,000 and that's one example. So we are happy to see the leverage with other software bundled and it can make our product more penetrate in market and also the ASP goes up.

Andrew Huang from American Technology Research.

My question is, based on the revenue guidance that you provided for March quarter it's a pretty steep drop. And I understand that there's seasonality, but given the kind of magnitude of that drop, have your customers said anything about the June quarter at this point?

Well what we reiterate again, that some of that had to do with mix issues and also some inventory product that was in the supply chain. But basically I think customers at this point are remaining quite optimistic for the June quarter.

However I do believe that, having seen some of the recent announcements that have been out -- for instance, Compal, which I mentioned earlier; there's been open public statements about Japan being in a recession. I do believe that we will see and we already anticipate that Q2 will not be as optimistic as some of our customers expect.

Okay and then maybe more on the full year outlook. Would you -- I don't know if you can comment but do you think you'll be able to achieve a double-digit revenue growth for the calendar year?

The answer to that is, we believe at this point there's no reason that cannot occur because we do see ongoing expansion in all of these markets. Certainly the TV market will continue to grow. It will probably not grow as rapidly as it has in the past.

Similarly, we do expect the monitor notebook markets to continue to grow, but just not at the same pace they have in the past.

So our goal certainly are in the double-digit growth type areas.

Thank you. At one last question. Have you seen any evidence of a market share loss for any of those applications of notebooks, TVs or monitors?

Well, I think if you look at the numbers from last year, particularly Q3, Q4 you'll see that if anything we probably gained market share. And those same models are out there in Q1 that were there in Q4. So we really don't see any market share loss.

But, again, I would remind listeners that we operate very much in the direct mode of operation with major companies. We are not buffeted by distributor type arrangements. So when they see mix changes occur, when they see drop-offs in the market occur, we see it immediately.

Thank you very much.

Bill [Lu] with Morgan Stanley.

A few questions for me as well. Just to make sure I understand this inventory problem here. Did I understand correctly that this is mainly limited to the lighting products right now?

Well, actually, it is not limited to just lighting products. We've seen this in products that go into notebooks as well. So we have seen it affect all product areas.

And to sort of follow-up on Tore's question how much inventory is actually out there? Do you have a sense of that?

It was in the multimillion dollar area in the -- somewhere we believe in the $2 to $4 million area.

So actually it wasn't that big.

Well it's big enough to certainly impact our projections for Q1.

But your revenue in Q1 is actually down $10 million or so, right?

Well, the revenue projection which Perry gave I believe was in the $37 to $39 million area. And of course there is normal seasonality that occurs.

Okay. Got it. To focus on the positives for a second here. Fourth quarter gross margin did upside in 1Q despite I think revenues being a little bit lower. Margins remains pretty healthy as well. Can you just talk a little bit more about what is driving that? What we see cycling forward?

We actually have improved year [rate] in the Intelligent E-Commerce product. So this actually helps our product mix. Also our Intelligent Lighting, also we have the mix. So initially we are moving into a more favorable product mix like we ship more product to (inaudible) LED and the larger size TV.

Then you'll see the trend in 2008 plus we do have some cost reduction (inaudible).

Okay. But I forget if it was Jim or Sterling also said that there was -- there's going to be a mix shift towards a low end especially in 1Q. So that's not having much of an impact on gross margins then.

No.

No but it can have impact on revenue.

Sure. Sure. Okay. Then lastly on LED it seems like we are finally getting some contraction with a lot of these notebook customers. Have you seen a lot of announcements out there? ASP is $0.80 today. Do you have an expectation for how much it might drop throughout this year?

It's very difficult to predict but you know if you said 10 to 15% not (inaudible).

One last question for me. I think I'm doing the math correctly but it seems like OpEx is dropping a little bit on the absolute basis in 1Q. Is that correct? And what should we expect going forward?

Yes OpEx in terms of the dollar amount we will drop a little bit and to see there's a trend, I think our R&D will be in the area of the 20, 21% area excluding the stock based compensation and also SG&A, litigation expense and income, also stock compensation. This will be in the area of the 19 to 20%.

I'm sorry. That's based on revenue range of what?

Based on the double-digit growth that you mentioned.

[Stephen Park] with Wedbush Morgan Securities.

Just had a quick question. You were talking about this supply chain working through in by March quarter. What gives you confidence that is going to happen?

Well, we work very directly with the customer base so we know their run rates. We know their mix of products individually and, basically, we can see the inventory diminish at key customers.

Do you guys expect the notebook and (inaudible) TV business to kind of -- I don't know if you guys have visibility beyond Q2 here. I mean, are you guys just expecting to jump back or is this going to be -- do you guys have any visibility into that right now?

Well we have visibility certainly from customer projections. Some of the customer projections indicate some snapback. We are taking a more conservative view because I do believe that with Japan economy where it's at, where the U.S. economy where it's at today that it's being very, very optimistic to expect the kind of growth rate that we have seen last year. We just don't think it's going to be there.

We think that some of the announcements we've seen on some of the cutbacks, there's no reason to believe that those will not continue to cut back in the second quarter. Hopefully if there is a recession it's short. And I think that at this point one has to take in the fact that consumer spending is down worldwide.

Just one last question. In inventory products, are you seeing ASPs decline kind of outside of normal seasonality there?

Not really. I think ASP declines have been quite typical.

Thank you.

(OPERATOR INSTRUCTIONS) [Vernon Estes] with Needham & Company.

Thank you. Lots of questions on this. I guess I'm not going to latest out there, but I would like to, Jim, just to go back into this one last time because you are bringing up a lot of points about the macroeconomy relative to your customers. I just want to be clear.

