O2micro International Ltd (OIIM) 2011 Q2 法說會逐字稿

Good day, and thank you for joining us today to discuss O2 Micro's earnings for the Second Quarter of the 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 August 10, 2011, at 9.59 p.m. Pacific time, by calling (888) 203-1112, or (719) 457-0820, referencing passcode 4459801. Following the presentation by management, the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Good day, and thank you for dialing in to O2 Micro's Second Quarter Financial Results Conference Call for the period ending June 30, 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 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 O2 Micro, for a discussion of the financial highlights of the Second Quarter ended June 30, 2011. Perry?

Thank you, and good afternoon. This is O2 Micro's Quarterly Conference Call. This call will cover our financial results for the Second Quarter of 2011. We will now review our financial results for Q2 2011. Please note that financial results will be presented on a non-GAAP basis unless we designate otherwise. A non-GAAP result [excludes] 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 second quarter of 2011 was $32.5 million. GAAP net income in the second quarter of 2011 was $3 million, which excludes stock-based compensation of $950,000 and income from discontinued operations of $29,000. The non-GAAP net income would be $3.9 million.

GAAP net income per ADS in the second quarter of 2011 was $0.09. Non-GAAP net income per ADS was $0.11. Gross margin was 57.2% in Q2. The gross margin is in the middle of our 55% to 60% target range.

R&D expense was $7.8 million, or 23.9% of revenue. This amount excludes stock-based compensation expense of $407,000 in the quarter.

SG&A expense was $6.9 million, or 21.3% of revenue. This amount excludes stock-based compensation expense of $543,000 in this quarter.

Income tax was $304,000 in the second quarter, and is mainly based on the effective tax rate of each taxable location of the prior year.

In Q2 2011, we repurchased 423,231 ADS units at a cost of $2.9 million. Q2 2011 revenue by end market breaks down into the following percentages. Consumer was 45% to 50% of revenue. Computer was 35% 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 second quarter with more than $114.9 million in unrestricted cash, and short-term investments. This represents cash and cash equivalent of $3.43 per ADS.

In addition, O2 Micro has no debt. Accounts Receivable at the end of Q2 was $14.9 million. Our DSO is 40 days, and is in our target range of 40 to 60 days.

Q2 inventory was $11.7 million at the end of the second quarter. This represents 77 days of inventory, and inventory turnover was 4.7 times in Q2.

From a cash flow perspective, we generated $5.5 million in cash inflow from operating activities in Q2. Capital expenditures were about [$414,000] in the second quarter for IT and R&D equipment and software. Depreciation and amortization was $1.2 million in Q2.

At the end of the second 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 third quarter of fiscal year 2011. This guidance reflects our best estimate from 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 Q3 revenue to be [about flat] with Q2. We are guiding the Q3 gross margin to be toward the low end of our target range of 55% to 60%. R&D expense excluding stock-based compensation should be $7.5 million to $8.5 million in Q3. SG&A should be $6.5 million to $7.5 million in Q3, excluding stock-based compensation expense. Stock-based compensation should be in the range of $1 million to $1.1 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 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 Q2, the computer market remained stable and we continued to enjoy general lighting design wins. However, the worldwide TV market remained sluggish including Europe, Japan, North America, and China, where the Chinese government continues to take aggressive steps to cool down the housing market.

As recently indicated by Corning, the TV market is not expected to see growth in Q3 but we are optimistic that our ongoing design wins in general lighting, as well as other key new products, can help offset the sluggish economy and lack of growth in TV and monitors.

Let's review some of these opportunities. In Intelligent Lighting, we are pleased to announce that our general lighting products are now in high-volume production for LED lighting applications. Our growing list of customers includes OSRAM and Phillips, as well as Mitsubishi and Orion in Japan, where we see major opportunities for rapid growth of high-quality, more power-efficient lighting following the Fukushima Nuclear Plant disaster.

Our general lighting design wins are being energized by our rapidly broadening patent-pending portfolio of products for the general lighting market including AC/DC product for LED bulbs and tubes, DC/DC product for MR16 bulbs, street lighting products and flashlight and bike light controllers.

We have growing confidence with every key design win that O2 Micro will emerge as the major supplier in this rapidly-evolving general lighting market. Our new products are all patent-pending, and incorporate novel design methodology including integrated MOFSETs, 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.

We remain very enthusiastic over this market and expect our products to attain increasing design wins and contribute to higher revenue 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 in LED lighting, to compliment our strong CCFL patent portfolio. We expect an increasing number of LED-based patents to be issued in the coming quarters. Our Intelligent Power products continue to enjoy broadening market acceptance, including applications from both Intel and AMD reference boards that find applications worldwide in many different market sectors.

