O2micro International Ltd (OIIM) 2016 Q1 法說會逐字稿

Good morning and thank you for joining us today to discuss O2 Micro's financial results for the first quarter of fiscal year 2016. If you would like a copy of the press release we issued this morning, please call Scott Anderson at 408-987-5920, extension 8888, and we will email you a copy immediately. It is also posted on the O2 Micro website at www.O2Micro.com under the heading Investors. There will be a replay available through May 11, 2016, at 9 AM Pacific time, also by visiting the O2 Micro website under the heading Investors. 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 O2 Micro's financial results conference call for the first quarter of fiscal year 2016, ending March 31, 2016. This is Scott Anderson, Director of Investor Relations.

I'd like to remind listeners that the discussion of business outlook for O2 Micro 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 risks 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 O2 Micro 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 of these gentlemen, the floor will be open for your questions.

Now I would like to introduce Perry Kuo, CFO of O2 Micro, for a discussion of the highlights of the first quarter of fiscal year 2016, ending March 31, 2016. Perry?

Thanks, Scott. We will now review our financial results for Q1 2016. Please note that 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 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 2016 was $13 million. GAAP net loss in the first quarter of 2016 was $2.4 million. If we exclude stock-based compensation of $438,000, non-GAAP net loss would be $1.9 million. GAAP net loss for ADS in the first quarter of 2016 was $0.09. Non-GAAP net loss per ADS was $0.08. Gross margin was 48.8% in Q1. The gross margin reflects the current revenue level and the product mix.

R&D expense was $3.7 million or 28.7% of revenue. This amount excludes stock-based compensation expense of $65,000. SG&A expense was $4.5 million or 34.3% of revenue. This amount excludes stock-based compensation expense of $373,000. The nonoperating gain was $122,000.

Income tax was $201,000 in the first quarter. And it is mainly based on the estimated effective tax rate of each taxable location. In Q1 2016, we repurchased 231,235 ADS units at a cost of $340,000.

Q1 2016 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. Communication was less than 5% of revenue.

At this time, I would like to provide some additional information. O2 Micro finished the first quarter with $46.5 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $1.81 per ADS.

In addition, O2 Micro has no debt. Accounts receivable at the end of Q1 was $5.3 million. Our DSO is 37 days. It is close to our target range of 40 to 60 days.

Inventory was $9.3 million at the end of the first quarter. This represents 129 days of inventory, and the inventory turnover was 2.8 times in Q1.

Net cash used in operating activities of $5.7 million in Q1 primarily consists of, first, net loss of $2.4 million; second, accrual expenses and other current liabilities decreases of $2.0 million; and, third, income tax payable is decreased by $1.8 million.

Capital expenditure was about $235,000 in the first quarter of R&D equipment and the leasehold improvement. Depreciation and amortization was $427,000 in Q1.

At the end of the first quarter of 2016, O2 Micro had 348 employees, 54% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter of fiscal 2016. This guidance reflects our best estimate for the current environment and is subject to change. This is the only official guidance we will provide unless we update it with a probably announcement in the future.

O2 Micro expects Q2 revenue to be flat to up 8% sequentially. We are guiding the Q2 gross margin will be in the range of 49% to 51% and is mainly from the product mix. R&D spend excluding stock-based compensation should be $4 million to $4.5 million in Q2. SG&A should be $4.5 million to $5 million in Q2, excluding stock-based compensation expense.

Stock-based compensation should be in the range of $400,000 to $500,000 in the second quarter. Nonoperating income should be in the range of $600,000 to $800,000 in the second quarter. Based on the service income of subsidiaries in different countries, we expect our tax amount to be in the range of $150,000 to $250,000 in the second quarter.

Finally, I would like to update some items in the balance sheet. Disposal of long-term investment [ex for the] Company we received $5.4 million cash in April and the property booked in Q2 will be $400,000. And the second disposal of one unit of our Shanghai office, the contract has been signed in April and the $3.6 million cash expected to receive in early Q3 timeframe, and the profit of $1.6 million will be booked in Q3 timeframe.

