O2micro International Ltd (OIIM) 2018 Q1 法說會逐字稿

Good morning, and thank you for joining us today to discuss O2Micro's financial results for the first quarter of fiscal year 2018. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg at 408-987-5920, extension number 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 May 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 opened for question and answers as time permits.

Gentlemen, you may begin.

Thank you, Paul. Good morning, everyone, and thank you for joining O2Micro's Financial Results Conference for the First Quarter of 2018 Ending March 31, 2018. 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 fact 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 annual filings, our annual reports, and other documents filed within 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, Head of Marketing & Sales and Director; and Sterling Du, O2's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be open for your questions.

At this point, I would like to introduce Perry Kuo, CFO for O2Micro, for a discussion of the financial highlights of the first quarter of fiscal year 2018 ending March 31, 2018. Perry?

Yes. Thank you, Dan. We will now review our financial results of Q1 2018. Please note that financial results will be presented on a GAAP basis, unless we designate otherwise. The non-GAAP result excludes 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 2018 was $14.1 million. GAAP net income in the first quarter of 2018 was $7.2 million. If we exclude stock-based compensation of $364,000 and the onetime fair value gain of $9.8 million, the non-GAAP net loss will be $2.2 million.

GAAP net income per ADS in the first quarter of 2018 was $0.27. Non-GAAP net loss per ADS was $0.09. Gross margin was 51.2% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.7 million or 33.6% of revenue. This amount excludes stock-based compensation expense of $62,000.

SG&A expense was $4.7 million or 33% of revenue. This amount excludes stock-based compensation expense of $302,000. The non-operating income was $10 million. This amount includes one unrealized fair value gain on long-term investments of EMC around $9.8 million. EMC became a listed company in Taipei Exchange on January 23, 2018. Its market price is considered as readily determinable fair value under the new U.S. GAAP guidance. So the company recognized an unrealized fair value gain of $9.8 million as of March 31, 2018.

Income tax was $265,000 in the first quarter and it is mainly based on the estimated effective tax rate of its taxable location. In Q1 2018, we repurchased [147,141] ADS unit at a cost of $219,000.

Q1 2018, the revenue breakdown by end-market 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. In this part, I would like to provide some additional information.

O2Micro finished the first quarter with $45.1 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.73 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of the Q1 was $8 million. Our DSO is 55 days. It is in our target range of 40 days to 60 days.

Inventory was $9.7 million at the end of the first quarter. This represents 124 days of inventory and inventory turnover was 2.9x in Q1. Net cash used in operating activity was $1.4 million. Capital expenditure of about $28,000 in the first quarter were R&D and IT purchase. Depreciation and amortization was $397,000 in Q1. At the end of the first quarter of 2018, O2Micro had 375 employees, 62% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2018. This guidance reflects our best estimate for the current environment and is subject to change. This is the only fiscal -- official guidance we will provide, unless we update it with a public announcement in the future.

O2Micro expect Q2 2018 revenue to be up 2% to 10% sequentially. We are guiding the Q2 gross margin will be in the range of 49% to 51% and it is mainly from the product mix. R&D expense, excluding stock-based compensation, should be $4.5 million to $5 million in Q2. SG&A should be $4.3 million to $4.7 million in Q2, excluding stock-based compensation expense. Stock-based compensation expense should be in the range of $350,000 to $450,000 in the second quarter.

Interest income and the rental income in non-operating 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 teams and Board of Directors is to maximize shareholders' value. We are accomplishing this by taking the necessary steps, which included managing operating expenses and the monetizing asset on the balance sheet.

In regard to our share repurchase program, we have been active in this program historically, and that we plan to continue going forward. Since 2002, we have repurchased over 19.7 million ADS shares for [$100,400,000]. As of the end of the Q1, we had $8.5 million remaining in our share buyback authorization. Returns to shareholders are very much on our minds and will continue to be our focus in the future. We will provide update 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 $7 million and $19 million in quarterly revenue, given the wider range of gross margin from product mix and also the 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 the -- on to the 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. As we mentioned last quarter, 2017 revenues exceeded 2016 revenues, continuing a trend of slowly increasing growth since our company revenues bottomed in 2015. We also stated the year-over-year revenue growth may accelerate in 2018, as our power products finally returned to growth after years of revenue decline. Despite the weak TV and monitor market in Q1, we do expect to see this acceleration in our growth for 2018 for the following reasons.

