O2micro International Ltd (OIIM) 2015 Q2 法說會逐字稿

Good morning, and thank you for joining us today to discuss O2Micro's financial results for the second quarter of fiscal year 2015. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at area code 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 August 6, 2015, at 9 a.m. Pacific time, by calling toll-free, 888-203-1112, or area code 719-457-0820, passcode 6355008.

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 second quarter of fiscal year 2015, ending June 30th, 2015. 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 filings, our Annual Report, and other documents filed with the SEC from time to time.

Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors.

The statements made herein are dated information. The Company assumes no responsibility to provide updates to this information.

With me today are Perry Kuo, our CFO and Director, our Head of Marketing and Sales, and Director, Jim Keim; and Sterling Du, O2's Founder, CEO and Chairman. After their prepared remarks from these gentlemen, the floor will be opened for 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 this 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's 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 second quarter of fiscal year 2015 ending June 30th, 2015.

Perry?

Thanks, Scott.

We will now review our financial results for Q2 2015. Please note that our financial results will be presented on a GAAP basis unless we designate otherwise.

The non-GAAP results exclude stock-based compensation expense, one-time charges, nonrecurring gains and losses for discontinued operations.

Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the second quarter of 2015 was $14.7 million. GAAP net loss in the second quarter of 2015 was $2.7 million. If we exclude stock-based compensation of $447,000, the non-GAAP net loss would be $2.3 million.

GAAP net loss for per ADS in the second quarter of 2015 was $0.10. Non-GAAP net loss per ADS was $0.09.

Gross margin was 49.6% in Q2. The gross margin reflects the current revenue label and product mix.

R&D expense was $3.8 million or 25.6% of revenue. This amount excludes stock-based compensation expense of $76,000. SG&A expense was $5.9 million or 40.5% of revenue. This amount is excludes stock-based compensation expense of $371,000.

So now, non-operation income was $424,000. This amount includes again on sales of real estate property of $201,000, and in the interest income of time deposits were $199,000.

Income tax was $287,000 in the second quarter, and is mainly based on the estimated effective tax rate of each taxable location.

In Q2 2015, we repurchased 497,082 ADS units at a cost of $1.21 million.

Q2 2015, the revenue by end market breaks down into the following percentages: consumer was [50%] to 55% of revenue. Computer was 10% to 15% of revenue. Industrial was 30% to 35% of revenue. Communication was less than 5% of revenue.

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

O2Micro finished the second quarter with $58.2 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.24 per ADS. In addition, O2Micro had no debt.

Accounts receivable at the end of Q2 was $7.7 million. Our DSO is 43 days. It is in our target range of 40 to 60 days.

Inventory was $8.4 million. At the end of the second quarter this represents 101 days of inventory and inventory turnover was 3.6 times in Q2.

So from a cash-flow perspective, we generated $2.0 million cash outflow from operating activities in Q2. Capital expenditures were about $95,000 in the second quarter for R&D, equipment and the computer. Depreciation and amortization was $600,000 in Q2. At the end of the second quarter of 2015, O2Micro had 386 employees, 21% of which are engineers.

At this time, I would like to provide our financial guidance for the third quarter of fiscal year 2015. This guidance reflects our best estimates for the current environment, and is subject to change. This is the only future guidance we will provide, unless we update it with an announcement in the future.

O2Micro expects Q3 revenue to be up 2% to 10% sequentially. We are guiding the Q3 gross margin will be in the range of 50% to 52%, and it is mainly from the product mix. R&D expense, including stock-based compensation, shall be $4.5 million to $5 million in Q3. SG&A should be $5.5 million to $6 million in Q3, excluding stock-based compensation expense.

Stock-based compensation expense should be in the range of $450,000 to $550,000 in the third quarter. Nonoperating income should be in the range of $400,000 to $500,000 in the third 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 up to $300,000 in the third quarter.

While we wait for our anticipated, next significant startup cycle to mature, the goal of this management team and the Board of Directors is to maximize shareholders value and we are taking the necessary steps to deliver.

Regarding our share-repurchase program, we have been active in this program historically and we plan to be active on going forward. Since 2002, we have repurchased approximately 18 million ADS shares for approximately $100 million. At the end of the Q2 we had 11.1 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. We will provide updates to the additional measures to enhance shareholders value throughout this year.

We believe our cash-breakeven point is between $17.5 million up to $18.5 million in quarterly revenue, and our profitability-breakeven point is between $20 million to $21 million in quarterly revenue.

