O2micro International Ltd (OIIM) 2017 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 2017. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg 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 November 15, 2017, at 9 a.m. Pacific Time or 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. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the third quarter of fiscal year 2017 ending September 30, 2017. 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 reports and other documents filed with the SEC from time to time. Listeners are referred to the O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors.

The statements made herein are dated information. The company assumes no responsibility to provide updates to this information.

With me today are Perry Kuo, CFO and Director; Jim Keim, our Head of Marketing & Sales and Director; and Sterling Du, O2Micro 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 of fiscal year 2017 ending September 30, 2017. Perry?

Thank you, Dan.

We will now review our financial results for Q3 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 or losses. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the third quarter of 2017 was $15.5 million. GAAP net loss in the third quarter of 2017 was $1.4 million. If we exclude stock-based compensation of $390,000, the non-GAAP net loss would be $985,000.

GAAP net loss per ADS in the third quarter of 2017 was $0.05. Non-GAAP net loss per ADS was $0.04.

Gross margin was 50.3% in Q3. The gross margin reflect the current revenue level and the product mix.

R&D expense was $4.6 million or 29.7% of revenue. This amount excludes stock-based compensation expense of $54,000.

SG&A expense was $4.5 million (sic) [$4.9 million] or 29.3% of revenue. This amount excludes stock-based compensation expense of $336,000.

The nonoperating income was $583,000.

This -- the income tax was $229,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location.

In Q3 2017, we repurchased 154,953 ADS units at a cost of $295,000.

Q3 2017, the revenue by end market breaks down into the following percentages: Consumer was 45% to 50% of revenue, computer was 15% to 20% 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 $46.2 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.80 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of the Q3 was $9 million. Our DSO is 52 days, is in our target range of 40 to 60 days.

Inventory was $10.5 million at the end of the third quarter. This represents 120 days of inventory, and inventory turnover was 3x in Q3.

Net cash used in operating activities of $810,000 primarily consists of net loss of $1.4 million, account receivable increase of $155,000, inventory increase of $516,000.

Capital expenditure was about $65,000 in the third quarter for R&D and IT purchase.

Depreciation and amortization was $447,000 in Q3.

At the end of the third quarter of 2017, O2Micro had 362 employees, 60% of which are engineers.

At this time, I would like to provide our financial guidance for the fourth 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 it with a public announcement in the future.

O2Micro expects Q4 2017 the revenue to be down 5% to up 5% sequentially.

We are guiding the Q4 gross margin will be in the range of 49% to 51% and is mainly from the product mix.

R&D expense, excluding stock-based compensation, should be $4.5 million to $5 million in Q4.

SG&A should be $4.3 million to $4.7 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.

Nonoperating 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 taking the necessary steps, which included reducing operating expenses and monetizing assets on the balance sheet. In regard 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 19.6 million ADS shares for $100.1 million. As of the end of Q3, we had $8.8 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 break-even point is between $15.5 million to $17 million in our quarterly revenue, and our profitability break-even point is between $17 million to $19 million in quarterly revenue given the wider range of the gross margin from product mix and also other income.

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 return the call to -- over to our Jim Keim for more about our business. Jim?

Thank you, Perry. Good morning, everyone.

Q3 2017 continued a trend on revenue growth since our company revenues bottomed out in 2015. Growth in Q3 2017 over Q3 of the prior year was the result of growth in battery management, along with increasing revenues in smartphone products. Our high-end area backlighting business also continued to expand, although overall lighting business showed only modest growth versus the prior year due to ongoing IC and panel product shortages that some of our major customers continued to experience.

As stated in last quarter's call, the IC shortages are in part due to high demand for fingerprint ICs in smartphones that have taken up significant supply chain capacity in both wafer fab and testing. These supply issues are particularly frustrating as it impacts our growth in high-end TV where our new area backlighting products are sold. Nevertheless, despite the market headwinds, we do see ongoing company revenue growth as we head into 2018, and we will highlight key product areas where we expect to see this growth. The first of these is battery management, which is our second largest product line that has continued to grow at an excellent pace year-over-year. We would remind everyone that our patented battery management products port critical cell balancing and lithium-ion batteries. Besides the rapid expansion of lithium-ion battery technology into mobile products due to their small size and high energy density, we are now seeing ongoing reductions in the cost of lithium-ion batteries that accelerate their expansion into more markets and products. At the same time, lithium-ion batteries are replacing lead acid batteries as this older technology becomes more expensive with rapidly increasing government regulation of their use. As a result, we continue to see major market growth opportunities in power tool, 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 the 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 includes Black & Decker, Dyson, Electrolux, LG, Makita, [Marata], Panasonic, Samsung and TTI.

