O2micro International Ltd (OIIM) 2012 Q4 法說會逐字稿

Good morning and thank you for joining us today to discuss O2Micro's financial results for the fourth quarter of fiscal year 2012. This call is being recorded. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 408-987-5920 extension 8095, and we will fax you a copy immediately.

It is also posted on the O2Micro website at www.o2micro.com under the heading Investors. There will be a replay available through February 6, 2013 at 9.00 A&M Pacific time by calling 1-888-203-1112 or 1-719-457-0820 passcode 8044151. Following the presentation by management, the conference will be open for questions and answers as time permits.

Gentlemen, you may begin.

And good morning and thank you for dialing in to O2Micro's financial results conference call for the fourth quarter of 2012 ending December 31, 2012. This is Scott Anderson, Director of Investor Relations.

I would like to remind listeners that the 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 risk factors. Such risk factors are enumerated in the Company's 20-F annual filings, our annual 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 and Director; our Head of Marketing and Sales and Director, Jim Keim; and Sterling Du, O2Micro's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be open for your questions.

Now we'd like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter ending December 31, 2012. Perry?

Thanks, Scott. We will now review our financial results for Q4 2012. Please note that financial results will be be presented on a non-GAAP basis unless we designate otherwise. The non-GAAP results exclude stock-based compensation expense, one-time charges, nonrecurring gains, and notice this is from discontinued operations. Our 4Q results are available in our press release that was issued earlier today.

GAAP revenue in the fourth quarter of 2012 was $16.8 million. GAAP net loss in the fourth quarter of 2012 was $10.6 million. If we exclude stock-based compensation of $742,000, the income from discontinued operations of $78,000, and the one-time expense of $4.3 million, the non-GAAP net loss will be $5.7 million. GAAP net loss per ADS in the fourth quarter of 2012 was $0.35. Non-GAAP net loss per ADS was $0.19.

Gross margin was 51.6% in Q4. The gross margin reflects the current revenue level and the product mix.

R&D expense was $9.1 million or 53.8% of revenue. This amount excludes stock-based compensation expense of $196,000 in the quarter. This amount includes the one-time expense of $1.5 million for Company downsizing.

SG&A expense was $10.2 million or [16.7%] of revenue. This amount excludes stock-based compensation expense of $546,000 in this quarter. This amount includes the one-time expense of $454,000 for Company downsizing and a fixed asset write-off of $2.3 million.

Income tax was $266,000 in the first quarter and is mainly the actual tax provisions calculated in our global taxable locations. In Q4 2012 we repurchased 819,637 ADS units at a cost of $2.55 million.

Q4 2012 revenue by end market breaks down into the following percentages -- consumer was 40% to 45% of revenue; computer was 30% to 35% of revenue; industrial was 20% to 25% of revenue; communications was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with more than $97.3 million in unrestricted cash and short-term investments. This represents cash and cash equivalent of $3.25 per ADS.

In addition, O2Micro has no debt.

Accounts receivable at the end of Q4 was $8.8 million. Our DSO is 54 days. This is in our target range of 40 to 60 days.

Inventory was $10.9 million at the end of the fourth quarter. This represents 91 days of inventory, and the inventory turnover was 4 times in Q4.

From a cash flow perspective, we generated $6.1 million cash outflow from operating activities in Q4. Capital expenditures were about $336,000 in the fourth quarter for IT and R&D equipment. Depreciation and amortization was $1.2 million in Q4. At the and of the fourth quarter of 2012, O2Micro has 655 employees, 56% of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2013. This guidance reflects our best estimates 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.

O2Micro expects Q1 revenue to be up middle single digits sequentially. We are guiding the Q1 gross margin to be 50% plus or minus 2 percentage points.

R&D expense, excluding stock-based compensation, should be $6 million to $7 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 $700,000 to $800,000 in the first quarter. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $200,000 to $300,000 in the first quarter.

Our fourth quarter and the full fiscal year 2012 results reflect a challenging macroeconomic environment that decreases consumer activity and affected demand for our product. Throughout much of the year, our customers struggled to a determined real now normalized demand in Asia to calibrate their normalized sourcing requirements. Demand in our end markets continues to be difficult to forecast at this point.

Our first-quarter revenue guidance reflects the limited visibility we currently see in our end markets. Although with revenue from CCFL, this product, representing a minimal portion of our overall business, we are hopeful we will begin to realize growth based on the overall contribution from our growth drivers.

