O2micro International Ltd (OIIM) 2015 Q4 法說會逐字稿

Good morning and thank you for joining us today to discuss the O2Micro financial results for the fourth quarter of fiscal year 2015. If you would like a copy of the press release we issued this morning, please contact Scott Anderson at 408-987-5920, extension 8888, and we will email 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 3, 2016, at 9 AM Pacific Time by calling the 1-888-203-1112 or the 1-719-457-0820; passcode will be 4400544. Following the presentation by management, the conference will be open for questions and answers at time Pacific. Mr. Anderson, you may begin.

Good morning, and thank you for dialing into O2Micro's financial results conference call for the fourth quarter of fiscal year 2015 ending December 31, 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, Chairman, and CEO. After the prepared remarks from these gentlemen, the floor will be open for your questions. Now I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter of fiscal year 2015 ending December 31, 2015. Perry?

Thanks, Scott. We will now review our financial results for Q4 2015. Please note that financial results will be presented on a GAAP basis unless we designate otherwise.

The non-GAAP results includes 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 fourth quarter of 2015 was $13.4 million. GAAP net loss in the fourth quarter 2015 was $12.8 million. If we exclude stock-based compensation of $464,000 and the one-time expense of $9.8 million, the non-GAAP net loss would be $2.5 million. One-time expense includes headcount consolidation for $1.1 million, impairment loss on long-term investment for $4.9 million, and the income tax accrual for the accumulated earnings distribution planned in 2016 for $3.8 million.

GAAP net loss per ADS in the fourth quarter of 2015 was $0.50. Non-GAAP net loss per ADS was $0.10. Gross margin was 50.4% in Q4. The gross margin reflects the current revenue level and the product mix.

R&D expense was $5.4 million or 40.4% of revenue. This amount includes stock-based compensation expense of $76,000. SG&A expense was $5.4 million or 14.6% of revenue. This amount includes stock-based compensation expense of $388,000.

The nonoperating loss was $4.4 million. This amount includes the following key items: the impairment loss on long-term investment, $4.9 million; increased income on bank deposits, $106,000; rental income, 132,000; dividend income from investee, $75,000.

Income tax was $3.8 million in the fourth quarter and is mainly for withholding taxes accrual from the accumulated undistributed earnings of China and the Taiwan subsidiary, and it is one-time expense.

In Q4 2015 we repurchased 291,458 ADS units at a cost of $520,000. Q4 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 35% to 40% of revenue; communications was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with $52.4 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.05 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q4 was $5.2 million. Our DSO is 41 days; it is in our target range of 40 to 60 days. Inventory was $9.7 million at the end of the fourth quarter. This represents 128 days of inventory, and inventory turnover was 2.8 times in Q3.

From a cash flow perspective, we generated $1.6 million cash outflow from operating activities in Q4. Capital expenditures were about $269,000 in the fourth quarter for R&D equipment and the leasehold improvements. Depreciation and amortization was $500,000 in Q4.

At the end of the fourth quarter of 2015, O2Micro had 357 employees, 54% of which are engineers. At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2016. 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 an appropriate announcement in the future.

O2Micro expects Q1 revenue to be up 2% to down 5%. We are guiding the Q1 gross margin will be in the range of 47% to 49% and is mainly from the product mix. R&D expense, excluding stock-based compensation, should be $4 million to $4.5 million in Q1. SG&A should be $4.5 million to $5 million in Q1, excluding stock-based compensation expense. Stock-based compensation should be in the range of $350,000 to $450,000 in the first quarter.

Based on the service income of our subsidiaries in different countries and the earnings distribution, we expect our tax amount to be in the range of $200,000 to $300,000 in the first 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 18.8 million ADS shares for approximately $100 million. At the end of Q4 we had $10.1 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 $16.5 million to $17.5 million in quarterly revenue, and our profitability breakeven point is between $18.5 million to $19.5 million in quarterly revenue. Given the uncertain demand and macro environment, we are prepared to continue to manage costs as needed, although we believe we have a nice current cost, based on current and anticipated revenue labels.

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 we continue to see weak economies in key areas in the world that impacts of revenue, we remain pleased with ongoing design wins, including battery management, LED lighting, and general lighting. We will review progress in each of these areas.

Battery management products have enjoyed excellent year-over-year growth in 2015. Our battery management products not only exceeded our previously-stated goal of reaching 15% of second-half 2015 revenues but are now expected to reach 20% to 25% of our projected 2016 revenues. This will make battery management the second-largest product line for O2Micro in 2016.

Ongoing design wins revenue expansion is expected in all key areas of battery management market which we participate. This includes power tool, e-bike, e-vehicle, and vacuum cleaners as Lithium Ion battery technology continues to become more reliable and cost-effective with the use of our battery management products. Major OEMs using our products continues to expand and includes Black & Decker, Electrolux, LG, Mikita, Panasonic, Samsung, and TTI. Additionally, there's increasing design activity for our products in uninterrupted power supply applications as we continue to see usage of our battery management products expand at major OEMs.

