O2micro International Ltd (OIIM) 2017 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 2017.

If you would like a copy of the press release we issued this morning, please call Daniel Meyberg at (408) 987-5920 extension 8888, and we will e-mail 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 15, 2018, 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 question 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 fourth quarter of fiscal year 2017 ending December 31, 2017. This is Daniel Meyberg, 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 materially due to numerous risk factors. Such factors are enumerated in the company's 20-F annual filings, our annual reports and other documents filed within the SEC from time to time.

With me today are Perry Kuo, CFO and Director; Jim Keim, Head of Marketing and Sales, and Director; and Sterling Du, O2 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 on the financial highlights of the third quarter of fiscal year 2017 ending September 30, 2017. Perry -- sorry, December 31, 2017. Perry?

Thank you, Dan. We will now review our financial results for Q4 2017 and fiscal 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. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the first quarter of 2017 was $15.2 million and $60.2 million in 2017. This is an increase of 6.4% over fiscal 2016. GAAP net loss in the fourth quarter of 2017 was $1.9 million. If we exclude stock-based compensation of $388,000, the non-GAAP net loss will be $1.5 million. GAAP net loss in 2017 was $6.1 million. The non-GAAP net loss will be $4.6 million.

GAAP net loss per ADS in the fourth quarter of 2017 was $0.07. Non-GAAP net loss per ADS was $0.06. GAAP net loss per ADS in 2017 was $0.24. Non-GAAP net loss per ADS in 2016 was $0.18.

Gross margin was 50.5% in Q4. The gross margin reflect the current revenue level and the product mix.

R&D expense was $4.7 million or 31% of revenue. This amount excludes stock-based compensation expense of $53,000. R&D increases in 2017 were mainly for battery and power for smartphone. We remain optimistic about our growth, growth drivers, including backlighting, battery management and the power product in 2018.

SG&A expense was $4.3 million or 28.5% of revenue. This amount excludes stock-based compensation expense of $335,000.

The nonoperating income was $205,000. Income tax was $329,000 in the fourth quarter and is mainly based on the income tax provision for our tax entities. In Q4 2017, we repurchased 33,602 ADS units at a cost of $56,000.

Q4 2017. The revenue by end market breaks down into the following percentages: consumer was 40% to 45% of revenue; computer was 10% to 15% of revenue; industrial was 40% to 45% of revenue; communications was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with $46.1 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.80...

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Please continue.

Account receivable at the end of Q4 was $9.2 million. Our DSO is 54 days, is in our target range of 40 to 60 days.

Net cash used in operating activities of $1.2 million primarily consists of net loss of $1.9 million, accounts payable increase of $1.6 million and offset by an inventory decrease of $1.2 million.

Capital expenditures were about $118,000 in the fourth quarter for R&D and IT purchase. Depreciation and amortization was $433,000 in Q4. At the end of the fourth quarter of 2017, O2Micro had 372 employees, 61% of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal 2018. 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 Q1 2018 revenue to be down 2% to down 8% sequentially. We are guiding that Q1 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 Q1. SG&A should be $4.3 million to $4.7 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 our subsidiaries in different countries, we expect our tax amount to be in the range of $200,000 to $300,000 in the first quarter.

The goal of our management team and Board of Directors is to maximize shareholders' value. We have accomplished this by taking the necessary steps, which are including managing operating expenses and the monetizing asset on the balance sheet. In Q4 2017, $1.1 million was received back due to share buyback from one of our investees, Sigurd Cayman.

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 more than $100 million. As of the end of Q4, we had $8.7 million remaining in our share buyback authorization. Returns to shareholders are very much on our minds and will continue to be a focus in the future. We will provide updates to the additional measures to enhance shareholders' value throughout this year.

We believe our cash breakeven point is between $15.5 million to $17 million in the 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 and other income.

