O2micro International Ltd (OIIM) 2009 Q3 法說會逐字稿

Good day and thank you for joining us today to discuss O2 Micro's earnings for the third quarter for the fiscal year 2009. If you would like a copy of the press release please call Pamela Campbell at 408-987-5920 at extension 8095 and we'll fax you a copy immediately. It is also posted on O2 Micro's Website at www.O2 Micro.com.

There will be a replay available through November 11, 2009, at 9:59 PM Pacific Time by calling 1-888-203-1112 or 1 719 457- 0820, passcode 649-8254. The following presentation by management -- .

I'm sorry -- following the presentation by management the conference call will be open to questions and answers as time permits. As a reminder today's call is being recorded. Gentlemen, you may

Good afternoon and thank you for dialing into O2 Micro's third-quarter financial results conference call for the period ending September 30, 2009. This is Gary Abbott, Director of Investor Relations.

I would like to remind listeners that this discussion of business outlooks for O2 Micro 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 F3 and 20F reports and other documents filed with the SEC from time to time. Listeners are referred to the O2 Micro 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. The Company assumes no responsibility to provide updates to this information.

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

Today Mr. Kuo will highlight operating results and projections followed by Mr. Keim. He will provide market highlights and closing comments will be made by Sterling Du. After some introductory remarks from these gentlemen, the floor will be opened for your questions.

Now I'd like to introduce Perry Kuo CFO of O2 Micro for a discussion of the financial highlights of the third quarter ended September 30, 2009.

Thank you and good afternoon. This is O2 Micro's quarterly conference call. This call will cover our financial results for the third quarter of 2009. We will now review our financial results for Q3 2009.

Please notice financial results will be presented (inaudible) unless we designate otherwise. The non-GAAP results [include] stock-based compensation, expenses and (inaudible) one time nonrecurring charges. time and one-time nonrecurring charges. Our full GAAP results are [readable] in our press release that was issued moments ago.

GAAP revenue in the third quarter of 2009 was $36.7 million. In Q3 our IT revenue was $36 million and our security revenue was about $657,000. GAAP net income in the third quarter of 2009 was $257,000. If we [exclude] stock-based compensation of $[860,000] the non-GAAP net income will be $1.1 million.

GAAP net income for ADS in the third quarter of 2009 was $0.01. Not GAAP net income per ADS was $0.03. Gross margin was 60.6% in Q3. The gross margin is in the high end of our 55% to 60% target range.

R&D spend was $8.2 million or 22.3% of revenue. This amount is accrued stock-based compensation expense of $297,000 in the quarter. SG&A expense was $12.8 million or 35.0% of revenue. This amount [excludes] stock-based compensation expense of $[553,000]. Income tax was $417,000 in the third quarter and (inaudible) on the effective tax rate of each (inaudible) location for the prior year.

Q3 2009 revenue by end market breaks out into the following percentage -- consumer was 50 to 55% of revenue. Computer was 30 to 35% of revenue. Industrial sector was 10 to 15% of revenue. Communications was less than 5% of revenue.

At this time, I would like to provide some additional information.

O2 Micro finished the third quarter with more than $120.3 million in our restricted cash and [shelter] investments. This represents cash and cash equivalent of $3.26 for ADS. In addition, O2 Micro has no debt. Accounts receivable at the end of Q3 was $15.2 million. Our DSO is 36 days. It is better than our target range of 40 to 60 days.

Q3 revenue finished at $11.1 million. This decreased by $2.2 million from $13.3 million in Q2 2009. O2 Micro finished the third quarter with 30 -- with -- excuse me -- with 76 days of inventory and inventory turn 4.7 times in Q3. This is also a significant improvement from 83 days and the 4.3 times at the end of Q2 2009.

From a cash flow perspective, we generated $4 million in cash inflow from operating activities in Q3. This is important because we have actively managed our cash flow. So our economic downturn and significantly exceeded Wall Street analyst expectations since the beginning of this year.

Capital expenditures were about $500,000 in the third quarter for IT and R&D equipment. Depreciation and amortization was $1.5 million in Q3. At the end of the third quarter of 2009, O2 Micro had 849 employees, [53]% of which are engineers.

At this time, I would like to provide our financial guidance for the fourth quarter of fiscal year 2009. This guidance replaces our best estimate for the current environment and is subject to change.

This is the only official guidance we will provide unless we offset it with a public announcement in the future. O2 Micro -- (inaudible) Q4 revenue should be in the range of $32 million to $34 million. We have been reasonably conservative because the fourth quarter revenue is influenced by consumer trends. They are especially difficult to predict this year.