The goal of this management team and Board of Directors is to maximize shareholders value, and we are taking the necessary steps to do this, including reducing operating expenses and monetizing assets on the balance sheet. 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 over 19 million ADS shares for approximately $100 million. At the end of Q1, we had 9.7 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 $6.5 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 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.

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 of the world, we remain pleased with ongoing design wins including battery management, LED lighting and general lighting that we believe will enjoy revenue growth in 2016. We also expect our new power products to contribute to revenue growth in the second half of 2016. We will review progress in each of these areas.

Let's first discuss battery management. As previously stated, our battery management products exceeded our goal of reaching 15% of second-half 2015 revenues and are expected to reach 20% to 25% of projected 2016 revenues, making it our second-largest product line.

In fact, battery management achieved the 20% level in Q1 2016 and is expected to enjoy additional growth in Q2 and the second half of the year, based upon our expanded number of design wins at key customers.

These battery management design wins are projected to enable revenue expansion in all key sectors of the market in which we participate. This includes our tool, e-bike, e-vehicles and vacuum cleaners as lithium ion battery technology continues to become more reliable and cost-effective with the use of our battery management products.

The number of major OEMs using our products continues to expand and now includes Black & Decker, Electrolux, LG, Nikita, Panasonic, Samsung and TTI. Additionally, there is 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.

Next, let's discuss our lighting products. We are pleased to announce that our new area backlighting product focused on the rapidly growing 4K TV market has entered mass production for a major international OEM. Similar designs are underway with other major OEMs which are expected to go into production later this year and onward into 2017. These design wins should enable growth of our backlighting in TV despite lackluster overall market projections for both the TV and monitor markets.

We have also focused more of our backlighting R&D effort in industrial and automotive backlighting and have significant design wins in process that should keep our backlighting business healthy for years to come.

Our general lighting business also remains healthy but is now focused on growth at the high end of this market, specifically our proprietary and patented free dimming and high-power general lighting products, where we can enjoy reasonable margins and profits. We are seeing ongoing growth in this high-end market area that includes an increasing number of major brand OEMs whose LED lighting products go into well-established retail stores.

This includes activity in Asia, Europe and the Americas. Our customers include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP and Toshiba.

Finally, let's discuss power products for tablets and smartphones. While we have previously expected that revenues of our first power management products for the tablet and smartphone markets will come more significant by early 2016 as these new products launched, the difficult economic trends have resulted in slower revenue growth than anticipated. Key smartphone and tablet customers failed to meet the projected product sales where we had design wins.

Nevertheless, we expect that our design wins should enable 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. Good morning.

Q1 revenue was in the range of guidance that we provided in January. We generated revenue of $13 million in the first quarter of 2016, a decrease of 3% sequentially and the decrease of 1% from the same quarter prior year. The year-over-year revenue decline was mainly due to the overall weak macro environment, weakness in our target markets and lower than anticipated revenue from our products, particularly in smartphones.

We remain very optimistic about our growth. We are projecting in our new product lines, including product for the backlighting markets, battery management products for the power tool as well as household appliance market and a product for the smartphone and tablet market will give further momentum this year and into 2017.

Through a combination of operational expense reductions and implementation of certain initiatives to monetize assets of the Company, we believe we have transitioned the Company to benefit from our next growth phase. We expect that the Company will achieve a cash breakeven point in the near future if market conditions do not worsen.

In our backlighting business, we are projecting renewed growth in this year basically increasing the activity in TV and the monitor. Although the TV market remains dynamic, we believe our backlighting business for the TV market continues to grow as our dollar content expands from the adoption of a high-end 4K TVs, which we have opportunity to design multiple LED [driver ICs] for higher-end TVs. We continue to be a worldwide leader in LED backlighting for TV and monitors and are expanding customer in our backlighting business including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, [Sky Works], TCO, (inaudible) among others.

[Auto Microsoft] (inaudible) power management technology in our battery management segment provides a variety of end markets and continue to grow with our expanding customer base. The Korean and Japanese battery markets are already adopting our battery product. Several products in the battery group have been launched, which will increase circuit content in the same custom base. We are making stable progress with smart phone and tablet manufacturers although, due to weak market and channel inventory buildup, adoption rate of this product is slower than we had anticipated.