This is a forecast you are getting from your customers that's giving you this conservative feel. This is not you interpreting Japan and the U.S. economy and baking that into your points. Am I clear on that?

Well, it depends on the customer. Some customers have already taken a conservative point and they have significant marketshares. And we believe that that conservatism is the right way to go.

You do have some of the notebook producers in Taiwan who show some short-term trend and, then, they are giving very optimistic projections beyond that and it's hard for us to believe those optimistic projections. The market is down 10% now. There's no reason for us to believe that it snaps back in two months and again have an extremely high run rate.

Appreciate that. Then just since you are one of the few companies looking at this a little bit more with the glass is half empty approach, I just want to ask another question. Have you seen any indication that this -- lack of a better word, these snowstorms that have been occurring in the Chinese mainland, have they interrupted any production numbers out of your customers? Or any shortages that you know are going into the holiday season over there?

Yes. We were on the phone about that last night. So the answer to that is yes. The snowstorms that have occurred have had major impact on some of the production activity. Certainly it will cause some issues. It remains to be seen how that impacts us also going into Chinese New Year but typically I think we will be out of that by the end of February back into a normal (inaudible) situation.

This is a tougher question. But if we can discount for those snowstorms so we were having this conversation a week ago would the guidance have still looked the same from you in terms of what you are expecting in the March quarter?

Yes, we don't view a snowstorm in Shanghai or one in Minneapolis as affecting our overall business. Those are short-term situations. We view the projections coming out of some of the major TV manufacturers that have been cut back, some of the projections out of some of the major notebook companies as being very significant. We think they are realistic and hopefully it is short-lived.

But we certainly have to take into account the fact that some consumer spending is down obviously.

And then just switching gears on my last question, on just on R&D your guidance, Perry, looks like it is going to be down in real dollar terms. I just want to doublecheck that. It went up sharply in the fourth quarter. Is that what we should be looking for?

Not too much but I think that at moment would be less than Q4.

So it is going to go down a little bit in dollar terms?

Yes.

Graham Tanaka with Tanaka Capital Management.

I just one to clarify a few things. I wasn't sure legal costs in the first quarter and in '08 what did you think?

In the Q1 we have the major one and this is the largest -- it's the last one (inaudible). In the area of the $3 to $3.5 million and no larger than $3.5 million.

Regarding the '08 the year annual budget, we don't give out the guidance in this area, but as I mentioned our litigation expense up to the last scheduled report, the legal expense to start to normalize in the second half of '08.

I also didn't hear and maybe you gave it but did you give guidance on the earnings per share in the first quarter?

[No, I don't.]

We gave all the line items, Graham, and you can calculate it easily. It does encompass the current consensus for the quarter.

Well you mentioned one number right at the end of 1 to 2 million and I didn't know what that was. I didn't hear what that was. (inaudible) 1.5 to 2.5 million.

CapEx. CapEx in [Q1].

CapEx. And then I was wondering what there were and what they might be in cost to handle the inventory situation either in terms of returns or extra shipping and that kind of thing. Are there any hard cost to this sort of correction?

No. This is not dead inventory. This is actually useful inventory in the customer base and there's no return associated with it.

So there's no hidden terms of prices or anything like that either?

No.

Great and could you give us a little guidance there seems to be some uncertainty about this at least for the third quarter, what the normal seasonality would be Q4 to Q1? And then Q1 to Q2, Q3 and Q4 going forward?

I think historically you've seen seasonality numbers. It's not unusual to see a seasonality in Q1 of 10%. Certainly a lot of that carries into Q2 and then the market starts picking up in the latter part of Q2 along into [third], fourth quarter. Certainly this year, I think the seasonality can be greater due to the economic situation and some of the downturns that we have seen in some of the customer bases.

So typically Q1 would be down 10% which might imply something more normally in the (inaudible) perhaps $47 million to fourth quarter 40, $43 million $42 million. And so this inventory correction accounts for that difference of $37 million to $39 million versus, say, $42 million. Is that correct?

That's fair. They're very close to that, yes.

Great when the math works, I guess. The other is then in the second quarter are you saying that normally there is continued seasonality and then picking up towards the end of the second quarter so it might be flat Q2 to Q1 or is that your -- not your message?

Well, remember, you need to subtract any inventory issues out of that. So we would expect certainly Q2 to show typically some upside to begin with plus there won't be any inventory issues in Q2.

And then in terms of market share, I just was wondering what kind of market shares you thought the trend sort of ending this last year and then going into this year, what your expectations are in terms of market share? Because you talked about double-digit revenue growth and I'm wondering what you assumed for market share gains in '08?

Well, we simply at this point had very high market share in all of these areas and it is our intent to maintain that market share.

And also we have a new product which is [additional] from probably market share, a very low base and we think (inaudible) that will be ramping up.

Graham, based -- when we say very high market share based on the preliminary estimates for the number of panels out there, we run some numbers internally. I can talk you about our thoughts. But we believe we have 40 to 50% market share of backlighting, maybe more. And very strong market share in the notebook business as well. Intelligent e-Commerce.

I just was trying to get a field for direction in '08 and in terms of wins and conversations and new products and design wins, that kind of thing where that marketshare should be rising and adding and helping in that double-digit revenue growth.

Again we are using the assumptions, we retain marketshare and get growth and new products.

That does conclude the question-and-answer session today. At this time Mr. Abbott, I will turn the conference back over to you for any additional or closing remarks.

Thank you, everyone, for participating in our Q4 conference call. I will be available for follow-up discussions and feel free to e-mail or call. Thank you. Have a nice day.

This concludes today's presentation. As a reminder there will be a replay available through February 7. You can call the number, 888-203-1112 or 719-457-0820. Passcode, again, is 6778743. We thank you for your participation. You may now disconnect.