Given the uncertain demand and the macro environment, we are prepared to continue to manage cost 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. 2017 revenues exceeded 2016 revenues and continued a trend of growth since our company revenues bottomed in 2015. The revenue increases in both 2016 and 2017 resulted from growth in lighting and battery management that more than offset declines in revenue in our legacy power products. This trend of year-over-year revenue growth should continue and may accelerate in 2018 as our power products finally return to growth after years of revenue decline in legacy notebook products.

Let's discuss general business highlights in 2017, followed by a more in-depth review of our 3 product lines. In 2017, we are very pleased with our revenue growth in battery management products, where we extended design wins into more markets and more major OEMs.

Growth in our largest product line, intelligent lighting, is ongoing despite allocation issues at many of our customers. Although panel allocations eased in the second half of the year, key TV and monitor customers faced a growing array of other component shortages, including ICs, capacitors and resistors, that caused cutbacks in their production plans. Nevertheless, we project ongoing growth in 2018 as we continue to make headway in high-end design wins at key customers.

Our power products revenue in 2017 was lower than planned as some new products were delayed going into production. This resulted in revenue in new market areas failing to offset reduced revenues in legacy notebook products. However, we do see a reversal of this trend occurring.

Let's now review more specific activity of our 3 product lines. Our patented battery management products supporting critical cell balancing in lithium-ion batteries continue to expand with more and more key design wins at major OEMs. This has resulted from the rapid expansion of lithium-ion battery technology into more mobile products due to their small size, high energy density and increasing cost-effectiveness versus older-technology lead acid batteries.

As a result, we continue to see major market growth opportunities in all key market areas, including 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. As previously mentioned, we have also engaged with key new customers having significant positions in the rapidly growing drone and solar markets.

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 soon to be introduced ARM-based, highly integrated 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. Our major customer list continues to grow and includes Black & Decker, Dyson, Electrolux, LG, Makita, Narada, Panasonic, Samsung and TTI.

In our largest product line, intelligent lighting, our new product design wins have accelerated in several areas. As a shortage of MOSFETs impacted our customers, many customers are quickly adopting our new line of backlighting products with integrated MOSFETs. We also see key OEMs desiring to differentiate their higher-end TV and monitors with more highly integrated application-specific devices. We are pleased to be delivering some of these in volume while expanding our design activity with both existing and new customers.

Finally, 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 high-power general lighting products, where we can enjoy reasonable margins and profits.

With our strength and 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. As stated earlier, we are finally seeing our power product revenues in new markets growing rapidly enough to more than offset any lost revenue in legacy notebook products. We project 2018 revenue growth in the smartphone and tablet markets to enable our power revenues to reverse their multiyear downward trend. These design wins for our smartphone and tablet products include our new charger IC, on-the-go charger booster, and accurate gas gauge, gain market acceptance. Additionally, we are working on key design wins in other market areas, including high-volume industrial opportunities.

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

Thanks, Jim, and good morning. O2Micro reported the fourth quarter 2017 revenue of $15.2 million. Revenue was down 2% from previous quarter and down 4.4% (sic - see press release, "4.3%")from the same quarter prior year.

The gross margin in the fourth quarter 2017 was 50.6%, and gross margin was up from 50.3% in the previous quarter and down from 51.7% the same quarter of last year, 2016.

We are pleased to see our revenue was in the guided range, and gross margin improved on the previous quarter despite very dynamic market and the market shifted. We observed the high-end TV continue to define what the new visual experience is and advanced color image contrast backlighting technology bringing a new era of the advanced display products.

We work with the top-tier worldwide customers who support the high-end 4K and the advanced 8K panel, low-coating impact lighting. Therefore, our local dimming technology obtained strong user activity in the high-end TV market, which will result in growth potential in both volume shipment and ASP incremental.

In order to meet the different size [ensuring] demands of backlighting, we offer various flavors of ICs, including integrating higher-voltage MOSFET to one chip, which is cost-effective; or we support external MOSFET, which helps the flexibility. Furthermore, we extended our product portfolio into AC/DC area for TV applications. This new product has been volume-shipped to TV makers in China.

For industrial applications, our industrial rated product offer the high-performance local dimming for automotive applications. The battery technology continued to meet the new design challenges by offering the [mixed signal] products to support new-generation power tools. Our new-generation IC contains multiple system functions, SOC and protection battery functionality.