We are guiding the Q4 growth margin to a range of 58% to 60%. R&D expense is [closing] stock-based compensation. It should be $8 million to $8.5 million in Q4. We are trying to keep (inaudible) as clear as possible in the near term.

SG&A should be $10.5 million to $11.5 million in Q4, including stock-based compensation expense. The sequential decrease in our SG&A expense is due to writing down legal expenses from -- for our ITC [action].

O2 Micro has also implemented major to more effectively control legal costs and to provide greater visibility and certainty. This includes not to (inaudible) with respect to all major litigation metrics in the United States. O2 Micro's outside counsel has agreed in writing not to -- not to exceed budget in O2 Micro's revised (inaudible).

Stock-based compensation should be in the range of $800,000 to $900,000 in the fourth quarter. Based on the service income of our subsidiaries in different countries, we expect our fixed amount to be in the range of $450,000 to $550,000 in the fourth quarter.

At this point, I would like to remind everyone that we have great strength in our [fellowship]. We also have new products with excellent growth margins and we are optimistic about the future.

At this time, I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business.

Thank you, Perry. Q3 evidence of ongoing success with the expansion of our analog and mixed signal power management business. While we continue efforts to grow our power management market share in the computer market, the major focus of our Company in the coming years will be to diversify into new markets and grow our customer base.

We are pleased to report that our Intelligent Lighting business remains strong with the leadership position in LCD monitor and LCD TV. We continue to see expansion of our TV business worldwide despite difficult economic times.

While maintaining leadership in traditional CCFL backlighting, we see major ongoing growth opportunities with rapid expansion of LED in all key markets, including consumer, computer, industrial and automotive. We are rapidly expanding both our product development and customer resource space to address these opportunities.

We also continue to see major growth opportunities and intelligent battery management for consumer and industrial markets, as well as battery powered transportation systems. We are pleased with our recent progress in design wins and battery management systems, complemented by growing intellectual property in this area.

Our focus in intelligent power products will be expansion of our computer market share with growing numbers of design wins in DC/DC and charger products, while also engaging new customers in other markets, including Industrial.

One area we are scaling back focus is low-end notebook e-commerce business in favor of advanced e-commerce products and new market areas, including industrial applications where our advanced technology can achieve higher margins. We are already engaging with new customers in this expanded market.

In brief, our growing analog and mixed signal revenue is the direct result of our marketing and R&D efforts to expand our product offering into these markets with the correspondingly significant expansion of our customer base. This expansion into new markets includes all product areas. Notably Intelligent battery, Intelligent Lighting, Intelligent power and security products. We believe that our new products will continue to constitute a growing percentage of our overall business to make our Company less prone to adverse economic conditions and increasing competition and commodity products.

While focusing on market expansion, we will continue to develop new products for the computing market where we believe we can grow our leadership role in next-generation notebooks and netbooks.

In summary, we believe that we are extremely well-positioned to expand O2 Micro's business into more and more customers across more markets including automotive and industrial as we move forward.

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

Thank you and good afternoon. We are pleased to report $36.7 million in Q3 [driven]. Our business is very good and we want to tell you why. Today we are doing better than our competitors and we can see this from our year-to-year revenue compared to where we are, only down 3%. Most semiconductor companies are down 10% to 20% or more, compared to the last year.

Our revenue guidance or growth in Q4 is also higher on year-to-year comparison than many other semiconductor companies.

Our key lighting products have also bounced back to good labor. This is our main product today, but we still invest for growth in new areas. For example, we have increased to more than 10% of revenue and industrial for the past three quarters. This was about 5% [minus plus] at the beginning of last year. This shows our success even during a challenging economy.

We also focused on our LED market penetration. The adoption of LED is going fast and that we are doing very well in market share in (inaudible) notebook, LED TV especially in China and LED (inaudible). The transition from CCFL to LED has already occurred. Most of it in notebook and followed by TV and [monitor].

On the other hand, our [general lighting], our LED penetration first progress in automotive, (inaudible) lighting, [rec lighting] and so on. We foresee our general lighting will go faster than conventional LED business.

We are also excited about batteries. The automotive industrial will move to [using] ion battery sometime around 2011 and we expect to get good sales. In the meantime, our successful power tools and that electrical bicycle business prepares us to do better penetration to [ED] markets. In fact the E5 supply chain in China shared a key supplier (technical difficulty) electronics automotive market.

