O2micro International Ltd (OIIM) 2015 Q1 法說會逐字稿

Good morning and thank you for joining us today to discuss O2Micro's financial results for the first quarter of fiscal year 2015. If you'd 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 May 6, 2015 at 9 AM Pacific time by calling 1-888-203-1112 or 1-719-457-0820, passcode 7055035. 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 daily into O2Micro's financial results conference call for the first quarter of fiscal 2015 ending March 31, 2015. 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 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 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.

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 to your questions.

Lastly, management is very focused on continuing our recovery efforts and making the Company more efficient and increasing shareholder value. To further aid in this process, O2Micro welcomes any input from its shareholders on how to attain such. However, in an effort to make sure the Company properly addresses these 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 first quarter of fiscal year 2015 ending March 31, 2015. Perry?

Thanks, Scott. We will now review our financial results for Q1 2015.

Quick knowledge. Financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results is the accrued stock-based compensation expense, one-time charges, nonrecurring debts and the losses from discontinued operations. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the first quarter of 2015 was $13.1 million. GAAP net loss in the first quarter of 2015 was $3.2 million. If we exclude stock-based compensation of $551,000, the non-GAAP net loss will be $2.6 million.

GAAP net loss per ADS in the first quarter of 2015 was $0.12. Non-GAAP net loss per ADS was $0.10.

Gross margin was 50% in Q1. The gross margin reflects the current revenue labels and the product mix. R&D expense was $4.4 million on 33.3% of revenue. This amount is closed stock-based compensation expense of $94,000. SG&A expenses was $5.2 million or 39.8% of revenue. This amount excludes stock-based compensation expense of $457,000.

The nonoperating income was $618,000. This amount includes the gain on sales of real estate properties for $298,000, and the interest income on current deposits were $237,000. Income tax was $241,000 in the first quarter and is mainly based on the estimated effective tax rate of each taxable location.

In Q1, we repurchased 387,847 ADS units at a cost of $1 million. As of March 31, 2014, there was [$12.32] million remaining in our authorization.

Q1 2015 revenue by end market breakdown into the following percentages. Consumer was 42% to 47% of revenue. Computer was 23% to 28% of revenue. Industrial was 28% to 33% of revenue. Communications was less than 5% of revenue.

At this time, I would like to provide some additional information.

O2Micro finished the first quarter with $59.7 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of [$2.25] per ADS. In addition, O2Micro has no debt.

Accounts Receivable at the end of Q1 was $6.3 million. Our DSO is 45 days. It is in our target range of 40 to 60 days. Inventory was $8.2 million at the end of the first quarter. This represents 116 days of inventory and inventory turnover or 3.1 times in Q1.

From a cash flow perspective, we generated $3 million cash outflow from operating activities in Q1. Capital expenditures were above [124,000] in the first quarter for R&D treatment and computers. Depreciation and amortization was $700,000 in Q1. At the end of the first quarter of 2015, O2Micro had 382 employees, 50% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2015. This guidance reflects our best estimates for the current environment and is subject to change. This is the only one of issued guidance we will provide unless we updated with a public announcement in the future.

O2Micro expects Q2 revenue to be up 10% to 16% sequentially. We are guiding the Q2 gross margin will be around 48%. R&D expense, excluding stock-based compensation, should be $4.2 million to $4.7 million in Q2. SG&A should be $5 million to $5.5 million in Q2, excluding stock-based compensation expense. Stock-based compensation expense should be in the range of $450,000 to $550,000 in the second quarter.

Now operating income should be in the range of $500,000 to $600,000 in the second 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 second quarter.

As we managed in 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 (inaudible) and the long-term investments. In Q1 of this year, we saw another portion of the real estate in Hsinchu, Taiwan. And we recognized again approximately $300,000 of (inaudible) operating income. We plan to monetize another portion of the (inaudible) assets in Hsinchu this year, and we will provide additional details when and if this transaction is closed.

We have also leased a portion of the building that we own in Santa Clara, California. While we wait for our anticipated next significant product cycle to materialize, the goal of the 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 majors to enhance shareholders value throughout this year.

In Q1, we continue to focus on our ongoing cost-saving measures, and we believe that we have aligned our operating expense structure to more effectively measure -- manage our business in the current environment. As a result of our previously announced workforce reduction in January, we expect to reduce operating expense throughout 2015 by approximately $4 million. We believe our cash breakeven point is 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 second quarter of 2015 reflects this ongoing (inaudible) better product lines and the power management products (inaudible). Given the uncertain demand in 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.

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 Q1, we had $12.3 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. Good morning, everyone.

While Q1 revenues dropped as expected due to seasonality in Chinese New Year, revenue expansion and general lighting and battery management products continued, and our first power management product for the tablet and smartphone markets again shipping. We expect the areas of general lighting, battery management, and power management for tablet and smartphone to help drive our Q2 growth with their combined revenue contributing approximately 25% of our projected Q2 revenue. These products are expected to see ongoing expansion through the balance of 2015, and we will give more detail of the revenue contribution of these products as our revenues grow in 2015.