In the notebook area, we continue to expand our product offering, and design wins including our AMD DC/DC product going into new HP-based systems, and multiple Intel IMVP-7 DC/DC design wins. Our new USB 3.0 boost charger with protection circuits enjoys high volume production at a world-leading camcorder producer. We also have a major GPU DC/DC design win for an AMD-based graphics mobile device, and continue to expand our automotive focus with design wins for our constant ripple current DC/DC modules for electric vehicle application.

Intelligent Battery Management products continue to enjoy design wins worldwide, and are now being shipped in volume to leading companies in major markets, including China, Europe, and Japan. While our major design focus includes industrial applications for power tools, UPS systems and electric vehicles, we are seeing growing opportunities in other areas including notebook and communication devices.

Although the automotive market will be slow to ramp into high volume, we see volumes beginning to ramp in other areas and expect increasing revenues in 2012 and beyond. We believe our technology leadership in the market is already assured by our strategic positioning, and rapidly-increasing intellectual property in this critical area.

Our Intelligent E-Commerce Group continues to develop work for new high-end market areas involving high speed I/O Connectivity applications. We are pleased to report that we are jointly working with multiple industry-leading OEM's in the development of these highly integrated products.

To summarize our overall market activity, we continue to 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 response.

Thanks, Jim. Today, I will give a summary of our financial performance and comment on our business segments, and our stock.

We reported Q2 revenue and a non-GAAP EPS of $32.5 million and $0.11. This compares well to the last quarter where we reported revenue of $31.5 million and non-GAAP EPS of $0.10. We continue to [show that] with a good profitability and a good balance sheet.

Now, I will turn to our segments. In our consumer segment, there are two factors that are softer than the LCD TV and LCD monitor market. First, the China consumer is growing less than before. There's still very good unit growth in the China market compared to the rest of the world, especially for the long-term. However, the Chinese government has raised interest rates several times in this year, and the housing market has been less active. TV marketing is affected by this, and the yearly shipments should be less than previously expected.

The second factor is striking other large markets including the US and Europe. In these markets, the consumer activities and economic recovery is not benefiting our consumer electronics market growth. This situation changes quickly from month to month, and is making it difficult for manufacturers to forecast demand. As a result, the supply chain has low confidence right now, and some leading panel makers are even reducing production capacity in the high season. Therefore, it looks like the near term should continue in the same trend that we are seeing. It doesn't look like it's getting any better or any worse.

On the other hand, our computer segment is getting stronger due to higher [design] (inaudible). The sequential growth from Q1 to Q2 was driven by new design wins for DC/DC and charger in notebooks. But also, [riding on] the sales of our new PCI Express family with USB 3.0 support, and we expect the computer segment to continue growth with incremental design wins. Moreover, the notebook market had proven to be more resilient in this economy environment and we are also gaining market share, which should offset some of the softness in our consumer segment and it shows diversification in our business.

At the same time, the industrial segment also helps to diversify our company. Our business with the leading power tool companies should grow well in 2011. We continue to focus attention on the automotive industry with both our battery and lighting products. In particular, we're increasing these activities in the China automotive market and we are working on some (inaudible) [major assistance] for electrical vehicles that could be unrolling in the future.

At this time, I would like to make some comments on stock. Currently, we are trading at less than book value. If we exclude our cash, we are trading at about four times our current annual run rate of earnings. This shows our stock is undervalued for solidly profitable and high cash flow companies. It is important to realize that we are now having success in areas beyond backlighting, and it's growing into new areas such as general lighting. It's a key to our strategy and to our future of stock.

With these comments, I am happy to turn the call back to Gary Abbott.

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

(Operator Instructions) Our first question comes from the site of Tore Svanberg with Stifel Nicolaus, please go ahead.

Yes, hi, this is Even Wang calling in for Tore Svanberg. My first question has to do with your guidance, the flat stuff. Can you give us a little bit more detail on how you came about this guidance, and it seems like you're just saying that it's flat instead of giving a range. Could you help us understand your thoughts behind how you frame the guidance, please?

Well first of all, that is a very difficult question in this economic scenario that is currently going on. Basically, we do see the TV business very soft in all four major markets -- Europe, United States is soft, we certainly see the China market soft due to the measures as we mentioned by the China government. We also see Japan as soft. This has been a very, very significant part of our business. We certainly hope that we may see some rebound in this market. However, at this point, there's very little visibility into the TV market or really other markets, so it's a very, very difficult market at this point to really project. We do hope that the visibility becomes better as we move through the quarter, but right now we are trying to take what we think is a reasonably conservative approach and just call it flat.