In the future we will be a monitor product company. We keep on investing over half of our R&D in to new technology and developing product for the new area. We are also investing in the China market. We have an excellent opportunity to get new business in LED netbooks, LED TV and a Palm management. We will continue to keep our expenses low and increase our profits.

At this time thank you for participating and I will turn the call to Gary Abbott.

Operator, at this time we would like to take questions.

(Operator Instructions). Tore Svanberg.

Thank you. A few questions. First of all, could you talk a little bit about how big your LED business now is primarily in the notebook market? Is it significantly higher as a percentage versus the CCFL?

Yes, it is growing at a significant rate. It's a significant number for us.

Okay. Very good. And you know you mentioned some traction now in LED TV and LED monitor. Could you just add a little bit more color there? You mentioned China as a possible opportunity. When would you expect some meaningful revenue in those two markets for LED?

Maybe starting our next Chinese New Year. Right now we begin to see at least two major brands in China promoting LED TV. They put commercial in the bus and also in a regular TV channel. So what people began awareness about those 2.99 cm thickness LED which, I believe, is using (inaudible) [methodology].

So that is appearing for space-saving and also providing a brighter screen. And however the price gets between conventional and LED TV still represents some difficulty to penetration.

But once again it's a challenge to bring LED TV in China. The pricing is cheaper than import -- other than -- the import brand. So I think that starting around this next Chinese New Year, we are going to see more adoption for LED TV.

In O2 Micro, we have very good penetration for China LED TV due to the reason we have been providing to the same supply chain, which is providing to the handheld portable DVD, portable GPS, notebook, netbook and also monitor.

So that is -- enables us to get into LED TV in China, once it is mature.

Very good and coming back to Q4 guidance, you said you have a conservative approach to Q4 because of some dynamics in consumer market. Could you just elaborate a little bit on that? Is that primarily due to the TV market and some shortages we've heard? Please just help us understand a little bit about what some of the dynamics are there?

Well, we see some of the customers being very conservative in their forecast and product releases. As we are aware last year, there was very significant dips in Q4 in years past. There have been dips as we got later on into Q4, particularly the December timeframe. We see that many of the customers are just very cautious and that is impacting us more in the LCD monitor and notebook area than the TV area.

So if we look at that 32 to 34 guidance, is it fair to say that you are expecting a fairly low turns amount?

Yes.

Great and then, the last question. Jim, you mentioned you were going to start to leverage your e-commerce technology from low-end notebook to industrial. Could you also elaborate a little bit on that? What technology are we talking about here and what applications?

We have been leveraging the same technologies. And after developing a new one which is USB took on all five technologies and they tried to do that penetrate industrial applications. And to give an example of that, we like to work with a major player for those office equipment which is made up some function block which we can provide in those IC to meet their needs.

So this is what we are working right now.

Great. Thank you.

(Operator Instructions). Vernon Essi.

To follow on Tore's line of questioning there on the LED portion, relative to CCFL, I think last quarter you gave sort of a ballpark guesstimate of the percentage drivers that were LED-based relative to CCFL. Would you care to revisit that figure and just give us an idea how much -- which made me realize LED is shipping faster, but as a proportion where that might be?

We've not really seen the proportion change much over the last quarter. We also see a real hesitancy, for instance, an LCD monitor for any significant conversion at this point in time, just due to price pressures in the marketplace. So we have not really seen any significant difference from quarter to quarter.

Could you just give us a refresh on the battery side? The battery management front? And you talked about some industrial customers and I think at one point you obviously had a nice program with a power tool manufacturer. Any others that you want to highlight to expand upon?

For the battery side, last quarter we also officially entered some charger area. We are being in protection IC for meeting [ion] battery. We had is for the high-end collector bicycle and also for intellectual vehicle [EV car]. [Light] EV car and a power tool.

We also are developing a charger. We right now are sampling a charger and a charger to charge EV car is (inaudible) charge and another one is a false charger. Right now we are target for the (inaudible) charger. We are not with for charger (inaudible) station yet.

The same charger, we also can apply to electrical bicycle. Due to the charging design, the charge of design, we also can charge regular lead acid battery and that's also the area where we are looking at, we have to be under standard lead (inaudible) and to recharge her. Normal is commanding a much lower price.

However, the same electric bicycle or (inaudible) motorcycle company that probably has the mix. I'd are also using maybe acid and they are also using [dipping] on batteries. So providing a full portfolio is very important.

We, also, the electrical vehicle we are engaging. We made progress with local China automakers. There's awareness from local China EV that automakers tried to divert with an EV sector, due to the [cabin] quarter and also the energy of awareness and also it relates to the policy of the nation. And that is the one we made a lot of progress and right now besides the BYD, most automotive companies in China they are behind, but they are faster than -- we do see they are faster. To speed up they are adopting programs in order to get into this market.

