O2micro International Ltd (OIIM) 2016 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 2016. If you would like a copy of the press release we issued this morning, please call Daniel [Meiberg] and also email danmeiberg@o2micro.com or call 408-987-5920, extension 8888, and we'll 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 November 9, 2016, at 9 AM Pacific time, at the same conference number later by visiting the O2Micro 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.

Thank you. This is Dan Meiberg. Good morning and thank you all for dialing into our call, and my apologies for the inconvenience as we worked out the phone numbers this morning.

Today we are going to be discussing the O2Micro financial results for the third quarter of fiscal year 2016 ending September 30, 2016. This is Daniel Meiberg, Corporate Communications for O2Micro.

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 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 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; Jim Keim, our Head of Marketing and Sales and Director; And Sterling Du, O2's Founder, CEO, and Chairman. After the prepared remarks from these gentlemen, the floor will be open for your questions.

At this point, I'd like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the third-quarter fiscal year 2016 ending September 30, 2016. Perry?

Thanks, Daniel. We will now review our financial results for Q3 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, non-recurring 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 third quarter of 2016 was $14.4 million. GAAP net income in the third quarter of 2016 was $1.3 million. If we exclude stock-based compensation of $376,000, the non-GAAP net income would be $1.7 million. GAAP net income per ADS in the third quarter of 2016 was $0.05. Non-GAAP net income per ADS was $0.07. Gross margin was 52.6% in Q3. The gross margin reflects the current revenue level and the product mix.

R&D expense was $3.9 million or 27% of revenue. This amount excludes stock-based compensation expense of $54,000. SG&A spend was $4.4 million or 30.6% of revenue. This amount excludes stock-based compensation expense of $322,000. The non-operating gain was $2.7 million.

Income tax was $282,000 in the third quarter, and is mainly based on the estimated effective tax rate of each taxable location.

In Q3 2016, we repurchased 53,288 units at a cost of $84,000. Q3 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 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 $53.1 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.07 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 were $6.6 million. Our DSO is 42 days. It is in our target range of 40 to 60 days. Inventory was $8.5 million at the end of the third quarter. This represents 116 days of inventory; and inventory turnover was 3.1 times in Q3.

Net cash provided by operating activities of $1.6 million. Capital expenditure were about $210,000 in the third quarter for R&D and IT equipment purchase. Depreciation and amortization was $430,000 in Q3. And at the end of the third quarter of 2016, O2Micro had 365 employees, 56% of which are engineers.

At this time I would like to provide our financial guidance for the fourth quarter of fiscal year 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 public announcement in the future.

O2Micro expects Q4 revenue to be up 2% to 8% sequentially. We are guiding the Q4 gross margin will be in the range of 51% to 53%, and is mainly from the product mix. R&D expense, excluding stock-based compensation, should be $4 million to $4.5 million in Q4. SG&A should be $4.5 million to $5 million in Q4, excluding stock-based compensation expense. Stock-based compensation should be in the range of $350,000 to $450,000 in the fourth quarter. Non-operating income should be in the range of $150,000 to $250,000 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.

The goal of our management team and Board of Directors is to maximize shareholder value. We have accomplished this by picking the necessary steps, which including -- included reducing operating expenses and monetizing assets on the balance sheet.

In regards to our share repurchase program, we have been active in this program historically and we plan to continue going forward. Since 2002, we have repurchased over 19 million ADS shares for approximately $100 million. As of the end of Q3, we had $9.5 million remaining in our share buyback authorization. Returns to shareholders are very much on our mind, and will continue to be a focus in the future. We will provide updates to the additional measures to enhance shareholder value throughout this year.

We believe our cash breakeven point is between $15.5 million to $16.5 million in quarterly revenue. And our profitability breakeven point is between $17 million to $18 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 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.

Thank you, Perry. Good morning, everyone. Last time we stated that we were pleased with ongoing design wins, including battery management and LED lighting that will enable revenue growth as we move through 2016. We also stated that we expect design wins in our new power products to contribute to revenue growth in the second half of 2016. In fact, our performance in Q3 and projected growth in Q4 continue to reflect this.

Let's review the progress in each of these areas. First, let's discuss our largest product line, intelligent lighting. We had good growth in Q3 for our backlighting products. As previously announced, our area backlighting product that focused on the rapidly growing 4K TV market has entered mass production for a major OEM, and has helped drive Q3 revenue growth.

We are pleased to announce that additional design wins at other major international OEMs will also ramp into high-volume production in coming quarters. These design wins should enable ongoing growth for our backlighting business in TV, despite weak 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.

As previously stated, our general lighting business remains focused on growth at the high end of this market, specifically our proprietary and patented Free Dimming and high-powered general lighting products where we can enjoy reasonable margins and profits.

