O2micro International Ltd (OIIM) 2011 Q4 法說會逐字稿

Good day and thank you for joining us today to discuss O2Micro's earnings for the fourth quarter of the fiscal year 2011.

59 PM Pacific time by calling 1-888-203-1112, or 1-719-457-0820, passcode 3477998. Following the presentation by management, the conference call will be open for questions and answers as time permits. Gentlemen, you may begin.

Thank you for dialing into O2Micro's fourth-quarter financial results conference call for the fourth quarter ending December 31, 2011. This is Gary Abbot, Director of Investor Relations.

I'd 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 facts 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 reports 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 opened for your questions.

Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter ending December 31, 2011. Perry?

Thank you and good morning. This is O2Micro's quarterly conference call. This call will cover our financial results for the fourth quarter of 2011. We will now review our financial results for Q4 2011. Please know that the financial results will be presented on a non-GAAP basis unless we tell you otherwise. The non-GAAP result is (inaudible) stock-based compensation expense, one-time charges, nonrecurring debt and losses from continued operations. Our full GAAP results are available in our press release that was issued earlier today.

(inaudible) revenue in the fourth quarter of 2011 was $28.7 million. GAAP net income in the fourth quarter of 2011 was $1.9 million. If we exclude stock-based compensation of $778,000 and one-time gain on the sale of a long-term investment of $1.6 million, and the income from discontinued operations of $49,000, the non-GAAP net income would be $996,000. GAAP net income or EPS in the fourth quarter of 2011 was $0.06. Non-GAAP net income per EPS was $0.03.

Gross margin was 56.1% in Q4. The gross margin reflects the current product mix and remains in our target range.

R&D expense was $8.3 million or 29% of revenue. This amount excludes stock-based compensation expense of $223,000 in the quarter.

SG&A spend was $7.4 million, or 25.8% of revenue. This amount excludes stock-based compensation expense of $555,000 in this quarter.

Income tax was $121,000 in the fourth quarter and is mainly based on the effective tax rate of each taxable location for the prior year.

In Q4 2011, we repurchased 959,802 (inaudible) units at a cost of $4.1 million. As of December 31, 2011, the total shares repurchased since 2002 was about 10.6 million shares for about $71.8 million.

Q4 revenue by end product 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 better than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with more than $125.6 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $3.80 for EPS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q4 was $12 million. Our DSO is 41 days. It is in our target range of 40 to 60 days. Q4 inventory was $7.9 million at the end of the fourth quarter. This represents 52 days of inventory and the inventory turnover was 5.8 times in Q4.

From a cash flow perspective, we generated $6.6 million in cash inflow from operating activities in Q4. Also, during the fourth quarter, we had a one-time [prediction] of $1.6 million related to the sales of one of our long-term investments.

Capital expenditure were about $648,000 in the fourth quarter for IT, R&D, and the machinery equipment. Depreciation and amortization was $1.4 million in Q4.

At the end of the fourth quarter of 2011, O2Micro had 786 employees, 54% of which are engineers.

At this time, I would like to provide our financial guidance. For the first quarter of fiscal year 2012, this guidance reflects our best estimate for the current environment and is subject to the change. This is the only official guidance we will provide unless we update it with a public announcement in the future.

O2Micro expects Q1 revenue to be sequentially flat to down 5%. We are guiding the Q1 gross margin to be in the range of 55% to 57%. R&D expense, excluding stock-based compensation, should be $8 million to $9 million in Q1. SG&A should be $7 million to $8 million in Q1, excluding stock-based compensation expense. Stock-based compensation should be in the range of $800,000 to $900,000 in the first quarter. Based on the service income of our receipt of our subsidiaries in different countries, we expect our fixed amount to be in the range of $250,000 to $350,000 in the first quarter.

At this point, I would like to remind everyone that we have great strength in our balance sheet and we are optimistic of 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.

Thanks Perry.

