O2micro International Ltd (OIIM) 2013 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 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 February 5, 2014 at 9.00 am Pacific Time by calling 1-888-203-1112 or 1-719-457-0820, passcode 8103180.

Following the presentation by management, the conference will be opened for questions and answers as time permits.

Gentlemen, you may begin.

Good morning, and thank you for dialing to O2Micro's financial results conference call for the fourth quarter of 2013 ending December 31, 2013. This is Scott Anderson, Director of Investor Relations.

I'd 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 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 Company's 20-F annual filing, our annual report, and other documents filed with the SEC from time to time.

Listeners are referred to 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 of 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, 2013. Perry?

Thanks, Scott. We will now review our financial results for Q4, 2013. Please note that financial results will be presented on a GAAP basis unless we designate otherwise.

The 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 fourth quarter of 2013 was $19.1 million. GAAP net loss in the fourth quarter of 2013 was $5.1 million. If we exclude stock-based compensation of $649,000 and the one-time expense of $1.2 million, the non-GAAP net loss will be $3.2 million.

GAAP net loss per ADS in the fourth quarter of 2013 was $0.18 Non-GAAP net loss per ADS was $0.11.

Gross margin was 50.1% in Q4. The gross margin reflects the current revenue level and the product mix.

R&D expense was $6.3 million, or 33% of revenue. This amount excludes stock-based compensation expense of $170,000 and the one-time expense of $718,000 in the quarter.

SG&A expense was $6.8 million, or 35.6% of revenue. This amount excludes stock-based compensation expense of $479,000 and the one-time expense of $512,000 in this quarter.

Income tax was $291,000 in the fourth quarter and is mainly the actual tax provisions calculated in our global taxable location.

In Q4 2013, we repurchased 401,767 ADS unit at a cost of $1.2 million.

Q4 2013 revenue by end market breakdown into the following percentages. Consumer was 45% to 55% of revenue. Computer was 25% to 35% of revenue. Industrial was 15% 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 $75.9 million in unrestricted cash and short-term investment. This represent cash and cash equivalent of $2.73 per ADS. In addition, O2Micro has no debt.

Account receivable at the end of Q4 was $10 million. Our DSO is 51 days. It is in our target range of 40 to 60 days.

Inventory was $7.2 million at the end of the fourth quarter. This represent 72 days of inventory, and the inventory turnover was five times in Q4.

From a cash flow perspective, we generated $11 million cash from operating activities in Q4.

Capital expenditure was about $242,000 in the fourth quarter for IT and R&D equipment. Depreciation and amortization was $1.1 million in Q4.

At the end of the fourth quarter of 2013, O2Micro had 492 employees, 55% of which are engineers.

At this time, I would like to provide our financial guidance the first quarter of fiscal year 2014. This guidance reflects our best estimates for the current environment and is subject to change. This is the only official guidance we will provide, and this -- we update it with a public announcement in the future.

O2Micro expect Q1 revenue to be flat to about 7% sequentially. We are guiding the Q1 gross margin to be in the range of 50% to 52%. R&D expense, excluding stock-based compensation, should be $5 million to $6 million in Q1.

SG&A should be $6 million to $7 million in Q1, excluding stock-based compensations expense. Stock-based compensation should be in the range of $600,000 to $700,000 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.

In summary, our top line result in the fourth quarter were at the higher range of the guidance that we provided in October, and continue to reflect a fairly weak but gradually improving end market environment. Excluding our legacy digital E-Commerce business, we achieved revenue of $15.6 million in Q4 of 2012, compared to Q4 2013 revenue of $19.1 million, or a 22% growth rate.

Based on the cost-cutting measures that we implemented in the fourth quarter, we believe that we have aligned our operating expense structure to more effectively manage our business in the current environment, with the goal to reach a cash breakeven point in 2014. We now believe our cash breakeven point is between $20 million to $21 million in quarterly revenue, and our profitability breakeven point is between $23 million to $24 million in quarterly revenue.

Our guidance for the first quarter of 2014 reflect seasonal weakness as the majority of our product, built for the US holidays and the Chinese New Year, occurred in Q4. Despite this -- despite the seasonal weakness in Q1 of 2014, we still expect to grow our core mixed signal business in Q1 from years-ago levels.

Additionally, based on current forecast, we do expect that full-year 2014 revenue levels, with increase in 2014 compared to 2013 labels.

We will continue to invest in our carefully-chosen growth drivers -- general lighting, intelligent battery, intelligent power and backlighting. And we remain confident that the innovation and investment we will making in these product segment, combined with strong design win activity and the market share gains, will lead to consistent growth and a return to profitability in the future.