Our guidance for the third quarter of 2015 reflects the ongoing rates in our backlighting (indiscernible) product line, and the power-management products for tablets and smartphones.

Given the uncertain demand in the macro environment, we are prepared to continue to manage costs as needed. Although we believe we have aligned, based on the current and the anticipated revenue levels, 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.

Last quarter we stated our new product areas of general lighting, battery management and power management for tablets and smartphones, would help drive our Q2 growth with their combined revenue contributing approximately 25% of our projected Q2 revenues.

We also stated that our largest product lines -- backlighting for the TV and monitor market -- was expected to experience improved revenues in Q2. We also noted that the growth in backlighting would result from modest market growth coupled with additional silicon content at key TV manufacturers who will utilize their new DC/DC and AC/DC products.

These projections were correct, with general lighting, battery management and power management for tablets and smartphones contributing the expected 25% of our revenues. As projected, we also increased the backlighting revenues for the TV and monitor markets in Q2. These products are expected to see ongoing expansion through the balance of 2015, and we remain committed to give more detail on the revenue contributions of these products as our revenues continue to grow in 2015 and 2016.

While our first power-management product for the tablet and smartphone remain a small part of our total revenue, their impact will become significant as these new products ramp into much higher volumes and increase our Company revenues in Q4 and all of 2016.

Before discussing individual product lines, we will make a few comments regarding Q3 revenue. While projecting some increase in Q3 revenues from ongoing growth and new product sales, there is softness in some key markets resulting from well-known economic issues in Europe, and slow China growth. This has caused many manufacturers to slow their purchasing activity while also cutting back inventory.

Nevertheless we remain very optimistic regarding our ability to continue to grow revenue in these products. Let's review the product areas that will drive our growth.

In battery management, we continue to see expansion revenues in all key market sectors. Our tools, e-Bike, e-Vehicle, appliances and vacuum cleaners, and lithium-ion battery technologies, continues to become more reliable and cost-effective with the use of our battery-management products. Major OEMs using our products include Black & Decker, Electrolux, LG, Panasonic, and PTI.

Additionally, there's increasing design activity for products in uninterrupted power supply applications, and we continue to see usage of our battery-management products expand at major OEMs.

While battery-management product revenues generally tends to grow slowly due to the nature of this business, we continue to expect product sales in battery management to grow to approximately 15% of our 2015 sales revenue in the second half of this year.

Our intelligent backlighting products enjoyed good growth in Q2, buoyed by reasonably good market conditions and product expansions in the TV sector. While market softness and inventory corrections in the TV market will slow growth in Q3, we nevertheless are projecting growth in both Q3 and Q4, based on our increasing design-win activity in TV, monitor and tablet areas.

Although general lighting revenue continues to expand, 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 product. Our customer list now includes GE, IKEA, [Hiro Suyama], Light Of America, [Ausram], Panasonic, Samsung, TCP and Toshiba, as we continue to see a broader-based acceptance of our proprietary pre-dimming and two-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 [track and filler] lighting products for legacy dimmable fixtures and see these products gaining revenue momentum in 2015. We now expect general lighting revenues to grow to approximately 13% of 2015 revenue in the second half of this year.

Finally, we are pleased to report that our power-management products for tablet and smartphone continue to achieve design wins and qualification. Q2 saw the beginning of volume delivery. We expect to see increasing revenues in Q3 and significant revenue expansion in Q4 and 2016 that will more than offset any decrease in traditional notebook product sales and allow our power products to reverse their downward trends of the past few years.

While we are working on key design wins on tablet and smartphone platforms for leading Chinese CPU manufacturers, these programs are expected to go into mass production in Q4 2015, we will continue to work on new charger and DC/DC product design wins with notebooks. We will also be announcing more regarding revenue, specific power-management customers, as we move forward.

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

Thank you, Jim.

Q2 revenue was in the range of guidance that we provided in April. We generated revenue of $14.7 million in the second quarter of 2015, an increase of 12% sequentially and a decrease of 16% on the same-quarter -- from the same quarter last year. The year-over-year revenue decline was mainly due to the overall weak macro environment.

Through a combination of operation 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-powered initiatives to deliver superior customer solutions resulted in design-win momentum in our new tablet and smartphone products, and expansion in our customer base in backlighting, battery management and general lighting markets. We report a GAAP loss of $2.7 million in the second quarter of 2015. GAAP net loss was $3.2 million in the second quarter last year. We reported gross margin of 49.6% in Q2, mainly reflecting product mix.

