O2micro International Ltd (OIIM) 2010 Q1 法說會逐字稿

Please stand by, we are about to begin. Good day everyone, and thank you for joining us today to discuss O2 Micro's earnings for the First Quarter of the Fiscal Year 2010. 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 O2 Micro's website at www.O2Micro.com. There will be a replay available through May 12, 2010, at 9:59 p.m. Pacific time, by calling 1-888-203-1112, or 1-719-457-0820, passcode 4797418. (Operator Instructions) I will now turn the conference over to Gary Abbott, please go ahead.

Good morning, and thank you for dialing in to O2 Micro's First Quarter financial results conference call for the period ending March 31, 2010. This is Gary Abbott, Director of Investor Relations.

I'd like to remind listeners that the discussion of business outlook for O2 Micro contains forward-looking statements. Statements made in this release that are not historical facts 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 report, 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, and Jim Keim, our Head of Sales and Marketing Director. Sterling Du will not be joining us today because of a last-minute family emergency. However, Jim Keim will continue with Sterling's intended comments.

After the prepared remarks from these gentlemen, the floor will be opened for your questions. Now, I would like to introduce Perry Kuo, CFO of O2 Micro for a discussion of the financial highlights of the First Quarter ended March 31, 2010.

Thank you, and good afternoon. This is O2 Micro's quarterly conference call. This call will cover our financial results for the first quarter of 2010. We will now review our financial results for Q1, 2010.

Please know that financial results will be presented on a non-GAAP basis, unless we [testament] otherwise. The non-GAAP results excludes stock-based compensation expense and one-time non-recurring charges. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the first quarter of 2010 was $34.9 million in Q1. Our IC revenue was $34.4 million and our securities revenue was $461,000. GAAP net income in the first quarter of 2010 was $4.1 million. If we exclude stock-based compensation of $927,000 the non-GAAP net income would be $5 million.

GAAP net income per ADS in the first quarter of 2010 was $0.11. Non-GAAP net income per ADS was $0.14. Gross margin was 61.6% in Q1. The gross margin is slightly above the high end of our 55% to 60% target range. We experienced good product mix and good sales of new products with high gross margins in Q1.

R&D spend was $8.1 million, or 23.2% of revenue. This amount excludes stock-based compensation expense of $275,000 in the quarter. This was in line with our guidance.

SG&A spend was $8.2 million or 23.5% of revenue. This amount excludes stock-based compensation expense of $250,000. This was better than our guidance because our cost reduction efforts are making good progress.

Income tax was $376,000 in the first quarter and is mainly based on the effective tax rate of each taxable location for the prior year. In Q1 2010, we repurchased 1,661,441 ADS units at a cost of $10.4 million.

As of March 31, 2010, there were 1 point million (sic) shares remaining on our authorization.

Q1 2010 revenue, our end market breakdown into the following percentages-- consumer was 55% to 60% of revenue. Computer was 25% to 30% of revenue. Industrial 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 first quarter with more than $111,020,000 in unrestricted cash and short term investments. This represents cash and cash equivalents of $3.18 per ADS. In addition, O2 Micro has no debt. Accounts receivable at the end of Q1 was $16.6 million. Our DSO is 40 days, and is at the low end of our target range of 40 to 60 days.

Q1 inventory finished at $9.8 million. O2 Micro finished the first quarter with 55 days of inventory and inventory turns 5.6 times in Q1. This is also a significant improvement from 71 days and the 5.1 turns at the end of Q4 2009. From a cash flow perspective, we generated $8.5 million in cash inflow from operating activities in Q1.

Capital expenditures were about $549,000 in the first quarter for machinery and R&D equipment. Depreciation and amortization was $1.4 million in Q1. At the end of the First Quarter of 2010, O2 Micro had 828 employees, 63% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter for the Fiscal Year 2010. 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 update it with a public announcement in the future.

O2 Micro expects Q2 revenue to be up in the range of 6% to 10%. We [seek an] expansion of market and customer base, and good adoption of new product. We are guiding the Q2 gross margin to a range of 59% to 60%. R&D spend excluding stock-based compensation should be $8.5 million to $9.5 million in Q2. This increase is mainly due to the (inaudible) that moved from Q1 to Q2.

SG&A should be $8.8 million to $9.8 million in Q2, excluding stock-based compensation expense. Stock-based compensation should be in the range of $850,000 to $950,000 in the second quarter.

Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $400,000 to $500,000 in the second quarter. At this point, I would like to remind everyone that we have great strength in our (inaudible). We also have new product with excellent gross margins, and we are optimistic about our 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. Q1 evidenced ongoing expansion of our analog and mixed-signal power management business as we see major opportunities continuing to emerge in green energy including automotive, industrial, solar, and general lighting systems. Each of our major analog product lines continues to enjoy significant design win and revenue progress. Intelligent lighting has a "very bright future" according to our Divisional Executive Vice President. In fact, this business continues to grow with design wins and many new customers in more and more diversified markets.