We are now well underway in our supply chain management review, and we expect to realize additional improvements to our cost structure profile in future quarters.

Given the uncertain demand and the macro environment, we are prepared to continue to manage costs as needed. Although we believe we have aligned current costs based on current and anticipated revenue levels, as a result of difficult recent cost-cutting initiatives, we remain very confident in our ability to support current and future customer demands in the program range.

Finally, regarding our share repurchase program, we have been active in the program historically, and we plan to be active going forward. At the end of the Q4, we had 18.3 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. Last quarter, we stated that as our new product and market base continues to grow, we would begin to share more information, including product sales information related to new products. We will now start this process, and share more information with you in coming quarters.

First, we would like to highlight that our analog and mixed signal product sales grew steadily quarter over quarter throughout 2013, with Q4 2013 sales of analog and mixed signal products being approximately 19.4% higher than Q1 2013. We expect to see ongoing growth in 2014, with the first half of 2014 showing reasonable growth over the first-half of 2013, and project that growth in the second half of 2014 could accelerate based on ongoing new product design wins.

As some investors are aware, our new product revenue growth has been masked by rapidly-declining revenues in our legacy CCFL products used in TV, as well as the rapid decline of notebook sales in 2013. Sales of CCFL continued to fall in 2013 from approximately $1 million in Q1 of 2013 to less than 1% of projected sales in Q1 2014. CCFL sales are now negligible.

The new products that were the primary drivers of our 2013 growth in analog and mixed signal products were battery management and LED general lighting products.

LED general lighting products have been growing very rapidly over the past year, and are now expected to contribute approximately 15% of our projected revenue in 2014.

Additionally, battery management product revenues have had a steady growth over the past year in the industrial market, and are expected to reach approximately 10% of Company revenues by Q4 of 2014.

Additionally, our LED backlighting products are expected to continue to grow in 2014, despite a declining market in LCD monitors and lackluster TV market. While we have gained market share in power products for notebook, growth in this area was mitigated by a rapid decline of notebook sales. However, we expect revenue growth to resume in power as our charger products continue to expand into new product and market areas.

I will now turn the call over to our CEO, Sterling Du, for closing remarks.

Thank you, Jim. I am pleased to report Q4 revenue that was in upper range of the guidance we provided in October. We generate revenue of $19.1 million in the fourth quarter of 2013, an increase of 3% sequentially and up 14% from year-ago period.

We reported a [get] loss of $5.1 million in the first quarter of 2013 compared to a get -- net loss of $10.6 million in a year-ago period. We reported gross margin of 50.1% in the Q4 of 2013, down slightly from 51.4% gross margin report in Q3 of 2013. During this challenging environment, we still maintain over 50% gross margin, attributable to our proprietary technology and technical superiority.

At the end of 2013, we conclude difficult but necessary cost-saving measures to align the Company with current and anticipated revenue levels. As a result of these measures, we have reduced operating expenses to $15 million in the fourth quarter of 2013, down from $20 million in the year-ago period.

And for Q1 of 2014, we are now providing operating expense guidance to be in the range of $11 million to $13 million, which at the midpoint is down approximately 15% from a year ago.

Specifically related to the cost saving, we have consolidated some long-term projects, including battery management solution for the electrical vehicle markets, to focus our resource on supporting fewer customers. As we highlight last quarter, we have also scaled back our focus and the resources on some notebook computer projects, and so have shift resource to design wins activity in China-based tablet and smartphone markets.

Finally, we also downsized our legal resources, notably in our Taiwan facilities, as we ended a gradual shift from the notebook computer market to the China-based, where most AAA and the smartphone market are in. We believe that we will continue to support our customer to their satisfaction in design win, prototyping, quality control in the production support, and that we will continue to get additional design win in the segments we target.

Meanwhile, we combine the resources of our power management and battery management teams to form a new business unit. We believe that was the result of this combination, the combined engineering team will have a broader focus and that we are able to leverage our talent teams of engineer to provide higher integrated solution to customers.

As Jim highlights in his remarks, we also intend to begin to break out revenue in future quarters by our gross business of backlighting, general lighting, and the newly-formed -- the power major business unit. We feel that reporting is -- maintains the transparency of Company, and investor will be able to understand the growth potential in our business units.

Similar to last quarter, we saw a meaningful number of recent design wins, new startup ramps and significant market share gains in the quarter. I'm very pleased with the progress that we are being -- projecting in many of long-term growth driver, including general lighting, backlighting and battery power management.