As projected, we are seeing revenue growth in the second half of 2016 with our expanded design wins. This 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. These customers include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba.

Next, let's discuss our second-largest product line, battery management. Our battery management product line continues to enjoy excellent year-over-year growth as our new product design activity remains robust at established customers. We continue this growth going forward into 2017 and beyond. We are focused on further expansion of our product offering into new market areas. This will include product expansion into more cost-effective products for existing markets and customers, as well as expansion into more complex products for new market applications where more sophisticated battery management is needed. We will expound on these products and opportunities as we move forward in future quarters.

Our current market activity includes power tool, e-bike, e-vehicle and vacuum cleaners, where our lithium ion battery technology continues to become more reliable and cost-effective with use of our battery management products. The number of major OEMs using our products continues to expand to now include Black & Decker, Electrolux, LG, Makita, 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.

Finally, let's discuss power products for tablet and smartphones. We are seeing our first design wins for our power management products for the smartphone and tablet market begin to ramp into production. As stated last quarter, increases in volume in these new products were expected to enable second-half growth and power, more than offsetting any revenue loss in legacy power products.

In fact, Q3 power product revenue did grow, and our second-half power revenues are now projected to end well above the first-half revenue levels. We do have ongoing key design win activities. However, the major revenue growth contributions are not expected until the second half of 2017.

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

Thanks, Jim. O2Micro report Q3 2016 revenue of $14.4 million. Revenue was up 9.2% sequentially, and up 5.7% from the prior year. With gross margin, in the third quarter of 2016 was 52.6%. This gross margin was up from 50.7% in the prior quarter and up from 52% in the third quarter of last year.

We are pleased to see our power management technology receive key customer acknowledgments without these activities in past years and quarters resulting in growth driver despite an overall weak macro environment and weakness in the target markets.

We remain optimistic that the growth we are projecting with our new product line -- including the product for the TV backlighting market, battery power management product for power tool, household appliance, and product for the smartphone category -- will again further momentum into 2017, which gives us both operational expense reductions and implementing certain initiatives to monetize assets of the Company. We have enabled the company to be lean, and [of course we practice] to achieve the next milestone we [quote for maintenance]. We expect that the Company will achieve a cash breakeven point in the near future if the market continues to not get worse.

In our backlighting business, we are projecting renewed growth this year based on increasing the activities in the TV market. We understand that the TV market remains dynamic. Our backlighting business strategy for the TV includes one focus on expanding our own and penetrating key market leaders of high-end 4K TV.

Second, increase certain content: there are two ways to achieve the Company's increased fundamentals. One is design in the 4K local TV [providing] technology. And the second is a higher integrated TV for next-generation TV to meet higher standard, such as the 1.25 watt for maximum standby power consumption for the TVs.

And lastly, we move beyond the Japanese market. As Jim indicated, our current customer also include market leaders such as Sony, Toshiba, HP, Dell, Lenovo, Skyworks, TCL, Hisense, among others. We are trying to leverage our technology as well into the China, and continue to be worldwide leader in LED backlighting for TV and monitors.

Our analog power management technology in battery management sector support a variety of end markets from power tools, UPS, leading on e-bikes, making premium and drones. Several new products in battery goods have been launched recently to offer new-generation batteries there protection with much faster A/D converters. We also achieved high cost reduction and reliability enhancement. We believe the safety of battery operations continues to be the priority for mobile devices.

For the smartphone and tablet market, we make progress by releasing new charger IC which provides ease of design, on-the-go charge booster, upgradable to pulse charging, and highly integrated solutions. Q2 the longer-than-expected design cycle, the adoption of product is slower than we have anticipated. We do have confidence in the new charger IT penetration in China second-tier market in 2017.

Overall, the [second pieces] right now is in initial stage and for remaining 2016, like Jim indicated; in the second half 2017 will be growth.

At this time, I'd like to thank you for listening to our conference call, and I turn back over to Daniel. Daniel, please.

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

(Operator Instructions). Tore Svanberg, Stifel.

Congratulations on the growth. My first question is in relation to gross margin. It looks like the mix (multiple speakers) --

Tore, could you speak louder? We are having trouble hearing you.

(multiple speakers) gross margin here sort of in the 52% range.

Mr. Svanberg, we are not able to hear you very clearly. If you can come closer to your phone, please.

I will try the question again. So first of all, congratulations on the return to year-over-year growth. And my first question was in relation to gross margin. So the mix has continued to improve. And Perry, I was hoping you could comment on the ability to maintain gross margin here sort of in the 52% range.

