O2micro International Ltd (OIIM) 2011 Q1 法說會逐字稿

Good day, and thank you for joining us today to discuss O2 Micro's earnings for the First Quarter of Fiscal Year 2011. 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 11, 2011, at 9.59 p.m. Pacific time by calling 888-203-1112, or 719-457-0820, passcode 9500009.

Following the presentation by management, the conference will be open for questions and answers as time permits. Gentlemen, you may begin.

Good day, and thank you for dialing into O2 Micro's First Quarter Financial Results conference call for the period ending March 31, 2011. 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 meaning of the Federal Securities laws. Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the Form F-1, Form F-3, and 20-F reports, and other documents filed with the SEC from time to time.

Listeners are referred to the 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. 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, 2011. Perry?

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 2011. We will now review our financial results for Q1, 2011.

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

GAAP revenue in the first quarter of 2011 was $31.1 million. GAAP net income in the first quarter of 2011 was $3,146,000, which includes stock-based compensations of [$1,094,000], litigation income of $850,000 and the loss from discontinued operations of $33,000. The non-GAAP net income will be $3.4 million.

GAAP net income per ADS in the first quarter of 2011 was $0.09. Non-GAAP net income per ADS was $0.10. Gross margin was 59.7% in Q1. The gross margin is in the high end of our 55% to 60% target range.

R&D expense was $8.1 million or 26% of revenue. This amount excludes stock-based compensation expense of [$333,000] in the quarter.

SG&A expense was $6.9 million or 22.2% of revenue. This amount excludes stock-based compensation expense of [$751,000] and also excludes the non-recurring litigation income of $850,000.

Income tax was $359,000 in the first quarter and is mainly based on the effective tax rate of each taxable location for the prior year.

In Q1 2011, we repurchased 396,726 ADS units at a cost of $3.1 million. Q1 2011 revenue by [end-market] breaks down into the following percentages -- consumer was 50% to 60% of revenue, computer was 30% to 40% 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 $111.6 million in unrestricted cash and short-term investments. This represents cash and the cash equivalent of $3.30 per ADS. In addition, O2 Micro has no debt.

Accounts receivable at the end of Q1 was $14.3 million. Our DSO of 40 days is in our target range of 40 to 60 days. Q1 inventory was $12 million at the end of the first quarter. This represents 92 days of inventory, and the inventory turnover or 3.9 times in Q1.

From a cash flow perspective, we generated $3.1 million of cash inflow from operating activities in Q1. Capital expenditure was about $194,000 in the first quarter, for IT and R&D equipment. Depreciation and amortization was $1.2 million in Q1. At the end of the first quarter of 2011, O2 Micro had 700 employees, 57% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2011. 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 2% to 6% sequentially. We are guiding the Q2 gross margin to a range of 57% to 59%. R&D expense, excluding stock-based compensation, should be $7.5 million to $8.5 million in Q2. SG&A should be $6.5 million to $7.5 million in Q2, excluding stock-based compensation expense.

Stock-based compensation should be in the range of $1 million to $1.1 million 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 balance sheet. We also have new products with excellent gross margins, and we are optimistic about our future. Right now, 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. In Q1, the computer market was stronger than expected, but the TV market remained sluggish due to slower-than-expected retail sales. Q1 also saw the beginning of some softness of sales in our previously-expanding Japanese market due to the Fukushima Nuclear Plant disaster. Despite the ups and downs in markets, Q1 continued to mark a significant shift in the company direction to broaden our market presence.

Design win activities in our analog and mixed-signal Power Management business continued in all key markets including computer, general lighting, industrial, and automotive. This included Japan, where recently-adopted new power conservation measures have driven an urgent demand for new power management solutions. Our worldwide design wins are setting the stage for an expansion of future revenues into these new applications.

We continue to address this market expansion with the addition of sales and marketing staff in key markets including China, Japan, Korea, and North America. We will highlight some of this new market activity as we now review each product line.

First, let's review Intelligent Power products. We have been focusing much of our R&D effort to move our power technology into new customers, new market areas. We now see many new design wins across an array of applications, and will briefly mention a few of them showing the diversity of this activity that will help drive our revenue growth.

In computer and industrial markets, we continued to expand both our Intel and AMD-based product design wins. These design wins include applications from Intel and AMD reference boards that find applications worldwide in many different market sectors. In the notebook area, we continued to expand our product offering and design wins. We are now positioned to support both AMD and Intel-based applications including the IMVP-7 DC/DC to support Intel's new Sandy Bridge CPU.