Q4 was affected by ongoing worldwide economic concerns. Consumer markets were soft, including those in Europe, Japan, North America and China, where the Chinese government's ongoing efforts to cool down the housing market impacted demand, especially in TB. Additionally, flooding in Thailand did have some impact on the notebook market due to hard disk drive shortages at some customers. The flooding also disrupted Japanese manufacturing facilities [through] which we deliver product.

As we enter 2012, the ongoing economic concerns have resulted in a combination of very conservative forecasts from our customers and abnormally low inventory being held by the supply chain, including ODMs. This makes it very difficult to project business and requires us to be able to quickly react to unexpected customer demand. Nevertheless, a growing portion of our forecasted demand is from new product design wins in new markets as well as new, more highly integrated products going into our traditional market. We remain optimistic that our ongoing design wins with key new products can offset the sluggish economy and lack of growth in TV and monitors, and enable us to grow revenues as we move forward into 2012 and 2013. Let's review some of these opportunities.

The Intelligent Lighting group received 22 patents with 434 claims granted in Q4 2011. This is a remarkable achievement and is reflective of our rapidly expanding product offering in general lighting that now covers a wide range of applications, enabling the customer to choose the most desired solution for their application. New products based on our novel design methodologies include integrated MOP sets, TRIAC control, 110 to 220-volt universal power factor correction circuitry, step dimming as well as free-dimming technology. Our products can also support both isolated and non-isolated designs. Applications for these products involve customers worldwide. As a result, new general lightning products continue to ramp into higher production levels for LED lightning applications, including AC-to-DC products for LED bulbs and tubes, DC-to-DC for MR-16 bulbs, street lighting products and flashlight and backlight controllers.

We see major opportunities worldwide for rapid growth of high-quality, efficient lightning for both consumer and industrial markets. Our growing list customers not only includes most of the world's lighting companies such as GE, [Orion], (inaudible), Philips and Mitsubishi, but also a list of many new technology-based companies that will play an important role in this broadly diversified market going forward. As stated previously, we have growing confidence that O2Micro will emerge as a major supplier in this rapidly evolving general lightning market.

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 for LED lightning. Our intellectual property in both Asian and Western countries continues to strengthen our market leadership position in all lighting areas. We are continuing to file more patents to extend this lead.

Our intellectual power products continue to enjoy broadening market acceptance of DC-to-DC applications for both Intel and AMD-based platforms in many market sectors worldwide. These design wins at major computer OEMs include our new single-chip DC-to-DC with integrated MOSFET that being delivered in chip-scale packaging, our new DC-to-DC supporting Intel Sandy Bridge CPU, and DC-to-DC products supporting AMD's new CPU and graphics processors.

Additionally, we have design wins for constant ripple current DC-to-DC modules for electrical vehicle applications.

Our intelligent power product offering in chargers also continues to expand. Our recently released integrated MOSFET charger has a significant notebook design win. Our hybrid boost charger has significant design wins at major notebook OEMs. Our new USB 3.0 booster charger with protection circuitry enjoys high volume production at a world leading camcorder producer and we are now delivering high-voltage chargers into key automotive applications to support battery management systems.

Intelligent battery management products continue to enjoy design wins worldwide. While our major design-in focus includes industrial applications for power tools, robotic vacuum cleaners, UPS systems and electric vehicles, we continue to see growing opportunities in other areas, including notebooks and communication devices. Although the automotive market will be slow to ramp into high volume, we expect volumes to ramp in other areas with revenue increases in 2012 and beyond. We believe our technology leadership in this market is already assured by strategic positioning and rapidly increasing intellectual property in this critical area.

Our intelligent e-commerce group continues to develop and work for new high-end market areas involving high-speed I/O connectivity applications. As previously reported, we are jointly working with multiple industry-leading OEMs in their 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 include all product areas, namely intelligent battery, intelligent lighting, intelligent power and intelligent e-commerce. We believe that our new products will continue to constitute a growth percentage of our overall business, increase our revenue base, and make our company less prone to adverse economic conditions and increasing competition and commodity products.