Yes, the gross margin, if we continue to penetrate into further on the TV area -- and this is the higher than the corporate average -- this actually will help our average gross margin. This is what we mentioned about the product mix. Behind also we are penetrating into the low-end market in some other area we mentioned earlier. So for this area, we'd like to take [in the feelings]. We'd like to continue to grow in both our revenue and also gross margin, keep gross margin in the area of 50% to 52%. And sometimes it could be over the earnings because of the product mix.

And Perry, on SG&A, you are guiding the midpoint to be about $4.75 million which would be up quite a bit sequentially. Are these just some catch-up expenses, since they were kind of down in Q3? Or is there anything else going on?

Expense. Expense, the -- I think the major reason is still that we have some [NRE] mix not yet completed in Q3. So we'll push this up. Now refundable expenses from Q3 to Q4, so Q4 will be a little bit over than $3.9 million in Q3.

Okay and maybe a question for Jim or Sterling. So it sounds like the penetration -- or further penetration of the smartphone and the tablet is delayed. How should I think about total revenue growth, then, in light of that? Do you still kind of have a bridge between now and the second half of next year, and enough momentum the intelligent lighting and better management to sort of continue to grow until the second half of next year?

Yes. We do see our quality design activity and turning to the revenue right now. Just with the revenue growth is smaller than we anticipated because some shortage in the current supply chain and smartphone area, especially for the Chinese maker, second-tier. So that's a one-off factor.

Another factor is due to the some of the market is not grow at original spec. But as you just mentioned, we have -- are engaged, and we try to put more ample resource to the fast charging, and that announced an additional opportunity for us for 2017. So we believe that we grow 2017, especially the second half of the next year.

Very good. Just one last question, Sterling, for you. Could you just update us on corporate governance, especially in relation to the Board composition, please?

Yes. We picked a new of four members called Dan Lenehan, Mr. Lenehan. And he has been 35-plus years in semiconductor; has been a key position in Intel and also Xilinx. He has been -- managed an independent group inside the big company. And then very familiar with the architecture to the FPGA technology, and also the foundry interface and the management.

So with his addition to our Board, we believe we have more of the view of the future trend, and also can increase and enhance our relationship with the foundry and supplier. Meanwhile, we can maintain good relationship and enhanced style with [Intel] and other partners in the US.

That's very helpful. Thank you very much.

(Operator Instructions). Lisa Thompson, Zacks Investment Research.

Hello and congratulations for revenue growth. It's so nice to see after all this time.

We agree.

Yes, right. (laughter) I want to talk a little bit about the things below the operating income. Can you just describe what exactly was sold in real estate this quarter, and what you have left?

Our non-operating income?

Yes.

Okay, so the non-operating income, inclusive of the gain from the sales of the real estate with our Shanghai building, mentioned earlier, the gain of the real estate was $1.7 million. And some interest income, $71,000. And we have some rental income; it's about $110,000. We have some -- we also sold some -- one of the low [trend] investment, the gain was $523,000 and realized exchange gain, $211,000. And also we received our cash dividend from [tour indices] in total $76,000.

Okay. So what was the real estate that was sold? Is there any more left on that property?

Can you ask again? I cannot hear clearly.

What was the real estate that was sold this quarter?

In the Q3 quarter, we sold our Shanghai office.

Okay. Is there anything left? What's left, as far as real estate that you own, besides California?

We still have two floors in Shanghai. It's for our current self use. And we don't intend to sell in the short term. And also we have some floor space in [Kubay]; some for rental, and some we are open to sell -- it's Taiwan, Taiwan. And also we have one office in Santa Clara, United States.

Right. Okay, great. And is there anything planned for the fourth quarter?

We opened a portion of the Taiwan -- we opened to sell. But we need to wait for some opportunities because currently they have some government policy, market fluctuation. So we are open, and we will look for the good opportunity.

Okay. What was the cash burn for Q3?

For Q3, Q3 we have the -- we have the past [feeder] from the operations, $1.3 million. Cash operations from the -- cash in from the operation.

Okay, great. So it looks like you're going to have another up quarter in the fourth quarter. And looking at last year's numbers, do you think that it could possibly be up from now on --revenue growth?

For Q4, yes. Beyond Q4, we probably need to wait and see and update you on the next conference call.

And Jim will probably comment on that.

Well, traditionally there is some softness in Q1 in some areas like TV. So we will update that. But certainly we do have expectation of continuing to overall grow our revenue through 2017.

Okay good. All right. Things looks great. I hope things will continue this good. Thank you very much.

That concludes our question-and-answer session.

I would like to turn the call back over to Dan for any closing remarks.

Thank you. Again, everyone, thank you for all your attention this morning. Please feel free to contact me at area code 408-987-5920, extension 8888, with any follow-up questions. This recording and any press releases will be on our O2Micro website. And thank you very much, and have a great day. Goodbye.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.