We continue to be the market leader by offering high integration with reliable industrial rating solution as IC plays a vital role in battery setting. We remain optimistic for our battery product growth momentum. Our new year 2018 growth driver clearly are products for the TV backlighting market and the battery management.

Now let us discuss the 4 markets which we shift our focus from the notebook, computer, the legacy power product. In order to meet the different market requirements, our product portfolio compares 2 type of fast charger and 1 type of regular charger and a battery gas gauge. All of these product has been designed in MP stage. We expect that this activity to grow further active in 2018 with more products into MP. We expect 2018 with good growth from 2017 and continue to drive the growth through 2019, where the design cycle to marketable platform is at least 1 year.

We watch the expense carefully by improving operation effectiveness, optimize operating cycle times and monetize the asset of company. We have to moderately increase new engineer headcount, which will focus the new technology in hiring and carefully further revenue upward curve.

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

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

(Operator Instructions) We'll hear first from Jeremy Kwan with Stifel, Nicolaus.

Just talking about the smartphone market, can you just give us an idea of your expectations for a ramp? Is it -- do you expect it to begin in the first half? Or is it something that's more towards the latter half? And can you talk about maybe the geographies that you expect growth to come more from?

Yes. We focus on the smartphone makers in China mainly. And our product portfolio, we have 2 category: One is existing -- we offer the -- 2 type of the fast charging and the regular charger. So those has been introduced to the market since year 2016, the almost Q3, Q4 time frame. So right now in the market for more than 1 year. And we already have seen the MP in at least half a dozen of the smartphone makers. So we are happy to see that. So this is how this micro -- like Jim has mentioned, we finally see the rapid growth. That's all talk about existing product.

And then the second wave is our new high-performance, the charger, but also including fast charging and regular charging. When I mean fast charging is more likely the 3m or 3.5m in a box, we call fast charging. So the new wave of the next-generation charger will be introduced to the market second half of this year. So that's in my -- the speech I mentioned about, we have a plan all the way go to the 2019, and that will be even providing higher performance to existing customer. And then we expect we'll get another first tier customer in China. So that is our description of smartphone.

Great. And in light of that, and given what -- your comments on the notebook market and the TV, how do you see your year-end end market breakout, I guess, falling out? Do you see consumer growing a little bit faster? Is industrial going to keep up? Can you give us an idea for that?

Yes. I think from the -- from our estimate, the proposal, backlight, the high-performance TV and also power for the smartphone, these are in the consumer area. We also expect growth in the 2018 as well as the battery management [latency] in the industry sector will also grow in 2018. I expect these 2 sector, consumer and industry area, will be -- continue to grow maybe in the same pace or some impacted by the shortage, as Jim just discussed. But I think that will be in the area of the 40% to 45% for some period of time.

And our next question will come from Tore Svanberg with Stifel.

So I had a follow-up to Jeremy's question on the smartphone segment. So I understand now -- a bit better now the timing. But as far as going from the first wave to the second wave, are we talking about a significant increase in content? And can you maybe put some numbers around that or at least approximate numbers?

No. It doesn't mean that ASP bottoming is the opportunity because our second generation of charger, they have been greatly improved for the certain performance, majorly is in high -- the end of the trailing of the charging. So we intend to be worldwide in the first year performance so that can help out the -- reduce the cycle -- the charge cycle and also can providing more content, more percentage of the battery being charged. So that's what I mean for that.

And the reason -- the difference between the first wave and the second wave is we're using a different process. The second wave, we redesign the whole thing in the new process. That contain more higher voltage. So that's why we can go to the end of this charging cycle, and we can continue to the more -- the rapid and more high-current charging. So that's the difference. So we [do] the whole redesign for the new process, yes. So I hope I answer your question.

Yes, that's very helpful. And then a question for Perry. Perry, you were pretty close to cash flow breakeven this last quarter. Should we expect the company to get to cash flow breakeven at some point in the first half? Or are we still targeting the second half for that?

