O2micro International Ltd (OIIM) 2010 Q2 法說會逐字稿

Good day and thank you for joining us today to discuss O2Micro's earnings for the second quarter of 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'll fax you a copy of immediately. It is also posted on O2Micro's website at www.O2Micro.com.

There will be a replay available through August 11, 2010 at 9.59 pm Pacific Time by calling 1-888-203-1112 or 1-719-457-0820, pass code 786-1418. Following the presentation by management the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Good morning and thank you for dialing into O2Micro's second-quarter financial results conference call for the period ending June 30, 2010. This is Gary Abbott, Director of Investor Relations. I would like to remind listeners that this discussion of business outlook for O2Micro contains forward-looking statements.

Statements made in this release that are not historical fact are forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially due to numerous risks 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 O2Micro 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. After the prepared remarks from these gentlemen the floor will be open for your questions. Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the second quarter ended June 30, 2010.

Thank you and good afternoon. This is O2Micro's quarterly conference call. This call will cover our financial results for the second quarter of 2010. We will now review our financial results for Q2 2010. Please note that financial results will be presented on a non-GAAP basis unless we designate otherwise. The non-GAAP result includes 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 second quarter of 2010 was $39.9 million in Q2. Our IC revenue was $39.4 million and our Security revenue was about $419,000. GAAP net income in the second quarter of 2010 was $7.1 million. If we exclude stock-based compensation of $[968,000], the non-GAAP income will be $8 million.

GAAP net income for ADS in the second quarter of 2010 was $0.20. Non-GAAP net income for ADS was $0.23. Gross margin was 51.7% in Q2 (inaudible) product mix and the good sales of new product with high gross margin in Q2.

R&D spend was $8.2 million or 20.7% of revenue. This amount is (inaudible) stock-based compensation expense of $238,000 in the quarter. SG&A expense was $8.1 million or 20.3% of revenue. This amount includes stock-based compensation expense of $730,000. Income tax was $456,000 in the second quarter and is mainly based on the effective tax rate of each taxable location of the prior year.

In the second quarter 2010 we repurchased 1,157,546 ADS units at a cost of $7.8 million. This brings the total number of shares repurchased to more than 8.3 million shares since we began our ongoing buyback program in 2002.

Second-quarter 2010 revenue by end market breaks down into the following percentage. 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. O2Micro finished the second quarter with more than $106.1 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $3.02 per ADS. In addition, O2Micro has (inaudible). Account receivable at the end of Q2 was $18.8 million. Our DSO is 40 days; it is at the low end of our target range of 40 to 60 days. Q2 inventory finished at $30 million; O2Micro finished the second quarter with 67 days of inventory and inventory turned 5.4 times in Q2.

From a cash flow perspective we generated $6.5 million in cash inflow from operating activities in Q2. Capital expenditures were about $306,000 in the second quarter for machinery and R&D equipment. Depreciation and amortization was $1.3 million in Q2. At the end of the second quarter of 2010, O2Micro had 827 employees, 63% of which are engineers.

At this time I would like to provide our financial guidance for the third quarter of fiscal year 2010. This guidance reflects our best estimate for the current environment and is subject to change. This is the only future guidance we will provide unless we update it with a public announcement in the future.

O2Micro expects Q3 revenue to be in the range of down 5% to up 5% sequentially. We are being reasonably conservative because our strong Q2 may have [pulled] in some business out of Q3. We are guiding the Q3 gross margin to a range of 59% to 60%. R&D expense excluding stock-based compensation should be $8.3 million to $8.9 million in Q3; this increase is merely do to the (inaudible) from Q2 to Q3.

SG&A should be $8.3 million to $8.9 million in Q3 excluding stock-based compensation expense. Stock-based compensation should be in the range of $900,000 to $1 million in the third 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 third quarter.

At this point I would like to remind everyone that we have great strength in our balance sheet. We also have new products 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. Q2 evidenced ongoing expansion of our analog and mixed signal power management business as we continue to see major opportunities emerge in green energy, including automotive, industrial, solar and general lighting systems.

Each of our major analog product lines is enjoying significant design win progress and we are especially pleased to see our international customer base growing in new market areas. This includes the volume shipments of Intelligent Battery products for a European industrial customer; several major Intelligent Power designs in Japan; and prototype shipments for a Battery Management system for a major China automotive customer.

Additionally, we are continuing to see rapid expansion of Intelligent Lighting products into commercial and industrial lighting applications. I will first make some remarks about general overall market conditions and then discuss individual product lines.

In the past few weeks, we have seen a slowdown in TV, monitor and notebook business. The same situation was reflected in the recent announcement from Corning that they do not expect to see sequential growth in glass panel shipments in Q3. Since Corning dominates much of the glass supply, this directly translates to the TV, monitor and notebook markets where we are a major leader in backlighting.

Corning's announcement was not surprising given the fact that some of our major customers have informed us that they are seeing slower demand, particularly in Europe, following the significant weakening of the euro. These same customers have informed us that slowing demand, improving product availability and falling panel prices will cause them to slow production while they digest product that was pulled into Q2.

