O2micro International Ltd (OIIM) 2015 Q3 法說會逐字稿

Good morning and thank you for joining us today to discuss O2Micro's financial results for the third quarter of fiscal year 2015.

If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 408-987-5920, extension 8095, and we will fax you a copy immediately. It is also posted on the O2Micro website at www.O2Micro.com, under the heading investors.

There will be a replay available through November 11, 2015, at 9 AM Pacific Time by calling 1-888-203-1112 or 1-719-457-0820 followed by the passcode 967965.

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 in to O2Micro's financial results conference call for the third quarter of fiscal year 2015 ending September 30, 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 facts are forward-looking statements within the meaning of the federal securities laws.

Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the Company's 20-F annual filings, our annual reports, and other documents filed with the SEC from time to time. Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors.

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

With me today are Perry Kuo, our CFO and Director; our Head of Marketing and Sales and Director, Jim Keim; and Sterling Du, O2's founder, CEO, and Chairman. After the prepared remarks from these gentlemen, the floor will be open to your questions.

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 third quarter of fiscal year 2015 ending September 30, 2015. Perry?

Thanks, Scott. We will now review our financial results for Q3 2015. Please know 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 the losses from discontinued operations. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the third quarter of 2015 was $13.7 million. GAAP net loss in the third quarter of 2015 was $2.4 million. If we exclude stock-based compensation of $450,000, the non-GAAP net loss would be $1.9 million.

GAAP net loss per ADS in the third quarter of 2015 was $0.09. Non-GAAP net loss per ADS was $0.07. Gross margin was 52% in Q3. The gross margin reflects the current revenue level and the product mix.

R&D expense was $4.6 million, or 33.9% of revenue. This amount excludes stock-based compensation expense of $76,000. SG&A expense was $5.5 million, or 39.9% of revenue. This amount excludes stock-based compensation expense of $374,000.

The non-operating income was $1.3 million. Income tax was $287,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3 2015, we repurchased 220,381 ADS units at a cost of $530,000.

Q3 2015 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. Communications was less than 5% of revenue.

At this time I would like to provide some additional information. O2Micro finished the third quarter with $55 million in (technical difficulty) [cash] and short-term investments. This represents cash and cash equivalents of $2.13 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 was $7.0 million. Our DSO is 48 days. It is in our target range of 40 to 60 days. Inventory was $9.2 million at the end of the third quarter. This represents 121 days of inventory and the inventory turnover was 3 times in Q3.

From a cash flow perspective, we generated $2 million cash outflow from operating activities in Q3. Capital expenditure was about $236,000 in the third quarter for R&D treatment and the leasehold improvements. Depreciation and amortization was $600,000 in Q3. At the end of the third quarter of 2015, O2Micro had 404 employees, 53% of which are engineers.

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

O2Micro expects Q4 revenue to be flat to down 7% sequentially. We are guiding the Q4 gross margin will be in the range of 50% to 52% and that is mainly from the product mix. R&D expense, excluding stock-based compensation, should be $4.5 million to $5 million in Q4. SG&A should be $5.5 million to $6 million in Q4, excluding stock-based competition expense.

Stock-based compensation expense should be in the range of $400,000 to $500,000 in the fourth quarter. Non-operating income should be in the range of $400,000 to $500,000 in the fourth quarter. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $200,000 to $300,000 in the fourth quarter.

While we wait for our anticipated next significant product cycle 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.

Regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. Since 2002, we have repurchased approximately 18.5 million ADS shares for approximately $100 million. At the end of Q3, we had $10.6 million remaining in our share buyback authorization.

Returns to shareholders are very much on our mind and we are continuing 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 $7.5 million to $18.5 million in quarterly revenue and our profitability breakeven point is between $20 million to $21 million in quarterly revenue. Given the uncertain demand in the macro environment, we are prepared to continue to manage costs as needed. Although we believe we have a [non-current] cost based on the current and expected 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. Good morning, everyone. Although Q3 results were adversely affected by a weak economy in key areas of the world that impacted our TV and monitor lighting revenue, we are pleased with ongoing design wins in LED lighting, general lighting, and battery management.

Our battery management products have enjoyed excellent growth in 2015 with good year-over-year growth expected in the second half of 2015 and continuing growth in 2016. We had previously stated that battery management products were expected to reach 15% of our revenue in the second half of 2015. We expect to not only reach this goal, but exceed it in Q4.

Ongoing design wins and revenue expansion is expected in all key market sectors -- power tool, e-bike, e-vehicle, appliances, and vacuum cleaners -- as lithium ion battery technology continues to become more reliable and cost-effective with use of our battery management products. Major OEMs using our products continues to expand and now includes Black & Decker, Electrolux, LG, Mikita, Panasonic, and TTI.