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

Thanks Jim. Today, I'd like to talk about a few different aspects of our business. First, I'd like to recap the year 2011.

In 2011, we produced revenue of $125 -- $124 million and a GAAP EPS $0.28. This was down a little bit from $137 million and $0.35 last year, or 2010. However, this was a typical year since our end market did not achieve the forecast growth expectation at the beginning of 2011.

When we reflect back on our core markets and consider the normal SB pressure, we believe we get market share across the key end market segment for both [tech] lightning and in power products in notebook computers.

In the Computer segment, the notebook market was originally expected to grow by about 10% to 20% in 2011. However, a slow economy along with the disaster in Japan and Thailand slowed our overall market growth. However, our DC/DC and the charger products penetrate the notebook market better than the overall market because the new design wins continue to ramp with top-tier notebook OEMs. This computer capacity is not fully recovered yet. We are factoring the environment into our Q1 outlook, although (inaudible) our industry analysts still expect the market to grow by about 15% in 2012. This should give us a pickup in the second half of this year.

In the Consumer segment, the (inaudible) market tended to be about flat last year. This market primarily reflects a weak consumer spending environment.

In the fourth quarter, we also saw customer slow (inaudible) to keep inventory low while they're waiting for the computer market to return to normal capacity.

On the LCD TV side of our Consumer segment, we observe mature markets like in Japan, US, and Europe to be relatively weak in 2011. Although there was some growth from the China market that China came the world's number one LCD TV market by shipping about 45 million to 50 million units. This is especially important to us because our position in China remain excellent and we are optimistic about the long-term potential for the region.

We also grew our general lightning nicely in 2011. We added two more key companies, household names, a wide picture company to our customer list, both of them are (inaudible) patent (inaudible) technology.

In the Industrial segment, we continue the sale of (inaudible) product into the power tools and [E-5] markets. We also continue to develop our LED lighting opportunity for industrial markets, including both automotive and general lightning applications. We are excited about those growth factors and expect the end market will continue to significantly grow in 2012.

Speaking of 2012, I'd like to highlight several things. First, our core LCD TV notebook and monitor segment should be together. The production should get back to the normal from the Thailand supply-chain disruption. Q1 (inaudible) is our strategy, but the environment is expected to improve later in a year.

In addition, we have many opportunities to win key new designs and to gain share in the (inaudible) lighting and the power markets.

Second, our general lightning business was the key area for the Company. As you may have seen, we have several important patents granted in 2011 that pertain to this market. We continue to add new customers and (inaudible) are ramping. It's likely that Asian markets will dominate the [uniboen] sales in 2012, especially Japan, China and Taiwan. We are very strong in these key regions and we have top-tier confidence of our actual success.

Third, we would like to continue to run our business efficiently and work to increase shareholder value. During the past quarter, we bought back about 1 million shares. This counted for about 8% of total trading volume for the whole quarter. In fact, as of the end of our first quarter, we still had $37.1 million quota to spend on our buyback program. And our plan is to use this program over time.

At this time, I'd like to thank everyone for attending and turn the call back to Perry Kuo.

Operator, we're ready to poll for questions.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

Thank you. I had a few questions. First of all, could you talk a little bit about the near-term environment? Obviously, visibility is pretty limited. Just directionally, can you talk a little bit about how you're seeing maybe bookings trends emerging or even backlog?

Yes, I'll be happy to address that. This is Jim. Basically, it's very slow to see backlog come into place. However, what we are seeing is that, when it does come in place, it's very flat from Q4. So far through the quarter, the trend has been flat to the previous quarter. We would expect that to continue, but nevertheless customers are, in general, very hesitant to [claim] any type of long-term backlog at this point. I hope that answered your question.

Yes, absolutely. Moving onto some of the business segments, you talked quite a bit about computing and notebooks potentially doing better in 2012. I'm just trying to understand, from a design win perspective, especially with Intel and maybe even looking at the ultrabook category, is that an area you're expecting to see some meaningful growth in in the second half of the year?

