O2micro International Ltd (OIIM) 2017 Q1 法說會逐字稿

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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. Again, after the prepared remarks from these gentlemen, the floor will be open 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 first quarter of fiscal year 2017, ending March 31, 2017. Perry?

Thank you, Dan. We'll now review our financial results for Q1 2017. 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, onetime 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 2017 was $15 million. GAAP net loss in the first quarter of 2017 was $1.5 million. If we exclude stock-based compensation of $432,000, the non-GAAP net income will be $1 million.

GAAP net loss per ADS in the first quarter of 2017 was $0.06. Non-GAAP net loss per ADS was $0.04. Gross margin was 52.7% in Q1. The gross margin reflects the current revenue level and the product mix.

R&D expense was $4 million or 26.7% of revenue. This amount excludes stock-based compensation expense of $60,000. SG&A expenses was $4.7 million or 31.3% of revenue. This amount excludes stock-based compensation expense of $372,000.

The nonoperating loss was $35,000. Income tax was $222,000 in the first quarter, and it is mainly based on the estimated effective tax rate of each taxable location. In Q1 2017, we repurchased 81,766 ADS units at a cost of $174,000.

Q1 2017, the revenue by end-market break down into the following percentages: 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 first quarter with $50.5 million in unrestricted cash and short-term equivalent. This represents cash and cash equivalent of $1.95 per ADS. In addition, O2Micro has no debt.

Account receivable at the end of Q1 was $6.9 million. Our DSO is 42 days. It is in our target range of 40 to 60 days.

Inventory was $9.6 million at the end of the first quarter. This represents 120 days of inventory, and the inventory turnover was 3.0x in Q1.

Net cash using operating activities of $2.5 million, primarily consists of net loss of $1.5 million, loss and accountable -- and a comparable decrease of $885,000 and accrued expenses decreases of $726,000. Capital expenditure was about $157,000 in the first quarter for R&D and IT equipment purchase.

Depreciation and amortization was $394,000 in Q1.

At the end of the first quarter of 2017, O2Micro had 366 employees, 56% of which are engineers.

At this time, I would like to provide our financial guidance for the second 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 Q2 2017 revenue to be down 4% to up 4% sequentially.

We are guiding that Q2 gross margin will be in the range of 48% to 51% and is mainly from the product mix.

R&D expense 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 $350,000 to $450,000 in the second quarter.

Nonoperating income should be in the range of $150,000 to $250,000 in the second 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 the Board of Directors is to maximize shareholders value. We have accomplished this by taking the necessary steps, which included reducing operating expenses and to 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 Q1, we have $9.3 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'll 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 $17 million in quarterly revenue, and our profitability breakeven point is between $17 million to $19 million in quarterly revenue, given the wider range of gross margin from product mix.

Given the uncertain demand and the macro environment, we are prepared to continue to manage costs as needed, although we believe we have an aligned current cost 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. Despite typical Q1 seasonality and some inventory issues at key customers, we did see reasonable growth in Q1 2017 versus Q1 2016. Not surprisingly, this growth was driven by 2 key product areas; battery management and high-end area backlighting for large screen TV.

General lighting revenues did increase compared to the year earlier Q1 revenues, while notebook powered products continued to decline. Although smartphone and tablet products remain a small revenue generator, prototype production volumes are growing and giving us confidence that we will see revenue growth in the second half of 2017.

I would note that the typical seasonal weakness we see in Q1 and Q2 has been exacerbated by supply chain issues. The demand from some of our major TV and monitor customers have been adversely affected by product shortages and ongoing allocation issues these customers face in key areas, including panel supply and digital control ICs. The panel shortages are largely due to cutback in supply from Foxconn, as well as Samsung closing one of its LCD production facilities. IC shortages are primarily due to high-end demand for fingerprint ICs and smartphones that have taken up significant supply chain capacity in wafer fab and testing. The panel supply issue is particularly frustrating, as it impacts growth in high-end TV, where our new area backlighting products are sold.

Same product shortages that impacted customers' production plans and moderated our Q1 growth will also impact Q2 revenue growth.

