O2micro International Ltd (OIIM) 2016 Q4 法說會逐字稿

Good morning and thank you for joining us today to discuss O2Micro's financial results for the fourth quarter of fiscal year 2016. If you would like a copy of the press release we issued this morning, please call Daniel [Myburgh] 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 17, 2017 at 9 a.m. Pacific time and also by visiting the O2Micro website under the heading "Investors". Following the presentation by management, the conference will be opened for questions and answers as time permits. Gentlemen, you may again.

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the fourth quarter of fiscal year 2016 ending December 31, 2016. This is Daniel Myburgh, Corporate Communications for O2Micro.

I'd like to remind listeners that the discussions 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 material due to numerous risk factors. Such 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. These 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 opened for your questions.

At this point, I would like to introduce Perry Kuo, CFO of O2Micro, for a discussion of the financial highlights of the fourth quarter of fiscal year 2016 ending December 31, 2016. Perry?

Thanks, Daniel. We will now review our financial results for Q4 2016. Please know that financial results will be presented on a GAAP basis unless we say 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 fourth quarter of 2016 was $15.9 million. GAAP net income in the fourth quarter of 2016 was $12,000. If we exclude stock-based compensation of $372,000, the non-GAAP net income will be $384,000. GAAP net income per ADS in the fourth quarter of 2016 was $0.00. Non-GAAP net income per ADS was $0.01.

Gross margin was 54.1% in Q4. The gross margin reflects the current revenue label and the product mix. R&D expense was $4.1 million, or 25.6% of revenue. This amount excludes stock-based compensation expense of $52,000. SG&A expense was $4.5 million, or 28.6% of revenue. This amount excludes stock-based compensation expense of $320,000. The nonoperating gain was $727,000. Income tax was $338,000 in the fourth quarter and is mainly based on income tax provisions from each taxable location.

In Q4 2016, we repurchased 22,460 ADS units at a cost of $41,000.

Q4 2016 revenue by end market breaks down into the following percentage: consumer was 45% to 50% 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. O2Micro finished the fourth quarter with $52.9 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 Q4 was $7.2 million. Our DSO is 39 days. It is slightly less than our target range of 40 to 60 days. Inventory was $9.3 million at the end of the fourth quarter. This represents 110 days of inventory and the inventory turnover was 3.3 times in Q4.

Net cash provided by operating activities of [$551,000]. Capital expenditures were about $91,000 in the fourth quarter for R&D and IT equipment purchase. Depreciation and amortization was $397,000 in Q4. At the end of the fourth quarter of 2016, O2Micro had 363 employees, 56 of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2017. 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 with a public announcement in the future.

O2Micro expects Q1 2017 revenue to be 5% to 10% lower than Q4 2016. We are guiding the Q1 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 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. Nonoperating income should be in the range of $150,000 to $250,000 in the first quarter. Based on the service income of 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 the Board of Directors is to maximize shareholders' value. We have accomplished this by taking the necessary steps, which included reducing operating expenses and the 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 Q4, we had $9.4 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 $15.5 million to $16.5 million in quarterly revenue, and our profitability breakeven point is between $17 million to $18 million in quarterly revenues. Given the uncertain demand in the macro environment, we are prepared to continue to manage costs as needed, although we believe we have aligned current cost base 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.

Q4 revenue was stronger than expected due to strength in both battery management and LED lighting. This was largely due to our design wins earlier in 2016. We expect ongoing growth in both product lines in 2017, although Q1 may be down somewhat in LED lighting due to normal seasonality due to market conditions in TV and monitor as well as the impact of Chinese New Year. Power products met our plans in Q4 and we expect ongoing growth in new product areas in 2017.

Let's review the progress in each of these areas.

First, let's discuss our largest product line, intelligent lighting. We had outstanding growth in Q4 for our backlighting products. As previously announced, our new area backlighting product that focused on the rapidly growing 4K TV market continued to ramp into higher volumes to help drive Q4 revenue growth.