Given the uncertain demand environment, we continue to aggressively manage costs. Today we filed our 6-K, and we announced the completion of the divestiture of our Intelligent E-Commerce Group. This divestiture includes licensing Intelligent E-Commerce Technology to [Arsalon Corporation], a distributor of semiconductors and electronic components, established in 1999 and the associated workforce reduction of the business group.

I would now like to focus on the financial impact as a result of this decision.

As a result of this transaction, we expect to realize approximately $6 million to $7 million in OpEx savings throughout calendar year 2013.

Additionally, we expect to save $1 million to $1.5 million in OpEx savings throughout 2014, one-time charges costs and charges associated with this transaction, and are estimated at approximately $3.3 million, which were recorded in the fourth quarter of 2012. Approximately 50 employees were affected by this divestiture.

Our previously-announced cost and expense reduction initiatives are tracking at or ahead of the plan, and we are actively sizing our organization to match anticipated demand.

In addition to our previously-announced cost and expense reduction initiatives, we implemented additional cost savings ranges during Q4 in the form of personnel adjustments. We expect to realize an additional $2 million to $3 million in OpEx savings in 2013 as a result of these measures. We incur a one-time charge of approximately $1 million as a result of these measures, which were recorded in the first quarter of 2012. Approximately 150 employees were affected by these measures.

In total, as a result of the E-Commerce divestiture and the personnel adjustments, we incurred a one-time charge of approximately $4.3 million in Q4. We expect to save a total of approximately $8 million to $10 million in operating expenses in 2013 and an additional $1 million to $1.5 million in OpEx savings in 2014. Approximately 170 O2Micro employees were affected by these actions.

We are also very confident in our ability to control costs further as may be required.

We believe R&D will drive our future sales, and O2Micro is committed to growing our business. We are now focusing nearly all of development resources on our carefully-chosen growth drivers, like the green -- like the general lighting market, and we are confident this will drive significant growth beginning in future quarters. We believe we will be well positioned to capitalize on higher demand as we eventually emerge from the current business cycle.

Lastly, regarding our share repurchase program, we have been active in this program historically, and we will continue to be active going forward. We believe that recently our stock price is below what we feel is a fair value of the Company by a significant decrease. We believe very strongly in the future of the Company, and we feel there is no smarter decision we can make than to repurchase our shares at this level.

At the end of Q4, we had $26.5 million remaining in our share buyback authorization. Returns to shareholders are very much on our minds and will continue to be a focus in the future.

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. Good morning, everyone. Although 2012 was an extremely challenging year, we see growth opportunities in 2013 and onward as a result of our 2012 design win momentum from our array of new analog power management products. While economic challenges remain, we believe our new product momentum in battery and power management, as well as general lighting, will enable expanding growth, despite economic uncertainty.

In 2011 and 2012, we dedicated approximately 50% of our R&D spending to new, innovative products. As a result, customer design activity with our new products is robust. In fact, revenue from our new products accounted for approximately 25% of total revenue in 2012, an increase of approximately 5% from 2000 levels. And if this trend continues, new design revenue will continue to gain momentum with a diversifying market and customer base for our General Lighting, Intelligent Lighting, Intelligent Battery, and Intelligent Power products.

Let's quickly review highlights of each of these areas.

General Lighting is seeing rapid growth. Early in 2012 we provided a target to ship 1 million units of General Lighting products per month by year end. Today I am pleased to report that we have not only met this goal, but have shipped over 10 million cumulative units and continue to see rapid growth in this important segment going forward.

Our expanding work with most of the world's largest lighting companies, as well as many new technology-based companies, makes us confident that O2Micro is emerging as a major supplier in the rapidly evolving, LED-based general lighting market. These achievements in General Lighting were accomplished by a dedicated team of engineers and support staff who have led O2Micro to emerge as a leader in this industry. Their innovative R&D activity is backed by intellectual property with our lighting group having been granted 52 patterns with 967 claims in 2012. Our Free Dimming Technology is now recognized worldwide, highlighted with the recent announcement of several new lighting products that are based on our technology and are already going into volume production with industry-leading suppliers.

As announced in our recent press releases, our Free Dimming product line now includes three step dimming, as well as continuous dimming products. The product line features includes integrated MOSFETs, 110 volt, 220 volt universal line input power factor correction circuitry for both isolated and non-isolated designs involving customers worldwide.

As a result, new General Lighting products are continuing to ramp into higher production levels for LED lighting applications, including AC/DC products for LED bulbs and T5 and T8 tubes; DC/DC for MR16 bulbs and street lighting products.

