O2micro International Ltd (OIIM) 2022 Q2 法說會逐字稿

Good morning, and thank you for joining us today to discuss O2Micro's Financial Results for the Second Quarter of Fiscal Year 2022. 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 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 for the next 14 days by visiting the O2Micro website under the heading Investors. (Operator Instructions) Please note this event is being recorded. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the second quarter of 2022 ending June 30, 2022. This is Daniel Meiberg, Corporate Communications for O2Micro.

I'd like to remind listeners that the discussion and 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 20F annual filings, our annual reports and other documents filed with the SEC from time to time. Listeners are referred to the O2Micro earnings press release, and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. 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 and 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 of O2Micro for a discussion of the financial highlights of the second quarter of fiscal year 2022, ending June 30, 2022. Perry?

Thank you, Dan. We will now review our financial result for Q2 2022. Please know that financial results will be presented on a GAAP basis unless we designate otherwise. Our GAAP result is gross stock-based compensation expense, onetime charges, nonrecurring gains and losses. Our full GAAP result are available in our press release that was issued earlier today.

GAAP revenue in the second quarter of 2022 was $22.1 million. GAAP net income in the second quarter of 2022 was $555,000. If we exclude stock-based compensation of $586,000, and a onetime special project expense of $823,000, the non-GAAP net income will be $2 million. GAAP net income per fully diluted ADS in the second quarter of 2022 was $0.02. Non-GAAP net income per fully diluted ADS was $0.06. Gross margin was 52.6% in Q2. The gross margin reflects the current revenue level and the product mix. R&D spend was $4.7 million or 21.3% of revenue.

This amount excluding stock-based compensation expense of $210,000. SG&A expense was $5 million or 22.8% of revenue. This amount excludes stock-based compensation expense of $376,000 and the onetime special project expense of $833,000.

The nonoperating income was $318,000. Income tax was $232,000 in the second quarter and is mainly based on the estimated effective tax rate of each testable location. In Q2 2022, there was no stock repurchase.

Q2 2022 revenue by end market rates down into the following percentages. Industrial was 52% to 54% of revenue. Consumer was 43% to 45% of revenue. Computer was 2% to 4% of revenue. Communication was almost 0. At this moment, I would like to provide some additional information. O2Micro finished the second quarter with $49.5 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.70 per ADS.

In addition, O2Micro has no debt. Accounts receivables at the end of Q1 was $17.2 million. Our DSO is 68 days. DSO is more than 60 days mainly from account mix. Inventory was $21.6 million at the end of the second quarter. This represents 187 days of inventory and inventory turnover was 1.9x in Q2.

Net cash provided by operating activities in the second quarter was about $1.5 million. Capital expenditure was about $602,000 in the second quarter, mainly for R&D, IT equipment and testers. Depreciation and amortization was $1 million in Q2. At the end of the second quarter of 2022, O2Micro had 324 employees, 57% of which are engineers.

Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q3 2022. Net revenues are expected to be $17 million to $19 million as compared to Q2 2022 of $22.1 million. Product gross margin expected to be in the range of 50% to 52%. R&D expenses excluding stock-based compensation are expected to be in the range of $4.5 million to $5 million. SG&A expenses, excluding stock-based compensation and onetime expense for spatial projects, are expected to be in the range of $4.7 million to $5.2 million. Hello?

Yes, Perry, we can hear you again.

Okay. Sorry. Some interruption. Yes. I don't know why. Yes. So stock-based compensation is expected to be in the range of $550,000 to $650,000. Nonoperating income is expected to be in the range of $200,000 to $300,000, excluding foreign exchange gain or losses. Income tax expense is expected 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 shareholder value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing assets on the balance sheet. In regards to our share repurchase program, since 2002 we have repurchased over 20.5 million ADS shares for $102.2 million. As of the end of Q2, we had $6.7 million remaining in our share buyback authorization.

In Q3, we are facing inventory correction due to weaker demand from some selected market by inflation. We will carefully managing the inventory while we also continue to qualify second sources for cost and additional supply chains as reported area. Given the uncertain changes in demand and the macro environment, we are continuously investing in R&D testing capabilities of complex product for more capacity and the cost down. And we watch the expenses carefully and continue to manage cost as needed.

Although we believe we have aligned current cost based on current anticipated revenue levels, in Q3 excluding the onetime special project, a cash breakeven point expected to be in $17 million to $18 million. 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.