While our major customers expect ongoing panel allocations in TV, we nevertheless continue to expect to see good growth in the second half of the year from products that we will highlight. The first of these is battery management, which is less affected by allocation issues. Battery management, which is our second-largest and fastest-growing product line, has continued to grow at an excellent pace year-over-year. This is the result of ongoing expansion of both our products and customer base. We continue to see major market growth opportunities in power tools, e-bike, e-vehicle, vacuum cleaners, garden tools and uninterrupted power supplies, where lithium-ion battery technology continues to become more reliable and cost-effective with use of our battery management products.

More recently, we have engaged with key new customers having significant positions in the rapidly growing drone and solar markets. Our major customer list continues to grow and now includes Black & Decker, Dyson, Electrolux, LG, Makita, Panasonic, Samsung and TTI. Our product plans include 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. This will include both higher cell cap battery management products and microcontroller-based products, which we will discuss in more detail in ensuing quarters. We would also note that we have filed key patent claims for our new products to protect both our company and our high-end customers' market positions.

Next, let's discuss our largest product line, Intelligent Lighting. While Q1 showed growth over Q1 of the prior year, Intelligent Lighting was weaker than Q4 for 2 reasons: allocations and inventory. Allocation of panels in other products became a significant problem towards the end of 2016, forcing major high-end customers to miss Q4 revenue targets and cut back Q1 production plans.

Additionally, the unexpected cuts in customer production resulted in some customers having excess inventory of our product at the end of Q4. Unfortunately, the allocation issues will carry into Q2 as customers continue to adjust their production plans.

The good news is that this situation has not affected our lighting design wins. We have seen an increasing number of design wins for area backlighting product, not only in TV, but high-end consumer and industrial monitor applications. These design wins should enable ongoing growth of our backlighting business despite lackluster market projections for both TV and monitor markets.

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

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. We do see a good backlog of design wins and expect ongoing growth in 2017, although general lighting revenues are not expected to exceed 10% of our overall revenue in 2017.

Our product and customer base does continue to expand, includes GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP and Toshiba.

Finally, let's discuss power products for tablets and smartphones. While older notebook products have continued to decline in revenue, Q1 did see good design-win activity in the smartphone and tablet markets with more designs moving into prototype production. We expect this trend to continue as our new charger IC on-the-go charger booster and accurate gas gauge gain market acceptance. We do expect revenue flow from this product area to return the power product area to growth in the second half of 2017.

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

Thank you, Jim. O2Micro reported a first quarter of 2017 revenue of $15 million. Revenue was down 6% sequentially and up 15.2% from a comparable year-ago quarter. The gross margin in the first quarter of 2017 was 52.7%. The gross margin was down from 54.1% in the prior quarter, but up from the full -- 48.8% in the first quarter of the -- last year. We are pleased to see the continuing strong design wins in past quarters, which have translated to the top line, and our power management technology continues to get good customer reception. In addition to the revenue growth, our high gross margin indicates strong core competence in the propriety product region. We understand the dynamic market reduced the visibility ahead. Yet, we remain optimistic for the growth momentum, including the products for the TV backlighting market, battery management products for the power tools, household appliance market and the product for the smartphones and tablets.

We've continued to do expense reduction and effective management. We optimized the operational cycle time and keep on monetizing the asset of company in past year and quarters. The company not only became lean and cost effective, but shortened the responding time, and in-time support to local customers. We expect our company will achieve the cash breakeven point in the near future if the market could further stabilize.

In our backlighting business, we've seen strong activities in the TV market, especially high-end, including high definition TV and local dimming technologies. We have seen customers -- the consumers' appetite moves up to the larger TV, so does the panel makers make more larger size plus the smaller ones. We also see the market shifting, partly due to the result of the recent M&A in panel industry while the new panel supplier established all operating tools to the new established manufacturer. TV might become the center of IT in household, which offer more functioning than just entertainment. Meanwhile, we offer more backlighting to the TV market, such as AC/DC and the DC/DC applications.

For automotive, telematic market is another potential growth area for our local dimming technologies. Our battery management products support variety of end-markets from power tools, UPS, lithium-ion based e-bike, vacuum cleaners and other IoTs. Our products to the battery market come with, first we have faster A/D converters, advanced accuracy, the level and also enhanced reliability.

Second, our high accurate battery gas gauge. And thirdly, we have a scalable methodology, which can support high number of the sales by cascading the chips. We saw both the same customer growth rate increasing and expanding the customer base as well. We make progress in the smartphone market. Our products provide good quality on the go charger booster and accuracy gas gauge.