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

Our revenue weakness in the TV and monitor business follows the general economic softness that has been widely discussed in recent weeks. This includes the announcement from Corning about weak glass sales for these key market areas. The weaker-than-expected TV sales affected virtually all of our major TV customers whose sales in China, Europe, and South America were particularly weak due to the general economic weakness exacerbated by the strength of the US dollar versus their respective monetary currencies.

Although the TV market was weaker than expected in Q3, we do see ongoing strength in our design win efforts as our new area lighting product has achieved major design wins at leading industry OEMs. Despite ongoing economic headwinds, we expect growth in 2016 revenues as a result of these design wins.

Similarly, despite a general slowdown in the expansion of LED-based general lighting, we expect our patented Free Dimming products continue their revenue expansion in 2016. In general lighting, 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, AusRam, Panasonic, Samsung, TCP, and Toshiba as we continue to see a broader-based acceptance of our proprietary Free 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 controller lighting products for legacy dimmable fixtures and see these products gaining revenue momentum in 2015.

While we had previously stated that the impact of our first power management product for the tablet and smartphone would start to become significant as these new products ramp into higher volumes and increase our company revenues in Q4 and 2016, we are disappointed by slower-than-expected revenue growth in both smartphone and tablet due to key customers failing to meet their projected product sales where we had design wins. Sterling Du, our Chairman and CEO, will more fully discuss our position in smartphone and tablet.

I will now turn the call over to Sterling for closing remarks. Thank you.

Thanks, Jim. Our Q3 revenue was in the range of guidance that we provided in October. We generate revenue $13.7 million in the third quarter of 2015, a decrease of 7% sequentially and a decrease of 11% from year ago.

Now year-over-year revenue decline was mainly due to overall weak macro environment and weakness in our target markets. While we are disappointed in the slower-than-anticipated adoption of growth drivers, we remain optimistic that the growth we are projecting in our new product lines, including product for the smartphone and tablet, the general lighting, and the battery management product for the power tools, will gain further momentum in 2016.

In the past, through a combination of operation expense reductions and the implementation of certain initiatives to monetize assets of the Company, we believe we have positioned the Company to benefit from our next growth phase. We are in the process of implementing additional cost-saving measures and we plan to provide additional detail on operation expense reductions when we report Q3 results in early 2016. We believe these additional expense reductions will position the Company to achieve a cash breakeven level in the near future.

We are making significant progress in the design win in smartphone and tablet since the first launch 18 months ago for the new product, although adoption and ramp of this product is much slower than we had anticipated. The combination of weak end-markets and ongoing inventory buildup have caused us to lower our internal projection for the smartphone and the tablet product.

We are engaged with several Tier 2 smartphone tablet manufacturers and have commenced volume shipping to the global Tier 2 smartphone manufacturer. The milestone is proving that our product for the market are in the process of manufacture adoption and we expect growth in this business throughout the quarters of the next year.

In order to maximize efficiency with our tablet and smartphone customer we have actively engaged distribution channel and a partner in this market, while our customer received direct technical support for our O2Micro. Our strong engineering and customer service presence in China market enabled O2Micro to expand our customer base in this region.

In our backlighting business, we are projecting renewed growth in the product area as we move into 2016 based on increasing these activities in the TV and monitor. Although our revenue from backlighting was slightly weaker than we expected this quarter, we believe our backlighting business for the TV market will continue growth as our dollar content expands from the adoption of high-end TVs where we have the opportunity to design multiple LED driver ICs for the high-end TV, which will require high resolution.

We continue to be worldwide leader in LED backlighting for TV and monitors and are expanding customer base in backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, [Skyworld], [TCL], [Hisense], among others. O2Micro proprietary analog power management technology in our battery management solution supports a variety of end-markets and continued growth with our expanding growth -- growing customer base. Our battery management product to achieve many new design wins and we continue to be very optimistic for continued growth in many end-markets going forward.

Our LED general lighting business continues to grow in this competitive market. Our strategy of providing broad-spectrum product lines from the high end (inaudible) [8, 12 series], (inaudible) dimming, conventional dimming, to self-powered cost-effective commodity-type solutions targeting leading LED manufacturers in the US, Japan, and their OEM/ODM in China is working. The great customer interest in both high-end and low-end solutions we offer and our competitiveness of products.

Although we are disappointed in the [length] of growth in the third quarter, we remain optimistic that our core power management product lines, including general lighting, backlighting, power ICs, or the smartphone, tablet, and the battery power management for the power tools, will regain momentum in 2016.

At this time I'd like to thank you for listening to our conference call and like to 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 Nicolaus.

Thank you. My first question is so your cash flow breakeven is about $17 million, $18 million. I'm just wondering from a sort of new product perspective if you have enough engagements to get to that level quarterly revenue next year, even in a tough economy.

Yes, Tore, due to the macroeconomic situation and also the slower-than-expected momentum growth in the smartphone and tablet area, so as we mentioned we are evaluating the cost-saving measures. So we are trying to reduce the breakeven point next year, so we hope that we can provide additional details on our Q4 2015 conference call. Actually we're working on all the possible available options on the cost-saving measures intended to bring down the breakeven point down further in 2016. But before this point, it's still too early to tell the details.