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. While our Q2 revenue of $22.1 million was in the projected range, Q3 revenue will be lower primarily due to inventory issues. As mentioned in last quarter's commentary, we believe that some battery management customers have built strategic inventories. As the retail demand for products like power tools and vacuum cleaners slowed, supply chain simultaneously began to improve. This left some ODMs and their OEM partners with inventory sufficient for the remainder of Q3 and into Q4 in selected cases.

Beyond the inventory issues, there is some good news. Key market areas including industrial and automotive where we have a growing presence remain strong. The slowed demand in consumer areas enabled us to not only resolve previous product delinquencies, but has enabled us to commit production to support some new industrial and automotive applications where production is expected to start as early as October. In effect the slowdown in some consumer areas is enabling us to shift our capacity and resources more rapidly to higher end industrial and automotive products where we have focused much of our R&D and design efforts in the past 2 years.

Simultaneously, we are continuing to broaden our overall production capability to enable us to support revenue growth across a broader market and customer base. This includes expansion of wafer supply, assembly and test to suppliers outside of China and Taiwan where we have been capacity limited. Our design activity in both Battery Management and intelligent lighting remains robust. This includes engagement with new customers who are leading suppliers of industrial and automotive products, as well as higher end products for the consumer designs including TV.

In intelligent lighting, our earlier capacity constraints have eased, delinquencies are reduced and inventory issues are minimal. Our highest volume product that is used widely in monitors was successfully second sourced with a second wafer fab partner enabling customers to have 2 sources of product from us. Our design activity remains robust in both monitors and TVs, including expansion into new customers for area backlighting applications.

In mini-LED, we're moving forward with new products targeted for tablet and notebook as well as monitor and TV. These activities are proceeding with well-known customers and we expect to be in high volume production in 2023. Finally, we are also proceeding forward with multiple customers and advanced products for new and innovative drive monitor system applications where we expect to become an industry leader.

In Battery Management, our fundamental business remains strong as we continue to see an expanding customer base and design win activity despite some temporary inventory issues. In fact, we are experiencing increased R&D activity as COVID-19 issues subside, while our market positioning garden tools, power tools, vacuum cleaners and e-bike remains strong, we see expanding design wins for our battery management business in eScooter as well as household and industrial energy storage systems. This includes designs moving forward with our integrated microcontrollers.

Even more encouraging, we are engaged with multiple automotive base customers and expect to begin high volume production with one of our new products later this year. We strongly believe that our new products will continue to drive long-term revenue expansion as we proceed forward. The major customers we've already penetrated can carry our company to much higher revenues as we increase our product footprint with them. Given our excellent patented technology and key growth areas and excellent customer positioning, we are confident of our ability to continue to grow long-term revenues within this customer base while also expanding to additional major customers.

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

Thanks, Jim. Our revenue for the second quarter of 2022 is with a guidance publicly released on May 6, 2022. We are doing high-end analog technology supporting Advanced Power Management Program in both intelligent lighting and the battery management markets. New product target at more complicated, industrial, consumer and automotive markets as well as top-tier customers that will not only expand our customer base, but engage with the next-generation product development.

Let us review the healthy market trend in which we participate despite some short-term headwinds due to the inventory correction. The 8K TV market is expected to witness a compound annual growth rate of 32.9% over the forecast period 2021 to 2026. And the global 4k TV market size is expected to reach USD 380 billion by 2025 at a compound annual growth rate of 21.2% according to the new report by Grand View.

Both report showed a large screen TV continue to grow at a double-digit growth rate. The 8K TV started grow from professional usage such as health care, medical, building construction and automotive industry, to entertainment consumer sector in coming years. We believe the 120 frames per second performance in 8K TV versus 60 frames per second in 4K TV not only give us much higher visual experience, reducing motion [blur] in fast moving action, but credible business opportunity for backlighting technology.

Now let us look at our technology frontier. The first full array local dimming technology which dominate large screen TV and the data monitor today. Our IC will roll out process the ability to capture the dimming through either analog function or the PW pathway function. The 2-in-1 mode will further simplify the TV system design architect, if our customer design to support different type panel dimming solution with one IC.

The second technology is mini-LED driver. Mini-LED solved the issue by multiplying the number of LED chips and mounting LED dye on substrate, therefore reducing the spacing between each light source and the thickness of the backlight. More importantly, they also can significantly increase the number of zones, which could reduce the halo effect and power consumption.

And third technology over the multi-scan technology. With the multi-scan the mini-LED could easily compose many predefined smaller local area due to its smaller size. This technology presents crystal clear picture even with fast moving object in a display.