We have lowered our internal projection for the smartphone and tablet products. We expect to grow this business at an additional penetration pace throughout the remaining quarters of this year and expect to further grow in 2017. Our strong engineering customer service presence in the Chinese market enable O2 Micro to penetrate this new market.

Although we are disappointed in the weak global market in the first quarter, we remain optimistic that our core power management product lines, including backlighting, battery management products, power IC for smart home tablet, will remain momentum in 2016.

At this time I would like to thank you for listening to our conference call and turn back over to Scott. Scott, please?

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

(Operator Instructions) Tore Svanberg, Stifel.

This is [Evan Wayne] calling in for Tore Svanberg. I just like to maybe start with your guidance for the second quarter. Can you talk a little bit about your confidence level and perhaps the visibility that gives rise to this guidance?

The confidence level, yes. Currently, for our revenue we have a pretty strong [bedrock] to support, and we do receive the focus from our key customers. So there is confidence level of the revenue I [don't think] that it's a problem. Current projection -- we will reach the level we provided. For the gross margin we have done the cost reduction, key cost reduction. And so we improved some EO improvement on the new product, renting in some lighting and also in some generating and also as well in the battery management.

So we have confidence that our gross margin will be in the area of mid-range of the 49% to 51%.

OpEx -- as we have done through the cost reduction, OpEx area will be in the range of the guidance. In other income, for the other income, that's $100,000 to $200,000 from the interest income and $400,000 -- we already sold the shares [long-term] investment of the (inaudible), so $400,000 already in the bank.

Okay, great. And with the cost reduction, is the OpEx level a new baseline for you? Is that likely to be the ongoing level?

Yes. For the rest of the year, I think our R&D and SG&A level will be in the area of the $4 million to $4.5 million for R&D and $4.5 million to $5 million area for SG&A, excluding stock-based compensation.

And for your gross margin, do you see that returning to a higher 50% to 52% level in the near future?

I think it also depends on the new product. As Sterling mentioned, it's probably in the second half we have more new products shipped to our smart phone and also tablet. So for the area may probably impact one or two quarter, by 1% to 2%. Yes. But it still too early to tell. Yes.

Okay, got it. Regarding your Q1 results, I was just wondering if you were still seeing any headwinds from your legacy product. Or is the challenge basically from the tablet and smart phone [area]?

The smart phone tablet has been -- the general market of the smart phone tablet has been slower than anticipated since last year. You probably can see some recent news. And that affected the new play phone development schedule and also as our new [common] as this market, we are in the play found, sometimes have some so-called dynamic change, the changing of the internal priority, and that gives us -- postpone our anticipated penetration realized as a revenue schedule.

My last question is that, in your prepared remarks, you talked about growth in the coming quarters. It sounds like you might be reaching an inflection point. Without giving actual guidance, I was just wondering if you think that it is possible that your revenue will grow in 2016, at this point.

Yes. He is asking -- I think, Evan, you are asking the breakeven point. Right?

Year-over-year growth.

Year-over-year growth. So Jim, do you care about --

Well, I think you are right. We have reached what we feel is an inflection point where our legacy products, particularly in the notebook area, has very much flattened at the bottom. So we do not see more downside risk in that area. And at the same time, some of our new product -- we mentioned the area lighting for 4K TV. That area we expect to begin to see good ramp starting in Q2 and then ramping further as we bring on additional customers in the Q3-Q4 timeframe.

We also see the battery management continue to ramp. Q2 in some of the battery management area tends to be somewhat slow, [and] the power tool area. Nevertheless, we do expect some moderate growth in Q2 but then accelerating growth in the second half. So we think we could see appreciably higher revenues in the second half. But we will wait and see after we get through Q2 first.

Great, thank you very much.

(Operator Instructions) Tom Sepenzis, Northland.

Congrats on the results and the guidance. I guess the first question is, when do you think, given the potential inflection here -- I think you said that you are targeting breakeven results of about $16.5 million. So my question is when do you think you can reach that?

