O2micro International Ltd (OIIM) 2013 Q3 法說會逐字稿

Good day and thank you for joining us today to discuss O2Micro's financial results for the third quarter of the fiscal year 2013.

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 November 6, 2013, at 9 AM Pacific Time by calling 1-888-203-1112 or 1-719-457-0820 using passcode 1689610.

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

Good morning and thank you for dialing into O2Micro's financial results conference call for the third quarter of 2013 ending September 30, 2013. 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 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 and Director; our Head of Marketing and Sales 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 to your questions.

Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the third quarter ending September 30, 2013. Perry?

We will now review our financial results for Q3 2013. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results includes stock-based compensation expense, one-time charges, nonrecurring debt, and losses from discontinued operations. Our full-year results are available in our press release that was issued earlier today.

GAAP revenue in the third quarter of 2013 was $18.6 million. GAAP net loss in the third quarter of 2013 was $4.5 million. If we exclude stock-based compensation of $638,000, the non-GAAP net loss would be $3.9 million.

GAAP net loss per ADS in the third quarter of 2013 was $0.16. Non-GAAP net loss per ADS was $0.14. Gross margin was 51.4% in Q3. The gross margin reflects the current revenue level and the product mix.

R&D expense was $6.3 million, or 34.1% of revenue. This amount excludes stock-based compensation expense of $173,000 in the quarter. SG&A expense was $7.3 million, or 39% of revenue. This amount excludes stock-based compensation expense of $465,000 in this quarter.

Income tax was $247,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location.

In Q3 2013 we repurchased 326,988 units at a cost of $1.1 million. As of September 30, 2013, there was $19.45 million remaining in our authorization. Q3 2013 revenue by end market breaks down into the following percentages -- consumer was 40% to 50% of revenue, computer was 30% to 40% of revenue, industrial was 15% to 20% of revenue, communications was less than 5% of revenue.

At this moment I would like to provide some additional information. O2Micro finished the third quarter with $78.1 million in restricted [cash] and short-term investments. This represents cash and cash equivalents of $2.77 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 was $11.5 million. Our DSO is 55 days in our target range of 40 to 60 days. Inventory was [$3.1 million] at the end of the third quarter. This represents 80 days of inventory, and inventory turnover was 4.5 times in Q3.

From a cash flow perspective, we generated $2.8 million cash outflow from operating activities in Q3. Capital expenditures were about $129,000 in the third quarter for IT and R&D equipment.

Depreciation and amortization was $1.1 million in Q3. At the end of the third quarter of 2013 O2Micro had 597 employees, 56% of which are engineers.

At this time I would like to provide our financial guidance for the fourth quarter of fiscal year 2013. 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.

O2Micro expects Q4 revenue to be flat, plus or minus 3%. We are guiding the Q4 gross margin to be in the range of 50% to 52%. R&D expense, excluding stock-based compensation, should be $6 million to $7 million in Q4. SG&A should be $7 million to $8 million in Q4 excluding stock-based compensation expense.

Stock-based compensation should be in the range of $600,000 to $700,000 in the fourth 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 fourth quarter.

In closing, our top-line results in the third quarter were in line with the guidance that we provided in July and continue to reflect a fairly weak end-market demand environment. We will continue to invest in our carefully chosen growth drivers -- general lighting, intelligent battery, intelligent power, and [spec] lighting.

And we remain confident that the innovation and the investment we are making in this product segment, combined with strong design win activity and market share gain, will lead to growth and a return to profitability in the near future. We are now well underway in our supply chain management review and we expect to realize additional improvement to our gross margin profile in future quarters. And we plan to provide additional details of these measures early next year.

Given the uncertain demand and the macro environment, we will continue to aggressively manage costs. We are also very confident in our ability to control costs further as may be required.

Lastly, regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. At the end of Q3 we had $19.5 million remaining in our share buyback authorization. Returns to shareholders are very much on our minds and will continue to be a focus on the future.