In addition, we come out with a smartphone fast-charging methodology from our notebook PC technology. It supports smartphone fast charge with optimized cost structure. We call it Express Charge. We expect this kind of design activity will grow in 2017 and to contribute to top line in 2018, next year.

At this time, I would like to thank you for listening to our conference call and turn back to Dan. Thank you.

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

(Operator Instructions) We'll take our first question from Tore Svanberg.

Few questions. First of all, could you talk about the gross margin dynamics in Q2? I assume the low gross margin is due to the revenue mix. But if you could just elaborate on that, that will be great.

Yes. Tore, this is Perry. Due to some supplying issue, as Jim indicated, and also some surge in our customer for the high-performance TV, we currently expect the revenue, the product mix will be the low-end model for the monitor and also TV and also some lower gross margin and probably average like the smartphone area, powerful smartphone and also lighting for the general lighting area. These 4 areas we are increasing the product mix. So that's why we give the guidance from 48% to 51%.

And question for Jim. Jim, this seems to be shortages in various different areas. Any sense for when the shortages would alleviate based on what you can tell?

Well, we're hoping that some of the panel shortage will alleviate itself as we move into the second half of the year, although some customers are being more effective than other due to the supply chain issues. But we would see, I think, from lessening of the issue in the second half. I think the IC issue is more difficult to project. This does not necessarily affect all of our wafer fabs, but there still are significant test issues, and it remains to be seen how much test capacity will be a problem as we go into the second half of the year. We do hope that can expand quickly. So there will be some lessening. I think there will be less of a shortage issue as we move on into Q3 and Q4.

Very good. Last question for Sterling. Sterling, you mentioned Express Charge design activity, and this business ramping in '18. But could you maybe elaborate a little bit more on that? Is this market going to be targeting Chinese smartphone OEMs? Or are you perhaps going after more the global market there?

Yes. I think probably for the Chinese smartphone maker, he go to a target that's global, right. Because you see the top 10 smartphone companies, many of them right now is a Chinese brand right now, including Oppo, Huawei, Vivo. So yes -- so what we're providing is -- many years ago, we developed the Cool Charge, at that time for the notebook, and the Express Charge for the smartphone was derived from this Cool Charge. Basically, we're providing the direct charge from the AC/DC to the battery, and the charging method is straightforward, however very skillful to design using one of the (inaudible) of the control signal back to the AC/DC. And that providing the people could be achieved with the high voltage at same time, also can reduce the heat dissipation inside the smartphone set, as we all know that heat issue in the smartphone could be very annoying. So one is, we provide very optimized cost structure for providing this because we don't do any A/D converter to convert those, such as the 2 players in the market. They have to do some coding and encoding, and we don't do that, and easy to design. And then number two is, we can reduce the heat inside the smartphone set itself. So this is something we are promoting, and we are optimistic, although, probably will be small unit to try to do production in the second half of this year, but we are (inaudible) for marketing right now.

We'll take our next question from Tom Sepenzis.

I just wanted to -- I was wondering what the mix between the old and the new smartphone and tablet products are. You mentioned that the older products are still weakening. So I'm just trying to get a sense of what kind of impact that will have going forward.

Well, the old legacy, which are primarily notebook, some tablet product, is well over 90% of the revenue base, Tom.

Okay. So it's still 90%. And in terms of automotive, that's obviously a pretty new market. When do you think that you'll actually see designs go into product? Is that a 2018- or 2019-type event?

We actually, historically, have had some automotive products, for instance in the GPS area, Tom. So we have had some position there. What we do see is an expansion of, particularly, some of our lighting products. We also have power products that may go into the 2018 models and by 2019 we think will be substantial revenue.

Great. And then lastly, you mentioned in the call, in your prepared remarks that you can return to profitability in the near term. Does that mean you think you can get there this year? Or does near term mean 2018?

Actually, we -- with the momentum of the design win and also with the -- given the market get stabilized, and we expect to get the cash breakeven by the end of this year.

Great. So confident then that these bottlenecks or the allocation issues will be over then in Q3?

I don't think they'll be over but there will be a lessening factor.

(Operator Instructions) We will take our next question from Lisa Thompson.

