O2micro International Ltd (OIIM) 2014 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 2014. 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 11, 2015, at 9 AM Pacific time by calling 1-888-203-1112 or 1-719-457-0820, passcode 6185636.

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 fourth quarter and fiscal year 2014 ending December 31, 2014. 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 risks 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.

Lastly, management is very focused on continuing our recovery efforts and making the company more efficient, aimed at increasing shareholder value. To further aid in the process, O2Micro welcomes any input from its shareholders on how to obtain such. However, in an effort to make sure the Company properly addresses those concerns, we encourage any shareholders who have suggestions to make such proposals in writing so that the Board of Directors can give such advice their proper due and review such at our regular board meetings. This will ensure that there is no miscommunications from shareholders and that everyone is operating on the same information.

Now, I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter and fiscal year 2014 ending December 31, 2014. Perry?

Thank you, Scott. We will now review our financial results for Q4 2014. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results excludes stock-based compensation expense, one-time charges, nonrecurring 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 2014 was $14.3 million. GAAP net loss in the fourth quarter of 2014 was $6 million. If we exclude stock-based compensation of $498,000 and a one-time expense of $3 million, the non-GAAP net loss will be $2.5 million.

GAAP net loss on ADS in the fourth quarter of 2014 was $0.23. Non-GAAP net loss per ADS was $0.09.

Gross margin was 51% in Q4. The gross margin reflects the current revenue label and the product mix.

R&D expense was $5.5 million or 38.1% of revenue. This amount excludes stock-based compensation expense of $99,000 and the one-time expense of $2.7 million. SG&A expense was $5.4 million or 37.7% of revenue. This amount excludes stock-based compensation expense of $399,000 and a one-time expense of $255,000.

The non-operating income was $1.5 million, a $643,000 increase over the preceding quarter of $850,000. The increase of $643,000 was mainly due to the gain on the sale of real estate properties for $458,000 and as a gain on foreign-exchange for $415,000.

Income tax was $450,000 in the fourth quarter, a $200,000 increase over the preceding quarter of $250,000. The increase of income tax mainly reflects the [extra tax] provision calculated in our global tech support locations. In Q4 2014 we repurchased [505,159] ADS unit at a cost of $1.2 million.

Q4 2014, the revenues by end market breaks down into the following percentages. Consumer was 50% to 60% of revenues. Computer was 15% to 25% of revenue. Industrial was 20% to 30% of revenue. Communication was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with $62.6 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.36 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q4 were $6.8 million. Our DSO is 47 days; it is in our target range of 40 to 60 days. Inventory was $8.6 million at the end of the fourth quarter. This represents 121 days of inventory, and inventory turnover was three times in Q4.

From a cash flow perspective, we generated $3 million cash outflow from operating activities in Q4. Capital expenditure was about $412,000 in the fourth quarter for R&D equipment and leasehold improvements. Depreciation and amortization was $900,000 in Q4.

At the end of the fourth quarter of 2014, O2Micro had 408 employees, 51% of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2015. 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 with a public announcement in the future.

O2Micro expects Q1 revenue to be flat to down 10% 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 $4.8 million to $5.8 million in Q1. SG&A should be $4.8 million to $5.8 million in Q1, excluding stock-based compensation. Stock-based compensation should the in the range of $450,000 to $550,000 in the first quarter. Non-operating income should be in the range of $300,000 to $400,000 in the first quarter. Based on the servicing cost 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.

As we mentioned last quarter, in order to maximize shareholders' value, we are in the process of making decisions in order to monetize some of the Company's real estate and the long-term investments. In Q4 of this year we sold a portion of the real estate in Hsinchu, Taiwan, and we recognized a gain of approximately $500,000 of non-operating income. We plan to monetize other portion of the real estate in Hsinchu this year. And we will provide additional detail when and if this transaction is closed.

Also during Q4, we sold the remainder of our shares in one of our long-term investments, and we are in the process of evaluating of our remaining long-term investments. While we wait for our anticipated next significant product cycles to materialize, the goal of this management team and the Board of Directors is to maximize shareholders' value, and we are taking the necessary steps to do this. We will provide updates to the additional measures to enhance shareholders' value on our next quarterly conference call following our first quarter of 2015.

In summary, while revenue levels persist below where we expect them to be, we are taking the necessary steps to enhance shareholders' value in the forms of our repurchase programs, operating expense reduction, and monetizing our real estate and the long-term investments. In Q4 we continued to focus on our ongoing cost savings measures, and we believe that we have aligned our operating expense structure to more effectively manage our business in the current environment.

As a result of our previously announced workforce reduction in January, we expect to reduce operating expenses throughout 2015 by approximately $4 million. We believe our cash breakeven point is now between $17 million to $18 million in quarterly revenue. And our profitability breakeven point is between $20 million to $21 million in quarterly revenue.