I will say maybe between Q2, Q3 2018, yes. That's a critical timing. That's mainly depending on the -- actually the gross margin, depending on the product mix, as I reported, and also the dynamics in the other income.

And our next question will come from Lisa Thompson with Zacks Investment Research.

Can we go back to the TV? I keep reading that the shortages are lessening. And that rather than TVs being down 4% last year, they're going to be up 4% this year. But now you're talking about other component shortages. Could you just get a little bit more granular on what's going on with your customers?

Yes. Last year, we talked about some panel shortages; as we moved through the second half, the panel shortage issue cleared up. So at this point, there's really no significant panel issues as we move into Q1. However, some of the major OEMs that we do business with are having difficulty getting other products, including ICs as basic as MOSFETs, also master ICs for the TV. They're also having problems getting very basic components, including capacitors. So this has curtailed some of their production plans that they had in Q4, and we saw that very directly because we do have some proprietary products with these OEMs. So that has caused them to back their production plans down.

Now you are right; we do expect TV volumes to increase next year, except that increase is not going to be as big as it could be if, in fact, there were not component shortages.

And is this something that's, like, that can be alleviated quickly? Because it doesn't sound like these are anything special. It's not like panels, right, if you're talking about ICs.

Yes. Except, generally speaking, in the market, there is a shortage even of silicon in the marketplace. So there is -- many of the wafer fabs at this point are on allocation. We have not been affected. However, that has affected more and more product areas, including the consumer area; it's included the smartphone area. So we do not expect the silicon issues to clear up until perhaps later in this year, perhaps not at all this year. So we do expect some ongoing allocations of these basic products, where there's not been much investment over the past few years to affect some of our customer base and the volumes that they could produce.

Okay. And so is this what's affecting your revenue growth? Or will you be able to grow revenues in the June quarter even with this problem?

We expect to grow revenues despite the problem, but it is hindering production volumes at some of our major customers. But the TV business will be up. We expect the power tool business to be up. So we expect both our battery management and TV business to increase. At the same time, as Sterling had covered earlier, we do expect to see our smartphone-type business begin to ramp up as we move through the year.

And we'll hear next from Tom Sepenzis with Northland Capital Markets.

Can you talk a little bit more about the power products returning to growth and what kind of growth we should be expecting for the total company in 2018, if that's going to hit double digits, how we should be thinking about that?

We shifted power focus to the smartphone. So we -- our first wave of the product has been in the market more than 1 year, and we see that it's finally getting to the production for marketable platform. And we are waiting for the second wave.

So what we mean by that is the legacy notebook power IC continue to be -- decline and they're offset by our -- the new smartphone power IC. So we expect to see that offset happening -- balance out in this year, 2018. And as towards the second half, we think that the direction will be toward -- upward. In 2019, we even have more confidence that is resumed the previous -- our growth in the power IC area. So this is roughly about this stage.

What differentiated the second wave from the first wave in terms of your smartphone products? And do you have actual purchase orders? Or are you just seeing an increased interest in your products for a ramp starting in Q2, Q3? Or do you actually have orders on hand?

Yes, we have order on hand since last year. We are in production for the smartphone already, different geography area around the -- across the world. And that is a second-tier -- mostly the second-tier smartphone makers in China. Probably it's like #5 and so on. So in the next year -- this year, 2018, with our new higher-voltage charger coming out available second half, and then we try to target for the first-tier smartphone makers in China. So yes, we are in production for the first wave right now.

Okay. And for the total company, it sounds like you're expecting a pretty good revenue ramp in June and then potential breakeven by September. So would that put you at double-digit revenue growth for all of -- for 2018?

Well, we have a potential to get there. Yes, we have the design wins to get there. That's where we're at. And we do see some customers being limited, as we mentioned earlier, in their production volumes, so that could hurt us in terms of how quickly we're able to grow. But nevertheless, we're very optimistic about growing all 3 product lines this year. But I don't think, at this point, we're able to put a percentage on that, but we do expect to grow.

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.

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