Our product plans in battery management 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-count battery management products and microcontroller-based products. We would also note that we have filed key patent claims for our new products to protect both our company and customers' market positions.

Next, let's discuss our largest product line, intelligent lighting.

Although key customers for intelligent lighting continue to be affected by mobile allocation issues, this situation has not affected our lighting design wins. We continue to see an increasing number of design wins for our area backlighting products 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 the TV and monitor markets. We have focused more of our backlighting R&D effort in the industrial and automotive markets and have significant design wins in process that 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 the high-powered general lighting products, where we can enjoy reasonable margins and profits. With our strength in design wins, we expect ongoing growth in general lighting, although revenues are not expected to exceed 10% of our overall revenue in the foreseeable future. Our product and customer base does continue to expand and includes GE, LG, Lights of America, Osram, Panasonic, Philips, Samsung, TCP and Toshiba.

Finally, let's discuss power products for smartphone and tablet.

While older notebook products have continued to decline in revenue, we did see smartphone revenues help our overall Q3 revenue growth. More importantly, based on increasing design wins, we are now projecting revenue growth in the smartphone and tablet markets to enable our power revenues to reverse their multiyear downward trend and begin to grow in 2018. These design wins for our smartphone and tablet products include our new charger IC, on-the-go charger booster and accurate gas gauge as they gain market acceptance.

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

Thanks, Jim.

O2Micro reported the third quarter 2017 revenue of $15.5 million. Revenue was up 6.9% sequentially and up 7.4% from the same quarter prior year.

The gross margin in the third quarter of 2017 was 50.3%. The gross margin was down from 50.9% in the previous quarter and is down from 52.6% in the same quarter prior year.

We are pleased to see the revenue improve from the same quarter prior year and in previous quarter despite the TV market remains weak, low visibility, which resulted from M&A in the market and also market shifting, panel supply undercapacity and then some component allocation issues.

Our battery technology continued to expand to: one, the new applications; two, new customers; and then three, the new-generation product to be released. Lithium-ion battery sales call continue to be effective and the performance enhanced. We observed new applications and a new market sector ideally for lithium-ion applications or conversion from lead acid battery, including, but not limited to, IoT, smartphones, logistics management and accessories. We remain optimistic for the growth momentum given that most of our battery customers are the first-tier and the good quality customers.

We continue to do expense control, improve operational effectiveness, review major operating cycle times from time to time. Meanwhile, we monetize the assets of the company. The company has enhanced the ERP effectiveness, logistics management, which is critical in this undercapacity situation and the communication with suppliers and customers. To better support China local customers, we have reorg-ed customer support group locally by putting more technical personnel and an improved response cycle time.

In our TV backlighting business, we continue to see the panel size growing as well as high end despite technology receiving more customers. Our local TV technology has been adopted by major TV makers. And furthermore, inquiries for the future product mix. We also see the variety of applications for automotives and industrial growth. We designed new different IC with additional new function to meet the new customers' demands.

Our battery management products support a variety of end markets, from power tools, UPS, new generic e-bike, vacuum cleaners and IoTs. We support the first-level protections, second-level protections, battery gas gauge and a new feature product, [MEX], mixed-signal design for ease to use, and support a variety of industrial or regulations. Meanwhile, we support scalable design concepts by opening combinations of [cell number] IC.

We have 3 different series for the smartphone market: one, we have a 1-amp to 3-amp on-the-go charger; two, we have a fast charger which support direct mode and a USB mode; three, we have precision gas gauge. We expect the design activities we have in 2017 will pave the way to growth, mostly revenue, for 2018.

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

Thank you, Sterling.

I'd like to take the opportunity to make one correction. Earlier today, an item was stated, and I wanted to verify that we have the right number that were spoken by Perry. And I'd like to restate that section just to be sure.