Okay, very good. As a follow-up, Sterling, you sounded confident that the backlighting business could actually grow in 2016. Could you maybe elaborate a little bit on the dollar content increase? Just because I assume you are expecting TV and monitor units to be still down year over year, right?

Well, yes. The unit level is going down, but the size is going up and also resolution was going up. So the technology we're developing is served high-end TV and we have a reason to believe it is quite a potential market. The new high-end TV, the customer we work with require so-called independent backlighting area for one panel, so that can give us some opportunity to sell the multiple ICs and also can increase the silicon content.

And how much will be -- how many IC extras to use and how much the silicon goes will depend on the size and also depends on the contrast and the brightness of the spec of the particular TV. And about what we can safe to say that is it's going to be more silicon content from O2Micro to serve the high-end TV in the next year.

Sterling, is this a first-half event or a second-half event or is it sort of a gradual penetration?

It is going to the certain sector and then maybe expand to the same customer growth to the different platforms and also can go to the multiple customers which we are engaging. Maybe Jim want to add some color to some question which Tore asked.

Yes, to accentuate a little bit further on Sterling's point, we do have about a major design win that is already beginning to ramp through the prototype stage that is being launched in Q1. We will probably be able to name the customer at the time of the launch. That's a significant program and we have similar products in the design win stage with several other majors.

Those programs will launch more toward the second half of next year. So we do expect additional revenue to start in the Q1, continue to ramp in Q2, and then there will be additional customers come on in the Q3/Q4 timeframe.

That's very helpful. Last question on the smartphone and tablet wins you've had. Sounds like there's maybe some of your customers that didn't see enough demand for their products, but as we look at 2016 is there an opportunity with some new customers here? Is some of the design wins that you already have expected to ramp more materially? I'm just trying to gauge your excitement around this opportunity for 2016.

Yes, that's what we want to do, yes, but the form is very consumer-driven. There's going to be quite the [rivals] in predicting. So what we predict in 2015 is not seeing that our inventory have been kind of slow to moving, so that makes our target customer slow their pace to face into the multiple core CPU.

And the other one, it's so called a fast-charging, quick-charging, but adoption rate also slower. You can look at the (inaudible) core comp and not too many so-called original expected penetration rate is happening. It's because of the current form has been weakness right now.

So we have to remember our solution is really advantage us is because we can provide into multiple and also high-current driving charging; is a [3M] or above. And those design activities are quite active in our target customer, but those turning to materialize has been slowed down due to the environment and also the new technology adoption rate.

So we are going to see -- it's going to happen in 2016, but how much is going to gauge that we also like to gauge that. And I think probably is toward the second half of 2016 for really the change to the more powerful smartphone and also have those Christmas season. So that's what we probably think that's going to happen.

Okay, thank you.

Lisa Thompson, Zacks Investment Research.

I was wondering could you just go through a recap on the real estate: what was the transaction you did this quarter and what do you have left?

This is Perry. We sold one portion of the Hsinchu area, that's about 1/7 of the Hsinchu big offices. Again on the sales about $268,000. We still have 2/7 of the Hsinchu area in this building and also we have one standalone Hsinchu building. This could be sold out in 2016. It is on our pipeline.

And also in the Shanghai area we are engaged in selling one floor in Shanghai office and we hope that we can complete the transaction in Q4 with lease. We expect that we have some more cash in Q4, by end of Q4 hopefully. Other than this, we still have the real estate in the US office and also two floor in the China Shanghai area. This is all the offices, our real estate.

Okay, great. Let me just ask you a kind of philosophical question. Two possibilities, one is why don't you just take some cuts to get to cash flow breakeven, and just estimate the worst and do whatever you have to do? It seems like you could easily just add back resources when you needed them, because it's not like you are producing product. It seems like a simple variable cost more type thing.

And the second is what have you done as far as the possibility of maybe going private transaction or anything like that? Have you considered other ways of structuring the Company?

Yes, as I just stated, we are looking for additional operational expense reduction cost savings plans that could be lead us to achieve the breakeven point in the near future. We are doing that; that's the process we are doing and more detail would be the Q4 conference call as our CFO stated.

For the privatization, that's always one of the options and our Board members is always open for any possible development in the future. And that's what we can comment right now, thank you.

Okay, great. Thank you so much. On the smartphone horizon, have you been incorporated into any new products or have any new customers that have added on since last quarter?

We work with the majority customers in China and Taiwan. We are engaged with some global Tier 2 manufacturers, several ones, multiple ones. And their machine right now difficult for us to track because go to everywhere, but we do know some of them go to the BRIC countries, which is like Russia and India. So that's what we know, but for the US we really don't know.

All right, great. Thank you very much.

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

Thank you, operator, and 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.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.