I would like to highlight considerable progress that we have made in our key growth drivers. In our backlighting business, we are projecting renewed growth in the product area as we move throughout 2015, based on increasing this activity in TV and monitor. Although our revenue from backlighting was slightly weaker than we expected in the quarter, we believe our backlighting business for the TV market will continue to grow as our power content expands from adoption of higher-end TVs where we have the opportunity to design [monitor or] LED driver ICs for high-end TVs.

We continue to be a worldwide leader in LED backlighting for TV and monitors, expanding customer bases in our backlighting business including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, [Skywalk], TCO, [Highsense], among others.

O2Micro's proprietary analog power-management technology in our battery-management sector supports a variety of end markets and continued growth with our expanding customer base. Our battery-management products continue to achieve many new design wins, and we continue to be very optimistic for the continued growth in the many end markets going forward.

We made significant progress in our goal of targeting smartphone and tablet manufacturers. We are engaged with several Tier II smartphone and tablet manufacturers, and we expect to realize additional revenue from those new customers in the second half of 2015.

In order to maximize efficiency with our tablet and smartphone customers, we are actively engaged the students in this market while our customers receive direct technical support from O2Micro.

Our strong engineering and customer-service presence in Chinese markets enables O2Micro to expand our customer base in the region. We expect this business to rapidly expand and to generate additional revenue throughout calendar year 2016.

Finally, our LED/general lighting business continues to grow in this competitive market, our strategy of targeting leading LED manufacturers in the US and Japan, is working. We also have a strategy to penetrate Chinese general lighting market. The general lighting market continues to evolve, and our product launches are well-positioned to serve this market.

I'm excited about our demonstrated success across all our core power-management product lines, including general lighting, track lighting, power ICs for smartphone and tablet, and the battery management. Based on our guidance for the third quarter, we are very close to the cash breakeven level. We look forward to providing you updates on our progress throughout the remainder of the year.

At this point I'd like to thank you for listening to our conference call, and turn it back to Scott.

Thank you, Sterling.

Operator, at this point we'd like to open the call for questions.

Thank you. (Operator Instructions)

Tore Svanberg of Stifel Nicolaus.

Thank you and great job on returning to sequential growth.

The first question: it looks like your gross margin is going to improve in Q3; I assume that is related to mix, but could you talk a little bit about the specifics of that?

I think mainly from the product mix in Q3 as we are enjoying some better gross margins from the larger-sized panels, inclusive of TV and the monitors, and also we ship more battery products in Q3, these are the two areas.

Very good. And a question on the TV business. It sounds like you expect growth there, also market trends would suggest that market potentially declining in the second half. So, could you just elaborate a little bit more on the dollar content increases you are experiencing there?

Yes, as we mentioned, we have been focusing on adding additional products into the TV customer base, including our DC/DC, AC/DC-type product, and we will continue to focus on growing that into the business. So, we look at the opportunity for not only increasing that area but also at the high end, where we are engaged with some proprietary product with some of the market leaders to expand the performance of some of their high-end offerings in TV.

So, we're quite happy with our position in TV, we think that we can continue despite a weak TV market to grow our revenues in that area in the second half.

Very good, and a question for Sterling. Sterling, it sounds like you're now finally penetrating smartphone and tablet vendors, at least Tier II vendors; I was hoping you could add some color on there. You mentioned battery management, so what types of components are you starting to sell to that market? Are these primarily charter ICs, or is there something else there?

Yes, happy to.

There's charter IC and also have the on-the-go boost from the battery back to the USB connector. And then the third product we are designing and in production with the gas gauge, we have a coolant counter which calculates the current in a precise -- of the quantity, and that is the third one.

And we also have some after the CPU DC/DC to serve the high-end, 4-core, 8-core, even 10-core CPU, and that also gets into some early design activity. So basically we have three positions plus the CPU DC/DC does number four, of these activities.

Very good. Last question: it sounds like you're starting to have some more exposure to the distribution channel, and I was hoping you could talk a little bit more about that. Are we talking about multiple distributors here, or is it one or two main ones? And are these distributors primarily serving you in any specific region? Is it China or is it more worldwide?

We remain focused on major accounts, and that's where we tend to continue our focus. You are correct that we have increased the number of distributors. Those distributors are usually very specific distributors for specific, targeted customers and specifically in Japan and China, they help handle the currency transactions that are involved. So, we are not engaged with worldwide distribution, but primarily in those areas where we need the currency transactions.

That's very helpful; thank you very much.