Okay, thank you. And my next question is about your end market percentages of revenue. Looks like this is the second quarter where you had a reduction in your exposure to consumer, and I was wondering if you can talk about the shift. You see it a positive, as a diversification of your business, and where do you think the percentages will eventually settle over the next couple of quarters?

Yes, I think for the Q3 we continue to see the growth in the computer sector, and beyond Q3-Q4, it will depend on the situation of the monitor and the TV area.

Evan, as you know, we've talked about new design wins coming from the power group and the DC/DC and the charger space, and over time that bringing the gross margin down from the 60% threshold where we were last year down to this level. If you were to go back, for example, to Q4, I believe the computer segment was 25 to 30, meaning the mix of lighting and in particular, backlighting, was heavier in the business which is higher gross margin business. If you look into Q1, we started to see that shift, and you saw that in the gross margin. And then as you look into Q2, we're continuing to see that shift. So, I think our business, you know, we've always had the long term target range is 55% to 60%. Jim made the point that TV is particularly weak right now, so at some point in the future, as that comes back, you can see it start to swing back upward. Although, we're not forecasting that right now. So for now, we see the new design wins in computer continuing to drive the business in the third quarter as Perry described.

And that explains why you're guiding margins to be slightly down for next quarter?

Yes.

Yes.

Right.

We guided up to be clear, to the lower end of our 55% to 60% range.

Yes, right. And also, you have, you're reporting many new product wins, design wins. And as your new products gain more momentum, could you tell us a little bit about which of your end segments will benefit most and grow as a larger percentage, into a larger percentage of revenue?

As Jim has mentioned just now, that there's a lot of new activities in the computer area. He mentioned about AMD CPU, GPU, also MD and then Intel, INVP-7. So, this new design win, which is some of the unrealized as revenue [help us out] which is related to the last question you mentioned, is very meaningful to O2 Micro. Because at the opening of the conference call just done by Jim, he mentioned about those new designs in the computer segment offset the softness of the TV market, right? So, the TV market as a whole, economy is the whole macro, is going to be softer in the near future. And about all the design wins, and our market share, remain very strong, right?

But, the total number, because of the sluggish of the TV market, so that's why we have being seeing going down at in terms of the percentage of consumer revenue in the company. But, we offset by the computer. So, the hard part that we already done, which is, we get it, a lot of new, brand new design win. And all those get into production to qualify as qualified vendor or qualified solution, to measure for still a notebook computer makers, and when a TV recovery and then our computer, our new design win which [mostly is the power], already becomes sizeable, significant revenue. And the Company will be not only recovered when a TV market coming back, but also will be exponential growth with the new power design, new design right now. Right? So, is for O2 Micro, for the many, this is the first time our power has been one of the getting cutting into the sweet spot, the mainstream of the notebook computer power solutions.

So, we are very happy to see that. Just because this sluggish environment doesn't really show our strength, but when the environment get improved, and we expect that we're going to have to see the double barrel growth for this (inaudible), yes.

Okay, great. I'll get back in the queue, thank you.

Thanks, Evan.

Thank you. Our next question comes from the site of Vernon Essi with Needham & Co., please go ahead.

Hi, Vern.

Hi, thanks for taking my questions. Listen, I was wondering, a couple of your peers have actually had some good things to say about computing in general this earnings season. Is there any way we could dive into that a little bit deeper, as to what specific channels and maybe geographies where you saw demand and kind of where you see the momentum in the second half of the year?

Well basically, the computing market has been actually a good area for us, because we have more and more products going into more and more areas, and certainly there are more types of devices that have come into the market as well. So, basically, we do see this market continuing to expand, to continue to diversify at the same time as Sterling indicated, we've begun to get more and more design activity, more and more tractions into this market. Our position as we mentioned on the AMD and Intel design boards has helped appreciably. So, we see two things. The market expanding, also our product offering continuing to expand with it, and we do expect to see ongoing growth in this area. I hope that answers your question.

So, so, I mean, so just let me recharacterize it. Obviously, there's -- I appreciate the penetration rates going up, but from an organic kind of end unit area, I mean, you have to be seeing some lift in some of these spots. Obviously, notebook would be where you're probably seeing more activity relative to desktop, but I'm just curious. There's always the question of tablets overtaking notebooks, and in some areas it seems like notebooks have done really well. I'm just trying to understand if there's anything to glean from that, as you see it in the channel?