I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim?

Thank you, Perry. Good morning, everyone. As we entered last quarter we stated that we faced difficult market conditions entering Q3 in notebooks, monitor, and TV, and expected to see an increasing proportion of our revenues from new products directly resulting from our major R&D investments in general lighting, intelligent lighting, intelligent battery, and intelligent power products.

While the TV market remained at relatively stable, the monitor and notebook markets were weaker than expected in Q3. Lackluster sales of notebook and monitor markets were offset with new product sales and expansion of our industrial products sales.

While this trend of slowing notebook and monitor sales will continue from Q4 into 2014, we are excited to see increasing opportunities in battery management, general lighting, and industrial power. These product areas will continue to become an increasing portion of our revenue base and drive future growth while maintaining reasonable margins. We will place increasing emphasis into these markets, which will consume more and more of our focus and energy going forward.

As we move forward and our new product and market base continues to grow, we expect by the second half of 2014 to share more information and product sales breakout information related to these new products with our investors. In the meantime, we will continue to share some general highlights of our product and market expansion.

In general lighting we continue to expand in three critical areas -- patent portfolio, product offering, and major account design wins. Most importantly, the competitive nature of the LED general lighting business with traditional OEM lighting suppliers like General Electric, Osram, and Phillips competing with new market entrants for retail shelf space is resulting in rapidly dropping retail LED lighting prices. This will obviously drive much higher volumes as long-life LED bulbs and tubes become increasingly attractive to buyers.

Although we have stated in earlier investor calls that the general lighting market was fragmented, we now see this situation stabilize and we have better market visibility. Based on our growing position in this market in both namebrand OEMs and key supply chain ODMs, revenue flows from this market will become an increasingly important revenue generator for us in 2014. As noted previously, we have a leading-edge product line with our intelligent lighting group having been granted 36 patents with 649 patent claims in the first three quarters of this year.

As announced in our press release, our Free Dimming product line now includes three-step dimming as well as continuous dimming products. The product line features include integrated MOSFETs; 110-, 220-volt universal line input power factor correction circuitry for both isolated and non-isolated designs involving customers worldwide. Applications include AC to DC product for LED bulbs and T5 and T8 tubes, DC to DC for MR16 bulbs, and street lighting.

Besides general lighting we continue to be the industry leader in TV and monitor backlight applications. We remain confident that we will continue to grow revenue in LED-based products as these markets continue to expand to an increasingly broad application base, including industrial and automotive applications.

Our intelligent property in both Asian and Western countries continues to strengthen our market leadership position in all lighting areas and we are continue to file additional patents to extend this lead. Additionally, we are pleased to see our intelligent battery design activity continue to gain momentum based on our creative design methodology.

Our revenue base continues to grow in this product area and more design wins in higher-end industrial applications including power tools, vacuum cleaners, UPS systems, eBike, and other light electric vehicles. We also continue to see growing opportunities in communication devices with our patented [coolant] counter technology. While the automotive market is slow to ramp into high volume, smaller e-vehicles continue to gain market momentum and our technology leadership is enjoying revenue growth.

With our increasing battery management activity opening new market opportunities, we will focus an increasing amount of our energy in intelligent power products, including chargers and DC to DC, into industrial market areas where battery management is growing in success. Our intelligent power products continue to enjoy broadening market acceptance in both Intel and AMD-based platforms in computer and industrial applications.

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's CPUs.

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, and intelligent power. O2Micro is executing on a growth and diversification strategy built on product and technology leadership deliverable to the world's leading manufacturers.

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

Thanks, Jim. I am pleased to report Q3 revenue that was in line with the guidance we provided in July. We generated revenue of $18.6 million in the third quarter of 2013, a slight decrease of approximately 1% from $18.7 million that we reported in the second quarter of 2013.