The ultrabook, back to the CES show, (inaudible) ultrabook displayed in a booth. But mostly it's now using ultrabook into upcoming core technologies. They are using the previous one but utilize the (inaudible) of packaging (inaudible) to do delivery of ultrabook. And for those, still counting on a small percentage of the whole notebook market share.

With the really core technology firms, Intel, to deliver for the ultrabook, we believe that could be quickly [used] to penetrate the double-digit percentage of the market share. With a newer version of Windows, Windows upcoming, and we have the [same stock], the goal is try to come out and extend the variety also of the notebook, and the (inaudible) is complete with (inaudible) PCI, I think that would be predicted. So it is very important for the O2Micro position to work closely with both the CPU major players, major is Intel and followed by AMD. We are very glad that currently (inaudible) as we partnership with both company have for those ultrabook (inaudible) design, and we simplify the program and we hope that program could be successful in delivery to the market, and bring our notebook business to the ultrabook area and that can compete with the (inaudible) PC area.

Very good. You mentioned some new patents, or at least new offerings, including integrated MOSFET and also chip scale packaging. What are those doing for you as far as penetrating new markets, maybe even penetrating some customers?

For the isolation products, that space is limited. So the MOSFET integrated, and CHB package, and that will be (inaudible) help the isolation design to enable the better design and also reduce the heat consumption and better heat dissipation. So for the Dell isolation, as they have less component costs, and Dell is quite, today is quite matured, and also driven by O2Micro special technologies, so the new pattern coming out as a two-for-one has enhanced our IP portfolio for the (inaudible) and (inaudible) and also our (inaudible) technology type of software, that infrastructure issue interacting currently in the market, and the secondary (inaudible) providing the better heat management and also integrate to address the isolation area.

Very good. Lastly, I do recognize that obviously lightning and power are the main growth engines in 2012. But on the e-commerce product line, obviously you're working on some I/O conductivity technologies. Can you just give us a little bit better sense on what you're working on there? Is it USB or any other new I/O type technologies that are emerging?

Yes. The USB (inaudible) express. We're probably one of the first offering a solution to the market. Beyond that, we work with several Japanese consumer companies for their (inaudible) version 2. For those, it's hard to handle their high-speed data throughput in order to support upcoming hybrid solution, either it is the graphic or is video data, so this is a very important. We believe this year there will be more solid engagement for the design wins, and also prototyping, and next year we'll be [ripping] off those (inaudible) parts, light products in sales in the market. And (inaudible) beyond the notebook, it's getting to those video devices, or the professional [SLR] camera devices.

Very good. Actually, I did have one last question. I don't know, maybe, Jim, you can answer this one. But as far as the General Lighting segment and now that you finally have all of the patents and starting to get some good design wins, could that business potentially be in the millions of dollars in 2012?

Yes.

Very good. Thank you.

Vernon Essie, Needham & Co.

Thank you. I was wondering if you could elaborate a little bit. We've heard from a couple of other companies that there's some interruptions going on in the distribution channel over in China. One of the excuses I've heard is the potential limited access to credit at some of these distribution partners.

Are you seeing anything like that in your business? And do you feel there's any sort of impact that could be playing out? I guess this is leaning more towards the consumer ended markets.

Let me comment on it from a sales and marketing point of view and Perry may add something from the financial end, Vern. First of all, we do not have a distribution channel in place like many companies do. So therefore we ship our product to typically very large customers on a direct basis, and we are seeing no issues in terms of payment or delivery. The only issue we have is their inability to forecast (inaudible) far out. But as far as placing orders and taking delivery and payment, there's no issues from our end at these customers. So we have not seen disruption. Perry, would you care to comment?

Yes, I agree with Jim. We, actually, we are working with directly with key customers, key end customers in the market. We also believe most of our customers are listed companies, and we also monitor the situation of the customer (inaudible) very healthy into working capital.

Just to clarify a point here, I would assume, though, where you are growing your revenues, at least or seeding you revenue in a lot of these let's call them off products from your core monitor and backlighting sort of business. I would assume some of this is still handled through a channel of some sort that involves distributors, or are you -- like, for every one of these lightning wins, you are dealing with directly with a sizable customer?