Well, basically, we see opportunities in both the tablet as well as the notebook area. We see the whole market expanding, certainly tablets are taking a increasing position in the marketplace and we expect that trend to continue. But at the same time, we have opportunities in both of those areas to continue to expand our product offering and continue to get more design wins. So, we view those as a good, ongoing growth opportunity for us.

Okay. And I hate to revisit it one last time, is there any specific geography that was stronger for computing, or any specific end market that was stronger than where forecasts were coming in say two months ago, or at the end of the first quarter?

It is difficult to track to the geography as we are supplied to the -- in the media OEM manufacturer. But, in terms of the type, the enterprise sector for the notebook remains very strong. And consumer notebook has been replaced by the tablet PC as you know. Many of our [IC's], especially our INVP-7, that's target for the enterprise. And so, at this moment, although we really don't have any breakdown, but we do see that more power go to the enterprise versus the consumer.

Okay, that's helpful. And then just if we could switch gears here to your stock repurchase program, give us an update on that. I apologize, I don't know where you stand right now, and sort of how obviously you're making the case your share price is very cheap. How is that going to play out for the rest of the year?

Yes, we, in Q2 we repurchased about 400,000 shares, and we will continue. We still have the authorization to repurchase, yes.

What is the size of the authorization?

$8.7 million left.

It was originally $20 million, and there's $8.7 million remaining on the authorization. Dollars.

Okay, that's helpful, thanks, guys.

Thank you.

Thank you. Our next question comes from the site of Andrew Huang with Stern Agee, please go ahead.

Hi, Andrew.

Hi. I just wanted to revisit your revenue guidance for Q3 one more time. So, are you expecting the TV business to be down sequential, and then the computer business to be up sequential? Is that how you're getting to your flat guidance for Q3?

Yes.

Okay. And then, if you exclude backlighting, can you give a sense of how big your LED lighting business is today?

Oh, Andrew, it is -- yes, I don't think we have any, we didn't break down for that. So, sorry, cannot answer you that. Because sometimes, the -- for example, the monitor makers, they probably go both because it's difficult to distinguish at this moment, yes.

Andrew, there will be thresholds in time when we will disclose certain things, but we're not at one of those thresholds. So, we don't have anything to add right now.

Okay. But you mentioned that you're selling into OSRAM, Phillips, Mitsubishi and Orion, I think?

Yes. Yes, we are gaining traction in the market. We're clearly getting design wins. We can tell you that unit volume is climbing nicely. We don't care to divulge beyond that point at this time.

Yes, I've heard that LED bulb penetration in Japan now is over 40%, it's a very high number.

Yes, yes, the government has a very active program to quickly move into the LED lighting simply because they continue to have power problems in the northern part of the country, specifically Tokyo has major problems.

Okay. And my last question is, can you comment on order trends since July 1?

Difficult to do, I think. Generally speaking, what we have seen is a trend this year where more and more customers are hesitant to place backlog, and they place shorter and shorter term backlogs with us. So, the order trend in general has been very difficult. There is no highly significant order trend that has occurred since July 1, for us anyway.

Okay. Thanks very much.

Okay, thank you.

Our next question comes from the site of Chris Longiaru with Sidoti and Company, please go ahead.

Hi, Chris.

Hey guys, how are you?

Good thanks, how are you?

Good. So, my first question is, can you give us a little bit of an insight into weeks of inventory and how they've trended in the channel from last quarter to this quarter, and what your expectation is for next quarter?

Well, when you say channel, now, we do not have distribution channels like most companies do. So, we do not have significant amounts of inventory.

Okay, with your specific customers, just in terms of what they're holding, and what your expectations are for your inventories going forward?

Well, as I mentioned, customers have been very hesitant to place long-term orders. There has been a trend this year for customers, or at least our customers, to reduce their inventories. We see very little inventory at customers, and we expect that to continue in this current economic scenario.

So, would you say they have a quarter's worth of inventory? A few weeks worth of inventory? I mean, what would you characterize their inventory weeks at, at this point?

Days. Days. Hours.

Days. Okay. Got it. Okay, that's helpful. All right. And on the other side, at what revenue run rate is the minimum for you to be cash flow positive around?

Too low to have calculated it at this point.

Okay.

It's about $30 million.

Okay, got it. All right, that's all I have for now. Thanks, guys.

Thanks, Chris.

We have no further questions at this time.

Okay then, I guess we'll wrap this up. Thank you for participating, and if there's any follow-up questions, I'm reachable at the office at (408) 987-5920. Thank you very much, and have a nice day.

A replay will be available through August 10, 2011 by calling (888) 203-1112, or (719) 457-0820, entering passcode 4459801. Your conference call has concluded. You may now disconnect, and have a wonderful day.