(Operator Instructions) Lisa Thompson of Zacks Investment Research.

I have a few questions. First off, on your expenses -- and I look at the R&D and the SG&A line, R&D is a lot lower and SG&A is a lot higher. Is there something that went on in how you categorized the expenses this quarter? It seems (multiple speakers) --.

R&D, (multiple speakers) yes, this is a little bit lower. It's because of some of our [IE] will be a little bit delayed to Q3. That's why I guided Q3 R&D as a bit higher by $500,000 compared to earlier quarters.

And SG&A expenses, we do have some extra expenses but these are actually kind of one-time expenses, but I still count it as regular SG&A events, most of these are relating to the company activities for the shareholders' activities.

Okay, so that's why it goes back to kind of normal next quarter, right?

Right. Yes. And this quarter R&D is a little bit higher than the regular because of the IE, and Q4 I hope that we can go back to the normal for [that].

Okay, good.

And on the real estate, are you done selling things for now?

We still have some portion, maybe about 30% to be selling in Q3/Q4. Many times, maybe some more, some tied to consume all the real estate. So the real estate, we still have 30% available for sale in Q3/Q4.

So, it's actively for sale? Is that correct?

Yes, yes. Ready, ready.

Okay. And getting back to smartphones, which seems to be the most exciting thing going on next year, you talked that you had several vendors, and you're shipping to one. Are you going to be shipping to more than one in the next quarter?

We're shipping to several ones, but majorly in China region.

Okay, several different companies, so that's multiple different handsets, right?

Right, right.

And at what point are we going to find out what handsets you're in?

Could you repeat that again?

Yes -- when will we find out what, who the customers are and which specific handsets you are designed into?

Yes, well, I think it's before the holiday season, yes, there will be several ones that's major. We have some engaged earlier already in the market, mostly the white box and also some of the white box is -- go to the China Unicom and China mobile for the so-called contract phones in China, and for the therefore the particular brand won't come up before the end of the year, yes.

Okay, and given what you're seeing in that business, what would be your guess on percentage of revenues in 2016 from smartphone and tablets?

(laughter) Yes, we'd also like to know that ourselves. This, we are definitely on the right path, direction to go to the significant revenue, as Jim has just stated in the conference call. However, the timing of the revenue happening could be one or two fiscal quarters shift, pull in or pull out, based on several factors, even including the macro environment, as we know.

But we are very small penetration right now, and so we believe it's the readiness of the play phone we're designing and when -- how much, how many they are shipping. So we expect that 2016 is going to be quite growth compared to the 2015, and we will continue to see that many years to come -- the high potential growth of this driver, yes. But actual accuracy probably difficult to predict at this moment, yes.

Do you think that you'll have more than 5% of revenues coming from that?

Next year?

Yes.

Yes.

Yes, okay; so it's going to be quite meaningful as we progress. Great. That sounds like (multiple speakers) --.

And just like -- and I will add, we indicated we will begin to divulge more information relative to customers, just like we're doing in battery now. We expect certainly by sometime in the first half next year we will begin to certainly release some specific customer information.

Great, that would be great to track what they are selling and keeping our eyes on their volume.

Very good, great quarter; I'm glad to see that there's no drama this quarter! Everything looks good, and the guidance sounds wonderful. Thank you.

(Operator Instructions). Tom Sepenzis.

I was just wondering if you could talk a little bit about your share in the television market, just between Taiwanese display, Korean and Chinese display companies. And if you've seen any kind of shift in the marketplace away from Taiwan and Korea towards Chinese display manufacturers.

Interesting question, not necessarily easy to answer. (laughter) I will try to say a few words that maybe are meaningful.

First of all, we are well-positioned in China and we're well-positioned in Japan. Korea tends to be a little bit more vertically integrated. We do have declined wins, do have revenue in Korea but not as strong a penetration as we do elsewhere.

We are seeing more activities than I think you would say brings Taiwan and China more together, in terms of some Taiwanese companies doing more and more in China. So I think that our position being strong in China, that will enable us to retain a strong position in Taiwan as well.

So, we feel we're well-positioned in TV, and we see no reason -- given our current position -- that we can't continue to expand this business.

Okay, thank you. And then I apologize if you talked about this and I missed it, but in terms of the smartphone business, you had mentioned a number of power and battery components but in terms of the volumes, you're talking about next year on the prior question. Is that backlighting? And when should we expect that that starts to hit the model?

Relative to the smartphone, we were talking more about our power. Not that we won't have some in, certainly, lighting, but I think Sterling addressed most of his comments to really the power area.