So -- which is very active design win. Activities is happening across the board of the whole China country. At the same time we also have the activity to engage with us some of the automotive suppliers in the US and also in Europe. Those are also indicating [active and active].

And on the just the E bike side which is certainly a fragmented market over there -- would you venture to guess what sort of what penetration rate you might have even in 2010 for newer models that are being introduced?

I'm just trying to get a handle on how many vendors you might be talking to and how that supply-chain might be dovetailing into, maybe, a handful of subassembly guys that are shipping to all of these folks. And also venture to let us -- give us an understanding what sort of dollar content you might have a per byte or per unit?

We see the recent quarters. AIPAC makers convert to (technical difficulty) compared to almost for all the major AIPAC manufactures. This is something everyone tried to push for the leading ion battery from the lead (inaudible) and the E bike for the leading ion also has the two sectors. One is a high-end which is every battery comes with our protection and a low balance IC.

For the low end leading ion battery, they just want to utilize the regular leading ion cell and without load-balancing and protection they are just using their charger. They are charging it, which is we also will come that sector. With that sector, we can make the charger for then.

So we do see, this is something tried to replace the lead asset. Majorly because of the cost reason but at a distance of the battery span is different. With the high-end you're running [long] distance other than a short span after the low end and (inaudible) battery. E bike.

So in terms of the whole percentage penetration, I think still single digit. About -- we do see every order AIPAC maker, every one, has been EV ion battery of powered (inaudible). There was two weeks ago (inaudible) there is an (inaudible) of every single AIPAC maker had leading ion battery overflow, which has never happened before.

So I think there's a major penetration beyond the double digits. I think probably will happen 2011. Next year, 2010 that will be very (inaudible) so what kind of methodology for the supply chain to providing cost effective leading ion battery will be the next year. It is going to happen something like that. But the major penetration I think it would be 2011.

All right, thank you. That's helpful.

Graham Tanaka.

Hello. Just wanted to talk about growth margins and what contributed to the higher margin sequentially from the second quarter to the third quarter? Actually margins grew faster than sales. So just curious there.

The growth margins was high in Q3 and we had reached a high-end of the (inaudible). Driven by the new application of our lighting in the new sectors. And also some new product of the lighting and these two are the key area. And also we are benefiting and very soon our China departure in [close reduction] programs. This is coming to (inaudible--microphone inaccessible).

Sorry what's 20%?

The cost reduction.

Okay. So that when does that process get finished? The supply-chain, 20% cost reductions?

It's the increase of the growth margins. 20% was driven by the cost reduction.

20% of the improvement from the second quarter to the third quarter?

(inaudible--microphone inaccessible).

Sorry. So, that's great. And that cost reduction is now in place. Is there going to be further cost reduction in the next two quarters?

(inaudible--microphone inaccessible) continue to do so.

It would depend on the product mix.

Well okay you were talking about supply-chain cost reduction. I was wondering if there's more reduction in the supply-chain cost in the fourth quarter. Say the first or second quarter next year?

Our cost reduction in the supply-chain always going on. We have a special group in China to monitor and also help them to how to shorten the cycle and how to improve their methodology. (inaudible) benefit for each other. So what is a (inaudible) comment in Q3 we have one quarter, 20% or (inaudible) by this and all confused doing so.

Whether or not how to fall -- how do we estimate that? Probably too early to tell Q4 or next Q1. Cost reduction in the supply-chain contributes to the gross margin.

Right. Okay. This is great. Congratulations.

I am curious when you're talking about new products and lighting. Could you elaborate a little bit more on the new products and lighting and how that contributed to the higher margins? I assume a higher mix of products.

We saw the higher ASP (inaudible--microphone inaccessible).

Okay, so you're not talking -- are you talking about general lighting or are you talking about backlighting for LED and --?

All different kinds of lighting with the new applications. The new applications by the customer. So we found they are more on new product launch and we have a higher FD in this area.

Great and is that the beginning of a trend? Can the ASPs continue to improve or is that kind of a one step jump-off?

Through the product development and other business cycles I would expect the ASP was (inaudible) with an increase in the revenue. So we would continue to scan from the [more in] increases.

So the third quarter's rise and margins is due to the new higher ASP lighting product will not continue in the fourth quarter? Or you are just saying that the lower end ASPs will go faster?

Actually the gross margins are higher. The higher end of (inaudible) you see will happen by the application. But in Q4 this will be also happen by product mix.