First in lighting, some of the component shortages in the TV market appear to be easing, resulting in a recent acceleration of backlighting orders for Q2 and higher customer forecast for Q3.

In battery management, design wins continue to expand into new markets. We expect to see reasonable growth in Q2, which has historically been the weakest revenue quarter for this product line. We also expect ongoing growth for battery management products in the second half of 2018 based on new design wins.

In power products, we have seen increasing customer design win momentum and we are more confident in revenue growth. This includes additional new products and more customers qualifying the products.

Let's now review more specific activity in our 3 product lines. In our largest product line, Intelligent Lighting, our new product design wins have continued to accelerate in several areas. As a shortage of MOSFETs impacted our customers, many customers adopted our new line of backlighting products with integrated MOSFETs. We also see key OEMs desiring to differentiate their higher-end TVs and monitors with more highly integrated application-specific devices.

We are pleased to be delivering these in volume, while expanding our design activity with both existing and new customers. As mentioned earlier, these design wins coupled with higher forecasts from our customers are expected to drive increasing revenues for the balance of 2018. We continue to focus 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 strong.

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 this business to remain stable with modest growth in 2018.

Our patented Battery Management products, supporting critical cell balancing in lithium-ion batteries continued 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 tools, e-bikes, e-vehicles, vacuum cleaners, garden tools, uninterrupted power supplies where lithium-ion battery technology continues to become more reliable and cost-effective with the use of our Battery Management products. This diversification of our design wins across more market areas is making our business less cyclical on a quarter-to-quarter basis, while continuing to experience excellent overall yearly growth.

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, for more sophisticated battery management as needed. This will include both higher cell count battery management products and ARM-based, highly integrated microcontroller-based products.

We would also note that we have filed key patent claims for our new products to protect our company and customers' market positions. Our major customer list continues to grow, includes Black & Decker, Dyson, Electrolux, LG, Makita, Narada, Panasonic, Samsung and TTI.

Finally, let's discuss Power Products. We are encouraged to see both our product base expanding and more customers completing design wins with these products. Based on this wider diversity of design wins in customers, we can more confidently project a growing revenue base as we move through Q2 and into the second half of the year. This will enable our power revenues to reverse their multi-year 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 gained 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.

Thank you, Jim. O2Micro reported the first quarter of 2018 revenue of $14.1 million. Revenue was down 7.3% from the previous quarter and down 5.7% from the same prior year quarter. The gross margin in the first quarter of 2018 was 51.2%. The gross margin was up from 50.5% in the previous quarter and down from 52.7% in the second quarter of 2017.

Our revenue was in the guided range, and gross margin improved from the previous quarter, despite continued dynamic market and the market shifting. We are happy to disclose our Battery Product group has expanded our product base properly and have led new significant customers in last quarter.

Three new battery product lines are either already in production or pre-production and close to the final [customer] and ready production. Our battery product lines made (inaudible) primarily in the power tool market, where we maintain a healthy percentage of the sector. Now we are eager to seeing those same technology are about penetrating and is being adapted to variety of other application. Well efficiency, low operating times, reliability and safety are just as important as well.

Recent utilization of battery technology can be seen in a fine area along with (inaudible) long-term benefits and growth potential; personnel transportation such as electrical bike, e-scooter and light electrical -- electrical vehicle, an array of generation transportation devices; UPS or (inaudible) battery in consumer applications, handheld and also cordless vacuum cleaner along home and kitchens with safe and reliable power is not only desired, are key to consumer acceptance of this new technologies. Our battery technology continues to meet or exceed the new design challenges of customer by opening mixed signal products to support the latest generation of smartphone and devices.

Our new generation IC fulfill the latest UL regulations and contains several system functions SOC with MCU controlling site and as well as (inaudible) of safety and protection from battery failure. We are optimistic on our continue growth of our battery product and their critical role in end consumer adopting of the new battery technologies.