Our new USB 3.0 boost charger with protection circuit enjoyed high volume production in Q1 at a major camcorder producer. We also have a major GPU DC/DC design win for an AMD-based graphics mobile device that went into production in Q1. Additionally, we continue our automotive focus having delivered our first prototype production of 500 and 1,000-watt constant ripple current DC/DC modules to an automotive OEM for use in their electric vehicles.

In Intelligent Lighting, O2 Micro continues to broaden our patent-pending products to serve a rapidly-expanding market that is much larger than our traditionally-served market. These include AC/DC product for LED bulbs and tubes, DC/DC for MR 16 bulbs, street lighting products and flashlight and bike light controllers. We continue to see excellent progress in the general lighting market with design wins in China, Japan and Taiwan. We have growing confidence with increasing design win activity that O2 Micro will become a major supplier in this rapidly-evolving general lighting market.

Our new products are all patent pending, and incorporate novel design methodology including integrated MOSFETs, TRIAC control, and integrated power factor correction circuitry. Our products can support both isolated and non-isolated designs. Applications for these products involve customers worldwide. Production volumes are growing. We have a growing number of design activities with well-known companies. We expect our products to obtain an increasing number of design wins and contribute to significantly higher revenues in 2012 and beyond.

In our traditional markets of TV and monitor, we continue to be the industry leader in lighting control. We have positioned ourselves well, as these markets continue to transition from CCFL to LED lighting. This includes the recent granting of intellectual property in both Asian and Western countries to further strengthen our market leadership position. We expect an increasing number of patents to continue to be issued in the coming quarters.

Intelligent Battery Management products continued to enjoy design wins worldwide and are now being shipped in volume to leading companies in major markets including China, Europe and Japan. These design wins include industrial applications for power tools and UPS systems, as well as electric vehicles. While the automotive market will be slow to ramp into high volume, we believe we have already established technology leadership in this market.

Meanwhile, our power tool, UPS and lower-end EV applications are ramping into production at the leading manufacturers in China, Europe and Japan. Based on our strategic positioning and rapidly-increasing intellectual property in this critical area, we believe we will continue to see a multitude of new design wins that lead to significantly higher revenues in 2012 and 2013.

In Intelligent E-commerce, our PCI Express design wins at multiple top-tier notebook OEM's are ramping into production. However, our long-term focus is to position the Company to move into new advanced product in industrial applications that can generate both higher company revenue and profitability. As announced previously, we have the first engagement in a joint development program with a major printer manufacturer, with revenues expected to begin later this year. Additionally, we expect to continue to expand our design activity to more customers.

To summarize our overall market activity, we see a rapid expansion of design activity into new markets, that includes all product areas, notably Intelligent Battery, Intelligent Lighting, Intelligent Power, and Intelligent E-Commerce. We believe that our new products will continue to constitute a growing percentage of our overall business, increase our revenue base, and make our company less prone to adverse economic conditions and increasing competition in commodity products.

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

Thanks, Jim. Today, we reported Q1 revenue of $31.1 million and a non-GAAP EPS of $0.10. Our gross margin was 60% and our non-GAAP operating margin was 11.5%. And also, our sixth quarter in a row of double-digit non-GAAP operating margins. This consistency shows the good profitability of our business.

The largest segment of our business continued to be from the consumer area, but inventory correction in LCD TV and LCD monitor has passed in recent months and the market should return to normal season trends. The key global markets are responding to cost-effective LCD TVs, and this should continue to support unit growth in 2011. In addition, the LCD monitor market is picking up momentum. There is increasing demand for both CCFL and LED monitors right now. We are seeing key OEM and [ODM] customers ship a significant percentage of their production to LED monitors, and this is good for O2 Micro because our LED drivers carry a higher ASP.

We are also doing well in a new consumer segment. We are expanding the reach of our business with camcorder manufacturers, where we have design wins for power and connectivity products for 2011 models. We have our USB charger booster [IC] in a market today with a leading Japanese camcorder company, and we have design wins with other companies for our PCI Express product in a new model coming later in 2011.

In the lighting area, we are working to build an important position in general lighting market. We are targeting the replacement aftermarket for area lighting including replacement light bulbs. Our LED driver technology is a key advantage in this market where our experience with dimming and load balancing is important.