Intelligent lighting revenues met expectations and Q4 and are projected show revenue growth in 2016, despite the TV and monitor business continuing to be significantly impacted by general economic weakness in worldwide economies, including China, Europe, and South America. Although the TV market remains soft for our customers, we see ongoing product expansion and revenue growth in TV from our engineering efforts.

Our new area backlighting products have achieved key design wins at leading industry OEMs for high-end TV models that are now going into production. Based on these product design wins in TV and gains and other market areas, we expect to enjoy revenue growth in 2016 for our LED backlighting products despite the economic headwinds.

Similarly, despite a terrible slowdown in the expansion of LED-based general lighting, we expect our patented Free Dimming products to continue their revenue expansion in 2016. In general lighting, we remain focused on the higher end of this market, where we continued to gain new design wins worldwide and expanded more application with our patented products.

Our customer list includes GE, IKEA, Iris Ohyama, Lights of America, Osram, Panasonic, Samsung, TCP, and Toshiba, as we continue to see the broader-based acceptance of our proprietary Free Dimming and two-color dimming products in more and more applications and a widening international customer (technical difficulty) successfully introduced our TRIAC controller lighting products for legacy dimmable fixtures and see these products gaining revenue momentum in 2016.

While we had previously expected that revenues of our first power management product for the tablet and smartphone would become more significant by early 2016 as these new products launch. The difficult economic trends have resulted in slower revenue growth than anticipated. Key smartphone and tablet customers failed to meet their projected product sales where we had design wins. Nevertheless, we expect that our design wins should enable reasonable revenue growth as we continue to move forward in 2016.

Sterling Du, our Chairman and CEO, will more fully discuss our position in smartphone and tablet. I will now turn the call over to our CEO, Sterling, for closing remarks. Thank you.

Thanks, Jim. Q4 revenue was in the range of the guidance that we provided in last November. We generated revenue of $13.4 million in the fourth quarter of 2015, a decrease of 2% sequentially and decrease of 7% from the same quarter the year before last. The year-over-year revenue decline was mainly due to the overall weak macro environment, [energy] and weakness in our target markets, and the lower revenue from our mobile product group, of which was a [reduction] back in January 2015. While we are disappointed in the slower-than-anticipated adoption of growth drivers, we remain optimistic that the growth we are projecting our new product line, where we gain the further momentum in 2016, including the product for the smartphone, general lighting, and the battery management for the power tool and household appliance markets.

Through the combination of operation expense reductions and the implementation of certain initiatives to monetize assets of Company, we believe we have transitioned the Company to better prepare our next growth phase. We come to this difficult but necessary expense in headcount reductions in the fourth quarter and lowered the expense operation by $7.4 million on a year-over-year basis.

We believed our Company will achieve the cash breakeven point in the near future. We are making significant progress with the smartphone manufacturers since 18 months ago -- although, due to the weak market and the channel inventory buildup, the adoption rate of this product is slower than we had anticipated. We have lowered our internal projection for the smartphone products.

While we are engaged with a design win with several Tier 2 smartphone manufacturers and have commenced volume shipping to a global Tier 2 smartphone manufacturer, we expect to grow this business throughout 2016. Our strong engineering and customer service presence in Chinese market enable the Company to expand our customer base in the region.

In our backlighting business, we are projecting renewed growth this year based on increasing this activity in the TV and the monitor. Although the TV market remains dynamic, we believe our backlighting business for the TV market will continue growth as our dollar content expand from the adoption of higher-end 4K TV, where we have opportunity to design multiple LED driver IC for higher-end TVs.

We continue to be a worldwide leader in LED backlighting for TV and monitor. And our expanding customer base in our backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, Skyworth, TCL, Hisense, among others.

O2Micro's proprietary analog power management technology in battery management sector support variety of end markets continue to grow with our expanded customer base. The Korean and Japanese battery market have renewed for our battery products. Several products in this battery group has been launched, which increases the content in the same customer base.

Finally, our LED general lighting business continue to grow in this competitive market. Our strategy to provide broad-spectrum product line, from high-end MR8, MR12 series; household dimming; Free Dimming to serve power cost-effective commodity-type solution targeting leading LED manufacturers in the US, Japan, and their OEM/ODM partner in China, with great customer interest in both high-end and low-end solution we offer.

Although we are disappointed in the weak global market in the fourth quarter, we remain optimistic that our core power management product line, including general lighting, backlighting, power ICs for the smartphone battery management will regain momentum in 2016. At this time, I'd like to thank you for listening to our conference call. Turn back to the Scott. Scott, please?

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

(Operator Instructions) Tore Svanberg.