Our battery business for power tool and household appliance continues to stay strong, [develop] momentum, which will translate into meaningful revenue in the upcoming quarters. We are gaining market share in this market. We expect to be a market leader for battery management solution in the near future.

Depending on the type of tool or appliance, we could generate between $0.50 up to $1 of [counting] in this high-margin business, while many of the world top-tier power tool vendors are -- adopt O2 solutions. Our LED general lighting business is growing significantly, and we expect this business to increase throughout 2014.

We'll continue our strategies of optimizing the cost structure, including review of entire supply chain, combined purchase power, and vendor consolidation in general lighting in order to meet the requirement of customers, specifically in the Chinese market, in addition to the [active] design win (inaudible) [ramping on] Korea, Japan and the US marketplaces.

In closing, I'm excited about our successful across-border core power management product lines, including general lighting, backlighting and intelligent power management.

So, at this time I would like to thank you for listening to our conference call, and I turn back to Scott.

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

(Operator Instructions). Vernon Essi, Needham & Company.

This is Tony, calling in for Vern. So, you mentioned last quarter that you had some optimism in the consumer electronics market, going into the Chinese New Year season. I was wondering if you could maybe speak to this as it relates to demand for your products.

Could you repeat that? The last part wasn't quite clear.

Oh. My apologies. I was hoping you could just speak to that optimism that you had, as it relates to the demand for your products.

Well, we see very significant opportunities for us, as we look into some of the areas for, particularly, our power product, where we have been concentrated heavily in the notebook area. And as we look forward, we see very significant opportunities in some of the new consumer product areas that we've not been in previously. And we are in a transition period of getting design wins for those products.

So, we do remain very optimistic that we will see good consumer growth; but at the same time, we'd like to stress the fact, as we mentioned, we've seen good growth in areas like industrial with some of our battery management products.

Okay. And I guess, kind of looking at the notebook area a little more, some companies have mentioned that they're seeing, or they also still hold a little optimism for a turnaround in the notebook area, around this year. Can you guys maybe talk about that a little bit?

We would like to be optimistic, but I think we're not going to depend upon our growth -- so, basically we are going to focus more energy into continuing to grow some of the growth drivers where we have seen very successful results over the last year. You know, we certainly hope that there'll be some upturn in notebook. If there is, that can give us some additional upside.

Okay. And I guess, kind of, my last question was, you guys talked about how decline in legacy business and decline in notebooks are kind of offsetting these new product introductions and the revenue that's coming through there.

Could you maybe talk about where you might look at as a turning point for where that would help to increase your revenue rather than offset it? And I know that's a tough question, but maybe you could just walk through that.

Well, the time is really now. As we mentioned, we actually did grow quarter to quarter in analog and mixed signal products in 2013 -- and that wasn't insignificant growth -- while we saw CCFL ICs drop. At this point, as we move into 2014, the CCFL sales are projected to be well under 1% of our revenue base in 2014.

So, basically, that area is no longer a factor in terms of negative growth, if you please. So, it allows our new products to accelerate what we hope will be very strong growth in 2014.

And then, similar to what you said, it's a matter of, you know, not using notebook to help drive your revenue, but hoping for the eventual return demand there, which would then help that increase more meaningfully?

Yes, exactly.

Perfect. Thanks for your help, guys.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

First question on gross margin. It came just about 50% in this quarter. You've implemented some good supply chain management practices. I'm just wondering what the gross margin trajectory will be, going forward; and when could you potentially get back to the 55%, 60% long-term target?

Tore, this is Perry. I think, due to the product mix, we have more product shift expected in 2014. But for the general lighting, I think that, this area, we probably will experience the gross margin in the area of the 50% area.

So, in the future, from the product mix, I think that our gross margin for the area of the 50% to 53% area -- in the first quarter, first half of this year, we experienced some new product [range]. Normally you will also experience some low gross margin.

So, I expect the first portion of the year, we probably will be in the area of the low end of the 50%, 51%, and the second half of the year, through the cost structure and also improvement on the [year rate], I feel that we can gradually to improve up to the higher end of the 22%, 23% area.

Very good. And a question on power management. Sounds like you've shifted some resources away from notebook to focus more on tablet and smartphone. I was hoping you could talk a little bit about that -- the type of markets you're targeting there. Is this primarily on the battery management side, or would you even go after things like, you know, DC-to-DC converters?