We work closely with world top-tier and second-tier TV, monitor and panel manufacture to support the high-end 4K or even advanced 8K panel local dimming backlighting technologies. We support a higher end display market with our customers to drive the finer visual experience to bring the next era of the brand display product for home and industrial application with both brighter colors and higher contrast can be displayed with a lot of picture quality.

Our local dimming technology is seeing continued design activity in high-end TV market with growth potential, not only in volume shipment but our new customers. We have responded to the market by opening various ICs offering, integrating higher voltage MOSFET along with integrated AC/DC converters, which increase power efficiency and reducing the customer system cost.

For industrial applications, our industrial rated product offers reliability, high-performance local dimming for the automotive applications. Our new year 2018 will drive clearly our product of the TV backlighting market, battery management and our power product. We continue to see the shift from notebook to mobile device, such as mobile phones, smartphone and tablet.

Due to our product (inaudible) kind of being expected, we see our product start to get more customer and [entry] in the recent quarters. Our new charger technology for the mobile device focus on the cost effective and easy design -- flexible of design wins. Our O2, we have 2 charger technology right now, O2 Express charger and also a new charger technology has been -- right now in production and that providing the performance and without compromise safety, we also reduced the heat dissipation and then we only need minimal software support.

We continue to monitor our expense, operating effectiveness along with optimizing (inaudible), monetizing the asset of company, we've had some new engineer last quarter, which has allowed us to focus on new technology carefully for revenue upward curve.

At is time, I like to thank you for listening to our conference call. I'll turn it back to Dan.

Thank you, Sterling. One quick note, the mention of EMC is Excelliance MOS Corp. listed on the Taiwan Exchange.

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

(Operator Instructions) And our first question comes from towards Tore Svanberg from Stifel, Nicolaus.

Could you elaborate a little bit more on your battery management revenue? It sounds like it's going to expand into perhaps some higher unit markets here in the second half. So any more color you could offer there, that'd be great.

Yes, we see it already expanding into higher unit volume markets, Tore. As I mentioned, historically the battery management -- while it's been growing nicely year-over-year, Q2 is a weak quarter and that was the result of power tool and we saw this very specifically last year in Q2. Our battery management business was down in Q2 simply because of the cyclical nature of the power tools. However in the last year, we've significantly expanded our activity, including high volumes in areas like vacuum cleaners. We're working with some of the world leaders as well as the e-bike market recently has been very significant growth for us, and that has resulted in an expectation of not seeing downside in Q2 this year, but seeing upside in Q2 and that is the result specifically of the new markets and we see ongoing growth not only in those markets as we move forward, but also continued expansion in power tool as well as other key areas for Battery Management. So, at this point, we're very, very pleased to see the addition of new customers and also the adaptation of our product into more and more market areas. I hope that answered your question?

Yes. No, that's very helpful. And my second question is on the fast-charging or expressed charging. It sounds like you have quite a bit of confidence about growth in the second half of the year, and I was just wondering if that was driven by any specific platform or any specific customer. I assume this is all related to smartphone.

Yes, we've have -- that's a good potential although that will take some time. We -- right now we have 2 production for the 2 fast-charging topology, they are not USB PD so called, because we don't require software support and but we're providing a lower BOM assistant costs and the easy of design, flexible. One is double charger design, when you charge the battery; you can charge -- high current with 2 chargers, when the battery is providing the power for the system than using only 1 charger. So that's we call the 2 charger and the benefit of that one is the heat dissipation will be [half] distributed to the different locations to solve the heat problem. As we all know the heat problem for the smartphone, increasing critical. Second O2Micro Express charge is simply put the charger in AC adapter. So the AC adapter could adjust the current and voltage in terms of instruction set from the smartphone itself and that is -- bring the whole high current charging heat dissipation outside the smartphone. So this one is also in pre-production and (inaudible) currently our customer demonstrated this particular product in a latest smartphone exhibition in Hong Kong. So people are saying that, it's difficult to get the first production and right now we got it and we do see there is a great potential because there's a majority of the smartphone for second-tier or third-tier, they like to match the Oppo, the so-called the -- we call the low voltage, high current fast charging capability. This provides -- is cost [down] comparable to the USB PD. So we are very excited to see this potential and however the second half of this year for smartphone revenue is not only driven by these 2 particular topology, we also have the regular 4 amp charger is going to be introduced to the customer and our currently 2 amp to 3 amp charger also is [multiple platform] and already seen the mass production into the market and that will be the major growth driver for the phone sector for the second half of this year.