In our computer segment, we continued to expand our penetration of products. We continue to hold the leadership position LED [backlighting] while we are emphasizing our Powered PCI Express connectivity product in 2011. It is becoming common to extend the new architecture to more consumer electronics like camcorders that were previously mentioned. As a result, when computers see very strong unit growth for our DC/DC, charger and the PCI Express family in both notebook and other consumer devices. And this should help this product to grow faster than the overall company in 2011.

In notebooks specifically, we have captured new PCI Express design wins. Moreover, as new notebook model using PCI-E/USB 3.0 going to production and volume ramping up, we expect to be able to build even greater momentum over the future quarters.

The industrial segment is also important to the growth of the company. Our LED lighting business is growing in automotive applications and we have begun to develop solutions for general lighting applications that use LED tubes to replace [flows and lamps]. At the same time, we continue to invest in the battery market and we expect to see good growth in power tools in 2011, and the automotive opportunity is further out in [bandwidth] segment but we are still targeting this area for future growth.

In conclusion, we are expecting a good year in 2011 and will be very much a transition year from a company that its [maturity] in backlighting will more diversify business as we exit this year.

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

Thank you, Sterling. Operator, at this time we'd like to poll for questions.

Thank you. (Operator instructions) Our first question today will come from Tore Svanberg with Stifel Nicolaus.

Hi, Tore.

Yes, good morning and thank you. First question is on your guidance, can you talk a little bit about the moving parts for your guidance as far as the end markets are concerned? Are you expecting strength again across the board, or will you have some areas that are stronger or weaker?

It's the latter situation. We do see ongoing continuing strength in the notebook, the computer sector in particular. We are, however, still seeing the TV market lag, and we are somewhat conservative due to the TV market. We do expect pick-up later this year, but we have yet to see that reflected in the sales numbers.

Very good. And based on your gross margin guidance, it also looks like maybe gross margin will be down sequentially. Is that purely the reflection of mix and maybe more PC revenue?

Yes, you are right, and also some of other power areas, it's [the least two areas] I think it's mainly from the product mix as you mentioned.

Okay. And can you just update us on how much backlighting is right now as a percentage of revenue, versus your other, newer segments?

Our new segment, it's Power and also Battery, which was about 15% to 20% in Q1.

Could you repeat that question, Tore?

Yes. I was just trying to understand how much of your business today is backlighting, and then I also had a follow-up asking how much the new product groups.

The backlighting is around 70%.

Okay. Very good. And you talked about very strong design activity in the LED lighting market, and you also said some significant revenue contribution in 2012. How should I quantify that? Is significant 10% of revenue, or 20% of revenue? I'm just trying to understand how material your ramp of LED lighting is going to be next year.

Well, we would expect it to be well above the 10%-type number.

Okay, very good. I'll stop there and go back in the queue. Thank you.

Thank you, Tore.

We'll take our next question from Vernon Essi with Needham & Company.

Hi, Vernon.

Oh, thanks. Hey, how you guys doing? A couple of housekeeping questions here. I was wondering specifically if you could go over the share buyback metrics that you gave on the call, and what the outlook would be for shares outstanding in the next quarter?

We bought back 346,000 shares. Oh, sorry, 396,000 shares. And, roughly flat, maybe down 100,000 or so.

And how much remains in the authorization?

Authorization still we have $14.5 million.

$14.5 million remains and then it'll be up for renewal at the annual meeting.

Okay. Sorry about that, I just wanted to get those, don't have any data points on that. And then, if you could talk just in general, I think Jim you talked about expanding some sales channels in a lot of different regions. Is there anything we should be thinking about in our models as it pertains to SG&A costs on a go-forward basis? Do you expect to have perhaps a higher commission rate or greater up-front fixed portion of that going forward?

No, I don't think, I don't see a big change on the SG&A rates for the sales commission.

Okay. And on the product side, you discussed a printer win. I guess two questions off of that. Will that be -- which end market are you going to reflect that in, when you're giving us kind of these ranges of how each one is lining up? And then specifically, what was it that you won, and can you just dive into that a little further, what product line? How you won that business? That would be helpful.

As I mentioned, the [notebook] venture was extended to many consumer electronic devices, which also including this multiple-purpose printer sector, and they always for this portion, we come at PCI Express connectivity. So, the design wins in this multiple-purpose printer and probably it's next year, business. At the same time, this PCI Express connectivity which also includes USB 3.0, then also we get into other consumer devices. They're all in Japan.