We are dealing with our customers directly, yes.

Okay.

Not distributor.

So we monitor the customer base very carefully, so we do not engage with what we would consider to be a financially marginal customer.

Thanks for the clarification there. If we could switch gears on another thing I've noticed here in just tracking your headcount, your sales per employee is dipping rather low. It hasn't really actually hit this low since the I guess recession or whatever you want to call it that we had three years ago. We don't want to remember that. But I'm just curious. What's the thought process behind adding additional people? It sounds like you're going to grow in 2012, but are we sort of anticipating a lot more growth?

Then as it relates to that, your R&D spend is continuing to climb proportional to sales. I was wondering if you could discuss that and sort of what the planning and thought process is behind the scenes.

Yes, we have a more mature product in the general lighting, so we are (inaudible) sales than the (inaudible) people to support customers. Customers of the general lighting industry are different from a notebook customer, monitor customer, and TV customer. They are more diversified in the cities of China and also Japan, Korea, Taiwan as well. So this are one of the reasons.

Also, Vern, let me just comment, which we have commented before. We have, over the recent past, backed away from some low-end business to concentrate on higher-margin business. That's one of the reasons you noticed some change.

I guess I just want to understand this. You are funding a channel, if you will, of salespeople and feel that support and what have you for lighting solutions in different parts of the Chinese regions. I guess I'm trying to understand why that would involve that much more spend as opposed to just dealing with the customer directly, whether it's a OSRAM or a Philips or some other major vendor and then they would be taking those costs on their own to get the product to the customer.

First of all, in lighting, as in many markets, many of the large customers are dealing with the ODM type customer that they actually use to assemble the product for them. We've said before not just lighting, but in other areas as we have grown our activity with the AMD (inaudible) customer base that we also have a diversifying customer base that's going into more different types of applications, including the industrial automotive area, so we obviously are focused on design wins and growing revenue in those markets. We do have to (technical difficulty) some of those markets with resources.

Okay. So is there any thought process as to if you could -- I'm just asking this question because a lot of value people are looking at the stock obviously. They want to make sure that you are not putting the cart before the horse. What is sort of your threshold of investment? That's the main thrust of this question, in terms of the R&D line and building this. What's your comfort level if revenue isn't growing in line with that?

(inaudible) the short and the near term. Maybe I make some comments. For the near term, we will pipeline the priority of the project. (inaudible) with more pricing in our (inaudible). It depends on the P&L of each group we are doing that, and we will be -- we are encouraged the group management will be (inaudible).

The second is we have many mature and also ready to ramping up products, and we invest into the FAE and AE and sales. Especially for China, we have direct deal with a customer, and we also pick the customer very carefully. We didn't go through the (inaudible) through every provinces in China, so we are kind of providing their services to the people (inaudible) the customer international or top-tier. That's how we -- one time while we keep our real people headcount low, but also try to contribute to the revenue. So, we are very carefully to doing that.

We also review it quarter by quarter how much we would like to expand in our real people based on the future revenue.

Lastly is operations. We also are carefully to consult our headcount in operations in order to support our corporate revenue number. If the revenue is not growing as dramatically (inaudible) then we will be slow grow or even (inaudible) operation, acquiring the people to support the revenue. So every corner we will be doing that and do adjustment for the upcoming revenue forecast.

For the long-term, of course we have some moving projects, as we mentioned, the core developing. We have further generalizing for industrialification. We are battery management. We have other DC/DC power tools. And that is something we continue to invest in for the long term, and we make sure the long-term (inaudible) to our strategic goal, and we try to achieve the objective for the ROI in the long-term. So this is how we consolidate all internally.

If I can add one quick comment, we also, over the last two quarters, did some catch-up hiring. We had open positions. As you know, engineers in China are hard to come by. So we did some catch-up. We were probably low on headcount early in the year. So you certainly made the point about running the Company efficiently. He just discussed that.