Our guidance for the first quarter of 2015 reflects the ongoing [rates] in our general lighting, battery product lines, and the Power Management products for the tablet and the smartphones, offset by continued weakening in our Power Management business for notebooks as well as typical seasonal weakness. Given the uncertain demand and the macro environment we are prepared to continue to manage costs if needed, although we believe that we have aligned current costs based on current and anticipated revenue levels.

Finally, 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 Q4 we had [13.3 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. Jim?

Thank you, Perry, and good morning, everyone. Q4 continued our trend of increasing design win activity in lighting, battery management, power management for tablets and smartphones. Based on these design wins, all these product areas are expected to have revenue growth as we move forward in 2015.

Specifically in battery management, we reached our stated goal of exceeding 10% of revenues in the second half of 2014 as our battery management products continue to expand into new designs including applications in power tool, e-bike, e-vehicle, appliances, and vacuum cleaners. Major OEMs using our products include Black & Decker, Electrolux, LG, Panasonic, and TTI.

Additionally, we are seeing increasing design activity for our products' in uninterrupted power supply applications and continue to see the usage of our battery management products expand at major OEMs. While battery management product revenue generally tends to grow slowly due to the nature of the business, we expect product sales in battery management to grow to approximately 15% of our 2015 sales revenue by the second half of this year.

In general lighting, our 2014 stated goal was to reach 15% of total product sales. We finished just below this goal as we focused on our high-margin proprietary Free Dimming products. However, our revenue in this area continues to expand as we enter Q1, and we expect our general lighting products to exceed 15% of our first-half 2015 sales and continue to grow rapidly in the second half of the year.

We remain very pleased that more and more key customers are using our general lighting product technologies. This customer list now includes GE, IKEA, IRIS OHYAMA, Lights Of America, Osram, Panasonic, Samsung, TCP, and Toshiba as we continue to see a broader-based acceptance of our proprietary Free Dimming and 2 Color Dimming products in more and more applications and a widening international customer base including a growing number of Asian countries. We have also successfully introduced our TRIAC controller lighting products for legacy dimmable fixtures and see these products gaining revenue momentum in 2015.

In addition to general lighting, we expect to our LED backlighting designs to enjoy revenue growth in 2015 based not only on our strong position in TV but expansion of revenue in new smart phone, tablet, and industrial lighting applications.

Finally, we expect to see renewed growth in our power products, where a combination of weak notebook sales and charger product issues adversely affected our revenue growth in recent quarters. Our new charger and DC/DC products are gaining acceptance in new tablet and notebook designs.

We are now working on key design wins on tablet and smart phone platforms for leading Chinese CPU manufacturers. These programs are expected to go into production in Q3 2015. We will be announcing more regarding the specific customers for these products as we move forward in Q2 and Q3. We expect renewed growth in this area by the second half of this year.

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

Thank you, Jim. Q4 revenue was in the range of guidance that we provided in October. We generated revenue of $14.3 million in the fourth quarter of 2014, a decrease of 7% sequentially quarter over quarter and a decrease of 25% from the same quarter last year. The year-over-year revenue decline was mainly due to weakness in our notebook computer power management business. We plan to improve the revenue stream by targeting the smartphone and the tablet PC markets, which we were able to leverage our notebook PC and the industrial battery management technologies.

Meanwhile, from the fiscal year end of 2012 to fiscal year end of 2014, we have lowered operating expense from $81.6 million to $50 million, which is about 40% success rate. As smartphone and tablet PC market trend move more toward four-core CPU as mainstream and the high-end for the eight-core CPU, which is equivalent to the notebook PC CPU power consumption. So our CPU DC/DC previous design for the notebook PC and our industrial level gas gauge could adjust this high power consumption as well as larger battery management needs. This business could become one of growth driver in coming years.

We reported a GAAP loss of $6 million in the fourth quarter of 2014, including one-time charge $3 million associated with the workforce reduction. GAAP net loss was $5.1 million in the same quarter last year. We report gross margin of 51% in Q4 and increased from 51% gross margin same quarter last year.

We announced the strategic workflows reduction in January, and that will allow us to focus the key resources on higher gross margin in the business. It will facilitate us more quickly return to the profitability.

I would now like to highlight the considerable progress that we have made in key growth drivers. Our LED general lighting business continues to grow rapidly based on the two key factors. First, the overall replacement light bulb market is entering into significant growth phase. Second, we increasing our general and distributor in addition to our direct salesforce. The benefit to the channel markets, our strategy to engage both worldwide OEM and ODMs in these markets has paid off, and both type of customer have relied on the innovation and reliability of O2Micro products. Following successful penetration in Japan and US, we are now engaged with some of largest LED general lighting manufacturers in Chinese market. Our intelligent battery product for power tool, household appliance, and our product are also showing significant growth and design win momentum that will translate into meaningful revenue in upcoming quarters. We are gaining share in this market, and we expect to be the market leader for battery management solutions.

We remain focused on product innovation to expand our product offering and to develop safer, more reliable power to extend battery operating efficiency. We provide customers in specific design IC for the power tools such as protection and the secondary protection IC. This product optimized price-performance ratio and in which gaining market share.