And so it's fair to say, I mean, I'm just connecting the dots here. Last time, you had talked about the success in PCI Express in the notebook market. That's clearly what we're seeing in this growth in the first quarter, and as Jim had said, you're expecting strength in the second quarter. That's more driven by that, than the backlighting content, correct?

Yes, that's correct, because of the softness in the TV.

Okay. And then finally, and I apologize, I got interrupted during the call and I don't know if you went into any depth about Japan. What are the implications there from your perspective? Is there any way to quantify that, and how do you see the landscape for the rest of the year?

Well, it's a double-edged sword for us. We will see some revenue shortfall from original plan in Japan, very specifically due to a number of the markets that we are in, in Japan, will not meet their projections in terms of volume shipments. That includes the TV, the notebook, the automotive, as well as some consumer hand-held products, it's across the board. It's not dramatic, but it does nevertheless hit our revenue.

The upside from that, however, is very positive. We are seeing opportunities in Japan for design wins across the board. Many of the Japanese companies with whom we've already done work in the past have asked us to take a look at potential new design wins, and in some cases replace components that they have had serious problems acquiring. So, it is an opportunity for us and as we mentioned, we are actually adding staff in Japan to support the design win activity, and we do expect a significant position from that in the 2012-2013 time frame. So, that's the negative and very good positive for us in Japan.

Okay, thank you Jim, thanks a lot.

We'll take our next question from Christopher Longiaru with Sidoti & Company.

Hi, Chris.

Hey guys, how are you? Congratulations on the quarter.

Good, thank you.

My first question has to do with inventories. It seems like inventories came down, and I just wanted to know what your inventory expectation was kind of going forward. Are we going to hang out around this $12 million level? Are we going to build some inventory because of demand? I just wanted to get a little more of a read into that.

Yes, we can consume more IC [dye banks] in Q1 as more demand, and we expect, actually we expect to continue to improve our inventory efficiency in Q2-Q3 by increasing the inventory turns from 3.9 times to 4.5 times area in Q2-Q3.

So, if my calculations are right, that should bring inventories down another $500,000 about, in the June quarter?

Yes, you are right, yes.

Okay. All right. And the other thing is, what is the time frame on some of these design wins that you mentioned? I mean, just how do we look at this in terms of when it starts to contribute to revenue and how it ramps?

Well, some of the design wins in the notebook area are already beginning to take hold, so you will see some revenue generation from design wins Q3-Q4 time frame, some even in the Q2 time frame. Other areas take longer. The printer application, for instance, really does not have significant contribution until next year. Many of the lighting applications due to the [qual] situation, we may see some upside by the Q4, but more primarily in the 2012 and beyond timeframe, as that market begins to ramp. The automotive is second half 2012-2013. So, we see many of the design wins particularly in the industrial-type area being good design wins, but they do take longer to ramp revenue.

All right, that's all I have for now. Thank you, guys.

Thanks, Chris.

We'll now hear from Graham Tanaka, with Tanaka Capital Management.

Hi, guys. Nice quarter. Just a little bit more on the timing of these new product areas. Congratulations on getting the wins. We of course have difficulty trying to, we're trying to make our estimates even in the out years, 2012-2013. Is there a way for you to sort of put brackets around it, or how large the new product design wins could be in terms of percent of sales or size in say two years? I know it's hard for you to get the timing in the next few quarters, but either 2012-2013, what could the new products be? 20%, 30% of sales, or what?

You know, Graham, these products aren't in the market yet. So really, it wouldn't be prudent. I think that the sell-side models show us at double digit growth next year, and it's truly a guess, but we're optimistic. We certainly have been talking about design wins so a reasonable growth rate is to be expected. We can't guess at a number.

All right. So, in terms of the basic backlighting business, have you access to decent projections as to longer-term growth there? I mean, is that a market that's sort of, you anticipate to be peeking out the next two or three years, or do you -- what kind of growth rate do you see?

Probably single-digit growth.

Jim, is that what you're seeing in the marketplace?

I think actually in the market right now, the TV sales are very stagnant, not meeting projections due to the retail [sales-through] as you're probably aware. But, the lighting business to us will change significantly in terms of the general lighting. We see very significant opportunities in general lighting. That market, as you're aware, can become a huge market, and we do feel that we are getting ourselves very well-positioned in that market so we can see significant revenue growth in the 2012-2013 time frame, in the general lighting market.

What kind of [ASP's] can we sort of pencil in for general lighting?