Our largest product line, backlighting for TV and monitor markets, is also expected to experience improved revenues in Q2 and the remainder of the year. The growth in backlighting will result from modest market growth, coupled with additional silicon content and key TV manufacturers, will utilize our new DC to DC and AC to DC products.

In battery management, we see additional expansion of revenues going forward from our new designs, including applications and 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 and Uninterruptible 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 this business, we expect products sales and battery management to grow to approximately 15% of our 2015 sales revenue by the second half of this year.

General lighting revenue continues to expand as we enter Q2. We remain focused on the higher end of this market where we continue to gain new design wins worldwide and expand into more applications with our patented products. Our 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 in two color dimming products in more and more applications and a widening international customer base, including the growing number of Asian countries.

We have also successfully introduced our TRIAC controller lighting products for legacy dimmable fixtures and see these products are gaining revenue and momentum in 2015. We expect general lighting revenues to contribute approximately 15% of our expanding 2015 revenue.

Finally, we are pleased to report that our power management products for tablet and smartphone begin their initial shipments in Q1 and will ramp into higher volumes in Q2 and reap significant volumes in the second half of 2015.

At the same time, our traditional notebook customers expect that the notebook market is stabilizing, which may allow our notebook products to reverse their downward trend of the past few years. While we are working on key design wins in tablet and smartphone platforms for leading Chinese CPU manufacturers whose programs are expected to go into mass production in Q3 2015, we will continue to work on new charger and DC to DC product wins in notebooks.

We will be announcing more regarding the specific power management customers as we move forward in 2015.

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

Thanks, Jim. Q1 revenue was in the range of the guidance that we provided in February, reflecting normal seasonality. We generate revenue of $13.1 million in the first quarter of 2015, a decrease of 9% sequentially and decreased 20% 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 currently believe our first-quarter revenue performance reflects a trough in our business, and we expect revenue growth going forward.

Through a combination of operational expense reductions and the implementation of certain initiatives to monetize assets of the Company, we believe we have transitioned the Company to benefit from our next growth phase.

Our high-priority initiatives to deliver superior customer solution results in design win momentum in our new tablet and smartphone products, an expansion of our custom-based lighting, battery management, power management, and the general lighting markets. Pretty important, a debt loss of $3.2 million in the first quarter of 2015 and a GAAP net loss was $6 million in the first quarter last year. We brought the gross margin 50% in Q1, and it mainly reflects the product mix.

I would like to highlight considerable progress that we've made in the key gross drivers. In our backlighting business, we are projecting renewed growth in the product area as we move throughout 2015 based on increasing these activities in TV, monitor, tablet, and smartphone markets. We continue to be a worldwide leader in LED backlighting for TVs, monitors, and our expanding customer base in our backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, (inaudible) and others.

O2Micro proprietary analog power management technology segment supports a variety of end markets that continue to grow with our rapid expanding customer base. Our battery management products are continuing to achieve, mainly new design wins, and we continue to be very optimistic for continued growth in the many end markets going forward.

We continue to make significant progress in our goal, targeting smartphone tablet manufacturers. We're engaged with several Tier 2 smartphone tablet manufacturers, and we expect to realize additional revenue from those new customers in 2015. In order to maximize efficiency with our tablet smartphone customers, we are actively engaged just using partner channels in this market, while our customers receive direct technical support from O2Micro. Our strong engineering and customer service presence in China market is enabling O2Micro to expand our customer base in this region.

Finally, our LED general lighting business continues to grow regularly in the competitive market. Our strategy of targeting leading LED manufacturing in China, the US, and Japan is working.

We're very pleased to see an increasing number of market leaders on using our general lighting product technologies, the general lighting market continued to evolve, and we feel we are -- our product and technology are well-positioned to serve the market for the years to come.

I'm excited about our demonstrated success across all our core power management product lines, including general lighting, tech lighting, power (inaudible) for smartphone tablet, and battery management. We look forward to providing you updates of our progress throughout the remainder of the year.

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

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

(Operator Instructions). Tore Svanberg, Stifel.

Yes, hi. This is [Evan Wayne] calling in for Tore. My first question is regarding your confidence level on your guidance. I understand that you have some new design wins and expanding customer base, but could you give us a little more color on what gives you confidence for this double-digit growth?

Well, at this point, we are pleased to say that we've seen very good backlog for the quarter. So we are in a strong position from a backlog point of view, and the design wins, our design wins that have already ramped into production in most cases, we expect that production will simply carry on, and the backlog will continue to build. So we are sitting here very confident at this point in time of our projection.

That's great to hear. And could you also talk a little bit about maybe what kind of visibility you might have looking to Q3? I'm not actually looking for actual guidance obviously, but any color you can give there would be great.

Well, I think what we can safely say for Q3 -- of course, we all know there's economic situations out there, but we have gained some very significant design wins, and we see enhanced position. We mentioned in the TV area, we've gained new design wins and customers that are now ramping run rates. We have new design wins that are going into tablet, smartphone, and the power management area. The battery management products achieved some very nice design wins, including some of the areas we mentioned like vacuum cleaners that are continuing to ramp. So we're very confident at least of gaining market share in these areas, and if the economy remains in good, stable condition, we think we can see a good growth ongoing into Q3.