Net cash used in operating activities of $810,000 primarily consists of: one, net loss of $1.4 million; two, accounts receivable increase of $151,000; and inventory increase of $516,000.

All right. Thank you, Sterling and everyone. At this point here, I'd like to open it to questions. Operator? Frieda?

(Operator Instructions) Our first question will come from Tore Svanberg, Stifel.

Could you maybe comment a little bit more on the TV market? I understand the shortage situation has been around for a while now and just trying to understand if you're seeing sort of any visibility there or any easing at all over the next few quarters.

The easing has gotten significantly better in the panel supply, although there do remain some panel supply issues. The biggest issue remains in some of the IC supply area, which varies a lot from customer to customer. It depends on which IC and which supplier that they are using. Unfortunately, we have seen some push-outs from some key customers in the past few months directly related to them having to take revenue projections down due to some of the IC shortages. It's hard for us to have absolute visibility on that. We do expect some ongoing improvement. We have seen improvement, I would say, over the last 6 months. But there are still some shortages out there, and it is creating some problems, particularly at the high end of the market. So it's been somewhat frustrating for us.

Very good. And then a question on the smartphone revenue. So you said communications is still less than 5%. I assume that is a number that's going to increase quite a bit next year. But can you elaborate a little bit on where some of the revenues are coming from? And should we expect continued penetration into that market in 2018?

Tore, let me answer to you [briefly]. For smartphone, we will book this in the consumer sector as this is the more consumer-oriented purchase so -- in the future. And the smartphone currently is still single digit of our revenue.

Very good. And any comment on the prospects for 2018, some of the dynamics for the smartphone business?

Well, we are expecting ongoing growth. Our projections show reasonable quarter-to-quarter growth. We have a number of good design wins at this point. As we've said in past reviews, they were in prototype stage that are beginning to go now into small volume production programs. And then as that's successful, we'll move into larger volume production programs. So we do expect quarter-to-quarter ramping as we begin to move through the next year. And as we mentioned, we think we've seen the bottom of our power products as a result. So even though the traditional power product and notebook is still dropping, and that will continue to drop next year, we expect the smartphone tablet activity to more than offset that, Tore.

That's very helpful. Last question on power tools. My understanding is that there's a lot of changes happening in that market, including more connected power tools and so on and so forth. Could you help us understand how that's impacting your opportunities there, please?

Well, we think it's very positive, in fact, because we are able to work very directly with some of the best customers in power tools. And yes, a lot of connectivity, so they can just simply keep track of their product in the field. With major construction activities going on, just tracking all the tools becomes a major issue. So the tracing of those connectivity is very, very key, and we work directly with those customers and are working with them on next-generation products. So we're very optimistic about continuing to grow this product line.

And just to clarify, does that also means potential higher dollar content, I guess, is what I'm referring to?

Yes.

(Operator Instructions) Our next question will come from Tom Sepenzis, Northland.

First one is just in terms of the gross margins. The mix, obviously, was at the expense of margin in the quarter. So I was just wondering if you could just give us some color on that and what you see moving forward here.

Yes, the gross margin is majorly from the product mix from the -- we have more weight in the consumer area. And also, we are releasing some new product to the smartphone area and also to the [biller] area. For the new product area, we probably need 3 to 6 months to improve the rate. So I expect that our gross margin in the future will be in the 49% to 51% for several quarters, yes. It's -- we have lots of the new product to be released in the coming quarters as well.

Okay. But then towards the second half of next year, you would expect it to start to move back higher?

It -- we hope that we can move back to the 51%, 52%, but it also depends on the product mix that's -- it's between the battery and also the consumer area. And it's -- it will be the product mix between the battery and also the consumer area. So let me comment on the second half, yes, when time is approaching.

Okay. And then just in terms of OpEx, it increased pretty significantly in the September quarter over June and over March. So I'm just curious because it seems like incremental revenue is coming at the full price with gross margins, and OpEx is almost wiping out the incremental revenue on the top line. So I'm just curious as to why we're seeing OpEx increase that dramatically and if you plan on taking it back down here. Or what are the levers there?