However, we are still optimistic that this slowdown will be short-lived and falling panel prices will stimulate demand. Nevertheless, this market situation will lessen the sequential revenue growth in Q3, although it should not affect our ongoing customer base expansion.

Our Intelligent Lighting products continue to expand their customer base as we continue to see a rapid transition to LED-based lighting systems. Our design wins continue to grow with many new customers in more and more diversified markets. 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 LED power management products into a broad array of applications including LED light bulbs, flashlights and street lighting. Based on our growing new product development and innovation we expect to continue to broaden our design wins across expanded markets by 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 OEM car manufacturers and their battery suppliers to develop next-generation power management technology for electric vehicles and have started shipping prototypes for advanced highly complex battery management systems targeted for initial production in 2011.

We are also working directly with leading battery manufacturers to adapt their battery technology and battery packs to a multitude of applications. 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 new design wins in both consumer and industrial markets. We are especially pleased to see a growing number of opportunities in Japan where our high-quality designs have attracted increasing attention for both consumer and industrial application. Additionally, we are seeing ongoing expansion of computer design wins both in Intel and AMD-based systems.

As mentioned previously, Intelligent eCommerce business was scaled back in 2009 in lower margin notebook-based business. However, we have retained key design wins at selected major notebook OEMs and have positioned the Company to move into new advanced product in industrial applications that can generate reasonable revenue and profitability. This includes a joint development program with a major printer manufacturer.

In brief, our growing analog and mixed signal revenue this past quarter was a direct result of our marketing and R&D efforts to expand our product offering into these new markets with correspondingly significant expansion of our customer base. This expansion into new markets includes all product areas, notably Intelligent Battery, Intelligent Lighting, Intelligent Power and Intelligent eCommerce.

We believe that 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. We continue to believe that we are extremely well positioned to expand O2Micro's business into more and more customers across more markets with significantly increasing automotive and industrial revenues as we move forward.

At this time I will turn the call over to Sterling Du for some additional remarks.

Thanks, Jim. O2Micro reported a record for Q2 EPS. Our non-GAAP EPS was $0.23 and this was ahead of all analyst estimates. We also showed a very strong gross margin of 61.7% and a very strong non-GAAP operating margin of 20.7%. We achieved this excellent financial result because key customers are recognizing the value of our technologies and increasing business with us. It is seen in each of our core segments.

In the computer segment there are many good things happening. First, the tablet market is growing more quickly than expected; we are doing well in this area. We have also got a wide recognition for the best LED Driver in the market. In addition, we are growing the penetration of our (inaudible) core DC/DC, (inaudible) DC/DC and a charger product at many leading companies such as HP, [Innovo], Dell, Toshiba and others.

In the consumer segment LCD TV is driving business. We have very good penetration because of our superior technologies. In the past quarter Jim mentioned that one major OEM was using our LED Driver for 3-D TV. Right now we are seeing more 3-D TV in the market and we believe there is a good potential we are doing very well with everyone in the TV market including the large global OEM brands, as well as with the local Chinese manufacturers.

In the industrial segment our business continues to grow nicely for us. We have had good success building business with battery company like China, [Leshen], [BAK] and BYD. As a result our battery management products are winning more business in more power tool, electrical bicycle and green motorcycles. We are also in the initial stage with a key China automotive customer for new generation electrical vehicles.

At this time I would like to highlight why we believe we will continue to be successful. First, it is still early in adoption of LED applications and our leadership in LED [Driver] positions us nicely to participate. Second, we've got new design wins like the [tablet] general lighting and industrial lighting opportunities that are contributing to long-term revenue growth.

And finally, we are investing over a half hour IT dollars into new areas such as DC/DC and Battery Management for future growth. Since everything that we do is power efficient and a green technology, our products are good for the current product market where customers demand the most energy efficient technology. For this reason we are excited about our future. And now I'd like to thank you for your support and turn the call back to Gary Abbott.

Thank you, Sterling. And at this time we would like to take questions from the audience. Operator, can you please open the line for questions?

(Operator Instructions). Harsh Kumar, Morgan Keegan.

Congratulations on good results, but I had a lot of questions about your guidance actually. I wanted to dig in a little bit deeper into the slowdown that you talked about in Europe. Can you maybe help us out if it's one customer, one product, one area or is it just broad based? I think you said monitors, panels and notebooks. But maybe you can give us some color -- more color outside of what you said?

We've heard this directly from mobile customers including OEMs that have a large position in Europe and we've also seen the situation announced in China where the purchasing manager's index actually went down in July. So this has been a situation that has developed over the last several weeks. We believe that it's a temporary situation and basically we have seen some pull-ins that did occur in Q2 and now we're going to see it take some time to dissipate that inventory and begin to see our products move more rapidly into other markets.

I got you, that's very helpful. And then maybe on the same line. Just -- do you think this is just excess inventory burn or do you think there is something bigger than that? I know you said the word temporary in your answer, but I just want to dig in a little bit more.