No, and I appreciate that. I appreciate that. I think it's just you've got some shoes your building here and hopefully this revenue comes in to fill them. You're running at a higher OpEx threshold than you were 12 months ago. And so I just wanted to clarify that. So that's helpful.

Yes, I wouldn't view this as a trajectory. I would view it as catch-up.

Thank you.

Christopher Longiaru, Citigroup.

Hi guys. How are you? so my question has to do with inventory in the channel, and what you are seeing and what the trends are that you are seeing. Is it low? Is it high relatively? Any color on that would be helpful.

It's very low. Again, we deal directly with customers, not through a distribution channel. Due to the economic situation, customers are very hesitant to take any significant amount of inventory and hold it. Consequently, they typically place a minimal amount of backlog so that they can just keep their lights running, which does make visibility very difficult, and does create some support issues as well.

Can you give me an idea in terms of how many weeks of inventory you think your customers are holding onto on average right now?

It varies. I think it goes all the way from zero --

Okay.

-- in some cases, literally, where customers are working on getting orders. They may get an order and then all at once they need a new product and they need it very quickly -- all the way to some of the more traditional customers that are working with, say, a major notebook supplier and they may be maintaining two to four weeks of inventory typically.

When you say two to four weeks, it's more of a normalized number?

It's low.

Okay.

It's lower than it would be back in a more normal economic type situation.

That's helpful. That's all I really need. Thanks guys.

Andrew Huang, Sterne Agee.

Thank you. Good morning. On General Lighting, can you give us a sense of your shipping volumes maybe exiting 2011 in units per month and then where they might be exiting 2012?

We typically do not break those numbers down. What I will tell you is we did begin a rather sharp ramp toward the end of the year, and we expect that to continue throughout this year, so we will see our numbers growing steadily quarter-by-quarter.

Maybe to add some color there, do you think that number that I asked for, could it double on a year-over-year basis?

We would be highly disappointed if it were close to doubling. We expect it to be much higher than that.

Okay. Then when you look at your overall business for 2011, can you comment on what you think average ASP erosion may have been?

Average ASP erosion (multiple speakers)

So in terms of the product mix and also in terms of the new product actually, our ASP erosion is some of the highest originally (technical difficulty). So our gross margin maintained very good rates. Even our (inaudible) $28 million area. So the ASP erosion [IT] in 2011 would be in the area of 5% to 7% area.

Okay. That's still pretty good. Then I think a lot of people have been asking about this, but I just want to ask one more time. When I look at the income statement, it looks like revenue was down 11% compared to Q3. But R&D and SG&A were both flattish. So should we expect those to come down in dollars through 2012, or increase?

In 2012, in Q1, I think it's -- we think it will be a little bit up due to the inflation, and some of the annual salary adjustments for the regions, that we'd like to continue to keep our curtailment to our work on the key projects to make sure that we can continue to grow in the new application area and then also to grasp the opportunities that are in the market up from the TV and also monitors and notebooks.

Okay. Going back to that question on the General Lighting and your volumes, could you give us a sense of, assuming that business does ramp, what kind of effect that would have on gross and operating margins? I just want to get a sense of the profitability relative to the rest of the business.

We would expect to see in our model area I think is the best answer for that.

Yes, it will be (inaudible) the corporate average.

Okay, great. Then just one last housekeeping item. Could you give us a sense of where to model income taxes for 2012?

Our income tax for 2012 will be in the area of $250,000 to $350,000 a quarter.

Each quarter for the year.

Each quarter for the year, based on current [shipped to] and also current servicing income (inaudible) countries where we are located.

Okay. Thanks very much.

As a reminder, through February 8, 2012 there will be a replay available by calling 1-880-203-1112, or 1-719-457-0820, passcode 3477998. I'd now like to turn the call back our speakers.

Thank you everyone for attending. As usual, I will be reachable after the call and throughout the quarter. Thank you and have a nice day.

This does conclude today's teleconference. You may now disconnect and enjoy the rest of your day.