And it will be helped by the product mix in Q4?

Yes. In Q4 we actually repay our gross margin is in our target model. Target model at high-end 58 to 60%.

Right. And you beat that number. Congratulations on that. I just was wondering -- the battery market. You have battery power management and is that -- I think you said that a lot of the technology is the same for the E bike and the auto. Is that correct?

Yes, a lot of those suppliers they provide a key component for the E bike. They also provide to the EV car.

And last year that market developed a little slower than you expected and I'm just wondering why it's improving this year at a time when the economies are generally not strong even -- well, I guess they are picking up in China. But why is it picking up this year?

Well (technical difficulty) the energy crisis awareness and also driven by the policy of the country and the nation. And besides we also should be aware that the lead asset, some of the area countries like Europe, they have limitations, restrictions on how much lead you can import.

So far they are not the block -- the EV car lighter lead asset's battery but in the future as the trend goes they would like to see encourage more leading on battery.

Okay and the other thing was China has of course done what appears to be a wonderful job in managing and simulating the economy through internal programs. To what extent is that continuing the government stimulus program? Or is there an abating, a reduction in those programs possibly going to contribute to slower growth in the China market?

You are asking a general economic?

Yes. The Chinese economy. You referred to -- well you refer to battery and energy policy of the nation, but I'm also I just want to switch gears a little bit to the economic stimulus in China and to what extent do you think that improved demand? And is that going to be -- is the government going to be winding down their stimulus plan?

I see. Okay. We got a benefit from two programs from China. Policy one is appliance, including TV and computers. The program is benefited from they have the automotive but however automotive care they still (inaudible) it's gas powered. It's not EV car and we probably have a few benefits from that other than appliance.

Now you are asking when the stimulus plan moving forward as China as a country this year make very good progress in the [TDB]. They may be scaled back to the economy which is understandable. What people with estimate that's what will happen.

And yes that will be but was this awareness of using LED, LCD panel and the new LED TV once is already getting consumer [mine] and I think our sector which will benefit us not the appliance computers continue to grow. Continue to grow that is not unless of the solar which is have the -- subsidized from the government. We don't have any subsidized. This is just open to consumer and if they understand how good a product and they are moving forward.

So we are not too concerned about a stimulus plan from a China government slowdown.

Great. Do you have -- are there any estimates that you can site of demand growth in 2010 estimates by any third-party consultants or analysts on what demand growth might be for PCs and LED and LCD TVs in China in 2010?

Well, we certainly have same the forecast of the glass production which we track and estimates of the glass production are up 15% and what we have seen -- that's worldwide. And what we have seen actually in China is a growing percentage of that utilization going into China.

So we see no slowdown in the growth of the China market. And one of the things we have to remember is the very high volumes in TV have brought down the costs. So as the cost to the consumer continues to go down in China as well as worldwide, that only stimulates more growth. So --.

How much have prices come down in China? I'm sorry. I'm not there to estimate.

In China, [domestic plan], it's $1000. You probably can buy a 55 inch flat-panel TV right now. So (inaudible) is only 42 inch. So probably talk about 20%.

And what percentage is LED in China? Because I know that it is picking up here in the US? Is LED TV very -- are even LED-based laptops very high penetration in China?

No. No not yet. It's potential.

That's ahead of you. Great. Thank you very much. Congratulations.

Tore Svanberg.

I was wondering if you can talk a little bit about your tax assumptions here especially for Q4, maybe 2010?

For the tax?

Correct.

Yes, for the tax in Q4 it's in the area of the $450,000 to $550,000.

Okay and then next year should we apply a rates or a dollar amount?

I think next year is still the dollar amount because of the pay takes you to the service income of the (inaudible).

Very good and based on the guidance that you gave I assume you are expecting to remain cash flow positive in Q4?

We do the best we can.

I know you have an ongoing ITC case right now and I know you can't comment on that but can you at least provide us with some color on the logistics of this case? Meaning, when are you expecting it to conclude and when could you potentially get a judgment?

Well, the hearing itself is concluded. So the judgments themselves is a fairly complex issue where the judge initially rules. And then the whole panel can rule, which will go on into the first and early second quarter of next year.

Very good. And then finally it looks like your legal expenses are winding down here in Q4. Should we expect another step down in Q1?

Yes. I expect so.

Great. Thank you.

And that is all the time we have today. I'd like to turn things back over to our speakers for any closing remarks.

Thanks for your attention and look forward to talking next quarter. Have a nice day.

And that does conclude today's presentation. Thank you all for your participation and have a great day.