We are pleased to announce that additional design wins at other major international OEMs will ramp into high-volume production this year. These design wins should enable ongoing growth of our backlighting business in TV despite lackluster 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 stated previously, our general lighting business remains 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.

As projected, Q4 did enjoy revenue growth, and we remain optimistic that steady growth will continue in 2017 with our expanding design wins in the free dimming area. 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. Customers include GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP, and Toshiba.

Next, let's first discuss our -- next, let's discuss our second largest product line, battery management. Our battery management product line continued to experience excellent growth in Q4 versus Q3 2016 as well as Q4 2015 as our new product design activity remains robust at both established and new customers. We expect to continue this growth going forward in 2017 and beyond as we achieve a growing number of design wins in those markets where we are strongly established, as well as expansion into newer market areas such as drones and solar battery management. Our product expansion plans include expansion into more cost-effective products for our existing markets and customers as well as expansion into more complex products for new market application where more sophisticated battery management is needed. We will expand on those products and opportunities as we move forward in future quarters.

Our current market activity now includes power tool, e-bike, e-vehicle, drones, and vacuum cleaners where 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 product continues to expand and now includes Black & Decker, Electrolux, LG, Makita, Panasonic, Samsung, and TTI. Additionally, there is increasing design activity for our products in uninterrupted power supply application that includes solar systems as we continue to see usage of our battery management products expand at major OEMs.

Finally, let's discuss power products for tablet and smartphone. We have a growing number of design wins for our new power management products for the smartphone and tablet market. As stated last quarter, increases in volume in these new products did enable second-half growth in power that more than offset any revenue loss in legacy products. We expect this trend to continue in the first half of 2017 with our ongoing key design win activities. As previously stated, the major revenue growth contributions in this area are not expected until the second half of 2017.

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

Thank you. Good morning, everyone. O2Micro reported Q4 2016 revenue of $15.9 million. The revenue was up 10.1% sequentially and up 18.9% from the comparable quarter of the prior year.

The gross margin in the fourth quarter of 2016 was 54.1%. The gross margin was up from 52.6% in the prior quarter and up from 50.4% in the first quarter of 2015.

We are pleased to see the significant design wins in the past quarters have translated into the meaningful revenue and our power management technologies receive the market popularity. Along with the revenue growth, our high gross margin indicates strong core competence. We remain optimistic for the growth momentum, including the product for the TV backlighting market, battery management product for the power tool/household appliance market, and the products for the smartphone market.

We conduct expense reductions, improve operation cycle times, as well as effectiveness, and also took initiative to monetize assets of the Company in past years and quarters. The Company now not only becomes lean and cost-effective to operate our focus on the key sector and the key customers.

In our backlighting business, we are seeing increasing design activities in the TV market, including the high-definition TV with local dimming technologies. We believe local dimming will soon be deployed in mainstream TV products. We understand that the TV market remains dynamic. Yet, the superior technology with high-voltage power solutions can support large and more advanced local dimming.

We are happy to see our product opening extended beyond the backlighting to other AC/DC and TC/DC applications for the TV customers, as we mentioned before. In addition to customer consumer market, we have a new opportunity of local dimming in the automotive telematics market, which will incrementally increase the silicon content.

Our analog power management technology in our battery management sector supports a variety of end markets from power tools, UPS, lithium ion, battery, and e-bike, vacuum cleaner, and other IoT. Our recent promoted product to the battery group market comes with a faster A/D converter, advanced security label and enhanced reliability. There are more activity in these kind of design wins.

Furthermore, the demand for our existing power management products for power tools which was designed many years ago remains very strong. The long lifespan of our IC indicates our management, power management IC are high entry barrier and with the vast core competence.