Oh, there is a wide range, depends on applications. Could be just less than $1 to above $1. It's a difficult to estimate, predict, right now. But, it's going to wide range. It's a LED, general lighting is very regular market, and we -- of course from right now through the next couple of years, we also try to add more silicon content, right? So, just like Gary was mentioning, difficult for us to predict at this moment. But as Jim was saying that, we hope optimistic because we do have reason to believe at the moment we are one of the market leaders, and we also are very focused on how to support the manufacture base on the production of LED general lighting business, yes.

So the general lighting is all LED power drivers and management sort of chips, or what?

Yes, you are right. Yes.

The LED, okay. And who are the competitors there?

Well, there is a lot of competitors. There you know, the general thinking all the major analog companies have solution for it. And each area, each country, we also probably are different profile of competition. So, in China, in Asia, it's different, in Japan or in US, so the competition is very different. So, you can see almost all the major analog has solution for certain sector, yes.

Right, okay. Now, I wasn't quite clear on what you were saying about Japan. You were getting increased demand for power management, for more efficiency of products to help their power management. Is that on an emergency basis, or is that something that's going to be more step functioning and then growth in there?

Well, the Japan market certainly does have opportunity for increased use of power management. There's the government very much now wants to put focus in terms of power management even in the home, in terms of more rapid switch to LED lighting. They're even doing that in some of the commercial areas. They will have a shortfall in power capability for the next several years so they're very quickly rushing that to market. There's UPS opportunities throughout Japan, so that is also an urgent situation.

Are UPS's --?

But beyond that --

What is the UPS?

It's Uninterrupted Power Supply.

Okay. Right.

Yes, pardon me. So in addition to that, there's opportunities due to some of the supply chain issues that exist in Japan, particularly some of the semiconductor supply, where we have the ability to go in and now get design wins where they are looking for backup sources for some products in systems, and in new systems they're opening up new designs to us. So, we are seeing a fairly dramatic new opportunity in terms of design win activity across all the product lines in Japan.

Okay. And what is, when you talk about that market, what -- can you put a size on that? Is that something where it's --?

So Graham, we also like you are eager to see what really the size of it, but it's very difficult at this moment. Yes, it's -- we know we have some technology and the product mature to benefit, but we don't know yet. But we've got that eager as you are.

All right, thank you.

Thanks, Graham.

And ladies and gentlemen, we have time for one more question. That will come from Andrew Huang with Sterne Agee.

Hello, everybody.

Hi, Andrew.

Hi. First question, did the earthquake in Japan effect your June quarter revenue guidance at all?

It does have some impact in June because in fact, our forecast for Japan has gone down as a result of the earthquake, because simply they're not able in some instances to produce as much product as had originally been projected. So, yes, that does have some impact on us in the June quarter.

Okay. And then, is it fair to say that more of the impact is due to the weak TV demand?

Well, there's -- yes. Yes.

Okay.

Is the answer to that.

And on the subject of TV's, maybe can you comment on TV demand out of China in particular?

TV government incentives for the consumer appliance has been [expired] and they are not doing that. Instead of, they also like to [count sort of] inflation. So, China TV market is not as high growth as two years ago where when you see China, the consumer appliance, which is very -- growing very fast. Right now, but we do see the housing market become stabilized after the sudden stage of the (inaudible). And we have reason to believe probably is going to be flat and slightly up. And then when economy situation gets improved or inflation get controlled, probably we're going to see the consumer appliance is going to be back to the normal track. So far, as not too many new house has been [real transaction], so that also affects the TV purchase at this couple months, yes.

Okay. And then just two kind of detailed questions. For your backlighting business, can you give us a sense of what the mix is between LED and CCFL?

In backlighting, it depends on the sector, right? Notebook and the monitor and the TV, but overall probably around maybe rounding half up, by the range, maybe 55 to 45 or vice versa, yes.

Okay. Okay. Thank you very much.

Thanks, Andrew.

Ladies and gentlemen, that does conclude today's question and answer session. I'd like to turn the call back over to management for any closing comments.

All right. Well, thank you very much. We appreciate your interest, and we'll talk to you next quarter. If there's any questions, as always I'm available. My number is (408) 987-5920, extension 8888. Thank you, have a nice day. Bye-bye.

Ladies and gentlemen, that concludes today's conference call. There will be a replay available through May 11, 2011 at 9.59 p.m. Pacific time by calling (888) 203-1112, or (719) 457-0820, passcode 9500009. Thank you all for your participation.