Right; right, I explained as the charger ICs, battery gauge ICs, and also have a boost IC which has supported -- a USB connector we call on the go. And a number four, we have the Seaview DC/DC, where is where we just have early-stage activities.

As Jim indicated, we also have some activity in backlighting related to Flash, and backlighting in LED, yes.

Okay, so all of those actually go in the phone itself and not just the charger piece?

Right, it's not -- we have -- yes, we address the full power-management needs, for the smartphone and tablet/PC.

So what is your addressable content within a cell phone, from an ASP perspective? Not necessarily what you're going to get for each phone, but what's the total dollar content that you can address with your product portfolio now?

Right, that number would be very high if you times the unit number, right? So it's not something regarding that we can give a 10% just overnight; it's not going to happen, that takes some time. But to answer your question, yes, $1 minus or plus is because of silicon content, we can design in a smartphone, one piece or tablet/PC.

Thank you for that.

And then lastly, just last year around this time, you lost one of your customers in the power side, and I think there was hope that you might get them back this year. Has there been any kind of progress on that?

Yes, we are working on that situation. But at the same time, we're taking versions of that product into the tablet area. So, we are highly focused with our engineering efforts in tablet. Yes, we will continue to try to win customers back, but at the same time the dynamics of the notebook market, there have been a number of shifts that have occurred in terms of market share and also the OEMs and the ODMs that they are working with.

We're seeing fewer and fewer OEMs do their own design right now; they're going more and more white box-type activity, specifically in the notebook area. And that causes us to focus more of our engineering efforts into the tablet and smartphone area.

Okay, so we're not likely to see all of a sudden an extra $3 million a quarter here starting in September-December? You just have to kind of win back on that business incrementally?

Yes, and some of that business has shifted.

Yes, it's shifted to tablet, so it doesn't really business form, I guess, right, is what you're saying?

Right, and we think we're better off positioning ourselves for the long term with the tablet, and that's really where we're focusing more and more of our engineering efforts. (multiple speakers) with success, I might add.

Thanks very much.

Lisa Thompson of Zacks.

I know we talked a little bit about this before, but I think it's interesting to go through a little bit about who you're displacing and who your main competition in the smartphone business is, and how you are selling against them. How is that turning out?

Yes, the competition is from TI, and some is from [Firelog], some is from [Maxey]. But majorly what we replace is kind of yes and no, because our power major focus is the high-end. Well, let me put it this way: it's more like the 2-decibel range smartphone equipped with the 4-core CPU, and to the 8-core or the 10- or 12-, which is in the future. So for those CPUs, in the peak of the power consumption they will reach 20 watts or 30 watts, and that is equivalent to the CPU in the notebook.

So this is naturally that, like Jim indicated, we have a technology and we do the different versions to address the tablet and the smartphone, by using our notebook technologies. So, in this area, which is in the 4-core and the 8-core and the 10-core, it used to be, there's no so-called on-the-go functionality.

It used to be, there's no so-called -- we called it a fast-charge or quick-charge functionality. So we addressed those needs. It's really for the new functionality into the phone, it's additional features; for those, we will not replace anyone.

For the charger, yes, we are replaced -- we -- it's TI and Maxey, and Fairchild. So, for the DC/DC we replace TI in the dialogue, yes.

Okay. So at this point do you have an idea of what percent of the smartphone market is the 4-core, 8-core, 10-core? You know, the notebook equivalent? Or is that a tiny part, or is it -- you know, 1%, 10%? How far have they gotten?

All right, on these new design projects they all are in mostly the 4-core and above. Very few is a 2-core inaudible (indiscernible). So we can address most of the design activity project right now.

Right; so all of the new stuff is going to be that, but the current stuff that's being sold, it's -- do you know what portion is the old technology that's going to go away?

We don't have a third-party number, but it's -- it keeps us busy; we just cannot -- their partition is like this: they probably go to the third wall, they may be using 2-core smartphone, but all the major designers that they are focused is 8-core, 4-core and 10-core, yes.

Okay, great. Great, sounds great; thank you very much.

And there are no further questions in the queue. I'd like to turn the call back over to Scott for any 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.

Have a good day and thank you again for your attention. Goodbye.

This does conclude today's conference. Once again, there will be a replay available through August 6, 2015, at nine a.m. Pacific Time by calling, toll-free, 888-203-1112, or area code 719-457-0820; passcode, 6355008.

You may now disconnect your lines, and everyone have a great day.