We made progress in the smartphone by releasing new charger IC which provides good quality on the co-charger booster accurate(inaudible). The smartphone is an additional target market to us, and our focus in the coming years for the smartphone. Our cell phone business is expanding into the design win space right now and with an initial mass production of a few customers we expect it to grow in 2017 second half.

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

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

(Operator Instructions). Tore Svanberg, Stifel.

Yes. Thank you and congratulations on the results. So, my first question is on gross margin. So, I recognize you are guiding it to be down in Q1 because of seasonality and the mix. But if we think about the $16 million you did in Q4, how would you classify new revenue versus legacy revenue? I don't know if you can put a certain percentage of that, but obviously the new revenue seems to be increasing as a percentage of your total sales.

Okay, for the legacy product, which is actually very minimal, I think under $1 million area, less than 10%, and for the new product, what we call the new product actually in each category, we have the new product. The reason why we have a higher gross margin product mix in Q4 which resulted from the result of the high NPV and also for the power tool, which we also have higher share mix in the industry product which I reported earlier.

Okay, very good. And Sterling, you mentioned your lighting technology can find a home in automotive telematics. I was hoping you could expand a little bit more on that. What type of an opportunity is this for you, and when should we start to expect some potential revenue in that area?

We are in automotive telematic lighting business for many years, and that is categorized in industry, the mix. But the most recent developing trend for the automotive due to electrical vehicle or due to the autonomous vehicle or due to so-called level 1/level 2. So then there's a numerous camera app for the automotive cell as a trend. Now, when there's multiple camera put in a -- installed in, designed into the auto, including the front, rear and the side and sometimes even more, and try to sum up, the Chinese talk about the 360 degree surrounding visual, so then that inevitably you need to display inside the car. So we are not saying that today just one jump going to a huge telematic displays. But however, the display for the telematics is going to be increasing their size. So when they increase in size, and we are a current player in there, and plus we have been in leadership in local dimming, so these two factors combined together, we are saying that in the future probably opportunity we can increase our silicon content for the automotive telematic backlighting.

Very good. And last question, and I'll go back in queue. You talked about your design wins in smartphones and expecting perhaps a ramp in the second half. Can you maybe just talk a little about what gives you that confidence? Because, obviously, the smartphone market is very dynamic and sometimes -- who knows what platforms sell; right? So maybe you could just give us some confidence that you do expect smartphones to actually ramp in the second half of this year.

We are looking at the landscape of the smartphone. It was a very large number of the biz opportunity, the TAM and also the SAM. The TAM is target available market; SAM is sellable available market. Both is relatively quite high compared to the previous conventional market we are target. So for example like PC, notebook, or even a TV.

So we have been promoting our product for more than one year and we are already seeing our ICs have been adopted and we'll see the early production -- multiple brand, multiple customer, and go to multiple geographic area. And then we continue to think there is more design activity. Sometimes, the design activity take longer cycle than we expected due to various shortages in our customer base. Sometimes, they have shortage of this component, that component, but, eventually, they will have, say, more and more mass production due to the relative increasing these design activities. So this gives us the confidence. That's for number one.

And number two, as I mentioned, although the initial, we design and the production in the project, the volume may not be significant. However, as a smartphone manufacturer, they are quite large volume in terms relative to -- compared to our conventional. So, give that time. Also, we are improving unit production and we are confident that, once we get in, that could generate the revenue, the speed (inaudible) revenue will be faster than the conventional notebook market. So we feel encouraged and also we think that, second half of 2017, should we see something coming out.

Very good. And congratulations on returning to growth in 2016. Thank you.

Tom Sepenzis, Northland.

Thank you for taking my questions, and I'll echo my congratulations. Let me just ask, you mentioned in your press release that there were inventory issues that were going to combine with seasonality in Q1 in terms of the revenue being down sequentially. So, I was just wondering if you could highlight what inventory issues you are actually seeing?