Beyond General Lighting, our Intelligent Lighting product line has positioned our LED products for TV and monitors from low end single-string LED applications to high end, multi-string 3-D TV and high contrast ratio TV. In these traditional markets, we continue to be the industry leader in backlight applications while successfully transitioning from CCFL to LED lighting.

At this time, revenue from CCFL-based products constitutes a very small portion of our overall business. We remain confident that we will grow revenue and LED-based products in our traditional markets as this market continues to expand.

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 additional patents to extend the lead.

Intelligent Battery design activity is also gaining momentum based on our creative design methodology. Our major design in activity has resulted in increasing revenues being forecasted as we move forward in 2013. Design wins include industrial applications for power tools, robotic vacuum cleaners, UPS systems, and electric vehicles.

We also continue to see growing opportunities in tablets and communication devices with our cool encounter technology.

Although the automotive market will be slow to ramp into high volume, we do see smaller e-vehicles gaining market momentum, and we believe our technology leadership will enable revenue growth moving forward in late 2013 and on into 2014.

Intelligent Power Products are also continuing to show increasing design wins and revenue growth opportunities, despite notebooks being surprisingly weak during 2012. Our platform design win momentum remains intact as the market shifts toward ultrabooks and tablets where we are investing heavily in new Power Management chipsets.

At the same time, we are continuing to expand our market position in power for traditional notebooks as design activity on next-generation notebooks and ultrabook platforms remains strong.

Our Intelligent Power products also continue to enjoy broadening market acceptance in both Intel and AMD-based platforms. This includes our highly-integrated, SMBus programmable, multi-chemistry battery charger controller providing complete battery charging control for single battery portable computer systems. It also features the hybrid power boost feature to support the turbo boost mode of Intel CPUs.

To summarize our overall market activity, we continue to see a rapid expansion in design activity into new markets that include all product areas, notably Intelligent Battery, Intelligent Lighting, and Intelligent Power. O2Micro is executing on a growth and diversification strategy built on processing technology leadership deliverable to the world's leading manufacturers. We believe that our new products will continue to constitute a growing percentage of our overall business. While market challenges persist, we remain confident that our product development investment and execution will drive revenue growth in the future.

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

Thanks, Jim. Today I'd like to discuss a few different aspects of business. First, I'd like to provide a recap of 2012.

2012 was characterized by weaker-than-anticipated consumer activity due to the macro economy factors. We generate revenue of $97.7 million in 2012, a decrease of approximately 21% from the $124.3 million in 2011. We reported a GAAP loss of $25.8 million in 2012 compared to GAAP net income of $9 million in 2011. Clearly this was a difficult year for the Company as our end market focus did not materialize and did not achieve the growth expectations that we anticipated at the beginning of 2012.

A significant factor that led to our revenue decline in 2012 was the revenue shortfall that we experience in CCFL products. Revenue from the CCFL product now represents a minimum portion of overall business, and that revenue from our new products are exceeding the declines that we've faced in 2012 from CCFL products. We do not anticipate our major end markets declining near this level in 2013, and we are confident that our growth drivers will begin to represent a greater portion of our overall revenue during Q4.

As a result of the divestiture of the E-Commerce Group and associated workforce reduction, O2Micro has now significantly reduced OpEx and is focused on our core competence of high performance analog integrated circuits. And this expects to unleash the value of growth drivers in General Lighting, Intelligent Battery, and Intelligent Power.

As a result, we believe O2Micro is positioned for an increase in profitability in the near future, while increasing our focus on our core business and growth drivers and deployed the full force of assets and resources behind this business.

Next, let's discuss our growth drivers and why we believe we are well positioned to grow and moving forward.

In spite of weak macro economy conditions that we experienced throughout 2012, we plan to focus the majority of development resources on our priority-chosen growth drivers, which includes General Lighting, Power Management, Intelligent Lighting and Battery Management. By implementing these strategies, we are confident in our ability to chart significant growth in the future. We remain focused on using the new product innovation to drive our growth through significant design win activities and market share gains.

As we look into calendar 2013, we will continue to develop new innovations to chart adoptions for LED General Lighting applications; address the market for increased power consumptions in tablets, smartphones, notebooks, and other books; and lastly, continue to penetrate into the large addressable Battery Management market for power tools, electrical, and hybrid vehicles, among others.

Our portfolio of high-performance power management solutions is showing steady, continuous growth. We continue to gain market share in the sector in both DC/DC and in the (technical difficulty) market with both Intel and AMD playphone for the notebook computer, which requires complicated Power Management. During the quarter, we introduced several new products with DC/DC and battery charge applications, including Windows 8 and Intel as book playphones.