While maintaining leadership and traditional CCFL backlighting, our LED backlight products enjoy market leadership at major TV producers including 3DTV. Our design wins continue to grow into more and more market applications. We are especially pleased to see a growing base of automotive lighting opportunities including power management for headlights, brake lights, turn lights, and accessory lighting. Additionally, we see the general and commercial lighting markets having huge opportunities as we are already shipping high volumes of power management product for LED light bulbs and flashlights.

These design wins are based on advanced product features, including properties that enable intelligent user friendly dimming control for commercial and general applications. We continue to expand our patent leadership for these innovative power management products, including LED power management. We were recently highlighted in the March 2010 IEEE Spectrum article on Patent Power Scorecards, that states, "The impact and general applicability of O2 Micro's patents, especially those related to power supplies for LCD panels and DC to AC power converters, put it next to the leading companies on this year's scorecard."

Based on our growing new product development innovation, we expect to continue to broaden our design wins across expanded markets while maintaining our leadership position in TV. Intelligent battery management products continue to win new designs in both industrial and automotive areas. We are working directly with both key battery manufacturers and OEM car manufacturers and developing next generation power management technology for electric vehicles. We are also working directly with leading battery manufacturers to adapt their battery technology and battery packs to a multitude of applications including solar energy storage. We have high confidence in the future of this product line, based on broadening customer acceptance, increasing revenue, and our rapidly-growing intellectual property in this critical area.

Intelligent power products continue to rapidly expand in market usage with industrial design wins and ongoing expansion of computer design wins. We are working on several new applications to expand our patented Cool Charge technology that is now being shipped in volume into the Dell Adamo XPS notebook, which is the world's thinnest notebook design. We see our charger technology expanding into more and more notebook applications, along with DC/DC products and notebook applications worldwide. We also see rapid ongoing expansion, or design wins into more and more industrial and automotive applications.

Intelligent e-commerce business was scaled back in 2009, in lower margin notebook base business. However, we are forging ahead with new advanced products and industrial applications that can generate reasonable revenue and profitability. We expect to have major design wins in this area later this year.

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 new 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, intelligent e-commerce, and security products. We believe our new products will continue to constitute a growing percentage of our overall business and make our company less prone to adverse economic conditions and increasing competition in 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. We continue to 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.

At this time I will continue with Sterling's prepared comments about the quarter, since he is unable to attend today. His remarks are as follows.

O2 Micro reported Q1 revenue and non-GAAP EPS of $34.9 million and $0.14, respectively. Our gross margin was 61.6%, and our non-GAAP operating margin was very good at 14.8%. These results show a strong business. It was also significantly better than our guidance and consensus analyst estimates.

These financial results only give a glimpse of our excitement. We are very excited because we are back on track to return to peak business levels for our key analog and mixed-signal product families. In our consumer segment, business is doing very well because of the strength of the TV market, as well as monitors. Specifically, we are doing well because of our strong penetration into Tier 1 OEM and ODM customers, and also our penetration into the local China manufacturers.

This two-pronged strategy is working for us. It is working for both the fast-growing LED segment and the traditional CCFL. Computer is also doing well. Our charger business is ramping, and our LED driver has achieved critical mass and good acceptance. We identified a key win last quarter with the Apple iPad, and this unit was just recently released.

We are happy with our inclusion in this Apple unit, and we are excited about its potential and the potential for penetrating the rest of the tablet market. From our perspective, the notebook market appears healthy in general, and the Windows 7 upgrade cycle is under way. This can only help us as time goes on. While consumer and computer still generate most of the revenue, the industrial and security segments remain important growth areas. Security is still in the business development stage, but we hope to show more good progress this year.

On the other hand, our industrial products have consistently been more than 10% of revenue in recent quarters, and are taking off. We had key design wins with our battery gas gauge, as well as our lighting products. We are very focused on the automotive market and have made noticeable progress. In fact, our battery products are being used to power the electric buses at the World Expo in China that is going on right now. This is a real-world application that we can highlight to potential customers. It also shows our technology skills to the largest applications like buses, and confirms our leadership position. All of this is good news, and highlights why our business is rising again.

During the downturn, we paid close attention to keeping good market positioning with high volume units. We also focused on key customers that sold into the strongest economies. Now the economic conditions are improving. Our company is set to grow on the tails of our strong technology and this good market positioning.

At this time, I would like to thank everyone for participating, and turn the call back over to Gary Abbott.

Thank you very much. Operator, at this time we'd like to take questions from our audience.

Thank you. (Operator Instructions) We'll take our first question from Vernon Essi with Needham & Company.