And regarding your gross margin and this question may be for Perry, it's 50% this quarter, and you are guiding to 48%. Is this a new level -- a new range? Are you finding this a new sweet spot, or is it purely a function of your current revenue level of mix?

Yes, this is due to the new product mix. We have (inaudible) gestated. We have lots of the new products for the new applications. It's for Q2.

So, for the past few quarters, you've pretty consistently guided for 50% to 52% for your gross margin. Going forward, is there a new range that we should be thinking about?

Hopefully we can improve so the new product -- your improvement. But however, for the Q3, I will update in the next quarter.

When we are ramping new products, in many cases there's yield issues that create it, and we mentioned a significant part of our revenue growth will come out of new products. So it will take a quarter or two to get those stabilized in terms of yield improvement.

Okay. My last question before going back into queue is, is the new gross margin level that you are guiding to for this quarter, is that in the breakeven analysis that you provided, the $17 million to $18 million for cash flow breakeven and $20 million to $21 million for profitability breakeven, or are those based on the 50% to 52% gross margin?

Based on 48%, yes.

Thank you very much.

Tom Sepenzis, Northland Capital Markets.

I was just curious, last year in the September timeframe, you lost a pretty big customer on the power side, and the expectation was you might be able to get that back a year later. So I am just curious as to if you have an update there or if you think that is still something that you might see in the near future as a return customer?

Yes, that was due to a product specific issue at a significant customer, and we actually have regained some of that position, and we are optimistic as we moved in the second half of the year that we can fully regain that.

Great. Thank you. And then in terms of the general lighting business, I think you said you expect that to be 15% of revenue by the end of 2015. Did I hear you correctly?

Yes, that was correct.

Yes, actually what we said was that it would be -- we estimat it to be 15% of our revenues this year. So we expect -- last year our goal was to be in the 10% to 15% area. We are basically there as we move forward into Q2, and we suspect to sustain that level. So we would expect for 2015 our general lighting to be approximately 15% of our total business.

You exited the year closer to 20%, though, last year, so is that then now kind of flat?

We exited the year at about 15%.

Okay. Great. Thank you very much.

We are saying -- just to clarify, we're going to stay toward the high end of that business for the time being, so we're going to continue to focus in those areas where we have strong intellectual property and can retain reasonable margin.

Got you. Thank you.

Lisa Thompson, Zacks Investment Research.

So can we talk a little bit more about smartphones? You said you started shipping, and you might be adding more customers as the year progressed?

Right. So first of all, our strategy and its target for the Q2 smartphone tablet customer, and mostly they are located in China. So we -- as we have leveraged our notebook technology -- so naturally, right now our most mix is the first ramping now is the tablet. And we also have smartphone breaking out.

Now generally speaking, after the design win, production will probably take you about six months. Then that will be from one major customer, it's (inaudible) then that also needs another six months to another year. So you are going to see our very good starting point and then ramping up maybe take more than one year.

So we are very happy to see today we have production in both tablet and in smartphone, and like Jim indicated, that we're going to see the same customer growth rate is going to continue to prevail to other (inaudible). And then we also have capacity to add more new customer to it. And because the smartphone tablet is a relatively large market to our original focus, notebook. So we are excited for the potential, and we are going to see our technology and product that will bring our revenue -- good revenue scale in the upcoming years.

All right. So you have one customer with two products right now?

No, we have production in multiple customers right now for the both smartphone and the tablet. Multiple, yes.

Okay. And it will start showing volumes at the end of this year?

They have already (inaudible) already have initial reproduction, and we're going to see a very good growth rate quarter by quarter here.

Okay. I look at the first quarter -- revenues are down 20%, expenses were down 13%. Is there some point where you're going to get the revenues and the expenses to match?

Yes, we have I would say I have provided $70 million as a cash flow breakeven point. That's the point we're looking at. We are approaching here.

Hopefully later we (inaudible) of the new product.

Okay. All right. I think that's what everyone is waiting for.

Right. That's -- so we are --

Okay. Thank you. That's all I have right now.

(Operator Instructions). There are no further questions in the queue. I would like to turn the call back over to Scott for any closing -- oh, we do have a question from Tore Svanberg.

Hey. Actually, this is still Evan. I just wanted to follow up on your asset sales. Can you tell us about how much assets you have left that you think it would be -- you would consider divesting and turning to cash?

Could you repeat the last sentence?

How much assets do you consider available for you to convert into cash -- to monetize?

We actually are peaking in this year. We target to sell $4 million in asset value beyond the Q1. We still -- in this year, but for the fixed asset, we're totaling [20] to [30] market value.

Okay. Okay. That's all. Thank you very much.

(Operator Instructions). And there are no further questions in the queue. I would like to turn the call back over to Scott for any closing remarks.

I thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920 at 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. Thank you for your participation.