That's very helpful, Sterling. And last question on the TV side, so it does sound like some of the shortages are no longer a headwind. I was just wondering as it relates to the U.S. China trading tensions, if you see that having any impact on your TV business at all going forward?

Well, it may have some long-term impact. However, at this point, I don't see any significant impact. We do see a very significant focus on the high end of the market and gaining international market share, doesn't matter whether it's Chinese, Korean, Japanese, all are focused very much on winning high-end market share. So we do see a focus in that area. Certainly, there may be some issues long-term-wise from the trade activity, but we think we are quite well positioned in both the China market as well as outside the China market.

(Operator Instructions) Our next question comes from Lisa Thompson from Zacks Investment Research.

Okay. Dan, first off, say the name of that public company slowly.

Sure, it's Excelliance, E-X-C-E-L-L-I-A-N-C-E M-O-S Corporation.

Excelliance Corporation. Okay, thank you. Looking at the second half growth, is the major driver the lack of TV component shortages or? Is it different than that?

Could you repeat that, Lisa?

Sure, is the major driver to growth in the second half the fact that there is no more shortages in TV, since that's such a big part of your business?

Well, for the first time, I think we're in a position where we are looking at growth in all 3 of our product lines as we move into, not only this quarter, but we're very hopeful seeing growth in all 3 product lines in Q2, and also extending that growth into Q3, Q4. So we see good growth opportunities in battery, we see good growth opportunity, particularly in the second half, as Sterling mentioned, although we are seeing now more design wins and beginning of production in Q2. So I think that's good. TV, I wish I had a crystal ball. What we can tell you is what our customers tell us. They want more and more product and they are giving us higher and higher forecast, almost on a weekly basis. And what we have seen, there are a few customers that appear to have some product shortages, but most are through the product shortages they have suffered, first through panel shortages, then through some other component shortages including capacitors, resistors. The customers seem to be through that at this point and they seem to be very optimistic about the TV business. We had positioned ourselves very well with some new products, so we're expecting good growth as long as that holds up in the TV business. But our other product lines, we think will do very well in the second half as well.

Okay. And I just want to understand smartphone a little better, when you look at that business line, which chips of yours or which technology are the biggest factor dollar-wise, as to what are people buying?

We're doing a charger for the smartphone, that's what we do. And we do the high-end sector inside the smartphone. So if that is -- answering your question, the adapter has relative higher ASP compared to other devices, smartphone, in power management area.

And how many customers have you won design-ins for that?

I don't have the exact numbers for the design, but we do have about 6 to 7 different company production for ICs, more or less 1 or 2 ICs right now.

And are there any phones that you can point to that are going to be using your chip or use it now?

Yes, they have -- we have production with a 7 different company. Yes, they are using our chip.

Okay, can you name a phone that would have it in it?

The phone company or what kind of chip inside?

You have a phone or the company that's using it in their phone?

Yes, BBK. BBK is part of the OPPO Group; Coosea, C-O-O-S-E-A; and the Coolpad, C-O-O-L-P-A-D; Meitzu, M-E-I-T-Z-U; HCT, in fact they call themselves HCT; and one -- I'm sorry, yes, (inaudible). I'm not sure exactly their production date, H-U-A-Q-I-N, a pretty big company. H-U-A-Q-I-N, and I mentioned it yes. And probably there is some like -- some other name I need to recall, because we...

Local Chinese name.

They are for the China Mobile, quite a wide range for the China Mobile. There is basically about -- probably 6 or 7 maybe even 8 different company based on our charging and all gas gauge.

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. Thank you, everyone, for your time and attention this morning. Please feel free to contact me at ir@o2micro.com or at 408-987-5920 extension 8888 with any follow-up questions. Everyone, have a great day, and thank you again for your attention. Goodbye.