Our fast-growing General Lighting products have achieved significant revenue at the end of 2012. O2Micro has established clear market leadership in General Lighting technology, and we are broadly engaged with the industrial-leading manufacturers to enable and accelerate wide-spread adoption of LED General Lighting solutions.

We are actively engaged with top-tier customers in China, Taiwan, Japan, and the United States. We believe 2013 will be an exciting year for the business as several key markets are banning the white incandescent lightbulb.

During the quarter, we extended our family of General Lighting products by introducing several LED driver controllers for Free Dimming. LED lighting remains a promising opportunity where we believe we have established a market leadership position and key patent grants to fortify our IP portfolio.

Looking across the whole Company, O2Micro strategies to diversify beyond our legacy products is resulting in significant design win momentum. We have the right technologies, the right products and the right customers with the benefit of several large-growing markets. We've broadened and deepened our relations with our customers and platform providers. We are supporting a significant number of new flagship programs at our customers for the year and for next-generation program in calendar year 2014. In some cases, these wins are following wins where our share is strong and in cases with our new winds where our current share is low.

In closing, I am excited about our growth opportunity in General Lighting, Intellectual Power, and Intelligent Battery and our new financial model based on a high performance analog. I believe growth in this market and the change we are making to our model will help offset potential weaker demand in other end markets.

At this time, I thank you for listening to our conference call and turn back to Scott.

Thank you, Sterling. Operator, at this point, we'd like to open the call to questions.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

I'm not sure if you mentioned this on the call, but given the new financial model, can you just remind us what your breakeven point is now whether on income or cash?

Yes, given the new OpEx and also the current situation of the product mix resulting in the gross margin in the area of 50%, our breakeven point will be in the area of $28 million, $29 million, and the cash breakeven will be in the area of $25 million to $26 million.

With the increase in the gross margin, we improved our yield and also our product mix. The breakeven point will be lower than in the future quarters. I think I will update in the future quarters on this.

Okay, very good. And Jim, you mentioned that last year new product revenue represented 25%. I'm just wondering, if you look at the $16.8 million you reported in Q4, I assume that number is higher.

Yes.

Would you care to comment how much, or is it approaching a third of your business, or --?

We would prefer not to. I don't actually have the latest calculations, but I would assume it is more in the 30% area in the Q4 timeframe.

Okay. Very good. And a question for Sterling. Sterling, you talked about some design win activity in tablets and smartphones. I'm just trying to understand what your content opportunity would be in devices like that.

The tablet will be higher than smartphone. In the tablet, we have a Power Management battery and also backlighting potential certain content, and probably we are looking at multiple IC can sell to the tablet.

For the smartphone, we probably -- it is the battery portion to go to the smartphone, which is one certain content opportunity in the smartphone.

And the sales strategy there, how is that going to play out? I mean the market today is dominated by obviously two players, one in the US, one in Korea. Is your strategy going to be to go after companies like that, or will you focus more on the up and coming OEMs in China and Taiwan?

Well, yes, you are right. Right now there's two major players. Our strategy tried to address non-US campaign, and then we also see the increasing aggressiveness from the channel base and talent base, the tablet PC and the smartphone. And so far, our tablet PC and the smartphone does lend in some of the channel-based customers so far.

Very good. Thank you very much.

Christopher Longiaru, Sidoti & Company.

I was just wondering, just in terms of your visibility, what that is right now, and also just in terms of these new products, what your expectation is for how the ramp really progresses?

Well, we see the ramp continuing to progress very nicely on the new product area. I think in general economic terms the market is still difficult to read, although we do see more stability than we've seen in previous quarters.

And just in terms of hitting your guide, what kind of turns number do you have to have to hit your guide for the March quarter?

We really don't look at turns. We deal mainly directly with the major customers, and so we work off a forecast base with major customers. And our projection is based upon that forecast, which we think is quite stable.

Okay. Thank you, guys.

Vernon Essi, Needham & Company.

This is Tony Grillo calling in for Vern Essi. Thanks for taking my call. I just have a couple of clarifying questions.

You mentioned that you expect guidance to be up middle single digits as a percentage over the next quarter. Is that correct?

Yes.

And then what was your cash flow from operations?

Cash flow from operations. All pro, $6.2 million.

Great. Thank you.

And at this time, we have no further questions from the phone lines.

Okay. Thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888, with follow-up questions. Have a good day, and thank you, again, for your attention. Goodbye.

This does conclude today's conference. Thank you for your participation.