Now let us review the battery market trend. Lithium ion battery market has exceeded USD 40 billion in 2019 and it is anticipated to grow at a compound annual growth rate over 15.4% from 2020 to 2026. A surging demand for electrical vehicle due to ongoing concern toward increasing pollution level, gasoline price were partially impacted market growth. Back to last year USB for power delivery type C also announced expansion to the new standard 240 watt for a [1660] watt standard. This news expand USB type C to the power tool market and will fuel the future growth of the power tool to the next level.

Our battery design wins are very active and older sector despite some short-term inventory correction. We are confident for our long-term goal with the existing growing design win activities. We observe the higher number of sale application penetrate more market share as customer need more battery capacity, the freedom of normal operation. Also it has driven by the sharp cost cropping as well as improving battery quality. For example, the nickel magnesium cobalt oxide chemistry segment in lithium ion battery market is projected to showcase 18% growth rate through 2026.

By rising acceptance of our light natural vehicle will stimulate the demand for the nickel magnesium cobalt oxide battery. This battery have a wide range application, higher density and also -- that will be included in a power tool powertrains for electric vehicles due to the no self-heating great which further falls to the market opportunity.

Meanwhile, the higher energy density means higher resolution and a faster AD converter are needed. Our analog front end in a business management unit was designed with a 14 bit high acreage AD converter to meet a customer needs. Our high-accuracy AD converter which fitting the new of resolution performance was way beyond customer expectation.

Our arm-based all in one battery management systems solution enable power tool to be connected as an IOT devices. The 5G deployment will further enrich the power tool connectivity. We expect to continue to grow the business despite the dynamic market situation and short-term inventory management. We are optimistic to our long-term goal and focus on high-margin, high-performance business.

We started several new projects to address automotive market quality control, seconds supply chain management, recruiting more engineers outside China. We always watch experience carefully where our view base for to drive the future momentum. We always give the shareholder base entry in mind, especially in the current dynamic situation.

At this moment, I'd like to thank you for listening to our conference call, and I return the call back to the Dan. Dan, please.

Thank you, Sterling. We will shortly be opening up lines for questions. During this call, we will not be addressing any presentation-related questions on this call. As disclosed in O2Micro's International Limited press release as of March 18, 2022, O2Micro International Limited Board has received a preliminary nonbinding proposal letter dated March 14, 2022, from FNOF Precious Honor Limited to acquire all of the outstanding shares of the company for a purchase price of $5.50 per ADS or USD 11 -- sorry, $0.11 per ordinary share in cash.

Following receipt of the proposal, O2Micro International Limited Board has formed a special committee consisting solely of independent directors to evaluate and consider the proposal and proposed transaction and has also engaged its own financial and legal advisers. The special committee continuing its review and evaluation of the proposal and proposed transaction and has not made any decisions with respect to the proposal and proposed transaction. The proposal constitutes only a preliminary indication of interest and does not constitute any funding commitment.

The O2 International Limited has been making SEC filings and issuing press releases in connection with the proposal and proposed transaction and will continue to do so pursuant to the requirements of the SEC rules and regulations. We encourage you to periodically check the company's SEC filings for more information regarding the proposal or the proposed transaction.

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

(Operator Instructions) And our first question will come from Theodore Rudd O'Neill of Litchfield Hills Research.

So my question is what your -- the inventory issue that you've got on the consumer side, I understand. And it also makes sense that you would be able to focus on the industrial and automotive. So my question is, what happens when the consumer side comes back, given that you've got supply constraints out there?

Well, I think -- this is Jim. Several of us address that. We're in the active process of expansion of our wafer assembly and test capability. We mentioned, for instance, in wafers, we've already brought up a second source for our highest volume lighting product at the second time -- at the same time, we are rapidly designing new products that go into other wafer fab activities. So that, coupled with the additional back-end supply chain and test capability, we feel confident of moving forward with more capacity.

Okay. And do you have a feeling for whether or not this economic -- potential economic issues are going to continue beyond the fourth quarter?

Well, it's hard to project the overall economy with the many situations that are occurring. Currently, we do see with our active design capability even if there is some reduction, for instance, in TV area to pick one, we see that the expansion into the newer high-end products will drive ongoing revenue growth for us. So we believe that our new product portfolio and all of the design activity that is going on that we'll be in a position in 2023 to see some ongoing growth for the company.

The next question comes from Tore Svanberg of Stifel.

Yes. I'd like to know, you just got a question around timing, but do you have to handle for the inventory correction that's going to happen in Q3? Have you got any sense from the customers that would be sort of the main quarter for the correction and then things could potentially normalize by Q4?