Well, particularly in the TV area, you may or may not be aware there were some panel shortages that did occur in the TV area. Nevertheless, we did deliver the requested quantities of our products to some of those OEMs and ODMs that were involved. So they were not able to clear out all of their TVs due to panel shortages or, in some cases, other product issues where they had shortages. So some of them did move into Q1 with some inventory on hand, and they will take a little while to clear out that inventory. So that's where the inventory situation came in, Tom.

Great. Thank you. And how long do you expect that to persist?

It will be all flushed out by the end of Q1. (multiple speakers) Q1.

Okay. Thank you. And then in terms of the general lighting business, could you just expand upon what your opportunities are there in terms of returning to growth and any new markets that you might be targeting?

Well, we did grow in Q4, and we do see a lot of design win activity. We see more and more of the major OEMs beginning to pick up pre-dimming technology. It has not grown as quickly as we would've liked, but there has been ongoing growth. So, we do see this. We see the projections from them. We see the run rates that they expect. So, there's not going to be an explosion of growth, but we expect a slow and steady growth as we move through 2017.

Great. Thank you very much.

(Operator Instructions). Lisa Thompson, Zacks.

Hi, great quarter, nice to see it, and I hope that portends up quarters for the rest of the year and for the years to come. Let me just ask you a question about the high-end TV. You said that they are adding local dimming technology. Could you explain what that means on a TV set?

Well, as you move to higher definition TVs, particularly on the very large TV sectors. We announced one OEM for instance that goes into their 60-plus-inch all the way up to 100-inch TV. The backlighting technology requires more complex lighting to get very high definition in the 4K area. So as these get larger, the chips not only -- the silicon chips not only get more sophisticated but, in many cases, we deliver more product per TV. Right now, many of the TVs are taking four of our chips at the high end for one TV.

Okay. So, the free dimming part is not something new, right?

No. Free dimming goes into our general lighting (multiple speakers)

No, I'm sorry, I meant local dimming.

Local dimming for TV.

It's not new. We have been working in this area for some time. We ramped in production in the second half of 2016, and then we did achieve additional design wins that will be coming into volume as we move through 2017.

Okay. Great. And as far as 2016, what was kind of the breakdown of your geographic locations of where you sold product?

Well, geographically, we ship most of our product into China. We ship some into other areas, including Japan. Some goes into Korea; some goes into Taiwan. But much of that goes into ODMs that then ship worldwide. So, most of the production is actually now done here in China but, nevertheless, that product moves worldwide from the US, anywhere in North America, South America, Australia, on into even places like Turkey. So the product goes from China worldwide, so we actually ship most of our product into China at this point in time.

Okay. Do you see that changing this year, or is it still going to be pretty much the same?

Pretty much the same. Over the past few years, it's become more and more dominant actually in China because they are really set up to do the production. So more and more of the OEMs have moved into China. A good example of that is actually the lighting market itself for the replacement of the traditional light bulbs. As they went LED, most of that production came up in China. So more and more of the general lighting product comes out of China, the vast majority of it, at this point.

Okay. Great. Thank you. That's all my questions.

Tore Svanberg, Stifel.

Thank you. I had two follow-up questions. First of all, as we start looking at the smartphone opportunity, especially as it relates to dollar content with battery management, should we think about the content opportunity being sort of in the $0.20/$0.30 or could this potentially be sort of more in the $1 range?

Yes. I think $0.20 to $0.30, yes, that's a good range, yes.

Okay. Very good. And then the last question is a follow-up for Perry. Perry, the other income line moves around quite a bit. How should we think about other income for the Q1?

Q1, I think it will be in the area of $200,000 to $250,000.

Great. Thank you very much.

Thank you. And there are no further questions in the queue. I'd like to turn the call back over to Dan for any closing remarks today.

Thank you. And everyone, thank you for your attention this morning. Please feel free to contact me at 408-987-5920 extension 8888 with any follow-up questions and I will get right back to you. Have a great day and thank you again for your attention. Good-bye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.