Yes. What we saw -- the smartphone, the tablet PC -- due to the demands of the computing -- so, it's moving to four-core and eight-core right now, available in the market. And the CPU DC-DC opportunity, as the eight-core CPU is already [improvement] to the low end notebook requirement.

So, for the high efficiency which will reduce the heat dissipation, plus the -- sustainable for the current pick-up, so that always similar to the notebook complexity, CPU DC-DC. So, that area could be potentially for O2Micro in the past couple of years, expertise to support [Intel] or [AMD]. That's for one.

And the second is, due to the power consumption continue to rise up and the one-cell battery for the smartphone and the two-cell battery for the tablet PC, they experience the battery short operating times. And that require -- one is, high speed to charging the battery; two, it require high precision of the battery status.

So, we -- O2Micro does have many years' experience to support the notebook, and that could be providing our precision -- we call it cool encounter. And also, we have a different methodology support the same cool encounter, to providing high precision of the battery, so that people can enjoy higher-capacity usable of the battery.

At the same time, we have developing our O2Micro expert charge, with some of the notable notebook manufacturer back to year 2002 and 2001. And those experience will be -- help us to providing usable and visible solution for the high-charging -- high-speed charging capability in the future smartphone and tablet PC.

Very good. And a question for Jim. Jim, you sound pretty confident that 2014 will be a growth year for you. I understand the whole dynamics would be, you know, the legacy business is declining. But, from a design win perspective -- obviously, I know you can't give us numbers or guidance here, but just, sort of, how you feel about design wins entering 2014, versus when you entered 2013. If you could qualitatively talk about -- that'd be great.

Yes. As I mentioned, the key growth drivers have been in the battery management area as well as general lighting. In general lighting, we have -- and we showed some of this in the past -- we have enjoyed some design wins with some major OEMs, as well as a number of the ODMs in this market.

And in fact, these designs are now starting to move into mass production, and we are seeing very good order flows in our whole general lighting product line, and we remain very confident, due to the strength of our product, and we point out from past conference calls, we do have very strong patent positions in our Free Dimming technology, and we do see this starting to get into more and more design wins.

So, if we look at the design wins -- the projections from our customers -- we're very confident of our general lighting position in the market and the revenue flow that will generate from that.

In the battery management area, we have positioned ourselves very well in a couple of key markets. Those include the power tool area, where again we have engaged with some very key OEMs as well as ODMs in this marketplace. And we've also begun to get very good design wins in some key areas like the e-bike area, which we see to be expanding quite rapidly at this point in time.

So, with those design wins in the key products that have been driving our revenue growth, we see ongoing growth; and we also see additional, excellent opportunities for ourselves in the LED backlighting area with some of the design activities we have. So, we're quite positive with our design wins, that we can grow revenue this year. Hope that answers your question.

Very good. Yes. No, that's very helpful.

Just one last question on general lighting. I know you're primarily focused on China. So, there's a lot of chatter, at least in the US, that this year's going to be a strong year for LED lighting because price points are going to drop below $10. Do you have, sort of, a similar, magic price point in China? And, you know, are we close to that price point for the market to be able to take off?

Well, first of all, I would agree with you that we have a lot of effort in China. But let me also point out that we have done a lot of work with companies like GE and Osram, as we've pointed out in the past. And while that product is built in China, the design decisions are quite often made with the OEMs.

We do see price points being very key. I think when the price point started going under the $10 area, that began to generate very significant volumes. And part of that had to do with the withdrawal from the market of the traditional-type lighting for 100-watt and even 60-watt bulbs, and the more costly mini-CCFL-type lights, which are also quite expensive.

We continue to see the price level going down in the marketplace with competition in LED lighting. We think that this will continue, and we see the volumes accelerating at this point in time. So, we're very optimistic that LED lighting will start to take very significant market share as we move through the next 2 years. So, those are our comments.

That's very helpful. Very helpful. Thank you very much.

[Evan Lang], Stifel Nicolaus.

I was wondering if you can talk a little bit about the bookings trends going into Chinese New Year, and whether your customers have provided you with any kind of forecast, or what your expectations might be for the second half of this quarter.

Well, we do see customer forecasts. The customer forecasts are actually reasonable. However, we did see pull-ins into Q4, as companies began to pull in product for the Chinese New Year. So, some of that obviously subtracts from Q1.

The backlog for the second half of the quarter is not fully in place. However, the projections at this point in time from the OEMs, including major TV manufacturers -- we clearly understand where that is at, and we based our guidance on that. So, I hope that answered your question.