The answer to that, Tore, is yes. We expect to be through the majority of the inventory correction in Q3. We understand from the leaders list primarily in the power tool and vacuum cleaner area, we understand the magnitude of those inventories, and we understand their ongoing run rates. In most cases, we give direct forecasts from them for their ongoing run rate. So we do expect to have most of the inventory correction done in Q3 and some into Q4. We don't expect to have any issues of any significance as we move into next year.

Very good. And a question on the automotive penetration. I know it's been sort of hard to talk about that since you have a product in production, but it sounds like you're going to now do in production. So can you give us any more color, any sense for where in the call you are going to be seeing that initial revenue? Maybe you're talking about some of the functionality or application?

The near-term revenue we discussed is with a new customer in an area that's very specific, and we're really not free to discuss that. But the details of that, Tore, at this time, we probably will in the next call, but we are slated to have some production starting early Q4 for that product. Sterling may want to mention more about drill automotive R&D activities.

We have multiple product lines go to the automotive applications. As Jim just mentioned about some functionality related to so-called driver management system, you probably can imagine that is something that relate to some of products, but we are not limited to only to the driver management system. We also do some other devices in automotive. So that's just the beginning chapter, we are going to have another mid-term new automotive part probably introduced early next year. So some of those business go through the module maker, of course, those is same as reputable module automotive maker. Yes. that's how the business model we are doing, yes.

Just one last question. And the lighting revenue a lot of dynamics or I mean you have delinquencies, now obviously, the consumer market is weakening, but like to get the new (inaudible) next year. So is it fair to say even in rate weak macro that the lighting business is kind of bouncing on the bottom?

There's several way to look at that. Our high-end TV, which is going to mini-LED and also local gaming, both product lines have creative new generation products going to be climbing up to production. For the local dimming, we expect it's going to also bouncing back from the -- despite the market probably a little weak, we will have new products to address the high resolution local dimming. Then we also have the mini-LED, as Jim indicated, the initial marketplace application will be notebook and tablet as the mini-LED, the production cost will be more effective at beginning phase, go to the tablet and the notebook, and that's the area. And we have multiple different topology, mini-LED driver ICs for this application. And together with the market scan, I mentioned, we also can do programmable combination variety of the way we do the metrics of the market scan. Yes, back to your question, the TV market, we will have some potential momentum driver for the 2023.

The next question comes from Lisa Thompson of Zacks Investment Research.

So now that I look at your revenue breakdown, it looks like TVs held up very well, and they actually kind of grew, and I actually thought that that would be where the shortfall would be, not power tools. So when you start shipping to automotive, is that going to be a new category? Or are you going to throw that in industrial?

So automotive, I think it's the beginning, I think it's -- it will be in the industry.

Okay. And so is that where all the shortfall is coming from in Q3?

The shortfall in Q3, Lisa, is due to the inventory in the battery management area. And I mentioned power tools and vacuum cleaners. That's where most of the inventory is we know it involves about 5 customers, all of whom hold some significant inventory in those 2 areas. And we know the amount of that inventory, but it's in the power tool and vacuum cleaner area primarily.

Okay. And how are TVs holding up? It looks like, I don't know, China is in recession, everybody is in recession. What's happening there?

Well, as we mentioned, we are in a good position from a design point of view. And although the TV market is projected to be down some, and we've seen some of that already in China, our position with the advanced products is we have design wins that, in fact, will replace any of that shortfall revenue on the lower end. So we're very optimistic with our lighting business as we look into next year and even the remainder of this year.

Okay. And how are the gross margins on the automotive business is going to roll out? Are they starting below company average or higher initially?

Lisa, at the beginning, I think that the automotive in the developing stage for the 6 months, this will be lower than the corporate average for the year-end. But after that, this will be higher than the corporate average.

Okay. Great. And I guess my last question is, are your fancy lawyers and bankers going to cost as much in Q3 as stated in Q2? And when is that process going to end? Any idea?

So I think -- yes, I think probably difficult to predict at this moment because special committee is handled that. I believe that is why a heavy pause, yes. So at least I hope you understand.

Okay. I had to ask, just in case I could get information.

And there are no further questions in the queue. I'd like to turn the call back over to Dan for any closing remarks. Once again, I'd like to turn it over to Dan for closing remarks.

Sorry about that. Thank you all for your time and attention this morning. Please feel free to contact me at (408) 987-5920, extension 8888 or at ir@o2micro.com with any follow-up questions. Have a great day, and thank you again for your time and attention.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.