We reported a GAAP loss of $4.5 million in the third quarter of 2013 compared to a GAAP net loss of $4.4 million in the second quarter of 2013. We reported gross margin of 51.4% in Q3, an increase from the 51.2% in Q2 and the 50% we reported in Q1 of 2013. The gradual improvements in our gross margin this year is a direct result of supply chain management review process which is ongoing, especially we have been working closely with our supply chain partners to realize efficiency in wafer, assembly, and testing processes.

We are also working with our vendor on pricing negotiation. The goal of this process to streamline our current processes and increase efficiencies to further improve our gross margin profile going forward. I am pleased with this process so far and we expect to realize additional improvement in our gross margin throughout 2014.

Similar to last quarter, we saw a meaningful number of recent design wins (technical difficulty) and significant market share gains in the quarter. I am very pleased with the progress that we have been projecting in many of our long-term growth drivers including general lighting, intelligent battery, and intelligent power. Growth in this area was partially offset by weakness in our backlighting business due to persistent weak end-market demand in TVs, monitors, and notebooks.

We are continuing to innovate; carefully investing in order to spur the adoption of advanced (inaudible) product in a market we serve through clear competitive advantages. Our battery business for power tool and household appliance continues to display a strong design win momentum. We expect these design wins to translate into meaningful revenue in upcoming quarters.

We are gaining share in this market and we expect to be one of the top suppliers of battery management solutions in the near future. Depending on the type of tool and appliance, we will generate between $0.50 and $1 of silicon content and (inaudible) with a high-margin business. Many of the world's top tier power tool vendors have adopted O2Micro's solution.

Our LED general lighting business growing significantly and we expect this business to increase for the remainder of 2013 and into 2014. We will continue our strategy to optimize the cost structure, including a review of the entire supply chain from buying power of the purchase and the vendor consolidation in general lighting in order to meet the requirements of our customers, specifically in the Chinese market, in addition to the active design wins and the business ramping up in Korea, Japan and US marketplaces.

Regarding backlighting we have improved our market share in our backlighting business due to the strength of Chinese TV manufacturers versus Korean manufacturers as our attach rate is higher with Chinese manufacturers. We are also very excited to introduce the new market (inaudible) for TV market. Our customer (inaudible) is sampling and is expected to reach production early next year.

As we enter into Q4 we plan to continue to focus the majority of (inaudible) resources from our [priority]-chosen cost drivers, including LED general lighting, backlighting, battery management, and power management. By implementing this strategy we are confident in our ability to drive (inaudible) in the future. We remain focused on using new product innovation to drive our growth through significant design win activities and the market share gains.

At this time I would like to thank you for listening to our conference call and I will turn it back to Scott. Scott, please?

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

(Operator Instructions) Tore Svanberg, Stifel.

Thank you. First question on the guidance flat to up or down 3%. Can you just talk about some of the moving parts there, and as part of that maybe you could talk a little bit about your current visibility towards that number? Thank you.

The current visibility towards the number, Tore, I think is quite good. The majority of the backlog is in place as basically we are proceeding to enter in November, so we feel quite good about the backlog positioning.

As we mentioned on the call earlier, we continue to see ongoing softness in the notebook area as well as the monitor area. I think Corning announced earlier today that they actually see glass production going down in the Q4 timeframe and that is a reflection into those markets.

The TV remains a little more stable, but nevertheless it is not expanding at this point in time. We do see ongoing growth for ourselves, certainly in the product areas we mentioned. Most namely, we expect to have reasonable growth in Q4 in the general lighting as well as the battery management areas.

Very good. If we looked at the 15% to 20% that is now industrial, is LED the higher sort of subsegment within there or is power tool right up there as well?

Yes. LED, too, yes.

And you had 80 days of inventory in the quarter. Can you talk a little bit about your plans for Q4, please, on the inventories?

Q4 inventory I think Q3 we (inaudible) some [die bank] who support a shorter cycle time. In Q4 the inventory would be probably a little bit less or the same level as Q3 ended.