I think our OpEx now, it's -- are for the labor, for the salary, it will remain almost the same. And the up and down, it is more up to the nonrefundable expenses related for the new product IC. So I think it's -- will be in the area of $5 million, plus, minus, exclude the stock-based compensation area.

Okay. And then lastly, if you can just talk a little bit about some of the new wins that you've had on the smartphone side. And the timing of those ramps, when we should expect to see revenue from those?

We have probably more than half dozen customers currently production variety of our smartphone ICs. We expect some of them will move to the larger amount of revenue [play phone], large amount roll in play phone . In the meanwhile, our target at 2018, try to also go up to the first-tier customer in China. We do have some design activity with a first-tier customer in China in this year, but it's not realized as quickly adopting, and that's probably towards the next year. It's safe to look at -- will be second half of next year, we're going to see the today's our design activity and will be realized as more significant revenue, which was second half of 2018.

So you think you can hit cash flow breakeven by the end of '18?

Cash breakeven, yes. It's the market and also the [sales] can be -- relate a little bit in that. Now we support -- it should be related, yes.

Our next question will come from Lisa Thompson, Zacks Investment Research.

So I'm interested in what you were talking about in power tools and the next generation of tools that will have Internet of things and let you trace where they are. I think that sounds like a really huge feature, particularly in construction where things walk off the job sites. Can you -- where are customers in that? Are those products out? Or when are they coming out? Or what's your feeling on that?

Hello? We lost you, Lisa. You said walk off the job site, which is a big issue, by the way. They literally walk off the job site. So I don't know. We have lost the connectivity from this end.

(technical difficulty)

I can hear you.

(technical difficulty)

Lisa, if you would like, would you please repeat your question?

Can you hear me now?

Yes, we can hear you.

Yes, you...

That's great.

Were about power tools walking off the job, and you said that wondering what happened.

Right, right. So where are customers with rolling out those products? Are they in the market yet? Are they coming?

They have some already in the market. The developing trend is when power a tool support this WiFi or IoT wireless communication, they need to convert their CPU and their software upgradable to certain level of operation, real-time operation. So when they do that, they give a window of opportunity to us, which is the people is looking at new generation of the digital design and that they prefer the new generation of the digital design, which is for -- aiming for the CPU, try to combine with certain mixed signal together. So answer your question, this is going to be gradually penetrate and then they will give us opportunity to increase our second content because we will be providing a product from pure analog to the mixed-signal in order to support some standard the power tool can -- communication connect to the WiFi.

So how does that increase what revenue you get per unit, say, per tool compared to what you've been getting now?

It's too early to tell because this product is not really to production. And conceptualized, that should be -- have increased at an double-digit percentage. And they also so-called the penetration time that's probably gradually who is connect.

Let me also say that as they redesign for these tools, they are looking at more proprietary technology in the path they want to take. So they have some -- more advantages over their competitors. And so it is like a complete redesign, and we are in the fortunate position with some of the majors in the market to be a part of that activity. So that is -- we're on the ground floor working with them with some of the new battery management products, which are becoming somewhat more sophisticated. And also, this whole market -- it helps grow the whole market, Lisa, because this now can be used at major construction sites across the whole city, and they can track these tools. So it makes the products that are portable traceable, and it enables better and better sales for this type of product. So many of the customers are very enthusiastic about this technology, and it will help grow the overall base. And we think we'll be in a proprietary situation with some of the majors. I hope that answers your question.

Yes, somewhat. I'm just a little confused. You said that they're already in the market. Or they're not in the market?

Some are already in the market.

And they're from your -- and they're using your product?

Yes. But they will be bringing out newer generations of this, I think, ever more sophisticated in terms of traceability of the product. Also, there's always a need by the customers, the majors, to get more and more life out of the products. So that requires better and better battery management capability. So the products are going to become more sophisticated. So yes, some are already in the market, and we're going to just see more and more of this.

(Operator Instructions) At this time, we have no further questions in the queue. So I would like to turn the conference back over to Dan for any closing remarks.

Thank you, operator.

Everyone, I'd like to thank you for your time and attention this morning. Please feel free to contact me at ir@o2micro.com or at area code (408) 987-5920, extension 8888 with any follow-up questions. Have a great day, and thank you again for your attention. Goodbye.

Thank you. Ladies and gentlemen, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.