As Jim just indicated, at this point I think we are getting closer to this as we have done the cost reduction on the OpEx, improved the gross margin. And we have several not a single product line to grow in the future. So we have [better] lighting, [miracle back] lighting, dollar content increasing the existing account, very qualified growth in the high-performance general lighting and multiple applications in battery management area, which enjoy a high gross margin for O2 Micro.

So after the Q2 I think we can update the growth situation, if the market continues to get improvement.

Lisa Thompson, Zacks Research.

Could you talk a little bit more about the battery management business? There seems to be a lot of activity, more portable appliances and tools. But I really haven't seen any data. What is your feel for how is that market growing?

Well, the market is expanding very nicely because the lithium ion technology as it matures and gets bigger in all areas, including automotive -- that has lowered cost production. At the same time, more governments are putting limitations into some of the lead area for batteries. That includes China, by the way.

So this has a major impact on the industry switching over to the battery management with lithium ion. So we are seeing some of the traditional lead acid go into lithium ion.

But at the same time, there's very significant growth, as you mentioned, in some of the portables -- for instance, vacuum cleaner. We are seeing virtually all the leaders in vacuum cleaners at this point begin the ramp into the lightweight, cordless vacuum cleaners. And that market has just begun its ramp. And we expect to see accelerating volumes in that area.

And I think, at some point, you will reach that market getting to be to the point where probably over half of the vacuum cleaners no longer have a cord attached to them.

At the same time, the power tool market across a broad variety of power tools, with the advances in lithium ion technology, are getting better and better. And we continue to see the volumes in those areas from some of the leaders that we mentioned including like Black & Decker, TTI, to accelerate more and more of their product line into portable cordless power tools.

So we see this market as being able to grow very quickly. It has traditionally been a fairly slow growth market, but at this point we are beginning to see an acceleration.

At the same time, you will see more and more -- I mentioned uninterrupted power supplies. You'll see this expand into the solar area, for instance, with some solar systems. Many people would like to go to lithium ion backups so they can actually go off the grid, so to speak.

And so we believe that there is a huge amount of opportunity here and then also, over time, we want to move further up in the e-vehicle area, including automotive.

So we see this as a very, very large market and one that is continuing to grow and one in which we feel that initially we are well-positioned. And we simply have been able to engage with some of the major companies we mentioned. And we believe that there's a lot of room to continue to grow this area.

That's a fairly lengthy answer. But I hope it covered some of your question area.

Right, that's great. So, given that you work with so many different manufacturers, do you feel that your growth will be proportional to the industry growth?

Yes, we feel that we are positioned with some of the right companies. And I think not only can we keep up with their growth but, as we get the initial design wins, we can also move into new product areas with them. So in many cases we can grow faster than they are growing, simply because as we engage with them we engage not just in the growth product area they are, but then also can expand into additional product areas that they are already engaged in.

Great. As far as LED goes, there's a lot of, I don't know, chaos in the LED business with prices coming down like on a daily basis. Can you talk about where you fit in, in the whole ecosystem, and how your pricing and volumes are affected?

I believe chaos was a good description. And we decided some time back -- we discussed this a little bit in our last call, last quarter, to step aside from what we call the chaos. And so we have focused, as we mentioned, on the high end of this business. We have some very strong patent positions worldwide in what we call free dimming. And we have customers we are engaged with, with the free dimming. And due to our patent position we are able to maintain a strong pricing and good margin position. There's also some high-performance areas of the market including some of the industrial area, where high quality and performance are very critical. We are also able to maintain margins there.

So we have sidestepped from the chaos, if you please, of the low end of the mass market and really focused on those areas where we have good technology, good patent position. And these areas are growing at a reasonable pace, not necessarily exponential in terms of volume, but at a reasonable pace. And we think we will grow our business this year and next year.

Great, thank you. That's all my questions.

As there are no further questions in the queue, I'd like to turn the call back over to Scott for any closing remarks at this time.

Thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888, with any follow-up questions. So have a good day and thank you again for your attention. Goodbye.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.