It just seems like it is a lower level than usual, so I am just wondering if you are choosing to keep it this low or --?

Actually we are -- as Sterling mentioned, we have employed some turnkey solution of vendors so that is also we can do a faster cycle time. So the inventory level we have done some consolidation, but however we are adding some (inaudible) in Q3 to support dynamic demand. But while we are adding a wafer die bank which we also cut in the final [PEG GIC] inventory in the stock.

Sounds good. Last question; so you have done some cost-down initiatives to try and get gross margin back up. At what revenue level did you expect to be back within your target range of 55% to 60%?

I believe that is in the area of the $28 million to $30 million. We will probably reach to 54%, 55% area given the current situation of the competition.

Very good. Thank you very much.

(Operator Instructions) Vernon Essi, Needham & Company.

Thanks for taking my question. Wanted to just dive into the gross margin point a little more here and I am wondering -- I guess you have a $28 million to $30 million revenue target on that. I'm asking this because how are you going to get to that in some of the markets that you are in right now?

It seems as though you are moving into these higher mix markets like battery charge, and it is not really reflecting a positive gross margin traction. I mean I realize your revenue is declining, but would the profile and mix be leaning a lot more towards those types of products or would it be leaning more towards some of the traditional power products in the notebook and the backlighting products as well?

Where we are moving up to $28 million to $30 million our gross margin will improve by the revenue level by 2%, plus or minus. And hopefully we can continue to improve on this area.

Also, we can leverage our product in the cost-saving programs. In Jim's comment on the market sector we saw some of the general lighting and also battery management area that we have high gross margin at the corporate, but we believe that we will continue to grow higher growth over there as well.

And also in the (inaudible) area also we have a higher gross margin in the [corporate] area. That is why I think that, given the current competition area, when we move up to the $28 million, $30 million area we can leverage our revenue level with the improvement in the gross margin by 2% area and also some product mix.

So I guess maybe let me rephrase this and I want to try to get some thinking around the construct to get to that. If you were to get to that revenue level, say, the high 20s, are you operating under the assumption that almost all the incremental growth would be in these newer products that are serving the industrial areas as well as LED?

Would we see a dramatic mix shift in those, how Perry goes through the different buckets of revenue, or would we still have kind of the same situation where about two-thirds to 70%, maybe even 80% of the revenue is in that sort of notebook computer/consumer area?

Notebook area is only 30% to 40% area now. And for TV area, actually for larger size TV area, the lighting, we also enjoy higher gross margin than the corporate average.

Okay. (multiple speakers) All right, that helps a little bit there. Then just you sort of brought up the TV opportunity in China and given it is that time of year to ask the question, what are you hearing, just generically speaking, from the supply chain regarding Chinese New Year? And what do you think is sort of -- not that it has to reflective upon your company directly but what seems to be the chatter out there on build plans for Chinese New Year?

The October Golden Week of Chinese holiday [just pales] and is a little disappointed, so we hold carefully optimistic towards the Chinese New Year.

There is some incentive programs going to be coming out for the China -- for the appliance, but however that also comes with some condition to (inaudible) on power saving. So we believe that the TV market in China probably will be conservatively optimistic.

But similar to what we commented, inside this market the Chinese manufacturers, the market share gained from Korean manufacturer. And our attach rate in Chinese TV manufacturers is higher than Korea, so that will benefit us.

Okay. Just generically, though, it sounds as though there could be conservative optimism in the consumer electronics market for the Chinese New Year season?

Yes, yes.

Okay. All right, thank you.

(Operator Instructions) There are no further questions at this time. I would like to turn the call back over to Mr. Scott Anderson for any additional or closing remarks.

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

This does conclude today's conference. We appreciate your participation. A replay is available until 9 AM Pacific Time on November 6, 2013, by calling 1-888-203-112 or 1-719-457-0820 using passcode 1689610.