Yes. Great. Thank you. And I'd like to just piggyback on Tore's question on the LED lighting -- the Free Dimming in particular. Is it growing faster than your non-free dimming solutions? And what portion of your LED revenue is from Free Dimming right now?

You know, we don't care to break that out for proprietary reasons, because that would be giving away a lot of information. What I can say is that the market is expanding very rapidly at this point in time. The initial portion of the market was for non-dimming, but right behind that we began to see a significant number of design wins in free dimming.

It remains to be seen how quickly those will ramp into markets; but nevertheless, the design win activity is there. As we go forward through this year, as we begin to see more of that trend, I think we can begin to break more of that out for you.

Great. Thank you very much.

Andrew Huang, Sterne, Agee & Leach, Inc.

I just had a bigger, or longer-term, question. I guess, when I look at the full-year results, your revenues have been down I guess for 3 years in a row. Your R&D had been increasing every year until this year. So, I guess my thought, or my question is, like, what's the appropriate level of R&D spending for you, given these revenue levels?

(Inaudible). As I reported in the conference, we do carefully (inaudible) and also through some consolidation by the project and also by the group. For the current situation and based on the needs in the -- customer demands, and also needs in China, and also [our friends] in the global areas, we will -- we can continue to support our customers in the different applications, and also sectors.

So, I think the -- we do believe it's -- our OpEx will be in the area of the $11 million to $13 million area, to support our revenue up to the profitability -- a profitability breakeven point (inaudible) in 2014. I think this is very important for the 2014. Of course, I do mention that we will continue to manage the cost [immediate] through the -- due to the macroeconomic situation.

When you (inaudible) --

So, Andrew--

Yes.

Andrew, I just-- let me add something. So, we -- our R&D has been reduced since a year ago, which was Q1 2013. But that's -- we do the consolidation plan in the end of 2012. And then we further do another consolidation plan in Q4 2013 right now. So, R&D doesn't -- is go to the downward, since beginning of last year. Yes.

Uh-huh. So, does that mean that for the full year for 2014, we should expect R&D expense for the full year to be down compared to 2013?

Of course. Yes. You -- we have -- if you listen to my presentation just now, we coming from three cost saving plan. The three sector. One is, we do legal activity scaling back; then we will also -- to focus on fewer customer for some (inaudible) project. And also, number three, we also make the efficiency through some reorganization, to make the group, as we (inaudible) shorten.

So, as a result of that, we are looking at another 15% down from Q1 from the last Q4, last year. Now, you -- if you look at Q4 2012 -- so, we've -- from $20 million OpEx all the way to Q1, 2014, the guidance Perry provided, we're only in the midpoint of $12 million. Right? So far. $20 million OpEx within 5 quarter, we down to the $12 million. Right?

So, the major (inaudible) does go so very difficult, and challenge (inaudible) without the major impact to our customer support, and also the core competence project (inaudible). So, this is something I like to make sure you understand the picture. Okay?

Thank you very much. That's helpful. And then, I just had a question -- when you gave the breakeven revenue targets, you said -- is that -- $20 million to $21 million in revenue for what kind of breakeven? Is that breakeven for gross margin, or what was the metric there?

$20 million to $21 million is for the cash breakeven. Okay? You see --

Cash breakeven. Got it.

The cash breakeven, yes.

And then the $23 million to $24 million was for EPS?

Yes. For the breakeven, yes. For the project [ability to] breakeven. Yes. We include the non-cash items, which are depreciation and also the stock-based expense.

So, do you expect to hit the $23 million to $24 million revenue level at some point in 2014?

Yes. This is what we expect.

Well, we -- normally we don't give out guidance, Andrew. You know. We are confident; but, you know, don't (inaudible). We cannot give you the full-year (inaudible) supply. So --

Okay.

-- the forecast yet. But you can calculate that, right?

Yes. What we said was, we expect to reach a cash breakeven level some time in 2014. We didn't really talk about the profitability breakeven level at this point in the year.

Okay. Got it. Okay. And I think, when you look at the numbers, actually, the December quarter is actually the first time in 3 years where you've had year-over-year revenue growth. Is that -- does that sound right to you?

That's correct.

Okay. Thanks very much.

Thanks, Andrew.

(Operator Instructions). Thank you. There are no further questions in the queue. I'd like to return the call back over to Scott for any closing remarks.

Thank you all very much 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.

Thank you. That concludes today's conference. A reply is available until 9.00 am Pacific Time on February 5, 2014 by calling 1-888-203-1112 or 1-719-457-0820, passcode 8103180. Thank you for your participation.