So I'm trying to understand this shortage of panels and chips. How is this going to work out? Is there -- are the companies just adding capacity? And is there is going to be this big pent-up demand, so that we may finally get the panels, it's going to be a big bump in one of your quarters because then they can finally order again? How does that work?

So let me refer -- talk about the IC area. Yes, you are right. The IC quite overloaded is 8-inch process, and then we do know there's a lot of new 8-inch expansion for the inch foundry, and we expect that the 8-inch probably will be starting quite -- providing a lot of capacity will be 2018. At the same time, they will also increase the utilization of existing product lines. That's for the wafer, 8-inch wafer. So which is, as Jim mentioned, that right now, is crowded by fingerprint IC, that takes a lot of the tight space. In the second quarter, testing. Testing is this, the different packaging and different characteristics of IC probably have a different tester. So tester itself due to overloaded, and then the testing company will be at more, spending more capital to increase their bandwidth because everyone likes to get the business and also likes to get into the fully utilized type of the product. So this is a good timing for the testing company to add the tester, which is aiming at right now the overloaded one. So you are right. So for the panel, maybe Jim has some color here.

The panel will be somewhat more complex because there's also some intercompany politics involved in the panel area. For instance, after Foxconn, also known as Hon Hai, bought out Sharp, their intention is to move more into the TV area using Sharp's name. They literally cut off some of supply to potential long-term competitors, and that was a very significant issue for some TV suppliers. And those suppliers then have had to scramble to find other sources of supply, but it significantly affected their production. Also, you have the mix changing. There has been a predominance a move to higher-end TVs, very large size TVs. So 60 to 100-inch type displays as well as many of the monitors have been getting bigger. So there is fewer TVs shipping in some areas due to the large size, and, of course, it's harder to manufacture the larger display sizes. So the panel size will be more complex and will depend a lot on customer-to-customer. We do see that alleviating as we move through the year, but it will be customer dependent, and we'll also just have to monitor the situation very closely. That's really all we can say.

Okay. So it seems to me that if you plan to buy a big TV, it's not -- you're not going to not buy your TV, just going to shift it, right? So you should not actually lose business but just get it in a lumpy fashion. Is that correct?

Right. But it also depends on whose TV you buy and whether or not our product's in it.

Okay. So who should we -- should we just take -- keep watching Foxconn and what they're doing to see when this might be alleviated?

Well, Foxconn will definitely and already are making a major movement to try to ramp more product into the Sharp name. And Foxconn will stay, I think, very much focused in that area and will probably deliberately hold back supply to potential long-term competitors in some areas so they can simply take the market share. So that adds a complicated factor to this. So customers that did get hurt with this are going out and will obviously try to ramp up supply with other supply base, which is tight. So again, it's somewhat complex, Lisa, but we do see higher volume projections out of our customers as we move on through the year. So we definitely will see some volume increase.

So when do they make most of the TVs to have them available for Christmas and New Year's?

Usually, the Christmas ramp begins in the Q3 time frame. So you begin to see some pickup for Christmas ramp starting in the June, July, August timeframe, and then that moves on through typically the latest October, and then it starts to ramp down. That will be also little bit complicated due to the allocations and also, there is extended lead times now and some of the IC test area. So again, that will be a little bit more complicated, but we do see customers, on the positive side, giving us increased forecast as we move through the year.

All right. And as far as the smartphone front, is there -- are there any products out in the market using any of your chips? Or -- and which ones, which of the products do you think will be out there first in the marketplace?

There are multiple smartphones, difficult to tracking, but we do know is overseas or inside the local market in China, there is quite a different smartphone utilized, different IC from us. Although, we are doing with the charger with OTG and booster inside, but we have several different flavors. So I think, we have -- currently have as many as like 3 types of different chargers right now shipping and in production right now. So that will be -- so probably go to different countries. I do know some of this in India, some is in Europe, some is in other areas.

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

I'd like to thank everyone for your time and attention this morning. Please feel free to contact me at area code (408) 987-5920, extension 8888, with any follow-up questions, and I'll get back to you as soon as I can. Have a great day, and thank you again for your attention. Have a great day. Goodbye, everyone, and thank you, Alexia.

Thank you all so much for your participation. You may disconnect at any time.