Well, there definitely has been some slowdown in Europe. And as we saw from the Corning announcement, they're seeing a sequentially flat quarter coming up in Q3 for glass shipments. And obviously since we're in a leadership position in TV and monitors that directly impacts the same markets that they see and we see.

We do see the panel pricing going down. We have been told that by a number of ODMs as well as OEMs, and this almost always stimulates the market. And so we do expect the market to turn around and begin to do well in the second half as it traditionally does.

Got it. Thanks, guys.

(Operator Instructions). Vernon Essi, Needham & Company.

Thanks for taking my question. I wonder if we could just dig in to the commentary about the screen market in general and I wanted to understand how things are progressing for you in LED monitors. I think in prior calls you've talked about the penetration rate starting to pick up there. Can you give us an update on that and is the trend line -- how is that faring out relative to sort of this digestion slump that you see out there?

Well, we think we've done very well in the whole transition. We have seen the transition begin in the LCD monitor market from the traditional CCFL type backlighting to LED, that transition as begun to accelerate. And we are very well positioned, we are the market leader in that area and we do see huge opportunities as this market continues to over time evolve and grow very quickly with the transition.

Is there anymore color you can give us in terms of what ranges you expect that penetration rate to be say 12 months out or maybe by year end versus where it was maybe a year ago?

We really don't announce the penetration rates. But we do see ourselves in the market leadership position in LED just as we were in CCFL.

Vern, I think it's fair to say a year ago the penetration of LED in the [monitor] was very, very low, probably less than 5%. And it's going to be significant this year, but we don't want to try to quantify that.

If you're looking at relatively where the market is for LED, right now in the monitor area our numbers show that the LED penetration rate in monitors is in the 20% area and by the end of the year it will be, we think, over the 30% area.

Okay. And I think in the past you've quantified the dollar content as being advantageous in this migration. Any further thoughts on that and can you quantify that?

Generally speaking the ASPs are higher because of the complexity of the product.

Okay. Another question -- I didn't hear specifically, maybe I missed it. Anything on the Cool Charge product? Is there an update there or is that just sort of lumped into the Intelligent Battery discussion you were talking about with all the major OEMs?

Yes, it's in Intelligent Power. We are engaged with one of the projects which is probably can have a (inaudible) design for more market presence. So that is the most update regarding our Cool Charge, yes.

Are you -- let me ask this, are you in production with --?

We are in production with Dell Computer right now.

Right, are there any additional customers I guess (multiple speakers)?

Not at this moment. We have several of [these activities] and we also have one (inaudible) activity with some reference design now.

Okay. And then finally, just give us an update on the stock repurchase program and where you're at?

(Inaudible).

Yes, (multiple speakers) $7.8 million and we repurchased 1,157,546 ADS last quarter.

Okay. Is there a plan to do more in the near-term or what sort of -- any outlook on that?

Yes, we are open and we are willing to repurchase.

Okay, thanks a lot.

Thanks, Vern.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

Yes, this is Evan Wang calling for Tore Svanberg. I have a quick question about your gross margin as you continue to guide in the high end if your long-term range. Could you comment on how you see that that might play out in the coming quarter? Is there any potential for upside?

Evan, we don't want to change our long-term target range, so we're just going to stay at the high end of it. If we maintain the same mix then in the near term maybe it's a little better, but we're going to stay with that range. Because as we've talked about in the past, some of our other products carry gross margins that are in the 50s, not in the 60s. And so as those grow that should bring things normalizing into the high-end of the range.

Okay. And about your guidance for 3Q, obviously it's probably more cautious than your second-quarter guidance. Could you comment on your rationale behind this guidance and whether -- what kind of turns expectations built into it?

I think Jim said it was a pull-in. We saw some extra business in Q2 that would have probably otherwise been demand in Q3. So I think for the year things should look pretty similar to what we thought all along. And at this point we don't see it as any more complicated than that.

And my last question is, regarding the source of your revenue, could you talk a little bit about how your end customers breakdown by say geography or your sales into the different geographical regions?

We typically do not break that out. And in some cases it's actually not easy to break that out because, whether it's Europe, North America, South America, Asia, most of the product is built in Asia and in many cases it's built by shared ODMs. So it is difficult to break out in some cases.

But as we indicated, we are seeing a broader international customer base. And we specifically mentioned Europe where we have seen some good design traction and also Japan. So we do see a growing international customer base. Now, much of that product is still built in Asia, specifically China, even though it ships into Europe or even Japan for that matter.

Okay, great. Thank you very much.

Thank you.

(Operator Instructions). Mr. Abbott, I'd like to turn the conference back over to you for any closing or additional remarks.

Okay. Well, thank you, everyone, for listening in and we're available if you have any additional questions. Thank you and have a nice day.

And again, that does conclude today's conference. A replay of the call will be available through August 11 by calling 1-888-203-1112 or 1-719-457-0820 and using pass code 786-1418. Thank you all for your participation and have a great day.