I was hoping we could start on the battery management. It sounds like things are really moving there. And you mentioned 20% to 25% of 2016 revenues. What are the applications that would drive most of that growth? I mean, you mentioned where you already have exposure, but perhaps you have a few wins here and there that will be the main driver for that revenue growth.

Well, we see, Tore, rapid expansion in the power tool area. We are also seeing now rapid expansion in the e-bike activity as more and more e-bikes are utilizing the Lithium Ion rather than lead-acid batteries in their designs. We are also seeing the vacuum cleaner market now move very quickly toward Lithium Ion. So that market has a lot of growth to go, but there's a lot of models out there from a number of OEMs, and they're catching very good market recognition. And so we see that area moving forward rapidly. So those three are really helping drive our revenue growth.

Very good. Thank you for that, Jim. And Sterling, you mentioned some dollar content growth with 4K TVs. Could you maybe help us understand what type of a ratio we're talking about from a regular TV to a 4K TV for your content?

Some of the high-end 4K has adopted so-called area backlighting, as Jim mentioned. Local area backlighting means that there will be -- you can control the different area for backlighting, and not just a one-size-fits-all. So by using that depends on the architecture of the backlighting topology; some could be using 4X, some using 2X of original silicon content.

So our technology right now already goes to the quality. And right now production -- we can see the market for the first available TV set. And then the same technology also attract more China base, the TV set looking for their high-end 4K or even go to the 8K -- this kind of local area backlighting technology. So this is the sales content increases we mentioned, we referred to.

Very good. And, Perry, looks like gross margin is going to come down a little bit in Q1. I guess that's due to the mix. Could you maybe elaborate a little bit on that? And as we progress throughout the year, should we expect gross margin to go back up, especially as battery management becomes an even higher percentage of revenue?

Yes, Tore, this is a very good question. And the Q1 -- the gross margin is kind of the function of more new product ramping as we have more product for the general lighting and also for the smartphone. This kind of ramp probably will impact our gross margin for the Q1 and the Q2 time frame.

And I will tell this -- we have more battery management, as also you mentioned; the high gross margin; and also the higher gross margin of our backlight to the higher-resolution 4K TV set. I expect that gross margin will go back to 50% level.

Okay, great. Thank you. And the last question -- I don't know who wants to take this, but if you look at your $13.4 million in Q4, what type of percentage would you classify as new revenue? And you know, new revenue typically -- you know, applications of products introduced over the last couple of years.

The reason I'm asking the question -- I'm just trying to get a sense for how much percentage of revenue is actually growing with new applications versus those that are actually declining?

Tore, I'm doing some calculation, but I would suspect that that number in Q4 is in the 30%-plus area.

For new products?

For new products. That would include -- the strong drivers in that include our battery management product, our general lighting product, and some of our new LED backlighting products.

That's very helpful. Thank you very much, guys.

Lisa Thompson.

I was wondering, could you go through a little bit more on the one-time write-offs? I don't think I got it all. And what was the impairment for, exactly?

One-time expense for the Q4 we had $9.8 million. Of the $9.8 million, we have done a cost-saving headcount consolidation, $1.1 million, which will bring the OpEx down $1 million a quarter in 2016. So also we will help our (technical difficulty) and also profitability breakeven point.

We also have the one-time expense impairment loss, which is from one of our -- which is from our investee. This investee -- it's actually liquidated its Wuxi factory in the end of the 2015 as it stopped the production -- so according to our rule, we need to review its book value and then impair the loss, although it's also starting to find the new sites to reproduce the testing and assembly. But according to our rule, we do the impairment loss for now; and after it's reproduced, we will review if we are going to change the accounting way. But I think that we will continue to keep the lower investment value, which is actually a percentage of the full value of our shares in the investee.

And another one-time expense is tax accrual for the accumulated earnings. We plan to wire back our undistributed earnings of the subsidiaries of O2Micro in Taiwan and China to the O2 Global -- O2 Cayman Island for the global cash management in 2016. So we -- with that change, so we need to do some tax calculation policy from this quarter, according to our external auditor.

So we do the tax accrual for the distribution of the return earnings of our subsidiaries. We plan to do for Taiwan subsidiary and also China subsidiaries in 2016. So this amount up to $3.8 million. So all these key items amounted to a one-time expense $9.8 million in Q4.

Okay. And so you gave guidance for taxes in Q1. What are they going to look like for the rest of the year?

I believe, Lisa, in Q1 as we have done the change in the redistribution of our return earnings of subsidiaries in Taiwan and China, so -- starting from Q1 2016. So we have two major tax. One is service income tax, and the other one is the tax accrual for the redistribution of the earnings. So it will be $200,000 to $300,000 per quarter in 2016.

Between $20,000 and $200,000 per quarter?

$200,000. Between $200,000 and $300,000.

Okay. For all four quarters, then?

Yes, for a quarter. For a quarter in 2016.

Okay, so that helps.

Thank you.

Thank you very much.

Okay, there are no further questions. Please continue.

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