Hi, Vern.

Hey, hi, thank you very much for taking my questions here, and nice guidance. Wondering if you could-- this question always comes up on your calls, wondering if you could give us a little more color on the backlighting customers that you have, either somehow profile what they look like. You're saying "top ODMs and OEMs" in the industry, can you just expand upon that a little?

Well, basically it includes virtually all of the major TV and monitor producers. And of course, expands beyond that into notebooks, iPads as we mentioned, but beyond that we're now moving into more and more areas with the rapid expansion of LED, which includes many of the industrial and automotive applications. So, basically when you look at any of the large OEMs, ODMs, we're a participant in their business.

And as your industrial side grows for the lighting, the common knowledge or what we all would assume is that your margin structure and profile is going to be stronger in those markets versus of course the computer and consumer side of things, and what I just want to know is, is that's what's sort of driving your GM expansion here? Or is there another reason for that?

Oh, yes, of course the industry [propulsion] definitely will help our gross margin, which is actually enjoying a higher gross margin.

Okay, so you would say going forward, that's going to be a favorable mix shift against pricing declines in the consumer and computing?

Sure.

Okay.

In general yes, but we're not ready to move our margin targets yet.

Okay.

From the 55 to 60 range, our high end.

And then also, you know, I was last time around happy to hear about the Adamo win on the charger side. Should we be expecting other high profile wins to be announced in the quarter, or is there any other developments at least we could talk about now taking place on the charger front?

We have a lot of ongoing charger activity, but nothing we can announce at this point in time.

Okay, and then finally you went through a stock buyback. What should-- I guess my question, what would you be looking for, for shares outstanding into the June quarter, and is the buyback continuing? If you could just refresh us on that?

So, Perry said we had 1.2 million shares available to buy back under the authorization. You know, Vern, I guess what I would say, we don't have that estimate handy. I don't think the share count will be up. I would say if you were flat you'd be close. It could be down a little.

Okay, that's helpful, thank you.

Okay.

Next, we'll go to Graham Tanaka with Tanaka Capital Management.

Hi, Graham.

-- on the quarter, guys. Just a, if you give us like, sort of a feel for, a better feel for the mix of LED versus CCFL currently, and what direction that might be heading to?

I don't have figures on the mix today, but the trend is obviously toward LED at this point. Most notebooks have already converted, and obviously the mix toward LED will be continuing to go up in monitors and TV area. So, the mix trend will definitely be toward the LED side.

I'm just wondering at what point in time or what quarter looking out, there might be parity between the two. Are we close to that, or is it still a year away? When they might be equal? Hello?

We, we don't really know the answer to that. It's not half yet, but certainly some time I would expect by some time probably next year it would.

Notebook application is more than half. I talk about the market, okay. And both monitor and TV are far less than 50.

We would probably expect some time next year.

Sort of following the penetration of the market. Adoption in monitor, for example, is still --

Also cost down, cost down curve of the LED solution.

Oh, yes. It's happening quickly, but we don't have a target. We're moving with the market, Graham.

Okay. Now, how large is the charger business? My understanding was it wasn't really that large yet. I mean, it's going off of small base, right, but how large is that as a percent of revenues?

Yes, we really don't reveal that. We did mention the one Cool Charge design win, but we have traditional chargers including Smart Chargers in high volume production as well, but we really don't reveal the percentage.

Is that expected to get up to 10% in a year or two, or is it still a ways away?

I don't see that at a 10% level.

And what were new products as a percent of revenues in this quarter? I know you've been doing a great job of continuing to introduce new products, so, what percent of revenues were new products this quarter?

By the new product which include the power and security and also battery which is in the area of the 15%.

That's 15%?

Yes, one-five. This is what we call the three new product group.

Great. And are you experiencing anything in the way of shortages, part shortages, component shortages?

You mean our parts going into customers?

Yes. No, I meant sourcing, components or raw materials to produce the products.

We've not had shortages. We've certainly seen tightening in the supply chain, which we monitor very closely. We maintain very close relationships with our partners and frequently have significant investments, but we do see ongoing tightening in that activity which we monitor closely.

But you're not concerned about it restricting your ability to manufacture and ship?

Not at this point, no.

Great, thank you, congratulations.

Thank you.

(Operator Instructions) And next, we'll go to Peter Svendsen with Thomas Weisel.

Hi, Peter. Or Tore?

Hello?

Hello? No one seems to be --

Hearing no response, we'll go to Patrick Wang with Wedbush.

Hi, Patrick.

It's actually Mike, guys, how are you guys doing?

Oh, hi Mike, good. How are you?

Pretty good. Great quarter.

Thank you.

A few questions for you guys, here. For the SG&A, it came in well below guidance. Could you give us a split or a general split between what was litigation subsiding and what was cost reductions?