We continue to make progress in our goal of targeting smartphone and the tablet PC manufacturers. We are engaged with several tier 2 smartphone/tablet manufacturers, and we expect to realize additional revenue from those customer in 2015. In order to maximize efficiency with our tablet/smart phone customer, we have actively engaged with distributors in this market and where our customer receive direct technical support from O2Micro. Our strong engineering and customer service presence in Chinese market enable O2Micro to expand our customer base in this region.

In LED backlighting for TV and monitor we have increased our silicon content in those by offering new DC/DC and AC/DC product to our customers. We are expecting moderate growth in our LED backlighting business throughout this year.

I'm excited about our demonstrated success across all our four major products including general lighting, backlighting, power IC for smart phone and tablet, and the battery management. We look forward to providing you more update for our progress throughout the remainder of this year.

At this time, thank you for listening to our conference call and turn 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 with Stifel.

A few questions -- first of all, could you talk a little bit more about your notebook power management business? How big as a percentage of revenue is it now? I'm just trying to understand because it seems like that's still a headwind for you. It's already come down quite a bit. I'm just trying to get an understanding whether it's bottoming or about to bottom.

Yes. The currency power in the notebook is about 25% of the revenue. I think this is a stable level for our current situation. Compared to the Q4 last year it was only 50% of the revenue.

Okay, very good. And as a follow-up to that, as you start to see the ramps in smart phone and tablet power, would that be at a higher gross margin than the notebook power management business?

We see it in a same range, similar range.

Okay, very good. And you said you expect your backlighting business to actually grow this year. I assume that it potentially declined in 2014. So is this based on new design wins, more stable pricing? Please help me understand what's going on there.

It's based upon more design wins, Tore. We are taking a broader-based position in the whole product area and TV and gaining additional penetration into some additional customers in which we have not been involved in the past year.

Okay, very good. And then I know you typically don't give guidance more than a quarter out. But you are still a few million dollars below your cash flow breakeven rate. So should we expect that you will get there, potentially, sometime in the first half? Or will this be more of a second half?

I would say probably in the middle of the year. Q2/Q3 timeframe, yes. It's our target to reach.

Very good, thank you very much.

Tom Sepenzis with Northland Capital Markets.

In the very beginning of your prepared remarks you went through the segments. Can you just go through those again real quick?

Yes. So Q4 revenue breakdown -- consumer was about 50% to 60% of revenue. Computer was about 15% to 25% of revenue. Industrial was about 20% to 30% of revenue, and communication's was less than 5% of revenue.

Great, thank you. And then in terms of -- you had a benefit sale of assets. Can you just tell us a little bit more about what that was and whether -- what you have left?

In the two Bay Area we have some extra flow-through to sell. Currently, in the last Q4 we saw [2.7]. And we left almost more than 50% left and we are going to sell continuously in Q1, Q2, and Q3, depending on the market situation.

Great, thank you. And then just a follow-up on the last question -- you do think that you can get to a revenue run rate where you would be cash flow breakeven in the second half of the current year?

In the Q2/Q3 timeframe of this year.

Okay. So things should pick up pretty quickly in June?

Yes, yes.

Yes.

Great. Thanks very much.

Lisa Thompson with Zacks Investment.

I wanted to clarify a little bit the sale from the building. First you said what the profit was. How much was it sold for?

The sales, the gains of the sales of properties in Q4, the gain is $458,000. The cost is about $1.4 million.

Okay. So the cost was your cost, or was that what it sold for?

That's our purchase cost, original cost in the book.

Okay, good. And you talked about continued layoffs in Q1. Has that been reserved for in Q4?

The workforce reduction is happening in the Q4, but the press release we issued in Q1. So we refer that as January, yes.

Okay. So that's done?

Yes.

Yes, is done. There's just a little bit of workforce reduction still will be happening Q1. But that's like less than 10% (multiple speakers). Some projects we have to be trailing edge, need to [rev out].

And then to get to the Lone Star letter, have you had a conversation with them?

Well, Lisa, we prefer not to comment on the calls we've had with any specific shareholders at this time.

Okay. So there's no action or thoughts about what might happen in the future?

Yes, we can't comment on that. Sorry, Lisa.

Okay, I had to ask. Okay, that's all my questions for now. Thanks.

Tore Svanberg with Stifel.

I may have missed this, but the R&D was up with a bit sequentially. How should we think about the R&D line specifically going forward?

R&D, I think in 2015 be quite flat in the area of the $5 million area.

Yes, and just as a reminder, we guided Q1 R&D to be between $4.8 million and $5.8 million.

Okay. And then it will sort of remain flat throughout the year is what you're saying?

Yes.

Okay. Great, thank you.

Tom Sepenzis from Northland Capital Markets.

Sorry; I was going to ask the same thing. But I take it the bump in the December quarter was severance-related?

Yes.

Okay, thank you.

And that concludes our question-and-answer session. I would like to turn the call back over to Scott for any closing remarks at this time.

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 you may have. So have a good day and thank you again for your attention. Goodbye.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.