We don't break that out. We talked, and I told you we're going to try to drive expenses down and watch expenses, and that really is a priority. There's obviously some variable cost in the expense and Q1 is our low revenue quarter. So.

Well, what's the reason for an increase in 2Q, is it the variable cost?

Yes, variable cost is certainly a contributor.

That's why it's going to increase in the--?

You know, there's NRE, you know, on the R&D side. We deferred expenses that we could. The quarter was better than we thought, so we're doing what we need to do.

Sounds good. For gross margins, it's going to decline the second quarter even though there's higher revenues? What's the main reason for the decline?

We're being conservative. We don't try to predict mix.

Okay.

61.6% is the highest level we've achieved in many, many years. So.

Sure, that makes sense.

That was--

More conservatism than anything.

Yes.

All right. And then I guess at this point do you have any visibility in the second half, or anything about second half seasonality?

We're really not projecting it at this point. I think there's still enough mixed economic conditions out there. In general, overall I think we see the economic conditions generally improving, but there's obviously the concerns that you read about and we do too. So, we're certainly hopeful the second half will be good. Could be strong, but we'll wait and see.

That's fair. What are you most excited about for the second half? Would it be the notebook refresh, LED TV's, iPad, or something else?

I think what excites us the most is the opportunities in the new power management areas that we're continuing to expand into. We can see obvious ongoing expansion in notebook, TVs continue to grow, monitors are doing well, but we certainly have major new markets into which we are developing product and getting design wins, and those markets can certainly drive our future.

Sounds good, thanks Guys, great quarter.

Thanks, Mike.

We'll take the next question from Tore Svanberg with Thomas Weisel Partners.

Hi, Tore.

Yes, thank you, yes, thank you, great quarter. A few questions. First of all, I know you usually don't give backlog and bookings numbers, but can you just qualitatively talk about visibility at this point? You guided up 6% to 10%, how do you feel about that, where we stand so far in the quarter, and should we view that as conservative guidance or where do you think things are going to shake out?

Well, we feel good about the number in general. I think some of the issues that we do see in the market is, the market is being somewhat restrained in some areas by shortages, not in our product but in other products. We've seen other suppliers have problems, we've seen areas where customers are simply not able to get the supply of other products and components that they need, and we think that can hold back some of the robust growth that we might otherwise see. But, we feel good about the area of 6% to 10%. We feel that beyond that may be difficult due to component limitations that are in the market.

Very good. And, could you also talk about inventory levels at the ODMs? I know you have a hub relationship with them, and I'm sure you monitor that hub, so where do inventories stand at this point? Are they below average, at average, or above average?

Most of our customers, their inventory is not very high and they actually ship out the product. But, however, some of the customers, they do mention this, they show some concern to some key components, possible shortage by the end of the quarter. But in general, the inventory is not high, and the people seems to be optimistic in the manufacturing and also in the (inaudible).

Very good, and the Smart Charger, can you just tell us-- and then we'll bookmark it, where we are in the transition from regular charger to Smart Charger? I'm just trying to understand what opportunity is this for you, are we sort of in the first innings or has the conversion already happened?

Well, we still see a lot of growth opportunity in the Smart Charger area. We have seen significant expansion of design activity and significant revenue expansion in Smart Chargers in the past six months.

Very good. And then I know you can't really disclose specific customers for LED backlighting and TVs, but can you at least tell us if you are shipping to the top five TV OEMs at this point?

Yes.

Yes.

For LED driver, you're shipping to all five of the top TV OEMs?

Yes.

Yes.

Okay, very good. And then, you mentioned the iPad win. What has that caused as far as design activity with other OEMs in the tablet market? Is this something that you are allocating a lot of resources to, or is it more opportunistic at this point?

I think it has accelerated development of competitive products. We do see a lot of focus on that area, and it has accelerated some development activity for us.

Very good. Last question, on legal obviously, your SG&A is running a little lower. Can you just give us an update on what you still expect on the legal front this year?

This year we are continue to put the legal on the SG&A, which means that to do a [merge identification], that's our priority on the SG&A expenses. So, I don't think that the major expense will be out the legal area.

Okay. I guess my question is more, should it, is there any event this year that could cause SG&A to bump back up, or should it remain in this approximate area?

Maybe plus or minus a little bit more, but not, not in the level of the last year.

Excellent, very good. Great quarter, thank you very much.

Thank you.

(Operator Instructions) It looks like we have no further questions at this time.

Okay, well thank you, everyone, for joining us. We look forward to chatting with you over the next week or so. Have a nice day.

As a reminder everyone, there will be a replay available by calling 888-203-1112, or 719-457-0820, passcode 4797418. This concludes today's conference. We thank you for joining us.